Is the Healthcare Economy Rightsizing?

Brian KlepperMore 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.

  1. 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?

  2. 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?
  3. 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

The Threat
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.

The Opportunity

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

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Henry MassingaleAdel F.jim jaffePhilip Micali of bWell-informedDavid C. Kibbe, MD MBA Recent comment authors
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Henry Massingale

For the people to trust again, first we must fix the current failed tax system that drowned for 9 years, and then the People may trust Government Officials with the Health Care Dollar There is a unity lost between Governing Parties that is needed to help the people feel secure. The moral building block for Health Care. To see the true Health Care Tax forum you must stop thinking in 3-D,This multi tax forum is against a $100 Trillion Dollar system.. … To force pay into another system of failures within Health Care Insurance Groups. This economy will not balance… Read more »

Adel F.

I am a physician. When I was in active practice I was making an excellent income.
I never had to worry about the cost of my medications.
Once I retired my income dropped and I also had to buy all of my ever increasing list of medications.
As the cost of medications was a substantial part of my family’s budget, I started searching for Online certified
pharmacies that have lower prices. After investigating numerous pharmacies in the USA, Canada

jim jaffe
jim jaffe

One of the charms of the blogosphere is that it reminds is there are many parallel universes out there. There’s a wealth of poll data showing that Americans don’t see the health system in crisis and dissatisfaction with the system is a bit less than it was in the early 90s. More importantly, most folks are quite satisfied with the care they’re getting, although they’d like to pay less for it. The folks who are unsatisfied tend to be uninsured and tend, surprise, to lack political power. Which is why the political system can afford to ignore them and focus… Read more »

Philip Micali of bWell-informed

Here is a problem: What’s more fearful is how much our current system costs individuals and hurts economic security. The US is fatter than any other nation because people don’t have relationships with general doctors, rather they use the expensive specialty care system to ameliorate symptoms. Here is the solution: The foundation of any reform needs to emphasize prevention and primary care and convey the benefit of doing so, both in terms of cost savings and productivity. The ‘culture’ of medicine will change only if, like in the financial markets, incentives are aligned properly. Will healthcare finances be the next… Read more »

David C. Kibbe, MD MBA
David C. Kibbe, MD MBA

Dear Tim: Thanks for your thoughtful comments about the effects of the profit motive in health care. It’s time that we consider a public health model as a foundation of a national health care service, in my humble opinion. But it’s going to be an uphill struggle, as was civil rights, tobacco reform, and the election of President Obama. Kind regards, DCK


What would be solved; the cost of care, access, less disease, medical bankruptcy, less poor using the ER?

Roger Williams
Roger Williams

Nate said: “…Make EVERYONE pay for 50% of their care like we did in the 60s and problem would be solved.”
and I would add: “in one second!”


People want electricity, gas, phones and water, they don’t want to get sick.


“Health care is an essential service, the theory went, just as are electricity, gas, phones and water. Regulating health care as an essential service would assure that it would be rationally distributed and adequately funded.” This would be great if it was also paid like all these utilities. THe average person doesn’t use as much electricity and water as they like then expect someone else to pick up the bill. Nor do they pay a 20% surcharge to have someone else pay their utilitiy bills. Make EVERYONE pay for 50% of their care like we did in the 60s and… Read more »


“Then 1998 on Private insurance premiums took off as providers shifted cost to private plans to cover the shortfall from public financing.” A failure of private plans NOT Medicare. Medicare was trying to rein in costs but also has to live within a private for profit system. Your example shows the failure of a two tier system. “The point is 14 states spend 25% less then MA.” So, I guess hosptials charge 25% less in those states, docs earn 25% less, and insurance companies make 25% less profits as well? And I guess for the same policy to the same… Read more »

Brian Klepper

Mike, All systems have their flaws, through each system’s advocates rarely own up to them. In America’s governmentally-financed systems, special interest influence on Congress spins policy and regulation to advantage, and the result is cost as explosive as it is in the commercial sector. The bottom line is that inflation in Medicare and private-sector health plans have effectively tracked with each other for the last 30 years. See http://www.thedoctorweighsin.com/journal/2007/7/5/mr-orszags-surprise.html. If single-payer, by itself, was inherently more efficient, we’d have experienced MUCH lower costs in Medicare and Medicaid in the past. The answers are not merely in different financing mechanisms. We… Read more »


Perhaps someone can answer this. If the single payer system is the way to go, why is Medicare facing bankruptcy?

Tim Cousounis, DAI Palliative Care Group

Brian and David, Your comments and insights about the health industry market bubble are right on! Unfortunately, as a nation we are ill-prepared for the bursting of the bubble, and woefully short of solutions, not unlike the banking industry when that sector recently imploded. During my career as a health executive, I’ve made a point of studying the impact of organizational structure in the efficient delivery of health services. One point that has received scant attention of late is the role of profit-making organizations in the health care delivery system. During the 90s, proprietary hospital operators were lionized for their… Read more »


“That said, look at U.S. health care expenditures compared to other developed countries — we spend nearly double per capita and get results that are very mediocre. That to me describes a “bubble”.” This is a total Non sequitur argument. You can’t compare the aggregate results of 10,000 health systems to those of 1 health system then use the poor results to incriminate all of the 10K plans. That is the same as saying since the average IQ is lower then mine I’m more intelligent then all of you. There are thousands of health care systems in the US that… Read more »

Brian Klepper

Vince, Thanks for your comment. I understand your reasoning. Here’s why I disagree. 1) Demand may be inelastic. Money isn’t. A couple years ago, David Cutler from Harvard wrote a piece saying that all this money we’re spending on HC is good for the economy. I wrote a response – Enthoven signed on as a co-author – called “Running on Empty” arguing that, if the money ran out, it would only cause the sector and then the economy generally to crash. Now the reverse scenario is occurring. Resources in the rest of the economy are drying up. The impacts are… Read more »