More than at any time in recent memory, powerful forces are buffeting
the health care sector. We are in
the midst of profound upheaval,
driven by market and policy responses to the industry's long-term
We can already see evidence that the dysfunction of our traditional
health system is accelerating. It also seems clear that the center
cannot hold indefinitely.
Dog Eat Dog
It is useful to remember that the health care industry's
different stakeholders are adversaries. While they clearly share a
common understanding that a wholesale meltdown is possible, there is
little real motivation for collaboration and no unity. Independent of
role, the industry as a whole has been focused on, and extremely
effective at, securing dollars from purchasers: government, employers
and individuals. But each silo within the industry has been separately
focused on growing its own slice of the health care pie. In every
niche, there are courteous conceits – access, appropriateness, efficiency and value – reserved
for the good manners of public relations. But these are meaningful in
practice only if they do not conflict with the professional's or the
firm's economic performance.
Back in December when the bloom of the Obama election was still on the rose, the rhetoric of health industry representatives
reflected widespread, earnest agreement that we must finally move
toward meaningful reforms. But as the details of reform have taken shape, their impending realities have started to chill the industry's public stance on change. And so the gloves are coming off to protect self-interest as the system seeks solutions.
Steven Pearlstein of the Washington Post detailed the campaign by conservative commentators led by Rush Limbaugh to discredit the stimulus bill's allocation for comparative effectiveness research.
The mantra was that this effort was really cost-benefit analysis
intended to deny people care. But the funding for the disinformation
effort came from the drug and device industries. The funders worried
that credible data showing which drugs and devices actually worked best
would wreck their sales, margins and, most importantly, their business
paradigm of the last twenty years.
Short of an enterprise-wide catastrophe that sinks all ships,
fundamental differences in goals will also make any real collaboration
and compromise among the power players difficult. A New York Times story
last week focused on two important unions, the Service Employees
International Union (SEIU) and the American Federation of State, County
and Municipal Employees (AFSCM), that suddenly and without comment,
quit the multi-constituency Healthcare Reform Dialogue (HRD). HRD, a
health care reform coalition, has tried to bring together employers, unions, and health industry players
to find consensus on reform approaches. It is hard to not interpret
this seemingly insignificant event, the shattering of unity by apparent
intense disagreement, as a foreshadowing of the ferociousness yet to
come on health care reform.
Then there's the simmering rage that lower- and middle-class Americans
harbor for the industry. Most lawmakers are finally realizing that this
is a sleeping dragon. True, nurses, pharmacists and doctors, in that order, continue to engender the greatest consumer trust of professionals.
But many health care corporate segments – certainly the health plans
and the drug companies – are widely seen as taking advantage whenever
they can. Remember audiences' overwhelmingly supportive reactions to
Helen Hunt's frustration with her HMO in the 1997 movie, As Good As It Gets?
So we have the industry's fragmentation and fear of reduced margin, and
the consumers' seething. Now add an unexpected national economic
downturn, and the industry is finding that tolerance of its exorbitant
costs is evaporating and that its very structure is in question. Health
care has out-priced the mainstream of its purchasers, a sin that is
finally being revisited on every sector of the industry.
A Deteriorating Marketplace
We see circumstantial evidence that the health care industry is under
unprecedented siege in the marketplace, the fruit of longstanding
business practices that, as John Sinibaldi so eloquently pointed out last week, have consistently favored health care vendors over patients and purchasers.
Health plan enrollment is now like a sieve. At a
recent conference of senior health plan executives, all admitted that
enrollment had recently dropped precipitously. Some members are
switching to other plans. But many more are dropping out because their
premiums became unaffordable, or because they've lost their jobs. The
execs also agreed that the multiplier used by industry professionals to
estimate the number of total lives from employee lives, stable at 2.2
for many years, has plummeted over the last few years to 1.8. If true,
that would signal that increased costs have driven fewer businesses to
subsidize dependent coverage, resulting in a 20% drop in total
enrollment – the casualties would be mostly children here – that is NOT
being reflected in the uninsurance surveys. In a related vein, HHS data
from before the economic downturn show that only 39% of Florida's small
businesses – they comprise 95% of all Florida businesses – still offer
health coverage to their employees. This is significantly below the coverage values reported by the Kaiser Family Foundation, which makes it difficult to believe that these dynamics are accurately reflected in the surveys of those populations.
As coverage erodes, we
are most concerned about the hospitals and health systems that are the
anchor health care resources in most communities. With the economy and
stocks tanking, the investment income that was keeping many health
systems afloat has disappeared. The ranks of the uninsured and
underinsured have exploded, so uncompensated care costs and bad debt
are skyrocketing. Few health systems have gotten serious about huge
supply chain margins, often north of 50 percent, so there's nowhere to
turn in the short term. While safety net short term acute care
facilities have been under duress for many years, now these trends are
conspiring to also threaten the community facilities that cater to
those with more resources. One recent survey of 4,500 health systems,
published before the economy really began to plummet, found that more
than half were "technically insolvent or at risk of insolvency."
