AMERICA’S HEALTHCARE PROSPECTS I T C O S T S TO O M U C H A N D D E L I V E R S TO O L I T T L E
2 0 0 7 A N N U A L R E P O RT
AC Q U I S I T I O N
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FAC I L I T I E S A N D A S S E T M A N AG E M E N T |
F I N A N C I A L M A N AG E M E N T
TA B L E O F C O N T E N T S 2
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S O M E WO R D S F RO M O U R
CHAIRMAN AND THE CEO 4
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I N N O VAT I O N I N G O V E R N M E N T M A N A G E M E N T 6
LMI RESEARCH INSTITUTE 7
P R E V E N T I N G FA I L U R E B E F O R E I T H A P P E N S 8
P E R F O R M A N C E A N D C O R P O R AT E G O V E R N A N C E 10
D E M O N S T R AT I N G T H E R O L E O F S O C I A L I N F L U E N C E O N TA X C O M P L I A N C E 11
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P R E D I C T I N G T H E U N P R E D I C TA B L E TO R E D U C E C O S T OV E R R U N S 12
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A M E R I C A ’ S H E A LT H C A R E P R O S P E C T S — I T C O S T S TO O M U C H A N D D E L I V E R S TO O L I T T L E 16
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2007 HIGHLIGHTS I N F O R M AT I O N A N D T E C H N O L O G Y
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LOGISTICS
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O R G A N I Z AT I O N S A N D H U M A N C A P I TA L
S O M E WO R D S F RO M O U R
CHAIRMAN AND THE CEO On the eve of a new administration, we see a time of
dress the issues of today, and better anticipate the
great challenge in government management, a time
challenges of tomorrow.
when the workforce, operation, and structure of
agencies are dramatically changing. We now face is-
This year, it became clear that government agencies
conflict in Iraq, war on terrorism, domestic security,
sources who are able to provide complete solutions.
sues of enormous complexity and uncertainty: the
increasingly want partners with comprehensive re-
global climate change, immigration, and crisis in
To meet this demand, we began to expand and diver-
healthcare. More than ever before, government agen-
sify, exploring all our options. We also anticipated two
cies need bold solutions derived from analytics, inno-
consequential issues facing the next administration—
vation, and reasoned deliberation.
healthcare and global climate change—and augmented our competencies in both areas.
LMI is a leader in innovation. Through our increasing
capabilities, cutting-edge analytics, and insight from
We continued to strengthen and diversify our work-
perspectives, adopt course-changing solutions to ad-
of information technology, modeling and simulation,
experience, we help agencies see problems from new
force by expanding the staff in the high-demand areas
D o n a l d L . P i l l i n g , P r e s i d e n t a n d C E O o f L M I , a n d W i l l i a m S . N o r m a n , C h a i r m a n o f t h e B o a r d o f Tr u s t e e s .
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and human capital management and adding stellar
our 12th consecutive year of funding growth as we
invested in Lean Six Sigma training and project man-
year. This growth came from traditional areas such as
graduates of top academic public policy programs. We
hit a record of $155 million, up 5 percent from last
agement certifications to further enhance the quality
logistics, infrastructure management, and systems de-
of service provided to our clients. We added exciting
velopment, as well as from greater engagement in en-
new resources, notably the LMI Modeling and Simula-
vironmental, domestic security, and healthcare issues.
tion Center, a state-of-the-art facility for the devel-
As a not-for-profit, LMI’s continued growth reflects
opment, enhancement, demonstration, and application
our success at achieving our mission and funds our
of computer-based solutions.
growing ability to best serve the dynamic and complex needs of government agencies.
We expanded our international activity, providing two experienced logisticians to each combatant command
For the third consecutive time, LMI was recognized
tics strategies. Drawing on our extensive experience
to Work competition for companies in the national
gaged senior officials of the newly established U.S.
10 Best Companies for Employee Financial Security, a
to assist with the development of operational logis-
by Washingtonian magazine in its biennial Great Places
in working with the military commands, we also en-
capitol region. We also became part of The Principal
Africa Command regarding our capacity to support
prestigious national award recognizing extraordinary
its unique mission, which seeks better integration of
achievement in employee benefits. The Defense Secu-
U.S. diplomatic, development, and security strategies
rity Service awarded LMI the 2007 James S. Cogswell
in Africa.
Outstanding Industrial Security Achievement Award for extraordinary accomplishment in facility security.
We continued to build the LMI Research Institute, in-
This award is given to only 30 defense contractors of
vesting more than $2 million in independent research
16,000 nationwide.
to discover analytic breakthroughs and stay on the
leading edge of where government is going. We made
We take tremendous pride in our accomplishments,
modeling in uncertainty estimating, microsimulation
profit firm, we put government first. We are able to
exciting advancements in the areas of dependence
but cannot presume to rest on them. As a not-for-
models for policy analysis, and supply chain simula-
advocate—and deliver—the bold innovation needed
tions. This year, we expanded our capabilities by
by government. We provide trusted objectivity, help
adding world-class academic researchers, resources,
government managers tackle pressing problems, and
and partnerships with academic institutions. The
enable them to get in front of constantly changing is-
reach of our quarterly thought journal, The Public
sues. We exist to achieve our mission of advancing
Manager, expanded through increased distribution to
excellence in government operations and assisting
government agencies and public policy schools. We
our leaders in making decisions of immediate impact
continued our leadership and analytic involvement
and enduring value.
with the Defense Science Board, and we published
THE OPPORTUNITY TO MAKE A DIFFERENCE HAS NEVER BEEN GREATER.
provocative new thinking on critical topics like Amer-
ica’s healthcare prospects, featured as the cover story of this annual report.
