There Are Buoys: The Real Path to Lower cost in the Coming Catastrophic Deformation of Healthcare

There are buoys, far out in the ocean, that bob in the waves and signal, through satellites, when the surf will rise at Mavericks on the California coast, or when the tsunami will hit.

Here comes.

Healthcare in the U.S. is a hollow economy, inflated, impossible, all over patches and gimcracks and work-arounds puffed up on clouds of hot air generated by sweaty, dedicated crews of policy panjandrums and podium pundits burning forests of acronyms. True, that’s just looking at the bad side. But this bad side goes all the way around.

Will it pop? Will it undergo catastrophic exothermal deformation? Is it the Hindenburg nearing Lakehurst? This could be.

Look, this is the 21st Century. Whatever its name, catastrophic deformation, restructuring, “disruption,” or “creative destruction,” this is normal for businesses, industries, entire sectors. We have talked and whined and freaked out about massive change in healthcare since we had a peanut farmer in the Oval Office, and it hasn’t happened. Not really. Trust me, I was there, I watched it not happen. Nothing like the video stores, big-box malls, and Fotomats whose husks litter the landscape like the yonquerías of Baja. Nothing like Eastern Airlines, Western Airlines (“The only way to fly”), Northwest Airlines, Pacific Southwest with its dayglo go-go-booted stews, PanAm, and all the others whose logos adorn the Electras, L-1011s, 727s and Constellations parked wingtip to wingtip in the Mojave.

Healthcare has planetary inertia, gas giant inertia. It snacks on cost-cutting schemes like DRGs and Certificate of Need commissions and just gets bigger. It downs slices of GDP — 12 percent, 15, 18, 19 — and just gets bigger. Right through recessions, reforms, budget cuts. It’s Hungry Mungry. Its extraordinary resistance to deep transformation, compared to other industries and sectors, makes us ask why. What is holding it together? And makes us ask: What would do it? What would puncture this hollow, makeshift gas envelope? 

Today U.S. healthcare at $3.7 trillion is the largest business sector in the history of business sectors. If it were a country on its own it would be the fifth largest economy on the planet. The inflation rate of National Medical Expenditures is trending up, not down. Prices make no sense. Actual prices paid for the same procedure or test can be two, three, five, even 10 times greater across town or even across the street. U.S. healthcare wastes more than $1 trillion every year on overtreatment, doing complex, expensive procedures that don’t help, are not medically indicated, are not necessary, but are well paid.

But things have changed.

In 2012 I published Healthcare Beyond Reform: Doing It Right For Half The Cost, about how we could do healthcare for everyone in the country (not just the lucky) for half or less in constant dollars, in per capita expenditures, in percent of GDP, any way you want to measure it. In 2015 I published Getting What We Pay For: A Handbook for Healthcare Revolutionaries, with more detail and specificity about how to do healthcare for everyone in the country (not just the lucky) for half or less.

I haven’t changed my mind. Maybe I’m an extraordinarily far-seeing thinker with a long time span. Maybe I’m a loony optimism junky, a contrary contrarian. I don’t know. Ask my shrink when I get one.

But here’s what I believe: Today healthcare is where the film camera industry was in 1999, six years before Kodak blew up its factories in Rochester. It’s where cars with internal combustion engines and human drivers are today, on the edge of becoming relics and special-application vehicles. In 10 years healthcare will be unrecognizable, from its therapies to its workflows, from its physical plants to its technologies and especially to its economics. Any payer strategy which brings real market forces to bear, in which buyers, payers and consumers force providers to actually compete on appropriateness, on price, and on quality as in any other industry will bring the hammer down, will collapse those lunatic price spreads and wipe out the unnecessary, wasteful practices. The result will be a healthcare economy something like half its present size serving everyone (not just the lucky).

What are the buoys? What signals?

Let’s start with a lawsuit, not because it is a harbinger of the solution but because it well describes the problem.

