Not Really an Option

To: Executives leading U.S. Hospitals

The public option appears to back in the national dialogue and I’m wondering how concerned you all are about that.

After all, many of you have been quite successful at minimizing the appearance of true profit by growing your cost structure on the backs of private insurers, right?

Thinking back over the last ten to fifteen years, many things have changed.

First, you began to demonize the insurers, complaining about denials, telling you how to practice medicine, not paying your bills quickly, and generally not supporting your ability to practice medicine as you see fit. Some of your claims were fair, but many were not. However, fair or not, these complaints were heard loudly and clearly by the public. And now there is nearly absolute distrust of the insurance industry.

Then, Medicaid and Medicare tightened their reimbursements so you could only profit if you were efficient. And, to be honest, you had to be very efficient to make money on Medicare and/or Medicaid. So you decided that you’d be better off making money off of the private insurance companies. You could make up the losses incurred in Medicare and Medicaid through the private insurers by raising rates and then demanding higher reimbursements. If an insurer said no, you could take your rhetoric to the public, and inevitably the public would back you and essentially force the insurer to accept your demands.

Then, you purchased other hospitals and physicians offices (thus, eliminating competition), built new facilities in the suburbs, increased private rooms and birthing suites, added the latest technology (whether medically necessary or not), and turned your medical facilities into elegant, fashionable destinations. Sometimes you even added valet parking. All of these things helped you attract and keep the private insured people that you need to drive your profits.

Did you notice that all of these things drove up the cost of health care? Consequently, insurers had to raise their rates to keep up with your reimbursement demands. Which caused more people to not have insurance through their employer. Which caused you to serve more uninsured. Which drove up the cost of health care.

As this cycle continued, the public lost all trust in the insurance industry. The public (and the media) have not yet begun to connect the dots between your spending and the significant uptick in the cost of insurance to employers. Today, few insurers can truly control costs because they cannot exclude expensive hospitals or physicians, and they’re often not successful at negotiating fair rates with you.

So now we’re again considering a government-based alternative to commercial insurance. And, if it’s anything like Medicaid or Medicare, that plan will dictate lower reimbursements through law than insurers can negotiate. Once that’s available, many people will switch to the government option, because it costs less.

And so I wonder, where will your profits come from then?

– Gary Nissen, Health Care Analytics Zealot and CEO at Health Plus Technologies.

Gary Nissen is CEO at Health Plus Technologies. Gary has been involved in analytics for managed healthcare since 1989 as a software developer, project manager, independent consultant, and software vendor.

16 replies »

  1. Full-blown competition will only occur in the healthcare field if service provider contracts between the doctors/hospitals and insurance companies are eliminated. These contracts limit access, quality, competition and raise prices. Also these contracts make it harder for new insurance providers to enter a state since these contracts are used to build the insurance companies’ service provider network. A new insurance company would lack the network and find it difficult to recruit local providers who are already fully booked by established insurance carriers. The key is to eliminate the service provider contracts and require the doctors and hospitals to accept patients with any valid state licensed insurance until their full patient load is reached.
    It is only possible to eliminate service contracts in a Medical PSC environment since there has to be some mechanism for negotiating prices. The Medical PSC would set fair pricing based on actual average costs plus a reasonable mark-up which all state insurance carriers would pay for the exact same medical provider services. Since all insurance carriers would pay the same, the Medical PSC would require that all doctors/hospitals accept all valid state licensed health insurance without prejudice. Anyone could walk into any doctor’s office or hospital accepting patients in the state and receive medical attention and pay a fair price for service. (The insurer may still require an authorization to see a specialist, but the choice of specialist would not be limited.) This would equally apply to the non-profit co-op plan so that it would not be cost effective for this plan to invest in its own medical facilities.
    In the Medical PSC environment the insurance carriers are all the same except for the uniqueness of the policies they sell. The carriers only collect premiums and pay-out claims according to the terms of the individual policies. Their former network is no longer a selling point. Their patients no longer get preferential treatment if the carrier paid the highest. The common denominator becomes competition over which carrier can sell the best coverage at the cheapest price to out sell the others. Then the more carriers selling insurance in the state, the more competition you have. The level of healthcare access and quality available to the customers of these insurance carriers would be equal. Then everyone in the state could purchase the best healthcare they choose to afford. This is the basic healthcare operating environment which should be operational in each state now. A few cents can be added to the state tax tables to cover the cost of the Medical PSC. Spread over the millions of state tax returns makes the cost practically negligible. (Other states without a state income tax will have to decide how to cover these costs, but the best way is via the state income tax since all payers should have insurance and share these costs.)
    Common sense, which seems to be lacking in Washington, should tell you that the Medical PSC solution would increase access, quality, competition and policy coverage while lowering patient costs. These benefits are independent of any law changes in Washington. This idea should be echoed across the nation. Any “appropriate” law changes in Washington to glean money to subsidize the disadvantaged is an aside to creating the Medical PSC environment. If we had created the Medical PSC environment earlier, we probably would not have the healthcare crisis we have now. Like I said, if you do not eliminate the service contracts between the doctors/hospitals and the insurance carriers, you are subsidizing the problem by feeding it more money to absorb. A real solution requires fundamental change in the mechanics of the system. The Medical PSC is the missing piece of the healthcare puzzle.

