Irresistible Forces

At our first meeting years ago, Tom Emerick, Walmart’s then VP of Global Benefits, told me,

“No industry can grow indefinitely at a multiple of general inflation. It will eventually become so expensive that purchasers will simply abandon it.”

He said it casually, as though it was obvious and indisputable.

Health care is playing out this way. From 1999 to 2011, health care premium inflation grew steadily at 4 times the general inflation rate. During that same period, the percentage of non-elderly Americans with employer-sponsored health coverage fell from 69.2 to 58.6 percent, a 15.3 percent erosion rate.

Health care’s boosters like to argue that it has buttressed the economy, and that it means more jobs and economic prosperity within a community. A February 2011 Altarum Institute report estimated that private sector health care jobs now account for nearly 11 percent of total employment. Since the recession began in December 2007, health care employment has risen by 6.3 percent while employment in other industry sectors fell by 6.8 percent.

But there’s a darker side. Health care’s ever-increasing revenue growth has come at the expense of individuals and firms that pay its bills, directly through health plan premiums, and through taxes, often instead of buying other goods and services. It transfers wealth to health care from everyone else. Like the finance services industry, health care has become a disproportionate “taker” industry, sapping economic vitality from America’s communities.

And it is also clear that a sizable part of health care cost is inappropriate and unjustified. It is related to procedures that are done unnecessarily, markups that are hidden, and a thousand ruses to make it cost more. The prestigious National Academy of Sciences Institute of Medicine recently estimated this waste at 30 percent of total health care expenditures, or about $765 billion/year. But any number of health care professionals I’ve spoken with agree that, based on their experience, the number must be significantly higher. Other estimates have suggested this. In 2008, the consulting firm PwC issued The Price of Excess, which calculated that about 54.5 percent of health care cost, or nearly $1.5 trillion annually, focused in every sector – supply chain, health information technology, care delivery and finance – provides no value.

Institutional excess has made America’s health care costs double or more those in other industrialized nations, with middling quality, meaning that we have the lowest value health care among our peer countries. The out-of-control practices that are taken for granted throughout the US have become the most significant threat to our national economic security.

I recently visited a Wisconsin community that, with four health systems for 75,000 people and virtually no price competition, is a clearly understandable microcosm of this problem. Employers I met with told me, “We have great health care here. But the costs are crushing us.”

Wisconsin average health care costs are higher – 6.1 percent – than the national average, but that’s not the real story. Someone has to be above the mean, and the costs in many states – Alaska, Connecticut, Maine, Massachusetts, and others – are higher than Wisconsin’s.

The real culprit is Wisconsin’s regional health care cost variation, which makes clear that health care organizations in some markets have pressed their advantages more successfully than others. A local group, Citizen Action, led by Robert Kraig PhD – Dr. Kraig was named “Consumer Health Advocate of the Year” in 2009 by Families USA – writes a superb annual report ranking health insurance cost in different Wisconsin communities. The 2012 report shows that Wisconsin’s highest cost market, La Crosse, is 16.8 percent higher than the national average. Interestingly, Madison, Wisconsin’s 2nd largest community with more than a half-million people, has relatively low health care costs. There is a 32 percent difference – $2,177 per person per year – between the health care costs in Madison and La Crosse.

These health care cost differences are so large that they influence other economic realities. Communities with higher health care costs are likely to have more uninsureds, and regional businesses are at a competitive disadvantage relative to those in communities with lower health care costs. Higher cost communities are less desirable for firms seeking to establish a presence in new locations.

In other words, despite what they might say at local Chamber meetings about being community-focused, health care organizations that pursue excessive health care cost practices that have become the norm undermine their communities’ welfare, opportunities and futures.

As I have described elsewhere, the tide is turning. Market forces are beginning to emerge in health care, and employers are beginning to stir. There’s more evidence than ever of non-health care businesses collaborating on health care, which could evolve into mobilization on both policy- and market-based efforts that seek to improve quality while driving down cost.

Meanwhile, people knowledgeable about health care’s excesses will increasingly exploit them as market opportunities. Some health care organizations are actively engaged in developing more market-capable business practices. They seek to trade lower per patient revenues and margins for greater market share that will be drawn from their competitors.

Most, though, will remain resistant, and will hold onto the conventional, more lucrative (if less appropriate) ways as long as they can.

Which is why I believe a new organizational structure is coming in health care. Getting there won’t be pretty, though.

Brian Klepper, PhD is an independent health care analyst and Chief Development Officer for WeCare TLC Onsite Clinics. His website, Replace the RUC, provides extensive background on the role that the AMA’s RVS Update Committee has had on America’s health care cost crisis. This was first posted on Medscape Connect’s Care & Cost Blog.

16 replies »

  1. Thanks Brian, for being exhibit A for my long-held thesis that the cost of health care is not the same thing as the price of health care.

    Costs can stay constant or even decline. Much of what torments us is pricing power instead.

    I used to believe that Single Payer was the answer, and that still has merit.

    But there must be a key qualification.

    If a Single Payer plan adopts the current coding systems and fee schedules, it could wind up totally broke in 2 years. George Halvorson’s book Strong Medicine has a great quote from a hospital administrator, to the effect that
    “We can beat any fee schedule. Sometimes it takes as much as six months.”

  2. Bob,

    There is egregious unit pricing, as with advanced imaging, dialysis or ambulatory surgery that can be result of local dynamics or simply the aura of medical “specialty.” Then there is overtreatment, which can be seen in specific unnecessary procedures or buried in episodic pathways.

    There are many, many other mechanisms and devices that precipitate squandered money: the HIT sector’s refusal to facilitate interoperability, which stymies care coordination throughout the system; health plans’ insistence on “white pages” provider networks that don’t discriminate between high and low performers; PBM “rebate” programs that confuse purchasers with returned money; Group Purchasing Organization rewards for buying more.