Last month California Attorney General Xavier Becerra sued Sutter Health, a large hospital chain in Northern California, alleging (in the words of the L.A. Times) that Sutter Health “engaged in ‘anticompetitive contractual practices’ and that it charged prices for hospital healthcare services that far exceed what the company would have been able to charge in a competitive market.”

The suit cites a 2016 study published in the Journal of Health Care Organization, Provision and Financing that showed that actual prices paid at Sutter and Dignity Health, the other largest system in Northern California, were 25 percent higher than elsewhere in the state, raking in $4000 more per admission. A report by UC Berkeley researchers issued just two months ago pegs the difference at 30 percent. According to the Times, “Becerra cited the Berkeley study, which said the average patient hospital procedure in Northern California, $223,278, exceeded that in Southern California, $131,586, by more than $90,000.”

Thirty percent higher. Ninety thousand more.

Those are big numbers. As Kaiser Health News put it in their report on the 2016 study, “Hospital chains that buy up other facilities, clinics and physician offices often tout savings and improved services from coordinating patient care and eliminating inefficiencies. The researchers found no evidence that any potential savings were being passed along to the employers, insurers and patients who pay for the care.”

No evidence.

Both Sutter and Dignity disputed every aspect of the 2016 study, according to KHN. Dignity, for instance, said “a number of factors affect its prices for commercially insured patients. It cited high labor costs, the need to pay for state-mandated seismic upgrades and the expense of treating a rapidly growing Medicaid population in California.”

Southern California, it should be noted, does not have 25 to 30 percent lower labor costs, fewer earthquakes, lower seismic standards, or fewer poor people than Northern California, nor is there any difference in state regulations. There is only one difference according to multiple studies: Market concentration.

It’s right there on the frozen juice can: Concentrate

How’s that work? Consider what you go through to buy a car, a house, a breakfast burrito, or some toenail clippers. You know what you want: A four-bedroom McMansion, maybe, within a 45 minute commute. You know roughly how much you are willing to pay: No, I won’t pay $400 for toenail clippers. Don’t be silly. Or even $15. A couple of bucks, tops. You know or can easily find out what different places will charge for that car, locally or online, however you want it. There are plenty of places willing to supply what you want. Nothing constrains your choice. It’s perfectly legal to pick up that breakfast burrito at any of a dozen different places along your commute route.

That’s how capitalism is supposed to work. The end user makes (or at least influences) the choice, has options to choose between, and has plenty of information to power that choice. Buyers with choice, options, and information: Constrain any one of those and costs can go kablooey. Market concentration allows the seller to constrain all three.

How’s that work in healthcare markets? It’s complicated, but here’s the 101-level 411. Health systems do have a lot of Medicaid patients, Medicare patients, and “dual eligible” (Medicare + Medicaid). These two often account for a majority of charges (though not necessarily a majority of patients, because the Medicare patients are older and the Medicaid patients often sicker than average). Then they also have the private pay patients, with Blue Cross or other insurance. And some that fall outside all of those systems. Most big employers are “self-funded,” that is, rather than pay an insurance premium they pay the actual costs of their employees’ medical care—but they still pay through the insurance company at the rates the insurers are able to negotiate.

Typically, reimbursement for Medicaid patients are thought to come in at something like the system’s costs (though not the cost to produce any particular baby, tumor excision, or valve replacement, since most systems do not know their “total cost of ownership” of any particular product). Private insurance pays considerably more, and Medicare somewhere in between. Medicare and Medicaid reimbursements are more or less dictated by the federal and state governments, respectively.

Choose your strategy

So a healthcare system has a strategic choice to make. Some take the hard way. The combination of Community Medical Centers and Santé Health Foundation is centered in Fresno, California. It has a territory that somewhat overlaps that of Sutter, and it has a higher than usual concentration of Medicaid patients and uninsured, especially the agricultural workers of the Central Valley. CEO Tim Joslin will tell you (as he told me) that a decade or more ago they set a goal. If they were to survive they needed to get all of their actual costs low enough that they could survive at the Medicaid reimbursement level.

This is long and difficult work. He says they have more or less accomplished this, which has allowed them to grow, to add more services, open new departments, new clinical lines, to serve the people of the Central Valley better.