In 2007, LMI helped more agencies solve more problems than ever before in our history. We recorded
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INNOVATION IN GOVERNMENT MANAGEMENT G R E AT C H A N G E B R I N G S E V E N G R E AT E R C H A L L E N G E
At LMI, we bring the capabilities, forward vision,
i c a l ap p ro a ch e s t o a dd ress p ro b l em s. T h i s ye ar,
lems in a new way—applyin g hard-nosed analyt-
d e v e l o p i n g t h e n a t i o n ’s n e x t - g e n e r a t i o n a i r
and imagination to resolve contemporar y prob-
we expanded our work suppor ting research into
i c s , c o l l a b o r a t i ve e x c e l l e n c e , a n d wo r l d - c l a s s
transpor tation system, assessing the operational
p ro fe s s i o n a l i s m t o t h e s o l u t i o n s . T h i s ye a r, we
and safety benefits of various technologies and
s t re n g t h e n e d o u r e d g e i n i n n ov a t i o n t h ro u g h
o p e r a t i o n a l i m p rove m e n t s . We a l s o m a d e a
four interdependent means.
b re a k t h ro u g h i n r i s k p ro b a b i l i t y a s s e s s m e n t , d ev i s i n g a m o d e l t h a t h e l p s b e t t e r m a n a g e t h e
A d v a n c e d a n a l y t i c s . We continue to create mod-
risks of completing large , long-term capital proj-
els, develop tools, and design innovative analyt-
ects on time and within budget.
L M I o f f i c e r s p i c t u r e d l e f t t o r i g h t : W i l l i a m B . M o o r e , D o n a l d L . P i l l i n g , A n t h o n y J . P r o v e n z a n o , J e f f e r y P. B e n n e t t , Susan L. Marquis, and Manik K. Rath.
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Independent basic researc h. Pioneering work outs i d e t h e s c o p e o f a c o n t r a c t c a n a n swe r q u e s t i o n s t h a t o t h e r w i s e wo u l d n o t b e a s ke d . We in dependently ex plore and formulate new ide as for advancing government management and use o u r d i s c ove r i e s t o e m p owe r a g e n c i e s t o t a ke
better action. Our work in agent-based modeling led to a prototype for determining air campaign
resupply and sustainability using a learning-agent
a rc h i t e c t u re . We a l s o i n t e g r a t e d a s e r v i c e - o r i -
ented architecture approach into our highly respected enterprise architecture analysis models, in cluding building systems and applications that i n f l u e n c e t h e d e l i ve r y o f s e r v i c e s by b u s i n e s s entities.
T h o u g h t l e a d e r s h i p . Our duty is to be an author-
i t y, b r i n g t h e l a t e s t d eve l o p m e n t s t o gove r n m e n t , p u b l i s h o u r f i n d i n g s , a n d p rovo ke n ew thinking. This year, we explored new concepts in
earned value management repor ting that better
enable managers to identify and respond to performance trends and project plan variances and designed a method for building microsimulation
models that rigorously evaluate various healthcare policy alternatives. We also hosted several
leadership forums where exper ts from industr y, a c a d e m i a , a n d gove r n m e n t d i s c u s s e d t o d ay ’s
I N N OVAT I ON most pressing issues for government.
C u t t i n g - e d ge re s o u r c e s . We added to our world-
c l a s s s t a f f o f m o re t h a n 7 5 0 p ro fe s s i o n a l s , i n c l u d i n g m o re a d v a n c e d d e g re e s i n h a rd a n d
s o c i a l s c i e n c e s , s u c h a s e c o n o m i c s , c h e m i s t r y, m a t h e m a t i c s , o p e r a t i o n s re s e a rc h , e nv i ro n m e n tal sciences, health management, and information technolog y. We also launched the LMI Modeling
a n d S i mu l a t i o n C e n t e r, a s t a t e - o f - t h e - a r t l a b o r a t o r y fo r d eve l o p i n g , e n h a n c i n g , a n d d e m o n -
strating computer-based models and simulations.
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LMI RESEARCH INSTITUTE S E E I N G B E Y O N D W H AT I S T O W H AT C A N B E
Established in 2004, the LMI Research Institute is a one-of-
Our quarterly thought journal for practitioners in govern-
ways of advancing government management through analyt-
and continues to be a respected authority and source
ment, The Public Manager, had a record year in readership
a-kind, fully funded resource dedicated to discovering new
of new thinking in the federal, state, and local communities.
ical breakthroughs. It gives LMI the opportunity to explore
This year, we expanded the website to include a members
bold new concepts and systematically develop innovative
area that hosts over 2,500 articles representing the entire
ideas to aggressively accelerate progress.
35-year publishing history. During 2008, The Public Manager will launch a national discussion program—including
This was an extraordinary year of innovation for the Re-
seminars, forums, and workshops—culminating in an
search Institute. We invested more than $2 million in inde-
annual practitioners conference designed as a venue for na-
pendent research, covering the areas of healthcare, weapon system
tional dialog on a series
sustainability,
of public-service chal-
and supply chain simula-
lenges.
tion. We broke new ground in agent-based modeling, airspace sys-
We are delighted to
edge transfer manage-
M. Triscari, Jr. from the
welcome Dr. Thomas
tems research, knowl-
Lally School of Manage-
ment, methods for over-
ment and Technology
seeing mega-projects,
at Rensselaer Polytech-
and assessing risks.
nic Institute, as our
new Distinguished Vis-
We received a presti-
gious award from the International Society of Logistics for
iting Scholar, an annually rotating position. Dr.Triscari’s re-
National Aeronautics and Space Administration that esti-
security issues, opportunities and challenges in transna-
search activities will include examining national and global
development of a hybrid analytical parametric model for the
tional innovation models for developing sustainable energy
mates spares’ mass and volume for human missions beyond
technologies, and technology innovation models for home-
low-earth orbit.
land security.