  2. gee…like the non-profit health networks are any better and keeping costs down than the for-profits?
    i live in MN, where all hosptials are under moratorium and are by law non-profit.
    everybody seem to keep building specialty hospitals and remodeling birthing centers and rooms just as much.
    the only problem is that as population shifts further and further into the suburbs, the only beneficiaries are formerly rural hospitals in absorbed towns, or crummy old established hosptials in the cities an hour away from where most people now live.
    it’s almost like gov’t can’t help but cause distortions that eventually are worse than the unregulated world they were meant to remedy!

  3. Gary you are right on.
    I have been in the industry for years worked for a TPA, very large insurer, Physicians and hospitals.
    Could the playing field be leveled? These examples were for the same facility.
    Example: Medicare paid a ER visit and all testing @ $600. Private Insurance with a large membership paid the same hospital for and ER visit which also included all testing $1,550. An HMO negitated with the hospital for ER visits only and their contract rate was over $16,000 plus co-pay of $2,500.
    How come the Private Insurance Companies are the bad guys?

  4. ticktockdoc, I appreciate your perspective.
    At one time in my career, back in the mid-late 90’s, I sold Optimed criteria for the very purposes you’ve touched on.
    I support the concept, primarily as a way to protect patients from the risks associated with surgery when other forms of treatment may be viable, and I see cost-avoidance as a secondary feature.
    In any case, I suspect that we’ll see movement in this regard with Medicare/Medicaid as well in the coming years, along with other initiatives.
    My own clinical interest and focus is end of life care, again as a way to improve overall quality.
    May we live in interesting times, eh?

  5. I believe this comment is head-on with what has been happening over the past several years. As we argue over the “Public Option” Plan I would like to remind people that almost every County has a “Public Option” for Health Care and many choose not to take it. It is called the County Hospital or the Free Clinic. Both are government run public options and the reason that only poor choose to go there is because they, unlike most of us reading this blog, have no other choice but to seek their care at these locations

  6. Jerry, **Personally, I’ve never seen anybody make a convincing case in favor of even having a for-profit health insurance industry. I’ve never seen anybody coherently describe what value the health insurance industry adds to the process…**
    As a physician i dislike having to get preauthorization for procedures or imaging studies. I dislike having to justify the use of anything other than generic drugs. While often helpful, disease management programs can often be irritating to deal with. Having said that, there is no question that these policies decrease health care costs for the insurance company and ultimately, for society at large. Medicare does none of this. Other than arbitrarily deciding what it will pay and having an annual budget, it makes no attempt to curtail unnecessary health services…none. Zero incentive is provided for a practitioner to be prudent in health dollar consumption. to the contrary, increasing volume, necessary or not, is the only avenue available to a physician to compensate for diminishing reimbursements. That is part of what health insurance companies do that medicare makes no attempt to do. Without financial incentive, no one will do it in the “public option” either.