As the economy has worsened, and jobs and money evaporate, many patients are breaking physician appointments or are unable to pay for services received. Bad debt has become much more of a problem for physician practices, so many have become more aggressive in collections. We
have received anecdotal reports that some physician practices are
demanding payment in full prior to procedures, and are balance-billing
their health plan patients in direct violation of their contractual
agreements. The health plans aren't positioned to police every
practice's policies. But if this trend is widespread in the system, it
suggests that the niceties of business practice are going by the
wayside as practices struggle to maintain.
Finally, the combination of health coverage erosion and high care costs
is fueling an arms race that, until fixes are in place, patients will
lose. The two fastest growing segments of the health care financial
sector are individual credit scoring and collections, specifically
aimed at capturing available dollars for the system. In this economy,
aggressive collections practices will drive many more patients into
bankruptcy, intensifying consumer dissatisfaction and further fueling
the engines of change.
Is Health Care A Bursting Bubble?
One of us recently had a 3.5 hour diagnostic procedure at a local
hospital outpatient surgery center. The EOB (Explanation of Benefits)
from the health plan showed the hospital had submitted a facility
charge of just over $13,000 – more than four months of total income for one-third of American households – and
the health plan paid approximately $1,300, which means that willing
vendors and purchasers agreed that the procedure's market value was 10%
of the charge.
But without insurance, we would have been legally responsible for that
bill, with the willingness to negotiate utterly at the discretion of
the health system. Setting aside the fact that charges are crazily tied
to the evolution of Medicare cost reports and grow out of stuffing
every bit of possible cost into each charge, the EOB begs three questions.
Is it appropriate to add a 1,000%
surcharge for the sin of uninsurance. For not-for-profit health systems
especially, is it appropriate to do so while receiving a tax break for
providing community service?
When a provider chooses to pursue a receivable figure that is more than
the established market value (as determined through the contractual
figure with the health plan), can that effort properly be understood as
inflating the market?
- Can a system maintain stability when it inflates value beyond the means of most of its purchasers ?
The definition of a market bubble is a high variance between the
intrinsic value of a product and its market valuation. Bubbles always
burst eventually, as inflated market values tumble back towards
intrinsic value. We're seeing this with homes and banking stocks. Are
we there yet with health care services? Could America's health system
It's hard to imagine the health care system in free fall. The
federal government pays for approximately half of health care already,
through allocations for Medicare, Medicaid, SCHIP, the VA, and the
Federal Employees' Benefit Program. The stimulus bill allocates a "down
payment" of $634 billion for health care reform over the next ten
years, assuming that somehow this money will go to save health care
dollars. But it could just as easily become a bail out for the failing
health care sector, massively larger than the bailouts for the banks or
the autos, and "too large to fail." Keep in mind that health care is
now 16 percent of the US economy, one dollar in seven and one job in
eleven, so large that any significant disruption in the sector would
inevitably cascade to all other parts of the economy.
And the threat goes both ways. Health care could push the larger
economy over the cliff, or the reduced resources associated with the
downturned economy could precipitate the collapse of a health care
sector that has become accustomed to inflated reimbursements. Either
way, American society is vulnerable and in very big trouble.
It goes without saying that, as the funding dries up, the safety net
provider organizations that deliver the lion's share of care to the
medically indigent will fail first, as did Martin Luther King in Los
Angeles, and as Grady in Atlanta almost did. A year ago, the safety
nets' distress at the edges of the system were already the most
tangible signs of the unfolding crisis. Now, the problems we've
described above are with mainstream providers who cater to the middle
class. What we have not seen yet is the impact on the health care
supply chain, which accounts for 40 percent of health care dollars and
which are also tremendously over-valued.
Instability in systems that are directly connected with important
societal benefit is never good, because powerless people suffer
disproportionately according to caprices of fortune and the system's
rules. American health care certainly fits that bill at the moment. A
majority of the American people are very unhappy with the system, and
nearly every sector of the health care industry is under increasing and
unsustainable stress. American health care's storm clouds are
gathering. It's very ugly right now, and getting worse.
The good news is that, as the system becomes becomes
increasingly unstable, the opportunity also increases for a full scale
overhaul of health care that rightsizes the longstanding waste and
pricing of American health care to more sensible proportions, and
develops both policy- and market-based solutions that build on
experience and that can have lasting utility. If our leaders are
unwise and susceptible to special interest influence, it could also go
the other way. But times like this are our best shot, because the
problems are so glaring and the solutions that are in the common
interest so straightforward.
Whatever path we go down, health care is certainly poised for
significant change. Part of our national effort for that change must
include a transition plan that consciously seeks to reduce to a minimum the turmoil
Brian Klepper PhD is a health care market analyst and a Founding Principal of Health 2.0 Advisors, Inc . David C. Kibbe MD MBA
is a Family Physician and Senior Advisor to the American Academy of
Family Physicians who consults on health care professional and consumer