We continued to foster cross-agency knowledge sharing and networking through our Executive Forums. Based on a strict
Great ideas happen when excellence, collaboration, and
for government executives and invited experts from indus-
Research Institute, we continuously pursue curiosity-driven
brilliant thought are encouraged and inspired. Through the
policy of nonattribution, these forums offer an exciting venue
and market-based research in our efforts to advance the
try and academia to share experiences and insights on
science of government management by reducing risk and
today’s crucial issues. Our 2007 Executive Forum program
adding greater rigor, predictability, and precision to decision
included insightful exchanges on managing Department of
making.
Defense (DoD) in a fiscal crisis, assisting agencies in moving
from stovepipes to networks, and building an acquisition workforce to meet mission objectives.
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ONE S P OT L I G H T
P R E V E N T I N G FA I L U R E B E F O R E I T H A P P E N S
Imagine a version of the General Motors’ OnStar system
tively position resources in combat situations. By supply-
formance, operational status, and maintenance informa-
impact, and operating life before failure, it also helps man-
embedded on a military vehicle so that it can report pertion
instantaneously
to
operational
ing real-time data on failures, wear and tear, operational
commanders,
ufacturers build more sustainability into the replacement
logisticians, and others. Today, LMI is working with the U.S.
parts and systems.
Army Logistics Innovation Agency to make this idea a re-
ality through the development of a common logistics op-
Our work encompasses developing a series of highly com-
Army policy, doctrine, and acquisition requirements.
necessary onboard processors, defining the needed infor-
erating environment (CLOE) that is influencing overall
plex, integrated logistics architectures—identifying the
mation exchanges, determining the transmission require-
CLOE engages a series of sensor-based, self-monitoring
ments, and recommending the information recipients. We
diagnostics and predictive capabilities that are already
are involved in concept exploration, policy and procedure
being embedded in vehicles to furnish real-time status re-
development, resource estimates, requirements definition,
ports on the health of weapon systems and vehicle com-
and supporting tests and demonstrations of CLOE.
ponents, such as navigation, fuel, communication, and fire
control systems. Because the vehicle can predict what will
As CLOE development progresses, the Army is gaining a
will occur, the capability will allow the supply chain and
grated with DoD objectives for focused logistics and net-
fail and will eventually be able to predict when a failure
fresh perspective on system visibility that is fully inte-
maintenance organizations to preposition material and re-
centric operations. The skills and techniques necessary to
sources rather than responding reactively—reducing the
easily integrate evolving technology within existing
in-theater footprint. It allows operational commanders to
weapon systems are becoming a permanent part of Army
better understand equipment readiness and more effec-
planning. 7
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PERFORMANCE AND CO R P O R AT E G OV E R NA N C E MAKING MORE OF A DIFFERENCE
the number of active tasks. We continued to excel at partner collaboration, frequently as the prime, leading the work and ensuring it meets our ISO 9001 standards.
FINANCIAL PERFORMANCE This year, LMI funding hit a record level of $155 million, a 5 percent increase over last year and our 12th consecutive year of funding growth.We are particularly proud of this accomplishment, which reflects LMI’s steady expansion in our core areas of logistics, acquisition, financial management, information and technology, human capital, and infrastructure management and increasing engagement in areas such as the environment, facilities management, healthcare, systems development, and domestic security.
We were thrilled to be recognized for the third consecutive time by Washingtonian magazine as one of the Great Places to Work in the Washington metro area and proud to be included in The Principal 10 Best Companies for Employee Financial Security, a prestigious national award recognizing extraordinary achievement in employee benefits. CORPORATE GOVERNANCE
Once again, we met our corporate performance objectives for customer satisfaction, indirect costs, operating margin, and personnel management—all distinct measures of LMI operating excellence. In addition, we strengthened our capital reserves, further supporting our ability to best serve the government.
As a not-for-profit company, LMI is governed by a Board of Trustees, which ensures that we remain true to our charter, operate accordingly, and increase our value to and influence in government. In 2007, under the leadership of Chairman William S. Norman, the Board focused on advancing our strategic plan and exploring growth areas. It completed an environmental scan of issues facing our nation and met with national experts to discuss matters related to policy, the global war on terrorism, healthcare, global climate change, reform in the DoD combatant commands, and the impact of the federal budget and increasing entitlement costs on defense and other federal programs.
In 2007, we received 17 new indefinite delivery/indefinite quantity and blanket purchase agreement awards, clearly demonstrating the long-term confidence government agencies have in our capabilities. We also received 15 new multimillion dollar awards and saw an increase of 10 percent in $160M 05
$120M 01
$80M $0M
02
03
06
The LMI Board of Trustees has always represented an accomplished and well-credentialed group of professionals with significant government and industry expertise.This year, the Board saw the retirement of Ms. Regina Gindin, a member since 1998, and was deeply saddened by the untimely passing of the Honorable Jennifer B. Dunn, a member since 2005. We greatly appreciate the tremendous insights and contributions from both during their tenure. In 2007, we welcomed as new members the Honorable Jonathan B. Perlin, MD, Chief Medical Officer and President of Clinical Services Group, Hospital Association of America; the Honorable Alice C. Maroni, Chief Financial Officer, Smithsonian Institution; and Mr. Michael A. Daniels, Director of Sybase, Luna Innovations, and Global Logic.
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L M I B o a r d o f Tr u s t e e s p i c t u r e d c l o c k w i s e f r o m l e f t : W i l l i a m G . T. Tu t t l e , J r. , J o n a t h a n B . P e r l i n , J o s e p h E . K a s p u t y s , P h i l i p A . O d e e n , D o u g l a s B e r e u t e r, M i c h a e l A . D a n i e l s , P a t r i c i a M c G i n n i s , D a n i e l P. B u r n h a m , R o b e r t F. R a g g i o , J o s e p h S . N y e , J r. , W i l l i a m S . N o r m a n , a n d D o n a l d L . P i l l i n g . A l i c e C . M a r o n i i s n o t p i c t u r e d .