Others take the opposite path: “If we are to survive, we have to grow so that we have really significant market power throughout our area and can charge higher prices to the private payers: the insurers, employers, unions and pension plans.”

Look at this from the point of view of the insurer, in effect the buyer’s agent. You are selling people access to doctors, clinics, hospitals, and other medical services. In order to compete, you have to put together networks of such providers in every area that you cover. In some counties, you just can’t do that without one or both of the biggest chains of providers. So you say to one of these big chains, “Let’s negotiate so that we can include these particular hospitals and these medical practices in the network that we can offer our customers.” But the big system says, “No, if you want those, you have to contract for our entire system, every service, even in areas where we have more competition. And you have to not include anyone who might undercut us. That’s the deal, take it or leave it.” And the other big chains say the same thing. It’s “all or nothing.”

So you’re stuck. You can offer your customers access to medicine, but not the power of choice and options to exercise that power. Nor can you offer them information. Such contracts often include “gag clauses” specifically designed to prevent the buyers or end users from knowing how much a procedure or test is going to cost, let alone attempting to negotiate a price.

So the seller (the big medical chains) can constrain your ability to choose, the options you have to choose among, and the information you might use to do the choosing. And the market fails. There is no way for the buyers and sellers of healthcare to discover what is the true “market price.”

Wasn’t Obamacare supposed to keep costs down? The core strategy of Obamacare was (and is) to promote competition between insurers: Get more insurers fighting for market share. They win by putting together networks of medical providers and services who are willing to work for less. You can’t do that when the medical providers bulk up and say, “All or nothing.” The core cost-cutting strategy of Obamacare was wrongly conceived.

The battle cry for the healthcare industry all this time has been “value purchasing,” that is, “We need to allow the customer to buy on value.” What a concept, like the title of my book, we could “get what we pay for” in healthcare. But the action has mostly been confined to lip service. The actions of the industry have mostly been to fiddle around with little doodads and folderols like quality payments forced on them by the federal government (which can amount to a few percentage points of total payments) while consolidating massively to keep their prices up, rather than offering real competition between providers on price and quality, offering customers an array of options with an array of prices, the legal and practical ability to choose between them, and the information they need to make the choice. 

The Shape of the Wave

What is the shape of this tsunami? What are the signals we are getting from the buoys?


Angry consumers: With deductibles climbing ever higher, even insured consumers are taking more of the burden. Getting billed $937 when you take your tot’s bleeding “this little piggie” toe cut to Emergency, you get angry, aware, and open to new solutions. And this repeats over and over, every day, all across the land, to pretty much every consumer and every voter.

Damaged ACA: The Republicans eight-year drive to “repeal and replace” Obamacare evaporated with a whimper. But they are still managing to bite big chunks out of it by removing the penalty for not having insurance and other administrative changes, all of which tend to drive healthy people out of market and leave it increasingly to the older and sicker. This drives up the insurance costs for those who stay insured. With fewer healthy people signing up, we will see premiums and deductibles continue to go up by double digits every year. Again, voters get angrier and open to anyone who is promising new solutions.

Smart politicians: Beating up on Big Med is becoming politically smart again, as in Becerra’s suit. We will see more legal actions like California’s, and other political attempts to outlaw “all or nothing,” gag rules, and other specific anti-competitive practices that make consolidation so profitable for medical providers.

Angry employers: In 2014, the year Obamacare came into play, some 21% of employers said that rising healthcare costs were a big problem for their business. By last year that had risen to 44%. That’s a big rise in three years. These big buyers are increasingly fed up. They are not idiots, they know that they are being played, and they are increasingly aware that they, too, have market power. Did you wonder what Amazon, Berkshire Hathaway and JP Morgan Chase meant when they announced a few months back that they are forming a new business to build their own healthcare system? This. They will have the market power to go directly to medical services in the markets in which they have a lot of employees and say, “You want these tens of thousands of cases? What will you bid?”