    The message is that when you’re dealing with an evolved and dedicated system, you have to assume that they’ve become extremely creative with their approaches.

  3. Thanks Brian. i was being deliberately cautious in my post about sectoral inflation. I am glad you moved the discussion over towards price-gouging.

    If non-emergency health care was treated like air travel, office supplies, term life insurance, i.e. most of the economy, then a patient needing an MRI would get a spreadsheet from the internet that listed who was charging what:

    –hospital outpatient dept — $5,500
    – prestige clinic – $5,200
    – cheap clinic 10 miles away – $850
    -Medicare’s fee schedule – $770

    With this level of transparency, the costs of discretionary health care would drop like a stone.

    Let me phrase it another way.

    Informally I divide health care products into 3 groups —

    a. those which are inherently expensive, like staying in a nursing home;
    (you cannot automate personal care or achieve scale)

    b. those which are inherently cheap, like aspirin;

    c. those which SHOULD be cheap, except for local monopolies, like X-rays.

    Items in the (a) category should be covered by social insurance. Items in the (c) category should be exposed to competition.

    This leaves my own writing called The Health Care Crusade as a curious mix of socialism and capitalism…..but so be it.

  4. Bob,

    It’s a little more complicated than that.

    As you say, there is variation in different product/service classes. Some products, like cancer drugs, specialty drugs and certain devices, have much higher cost growth rates than even average health care inflation.

    Then there is variation by provider. My clinic firm has observed procedural unit pricing growth within health systems at several hundred percent over 2-3 years, presumably as a way to compensate for the drops in volumes associated with the recession.

    Similarly, when I recently had an MRI at a particular facility because my urologist wanted it to be read by a specific radiologist there, the charge was 10x Medicare ($5,300 vs $534). I would have been on the hook for the $5,300 if were uninsured, or if that facility was out-of-network for my coverage.

    Then there are situations where health plan structure excessive cost to their own benefit.for products. For example, many have bought stakes in PBMs, then have jacked up the pricing on generic drugs 200-250 percent for the enrollees in their plans, reaping the margin while telling their enrollees that they’re managing cost.

    There are many, many schemes like this in health care, and it is impossible for individuals to know what’s what, especially in a system that lacks pricing and quality transparency. It is possible that some more targeted structural reforms are needed, but far more important are changes that make health care more transparent, that change the reimbursement methodology away from FFS and toward value, and that revalue primary care’s management function at the front end of the system.

  5. It may be worth repeating here that health care is not a single product, like wheat or oil or paper clips.

    Heath care is thousands of different procedure, more thousands of devices and drugs, and many types of insurance plans.

    Not all prices are going up. Obviously, the cost of a comprehensive health insurance policy keep going up, in part because the policy covers more things and in part because of actuarial death spirals.

    It might be worth highlighting which parts of health care are extremely inflationary, like cancer drugs, and which parts have a more normal cost growth (like eyeglasses).

    Having done that, we can make more precise reforms.

  6. Can you say “bubble?” We shake our heads at how those in the housing market couldn’t have seen it coming.

  7. No argument from me, Margalit. That’s my core argument. So long as we have a health care system that consumes 4/5 of household income growth because of private industry influence, we’re destined for cataclysm.

  8. Forget about health care. How long do you think a country like this one can be managed this way? Sooner or later something will have to give, or the whole thing will disintegrate. I can’t envision a democracy where the private sector runs things for the benefit of all citizens and the country as a whole. I am not aware of any governance theory or model of this type.

  9. I don’t disagree. But at the heart of it, the problem is legalized bribery and the capture of the regulatory process by the special interest, which trumps any capacity to create policy in the common interest. It isn’t merely that we’ve replaced competent legislators with bozos, but that we’ve allowed the systematic poisoning of the policy environment, which has made legislation less attractive.

  10. It isn’t just the lobbyists, its the Congress itself-the Senators in particular, and their staffs. We keep throwing the bums out and getting new, less experienced bums. We don’t reward the Tom Coburns and Ron Wydens- we vilify them for working with the other side, and eventually they retire. In an earlier era, we ran highly competent legislators like Dan Rostenkowski,
    Dave Durenberger and Bob Packwood out of Congress on Mickey Mouse ethics charges and replaced them with doufuses. Instead of George Mitchell or Tip O’Neill, we have Harry Reid (!!) and Nancy Pelosi. Instead of Bob Dole, we have Mitch McConnell. Sorry, guys, these were bad trades.

    It isn’t just the money, or (sorry Mike Dukakis) the ideology, it’s raw competence, or the lack of it.

  11. I’m with Jeff on this, Margalit. So long as the current lobbying structure holds, we’ll remain far off from a single-payer solution. At this point, only market-based change has the chance to work. The alternative would be for things to collapse financially, which is possible, I suppose.

  12. That’s why it won’t be pretty and it will take a while, but I don’t see any other equitable solution, and even WE are going to eventually figure this out.
    And yes, I still have faith that we will restore legitimacy to our federal government… eventually. What other choice is there?

  13. And the Messiah will come first. . .

    Remember that “single payer” would have to be created by the same pack of clowns (aka the Senate Finance Committee) that gave us the “Affordable Care Act”. Isn’t it abundantly clear that they didn’t know what they were doing?

    Do you really envision some magical renaissance in the legitimacy of our federal system sufficient to enable this? There is ZERO trust in our government to do this. . . . It’s OUR government, not the Swedes or the Dutch, that would have to run it.

  14. In the immortal words of Scarlet “I won’t think about that until tomorrow.”