N OT F O R FA M E
N OT F O R F O RT U N E
N OT F O R H I D D E N A G E N DA S
N OT F O R S P E C I A L I N T E R E S T S
N OT F O R C O R P O R AT E G R E E D N OT F O R D O O M - S AY E R S N OT F O R P RO F I T
FOR COUNTRY 9
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TWO S P OT L I G H T
D E M O N S T R AT I N G T H E RO L E O F S O C I A L I N F L U E N C E O N TA X C O M P L I A N C E
Using the power of modern computing combined with techniques from computational social science, we are modeling predictions of individual and group behavior. LMI developed a pioneering model that brings a novel approach to understanding tax compliance. The model demonstrates how compliance can vary on the basis of an individual’s risk preference, perceived probability of audit, experience in previous years with a tax authority, and most importantly, the filing practices of others in the social network.
compliant behavior can spread in epidemic-like fashion and lead to tipping points in macro-level compliance. We also learned that agents’ experiences and interactions with the tax authority can yield different compliance outcomes over time compared with a model where agents do not learn from or recall experiences. For example, if an agent observes low levels of enforcement by the tax authority as experienced by peers, the overall societal tendency toward noncompliance increases. However, broad awareness of penalization for non-compliant behavior can result in the reverse—more compliant behavior.
Agent-based modeling is a powerful simulation technique used in a wide array of disciplines to model the individual units (agents) that constitute a complex system.Through independent research at the LMI Research Institute, we used agent-based modeling to simulate tax compliance outcomes under different levels of enforcement. We constructed taxpayer “agents” that possessed heterogeneous characteristics such as risk preference and perceptions about the likelihood of audit and apprehension. In addition, we allowed our agents to be socially influenced in their decisions, which then revealed how compliance was influenced by relationships with and compliance strategies of friends, neighbors, and colleagues.
NACSM allowed us to integrate, for the first time, both economic and social network theory into a practical simulation environment, where the outcomes draw attention to specific tax enforcement policies. NACSM shows that we are able to analyze the complex interactions among all stakeholders in the context of a policy change and then observe their emergent behavior. The tax authority can use NACSM to help make more informed policy, resource allocation, and business process decisions with greater insight into citizen behavior. Increasingly, agencies spend millions of dollars on inherently complex issues across numerous programs and need guidance on how to manage them. NACSM can deliver valuable insights and answers to a broad range of these issues in defense, homeland security, healthcare, and other social policy areas.
This work culminated in the Networked Agent-Based Compliance Simulation Model (NACSM), which demonstrates that when agents are knowledgeable and influenced by the noncompliance strategies and outcomes of others, non10
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THREE S P OT L I G H T
P R E D I C T I N G T H E U N P R E D I C TA B L E TO R E D U C E C O S T O V E R R U N S Major government construction projects are frequently associated with massive cost overruns. Many federal and state government agencies experience these overruns because they do not adequately anticipate risk. Although they use probabilistic cost-estimating techniques to plan for risk, they do not sufficiently consider the effect of the statistical dependence between construction activities and associated risk events. The challenge is that probabilistic risk dependencies are difficult to estimate in one-of-a-kind construction projects, and inaccurate risk estimations often result in underestimated costs. By developing a provocative new model, our breakthrough efforts now account for these statistical dependencies, resulting in a dramatic reduction in cost overruns.
which estimates the effects of statistical dependencies between construction activities and associated risk events. For the first time, estimators can now identify and characterize the cost and schedule uncertainties of risk activities in their work. The LMI model breaks new ground by combining expert experience with sophisticated math modeling techniques to determine dependencies. The math modeling includes the transformation of the uncertainty distributions of base estimates and associated common risk factors to corresponding copulas—in statistics, a multivariate joint probability distribution function defined on an n-dimensional unit space such that every marginal distribution is uniform on a [0, 1] interval.
Through independent research at the LMI Research Institute, we sought to identify a practical way to better characterize the unique risks of a large, complex capital construction project to help cost and schedule estimators model this uncertainty in their planning. Our exploration resulted in the creation of the LMI Risk Dependency Model,
The LMI Risk Dependency Model will help estimators deliver more accurate cost and duration estimates for capital construction projects because they reflect the likely interactions of risk with costs and schedules.
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PROSPECTS
A M E R I C A ’ S H E A LT H C A R E Healthcare is the most important domestic issue on Amer-
Services (CMS)—but every government agency is a stake-
icans’ minds—second only to the war in Iraq overall. Al-
holder. All agencies share the federal budget and are con-
though political solutions at the federal level have proven
sumers of healthcare services.
elusive, universal healthcare legislation has passed in Massa-
chusetts, Maine, and Vermont; and Illinois, California, and
As healthcare costs increase, so does the likelihood of
that a national healthcare solution is inevitable simply to
cover the rising healthcare bill. Because Medicare and Med-
Pennsylvania have proposals awaiting action. Experts agree
agency budget reductions so that the federal budget can
protect the solvency of the federal government, which pays
icaid are “entitlements,” they get paid first, along with inter-
directly or indirectly for more than half of the nation’s
est on government debt and Social Security. Everything else,
healthcare.
from defense to education, gets funded with what remains. Simply put, every dollar spent on healthcare is a dollar un-
Today, government pays 46 percent of all healthcare costs
available for domestic and defense programs.
through public programs such as Medicare (17 percent); Medicaid and State Children’s Health Insurance Program
In addition, as healthcare costs increase, so too does the
ment of Defense, workers’ compensation, and public health
fits to employees and retirees. Like many private-sector
(16 percent); and Veterans Health Administration, Depart-
likelihood that agencies will consider reducing health bene-
(13 percent). Seventy percent of all Medicaid spending goes
companies, agencies will find it challenging to afford the in-
to care for the elderly and disabled adults. Federal expendi-
creasing costs of healthcare benefits and may be forced to
tures have continued to increase much faster than inflation.
cutback on existing plans in order to meet budget.