They can use strategies such as reference pricing, bundled payments and medical tourism to force medical providers to compete on price and quality. If you’re a big employer in Alameda County, California and your employee needs a new knee, the average cost to you works out to about $52,000. Promise the employee a $2,000 bonus, no co-pay, all travel costs paid, and a free week’s vacation while recovering on the beach in Los Cabos, Mexico, and the total cost to you the employer will be something like $15,000. Because the cost for the total knee replacement at H+, the best hospital in Los Cabos, is about $9,500 all in.

In creating real competition, big buyers are good, bundles of big buyers even better. But won’t this only serve those big employers? Won’t the medical systems just carve out special deals for them and go on their merry way raising prices on everyone else? No. Here’s why: There is a problem for hospital systems treating these deals as one-offs and loss leaders, because these are typically their most profitable cases. And if the strategy works for the biggest employers and bundles of buyers, others will flock to the strategy, consultants will set up shop showing them how to do it, new combines will be born, and soon the hospital systems will find that they have to compete on the same basis for a significant chunk of the most profitable cases.

When that happens to you, you can’t treat these as one-off deals, you have to change your whole pricing structure. To change your whole pricing structure you have to seriously engage in the long, detailed, life-changing struggle to drive down your own internal costs. The changes you have to make to really get your costs down are systemic. It is not possible to change your workflows and technologies just to accommodate just some specific customers. You have to make your whole system more efficient.

New market entrants: Pissed-off customers and big buyers are already attracting new providers that do business in different ways. This includes new primary chains such as Xoom, Iora, One Medical, and Chen Medical; super-primary chains such as ReadyMed which offer some services such as emergency services, infusion and overnight stays, that go beyond primary care; free-standing Emergency Services that do the same, and other types of specialty services with standing advertised bundled prices and warranties (“We’ll do it until it’s done right.”).

This is why we are seeing OWAs (other weird arrangements) unlike any we have seen before, such as the merger of CVS and Aetna, of Wal-Mart and Humana, of CIGNA and Express Scripts. These are all attempts to break up the market differently, to penetrate the economic wall.

Your own medical record, real, digital and free: We have been building digital systems in healthcare since the late 1980s, and the entire industry has been mandated to digitize since 2009. In all that rush to digitize the legacy healthcare IT companies have done everything they can to help the healthcare providers make all that information—including your medical records—unreadable by anyone else, all as part of their strategy to build and keep market share. Since 1996 by federal law you must be given access to your medical records on demand. Since 1996 the major industry practice has been to impede that access every way they can by delivering them only on paper (You ever wonder why healthcare is the last bastion of the fax machine? This.), in coded language that is unintelligible not only to you but even to other doctors, and in ways that cannot be searched by other medical practitioners.

That’s toast. The Trump Administration, which so far has not brought a single action to help consumers and has done everything it can to reverse previous administrations’ rules, is to the amazement and wonder of all bringing out the whoop-ass on this one. Seema Verma, the administrator of the Centers for Medicare and Medicaid Services, showed up at HIMMS, the massive 40,000-person healthcare IT conference in Las Vegas last month, to announce that by January 1, 2019, every medical entity has to build the necessary interface so that you can download your medical records, written to industry standards and in language you can understand, any time you want to. She was introduced by Jared Kushner, then backed up by the Health and Human Services Secretary Alex Azar in a speech elsewhere.

Every entity. By next January. All other information-sharing rules under HIPAA are “may share” rules. This is the only “must share.” Unless the “Fox and Friends” morning hour policy gurus find a way to rail against this policy change and blame it on James Comey, this is going to happen.

Here’s the kicker: The federal medical privacy law (HIPAA, the Health Insurance Portability and Accountability Act of 1996) applies to all “covered entities” such as hospitals, doctors, and insurance companies. You are not a “covered entity.” It’s your medical record, your privacy, and you can do what you want with it, including giving your records to some competitor of theirs, a different insurance company or healthcare system across town or across the country. Such full information is so valuable to insurers to help guide your care less expensively (such as guiding you into a diabetes program or a prenatal program) that they may well pay you to give them full access to your records. System X has never shared information with System Y, but they both have to talk to you, and you can say, “Here you go. Take my information, please.” And the information walls in healthcare come tumbling down.