  7. Amen, brother Nissen!
    Your history is impeccable and your writing is incisive, but I would suggest that your prognostication falls into a common trap.
    You write: “And, if it’s anything like Medicaid or Medicare, that plan will dictate lower reimbursements through law than insurers can negotiate.”
    If a public plan comes into being that is able to use Medicare or Medicaid-like rates, and is somehow able to acquire a network large enough to attract a significant number of members away from private insurers, then that is a game-changer for how private insurers negotiate with providers.
    Right now, insurers are like the Frankenstein’s monster that hides in the shadows because it knows that it is seen as hideous and destructive. They avoid public fights with hospital systems, because they know it always makes them look worse in the eyes of the public than the hospitals who plead poverty and hide behind the Rod of Asclepius.
    But the one thing Frankenstein hates more than the mob is fire. And a competitor public payer with teeth is fire. It will force insurers to engage in very hard-balled negotiations with providers to match the public-payer rates. They will do it, and they will succeed, because it will be a matter of life and death.
    They will be able to succeed because the conditions in which they negotiate will have changed profoundly. If a provider complains the rates are too low, the insurer can reply:
    1. The government is paying these rates for the same population, so you can’t say it is too miserly for us to do so.
    2. Unlike in the past, we can’t let the government pay less, because to do so will mean we lose members and eventually go out of business (or be relegated to ASO plans for ERISA self-insurers).
    Moreover, providers won’t be able to focus on private insurers. Their ire will be directed primarily at the government, because they will know that the government is both forcing private insurers to driver harder bargains and giving them cover for doing so. Also, it won’t help the bottom line of providers to let the public payer use those rates than for private ones to do so.
    So, if a public option comes into being and it pays low non-negotiated rates, AND it is able to build a big enough network to be attractive to a lot of people, THEN, I promise, insurers will match the public payer. It won’t be pretty, and smaller insurers will probably be swallowed or go out of business, but the cost shift will disappear.
    I’m willing to bet that this becomes conventional wisdom pretty soon. All you consultants out there are free to use this insight profitably for your clients. 😉

  8. Once upon a time, when I was in school getting my MPH, I learned about Certificate of Need programs, and how they are supposed to restrain facility costs by reducing unnecessary building programs. Obviously they don’t work very well (and they only exist in 36 states). Maybe part of healthcare reform should be a federal CoN progam with some teeth to clamp down on hospitals’ build-the-Taj-Mahal-and-pass-on-the-costs-to-private-insurers business model.
    Great piece Gary.

  9. Coming from a not-for-profit payer, I have to say this is an awesome post. Thanks Gary.

  10. bev M.D.,
    No shame on you; folks like Bill McGuire stopped being docs long ago. One major medical center I worked for back in the ’90’s had a prominent oncologist as its CEO. I wondered what made a physician stop ministering to the sick and become a businessman…then I found out what his salary was. It was clear to me then that serving humanity was obviously not his top priority.

  11. The for-profit health insurance industry exists to make people like Bill McGuire, M.D. (United Health) his – what was it? 30 billion? – dollars, of course! I am ashamed to share the same letters after my name as he does. Or rather, HE should be ashamed.
    This post doesn’t even pretend to be unbiased.

  12. Well, yeah. Of course hospital execs love the revenue stream they get from the insurance industry.
    Some are even pretty open about it.
    Personally, I’ve never seen anybody make a convincing case in favor of even having a for-profit health insurance industry. I’ve never seen anybody coherently describe what value the health insurance industry adds to the process, or how it’s participation benefits anybody besides, you know, the health insurance industry.
    But maybe I’m just stupid.

  13. This part of the equation is receiving even less discussion than singlepayer. We have to consider all the elements of the healthcare cost equation if we are to come up the best solution.

  14. Excellent post!! First insurance, then hospitals then universal budgets, then real affordable healthcare.