U.S. healthcare costs are growing at an unsustainable pace.
At the rate healthcare costs are escalating, the government
annually—16 percent of the gross domestic product (GDP),
means tackling the problem at its root—the real cost driv-
The government currently spends $2 trillion on healthcare
must act now to avoid disruptions in future operations.This
compared with an 8.5 percent median in other developed
ers behind the crisis.
countries. Healthcare spending will reach a projected $4 trillion by 2015—a full 20 percent of the GDP—equaling the
WHY DOES U.S. HEALTHCARE COST SO MUCH?
entire federal budget today.
Healthcare policy is traditionally viewed through three per-
Most alarming is the potential disruptive effects of these es-
spectives: access, cost, and quality. Much of the current pub-
calating costs on government agencies.The increased deficit
lic discussion centers on total access, or universal coverage,
spending required to solve this crisis would not only have
primarily covering the 47 million “uninsured.” Although uni-
catastrophic effects on interest rates and foreign exchange
versal coverage promises to reduce some costs through
balances, but would also reduce the core services provided
better preventive and urgent care, providing universal cov-
by the federal government. Healthcare is the direct province
erage to a broken system does not fix the cost problem.
of several agencies—the Departments of Health and Human
The bigger issue is that U.S. healthcare costs too much and
Services, Defense, and Veterans Affairs; Office of Personnel
does not deliver enough benefit.
Management (OPM); and Centers for Medicare & Medicaid
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After much analysis, the widespread consensus is that effec-
LOW-QUALITY CARE
drivers of growing U.S. healthcare costs: spiraling Medicare
Economists cite the graying of society and the explosion in
tive corrective measures need to focus on the three primary and Medicaid costs, high-priced care, and low-quality care.
technology (leading to more expensive treatments) as lead-
ing factors driving cost, but the real problem is that
SPIRALING MEDICARE AND MEDICAID COST
Americans—who are heavier and have more chronic dis-
eases—are less healthy than citizens of other developed
The Medicare population will double in the next 30 years.
countries. While many Americans believe that the United
Medicare and Medicaid costs are growing faster than the
States has the best healthcare system in the world, statistics
U.S. economy, consuming an ever-increasing share of gov-
suggest otherwise. U.S. primary health outcomes lag behind
ernment dollars. Medicare and Medicaid spending is pro-
those in other developed countries:
jected to increase from 21 percent of federal spending today to 31 percent by 2017.
HIGH-PRICED CARE
•
The United States ranks last among developed coun-
•
The United States is well below other national average
Perhaps the biggest reason why U.S. healthcare costs so much
I T C O S T S TO O
tries in infant mortality and life expectancy at age 60.
MUCH AND
rates for diabetes and hypertension control and for measures of care coordination.
is that doctors, hospitals, pharmaceutical companies, medical
•
device manufacturers, and shareholders get paid more in the United States than in other developed nations. According to
U.S. patients, both insured and uninsured, are much
DELIVERS
more likely to report being unable to get same-day or after-hours care when sick without going to an emer-
recent studies done by the McKinsey Global Institute, U.S.
gency room.
physicians see patients 1.6 times more than and earn ap-
proximately twice as much as physicians in other developed
•
countries, due primarily to our fee-for-service system. Hos-
pital costs are significantly higher as a result of higher input
TO O L I T T L E
Adults receive recommended care only 55 percent of
the time and children only 47 percent of the time. Older Americans with age-related health problems re-
costs and earnings. Drug prices are 70 percent higher in the
ceive only 33 percent of their recommended care.
United States than in other developed countries. In addition, healthcare administrative costs represent approximately 30 percent of total costs. McKinsey estimates that the United
States spends $100 billion more on administrative costs than any of the 13 other Organisation for Economic Co-operation and Development countries included in its study.
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•
Deaths from avoidable medical errors, nearly 100,000
•
Medication errors cause 500,000 preventable injuries
annually, equate to one jumbo jet crashing every day.
yearly. Hospital-acquired infections kill thousands more.
If we could improve the quality of our care, we could dra-
We have already begun to see how the private sector is
ing rates alone, a large percentage of chronic illnesses could
Rubber Company effectively “bought” itself out of providing
matically reduce the cost. By decreasing obesity and smok-
dealing with increasing health costs. The Goodyear Tire &
be prevented and billions of dollars saved. More fundamen-
a healthcare benefit to employees by giving their union
tally, if we could transform from a fragmented (cottage in-
$1 billion, thus putting the healthcare problem in its hands.
dustry) healthcare sector into a cohesive healthcare system,
The three biggest U.S. auto companies recently followed
we could save tens of billions in treatment and administra-
with similar moves. For years now, smaller-scale private em-
tive costs.
ployers have been severely cutting their healthcare benefits packages, or dropping them altogether. Expecting govern-
GOVERNMENT AGENCIES AT RISK
ment reform to follow a similar path is not a stretch.
In the immediate future, absent intervention, healthcare
CHANGES THAT WILL MAKE A DIFFERENCE
disrupt mission execution. Many short-term interventions
Although the decisions ahead are difficult—and the choices
substantial, fundamental change, potentially untenable prob-
more dire the consequences and more difficult the choices
costs will begin cutting into agency funding and potentially will themselves be disruptive to agency budgets. Without
may not be appealing—the longer we put off action, the
lems will arise by 2030 when healthcare, pension, and inter-
will be.We have an opportunity today to make changes that
est spending will approximate total government revenues.
will prevent the potentially catastrophic scenarios we face
At that point, entitlement programs will have “crowded out”
and to address the demand of the American people for bet-
all other government spending, forcing greater deficit spend-
ter healthcare. The key is to consider fundamental changes
ing, increased taxes, curtailment of most government activ-
that emphasize five pivotal areas:
ities, or most likely, some combination thereof. The impact
•
on national security as a result of direct spending cuts and the potential collapse of foreign exchange could be devas-
Create joint accountability at the hospital level. Hospitals
are a natural unit of accountability because they deliver
the most expensive and dangerous care. Physicians have
tating.
historically had an independent relationship with hospitals, and hospitals have depended on physicians for
The federal government is a primary purchaser of health-
admissions. Both factors have prevented joint account-
care for its employees, so we can expect that government
ability. New policies to achieve joint accountability
employees will lose health benefits. Anticipating actions by
could improve quality and bring about greater fiscal re-
OPM and Congress is difficult, but, as costs increase, they
sponsibility.
are likely to act to limit or modify coverage.