New tech: When you talk about the future of healthcare, people tend to think about new technologies, such as robotics, blockchain, artificial intelligence and machine learning, and the array of gadgets and implants that can connect the patient to the system in real time. Won’t these make the system more efficient and lower costs? Yes, absolutely, when the industry gets really focused on being more efficient because an enlivened market forces them to.

Not news

This is the path to lower-cost, higher-quality healthcare.

Why not just force the cost down by law? Single payer, or nationalized, or whatever, just say, “Stop that!” Because it doesn’t work. Lots of reasons and mechanisms, but see the above, look at the history of Hungry Mungry. Coercive laws, cost-cutting schemes, codifying reimbursements under Medicare, over and over again turn out to not be really coercive. Market forces are coercive. If the market finds ways to say, “Give us a better price or we will take our business elsewhere,” there is no argument, no lobbying, no rule-making that can stop it from forcing you to get better, faster, and cheaper at what you are doing.

Here’s something funny. None of this is news to the people who run these big systems. They are no dummies. They can see it coming. The CEOs and strategy teams of medical systems will acknowledge this in private. Their current strategies are delaying actions. They’re trying to build their market power, their capacity, and their financial reserves, against the inevitable. I asked one CEO when he was going to reduce the prices in his imaging center, which were four times the prices of the imaging center right across the highway. He said, “When I don’t get the volume.” When the market brings the hammer down. When the tsunami hits. When the metaphor of your choice collapses the hollow healthcare economy.

Joe Flower has 40 years of experience in the healthcare world and has emerged as a thought leader on the deep forces changing the system in the United States and around the world.

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34 replies »

  1. Disruption is going to happen, but it will come from startups that are completely outside of the healthcare industry. In the same way that Uber “re-started” the transport-for-hire industry from complete scratch, because the taxi industry was too entrenched and corrupt.
    Healthcare is the same way, and supposed disruptors like the new Bezos/Buffett startup aren’t getting it right – they are just automating a bad system, and making some improvements, but they aren’t fundamentally disrupting the current consumer health care use case. They will learn the same lesson that EHR vendors learned, and that IBM learned with their cancer software, the hard way.
    A completely new healthcare model is the only solution. It will start with things like software that disrupts the “consumer outcome” use case as it applies to chronic illnesses, and spread from there.
    This process has already started, for example, with people who cure themselves by collaborating in Facebook cancer groups. Those people are provably curing cancer with things like cannabis oil and Gerson Therapy. The Facebook process is messy and unstructured, and other startups will come along and fill the void on this use case with algorithms and more formal processes. The Bezos/Buffett startup will not be advocating any aspect of that example I cited.

  2. We need to be careful when we talk about costs. There are direct costs, indirect costs, fully allocated costs, and marginal costs among other costs. When hospitals consider closing a particular service line like labor and delivery to save money, there is going to be a big difference between fully allocated costs and escapable costs.

    Hospitals and doctors would probably claim that every service, test or procedure done for or to a patient is in compliance with the standard of care which, in the U.S., is probably more testing intensive than in other countries to reflect the litigiousness of our society.

    Hospitals that tend to lose the most money suffer from either an uneconomically low occupancy rate or a poor payer mix or both. Poor payer mix means too many Medicaid and uninsured patients and not enough commercially insured patients. Low occupancy rates are caused by too many licensed inpatient beds relative to the number of occupied beds on average over a month, a quarter or a year.

  3. ” revised system has to meet is that it has to cover the “costs” of the hospitals”

    We neither know what actual costs are nor can we know what they should be.

  4. “by January 1, 2019, every medical entity has to build the necessary interface so that you can download your medical records”

    Once they get the automatic upcoding out of the way, that should be a snap.

  5. “Most hospitals claim that they cannot cover their costs if they had to accept Medicare rates from all comers even with no uncompensated care”

    If you think the stipulation that any revised system has to meet is that it has to cover the “costs” of the hospitals, then you don’t really want reform.