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•
Replace the primary care physician with a primary care
WHAT CAN AGENCIES DO?
is expensive and inefficient. In addition, we face a short-
Much of the nation’s healthcare solution lies in cultural, pol-
phisticated markets. By leveraging information tech-
mentally. However, agency leaders, who are responsible for
team. A face-to-face encounter with a single physician
age of primary care availability in even our most so-
icy, and legislative reform, which, realistically, occurs incre-
nology and coordinating a spectrum of skill sets, we
developing and implementing rules and regulations, can help
could offer people the correct level of care without re-
facilitate and accelerate reform. To ensure that it happens
liance on the one primary physician.This is particularly
logically and cost-effectively, they can initiate research and
relevant for the treatment of chronic diseases, which
analysis of policy implications. Agency leaders can also begin
consumes three of every four healthcare dollars. Poli-
to address the crucial issues that are shaping how our health-
cies could encourage the team approach to primary
care system will look and help determine the best way to
and chronic care, and reward organizations that pro-
get there by exploring fundamental questions:
vide it. •
•
Use cost-benefit analyses when making government med-
•
but such requirements do not apply to CMS or Food
and Drug Administration decisions. As the largest sin-
provement and cost-efficiency?
How can managers directly influence their own health costs by considering programs that improve the health of their respective workforces, for example, rewarding
gle purchaser of healthcare through public programs
exercise, offering healthy food choices, and furnishing
and the federal employees benefit package, the gov-
ernment should ensure that it is maximizing its investment via a fair and transparent process.
•
Reengineer medical reimbursement formulas. Our current
system supports reimbursement that pays for quantity,
primary and preventive care units on site?
What areas of rule setting and regulation require analysis and assessment to better address future policy decisions?
not quality, of care over the lifetime of a patient. We
•
What possible actions can OPM and Congress take to
that provide incentives for quality over quantity in sup-
•
How can leaders in all agencies encourage candidates,
could develop alternative reimbursement mechanisms port of better outcomes. •
Federal Employees Health Benefits package to provide more choices and stronger incentives for quality im-
ical decisions. Public managers are well aware of the reg-
ulatory requirements to consider costs and benefits,
•
How can senior leaders work with OPM to redefine the
limit or modify healthcare coverage for employees?
Congress, and the new administration to address the real healthcare problems quickly?
Reconfigure our current insurance system. Americans want a choice of health plans, which cost $500 billion a year to administer. Many European countries have hybrid
Inaction will cost government agencies and the American
plans spend 30 percent of premiums on administration,
obvious need breaks through the combination of powerful
people dearly.Things may have to get much worse before the
systems that cost far less to administer. Private health
interest groups and ideology surrounding healthcare alter-
while Medicare spends 3 percent, still more than many
natives. We hope not. Agencies can seize the opportunity
European countries. There is a real opportunity to de-
today to act to protect their operations and missions amid
velop a hybrid system that limits the choices and re-
rising healthcare costs, effectively plan for change, and begin
duces costs yet allows a reasonable freedom of choice
the social dialogue on the problems and potential solutions.
without jeopardizing the quality of care received.
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2 0H0I G7H L I G H T S CARE
REVOLUTIONIZING DEFENSE TRANSPORTATION
TRANSFORMING NOAA’S LONG-TERM PLANNING PROCESSES
The Defense Transportation Coordination Initiative (DTCI) is a major transportation management reengineering task, perhaps the most significant materiel distribution transformation effort affecting the DoD since the ocean container revolution in the 1960s. DTCI replaces the numerous current contractors with a single coordinator for most continental U.S. shipments. This centralization features use of commercial practices to enable load consolidation and optimization, more efficient intermodal means of transporta-
The National Oceanic and Atmospheric Administration (NOAA) operated on a budget cycle that did not align well with the demands of long-term planning, investment, and acquisition strategies, making it difficult to set project priorities and estimate costs. We are helping NOAA transition to a planning, programming, budgeting, and execution (PPBE) system that will enhance its multiyear planning and programming. We helped it identify critical projects and
tion, and tailored scheduling to meet customer requirements. Major beneficiaries include the Defense Logistics Agency and military services. We partnered with a leading industry third-party logistics provider to support programmatic, analytical, acquisition, and change management aspects of the initiative. We helped guide the project management team through complex, and sometimes contentious, debates involving DoD and the carrier industry, inquiries from the Government Accountability Office (GAO) and Congress, and the overall acquisition support process, which eventually led to the award of a 7-year contract with a potential value of $1.6 billion.The precision and reliability of freight movements will improve dramatically, leading to increased customer confidence, cost savings, and better efficiency in shipping operations.
programs associated with our interactions with earth’s natural systems and better align resources and actions with long-term goals to comprehensively understand the implications of change. In addition, we assisted NOAA with conceptualizing, planning, and coordinating a national stakeholder forum—bringing together academic, government, and industry organizations that use or influence NOAA products—to help identify requirements and other inputs to the long-term planning process. NOAA is adjusting its organizational responsibilities and processes as needed to realize this PPBE environment. Now, it more clearly understands future priorities and appropriate investment strategies for attaining them, furnishes better information to management, is reducing program costs and timelines, and enjoys stronger stakeholder relationships.
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ENHANCING NEW YORK CITY’S EMERGENCY PREPAREDNESS
lated strategic communications—evaluating the staffing, skills, and structure of the Navy public affairs community. We interviewed key defense officials, Navy public affairs professionals, private-sector public relations leaders, and operational customers relying on the Navy public affairs community to ascertain capabilities, better understand the changing global communications environment, and determine stakeholder requirements. Our analysis contrasted today’s operations with the projected future communications landscape, identified critical skill set requirements, and recommended improvements to organization structures, service delivery, workforce composition, training, and strategy. Navy officials are implementing our recommendations, programming the necessary resources to restructure the public affairs community, and better aligning operational and communications goals in both the short and long terms.
New York City’s Coastal Storm Plan describes the decisions, operational strategies, and coordination necessary to respond effectively citywide to a very large coastal storm or hurricane.The city projects that in a very severe storm up to 600,000 could seek public shelter. Its Office of Emergency Management asked LMI to develop a shelter system stockpile plan to support the city’s sheltering requirements—at more than 500 locations—2 days before and 5 days after storm landfall. We developed the plan and helped the city define a concept that relies on a commercial third-party logistics provider to supply many of the services needed.We categorized the city’s 250+ material requirements into 13 commodity classes (such as food, comfort items, medical, water, and pet supplies) and developed a logistics process for ac-
quisition, storage, inventory and shelf-life management, and distribution activities to enable the city to plan for its transportation requirements, site operations, and resupply efforts. New York City has begun implementation of the plan and is now prepared to meet the requirements of a catastrophic coastal storm event.
STANDARDIZING IT GOVERNANCE AND PRACTICES FOR THE U.S. COURTS The Administrative Office of the U.S. Courts supports more than 2,000 judicial officers in 94 judicial districts—all with decentralized, disparate business processes, project management practices, information management and exchange practices, and approaches to systems administration. We worked with the client to develop a consistent, cost-effective approach for implementation of new information technology (IT) projects, produce consistent data and processes for evaluating projects, and streamline the time and resources required through a consistent project management approach. We developed IT governance principles regarding systems development, project management, risk assessment, and consistency of configuration. Our work involved documenting business process flows, roles, and responsibilities; developing
IMPROVING NAVAL PUBLIC AFFAIRS EFFECTIVENESS As the global war on terror continues, senior DoD leaders have become increasingly aware of the strategic importance of military communications with the public. The need for a communications capability that includes a critical mix of regional and international knowledge, cultural awareness, operational experience, and public affairs skills is growing. The Chief of Naval Operations and Chief of Information asked LMI to assess the Navy’s role and capability in military-re17
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a comprehensive handbook for managing projects; conducting training sessions; and preparing system development lifecycle management templates for project managers beginning or updating a project. We produced a handbook that outlined how project managers should execute change management and governance processes surrounding the adoption of a new IT system and how to automate manual processes. It includes a series of plans and templates for project management, risk management, configuration management, and acquisition management plans and a standardized set of steps, procedures, and activities for the entire life cycle of an IT project.
Budget to develop and validate a standard accounting classification structure for all government agencies to aid in the collection, interpretation, and reporting of financial information at the agency, department, and executive branch levels. We began by standardizing the disparate data elements in which the accounting systems are built to render comparable, consistent data. We identified the requirements to support common needs, obtained concurrence on definitions and format, aligned data elements from different sources, and encouraged central agencies to begin eliminating the disparities in their systems. The result was the Common Government-wide Accounting Classification (CGAC) structure, a mandatory preliminary step in the process of defining system replacement programs within the central agencies. Its use will be required for all executive branch agencies in conjunction with financial system replacement. The CGAC helps agencies standardize ac-
DOCUMENTING THE RETURN ON LEAN SIX SIGMA The U.S. Army has initiated one of the largest enterprisewide deployments of Lean Six Sigma on record to improve
the speed and quality of service and create savings that could be realigned to higher priorities.We helped the Army address the major challenge of assessing the performance of the Lean Six Sigma program.We focused on how to identify and document the cost reductions due to the transformational initiatives and how the savings were reapplied to other priorities. We developed policies, procedures, and metrics that leveraged existing financial systems to baseline, track, report, analyze, and assess the effectiveness. As a result, Army leadership can now better document and administer resource changes and make better resource and initiative allocation decisions.
counting classifications internally. Long term, it will aid in the standardization of financial management throughout the federal government, mitigate system implementation risks and costs, improve data consistency and accuracy, and establish a standard for exchanging information. IMPROVING HEALTHCARE SUPPLY CHAIN EFFECTIVENESS The Department of Veterans Affairs (VA)—responsible for operating one of the world’s largest healthcare systems and among the largest acquisition agencies in the federal government—was under intense congressional and GAO pressure to improve healthcare management for our nation’s veterans and transform its strategic direction. Facing a very short response time, the VA Office of Acquisition and Materiel Management asked LMI to ex-
SETTING A NEW STANDARD IN GOVERNMENT-WIDE ACCOUNTING We are working with the Office of Management and 18
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amine its strategic and organizational challenges. We interviewed key VA executives—customers, stakeholders, and managers of the department’s logistics and acquisition services—to gather information on how this work was actually performed. Our analysis revealed a disparity in performance expectations among the business lines and a concentration on short-term materiel management. VA officials are now implementing our recommendations for a 5-year plan that emphasizes business performance and renames the organization the “Office of Acquisition and Logistics”; an organizational restructuring that focuses on three distinct business lines—logistics, acquisition, and financial services; creation of centers of excellence for training with an emphasis on customer service; and a total commitment to integrated end-to-end supply chain management.
in the prototype state, and we are now proceeding with fullscale model development. The Navy now has a means to project losses on the basis of historical or econometric factors, promote the workforce to fill required manning levels, laterally transfer the workforce on the basis of force-shaping needs, and determine new officer accession requirements in addressing force structure strategies.
CREATING A WORKFORCE PLANNING AND FORECASTING MODEL FOR NAVAL OFFICERS
port has included analysis and recommendations on the organizations, infrastructure, policies, systems, processes, and functions needed to manage and execute a host of logistics operations at the national level—with immediate emphasis on procurement, distribution, asset management, sustainment, and financial management. We deployed strategic logisticians and experts in maintenance management, supply chain management, capacity development, information and systems architecture, local language and culture, and strategic planning. We analyzed, inspected, and inventoried existing logistics resources, processes, and capabilities and developed a plan that recommended ways to improve coordination of logistics. Our plan carefully considered the Iraqi culture, necessary training programs, business processes, supply chain requirements, information technology systems, and numerous other aspects of an overall logistics support environment.
DEVELOPING LOGISTICS FOR A SUSTAINABLE IRAQI SECURITY FORCE Long-term peace and security in Iraq depend on a stable, self-sufficient Iraqi security force (ISF).The ISF needs its own logistics support system to operate without the support of Coalition logistics elements.We are working with Coalition advisors to the Iraqi Ministries of Defense and Interior to support development of sustainable ISF logistics. Our sup-
The naval officer corps comprises 50,000 personnel in 72 distinct career fields, such as submarine, aviation, supply, engineering, and intelligence. To enable better decisions about recruiting, promotion, resourcing, and workforce optimization, the Navy asked LMI to develop a single, integrated model to study the overall officer community. We looked at all of the requirements and assumptions about recruitment, accession, transfers, and attrition.We interviewed Navy officials and assessed accession, promotion, and lateral transfer plans as well as historical personnel loss rates. We then developed a prototype planning and forecasting model, which fully integrates these complex workforce dynamics to show how each affects the Navy’s future resource and staffing requirements.The Navy has implemented our model 19
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THE OPPORTUNITY
TO M A K E A D I F F E R E N C E HAS NEVER
B E E N G R E AT E R .
20
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L M I C H A RT E R
W E E X I S T TO S E RV E OUR NATION’S GOVERNMENT: TO HELP CIVIL AGENCY AND DEPARTMENT OF
DEFENSE MANAGERS MAKE DECISIONS AND TAKE ACTIONS THAT B E S T S E RV E T H E P U B L I C I N T E R E S T.
W E M E A S U R E O U R VA LU E BY THE UTILITY OF OUR WORK: ITS ABILITY TO CO M P E L E F F E C T I V E
AC T I ON AND DELIVER OUTCOMES THAT MAKE OUR GOVERNMENT BETTER.
OUR COMMITMENT, AS A N OT- F O R - P R O F I T COMPANY, IS TO G OV E R N M E N T S U CC E S S INSTEAD OF
SHAREHOLDER PROFIT, PRODUCING THE HIGHEST VALUE WORK FOR THE TAXPAYER DOLLAR.
BORN OF A UNIQUE MISSION, WE BRING THE MOST C APABLE, CREATIVE, AND EXPERIENCED TALENT
AVAILABLE TO BEAR ON A DVA N C I N G G OV E R N M E N T M A NAG E M E N T; WE FOCUS ON PROVIDING INNOVATIVE SOLUTIONS THAT DELIVER
I M M E D I AT E I M P R OV E M E N T A N D E N D U R I N G VA LU E .
THROUGH OUR W O R L D - C LA S S L M I R E S E A R C H I N S T I T U T E ,
WE FOSTER AND ENCOURAGE THE DEVELOPMENT OF MANAGEMENT CONCEPTS, TOOLS, AND TECHNIQUES THAT ENABLE OUR GOVERNMENT CLIENTS TO
AC H I E V E T H E I R G OA LS .
WE ARE CONCERNED WITH THE MOST I M P O RTA N T A N D U R G E N T M ATT E R S
FACING OUR NATION, AND PLAY A VITAL ROLE IN ADVISING FOR ITS FUTURE. OUR DISTINCTIVE VIRTUES OF A NA LY T I C A L A N D T E C H N I C A L I N G E N U I T Y, OBJECTIVITY, AND TRUSTED ADVISORY ARE THE CORNERSTONES OF OUR EXCELLENCE.
THE OPPORTUNITY TO
M A K E A D I F F E R E N C E INSPIRES US TO PASSIONATELY PURSUE
IMPROVING OUR
NAT I ON ’ S G OV E R N M E N T.
T H E O P P O RT U N I T Y
2000 Corporate Ridge M c L e a n , VA 2 2 1 0 2 - 7 8 0 5 800.213.4817 C o n t a c t : P a u l T. We i s s pweiss@lmi.org
TO M A K E A D I F F E R E N C E H A S
N E V E R B E E N G R E AT E R .
LMI Park View Center 1 7104 Ambassador Road Suite 280 Baltimore , MD 21244 LMI 4690 Millennium Drive Suite 200 Belcamp, MD 21017 LMI 5053 Ritter Road Suite 102 M e c h a n i c s b u r g , PA 1 7 0 5 5 LMI 804 Omni Boulevard Suite 103 N e w p o r t N e w s , VA 2 3 6 0 6 LMI 10541-43 South Crater Road P e t e r s b u r g , VA 2 3 8 0 5 LMI 1777 NE Loop 410 Suite 608 San Antonio, TX 78217 LMI 703 Seibert Road Building 4, Suite 1 Scott AFB, IL 62225
RESEARCH INSTITUTE 2000 Corporate Ridge M c L e a n , VA 2 2 1 0 2 - 7 8 0 5 800.213.4817 C o n t a c t : M a u r i c e Ke l l y mkelly@lmi.org
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