    The cost structure, or claimed cost structure, of hospitals is an enormous barrier to reform.

  6. As a physician for 25 years, I’ve also been expecting a blow up but the walls keep getting reinforcements. The major thing I haven’t seen an honest accounting of WHY health costs are in the stratosphere. I will say that the hospital in Cabo doesn’t have the following expenses that we face in the USA–
    Ongoing compliance and audits/certificates with HIPPA, OSHA, JCAHO, STATE AND LOCAL REGS….BIOHAZARD DISPOSAL FEES, LICENSING AND CONTRACTS. CDC alerts, bioterrorism preparedness, mass casualty training. Maintenance of certification paid for all the specialists on staff. EMR training, licensing fees, subscription fees, and security. Lawyers, malpractice insurance, general liability, fire/ theft insurance…earthquake insurance and retrofitting under the quicksand that is San Fran is much different than the soil in Fresno. So it is comparing apples to oranges. We must have serious scaling back of the torts, regulations and busybody nonsense licensing that we must comply with, or we face closure. Then who’s going to take out your gallbladder? Sure go to Cabo, let’s talk when you have MRSA and can’t get anybody here to take you….

    The nurse in San Fran that starts your IV may be doing a double shift and union rules demand double time on a weekend. She has health insurance, 401K, and licensing and ongoing training that must be paid for. This is why the Tylenol she gave you cost $17. It had to be ordered, stored, inventoried and vetted before giving it to you in a little paper cup.

  7. Barry writes:”In most other areas of commerce, technological advances can increase the speed of products or processes, shrink their size, improve quality and reduce cost.” It should be similar to health care but top-down control generally produces the opposite effect. Leo writes: “ If we are going to have a collective direction in healthcare, it needs to come from the collective” I assume the collective being the individual. I think those two statements summarize the solution which is an economic solution based on the individual, not a political one which is what Obamacare was.

    No matter which way one chooses society cannot get away from liquidity constraint. If costs rise to become unaffordable costs automatically stop rising because there is no money available. It is best to inject liquidity constraint earlier rather than later and provide more power to the individual rather than the government.

  8. The big hope with Alzheimer’s and dementia is the development of new drugs though there have been a lot of failures and false starts so far. Even a drug that can delay the onset of the disease for 3-5 years would be a huge deal and a cure would be the holy grail of drug research.

  9. “Most medical spending can’t happen unless a doctor admits a patient to a hospital, orders tests, prescribes drugs, refers a patient to a specialist or, of course, performs a service, test or procedure himself or herself. With more doctors now working as employees of large health systems and more hospital networks also getting into the health insurance business, there will be more pressure to control costs.”

    The only thing I’ve noticed with these huge monopoly hospital based health systems is increased prices geared to funneling patients to the mother ship. All tests, x-rays, MRIs etc go to the hospital system. In my area of NC, Duke and UNC pretty much own the entire area. My personal experience on x-rays/blood tests is independent provider is about a third (or more) the cost. But the independents are getting bought out or forced out. Co-pays and deductibles are not going down – just the opposite.

    “On the plus side, new technologies from self-driving cars to home robots should soon make it possible for the elderly especially to continue to live independently longer than before…”

    Barry, if you need a self driven car and home robot then that’s the least you’ll need as you’re problems are much greater than can be solved by Artoo-Detoo.

    I think the Alzheimer’s/ Dementia cost will offset any small decrease in medical cost growth rates. Family caregivers (if you’re lucky enough to have one) will bankrupt themselves, both financially and medically, looking after these patients. Alzheimer’s/Dementia do not lend themselves to being solved with living will/medical POA.

  10. Peter, Medicaid spending growth per beneficiary has also slowed at least in part due to more states embracing managed care. Federal Medicaid spending is up less than 1% so far this fiscal year. Hospital inpatient beds per 1,000 people continue to shrink and the long term secular trend is down. Doctors seem to be getting more cost conscious as compared to 10 or 20 years ago.

    Most medical spending can’t happen unless a doctor admits a patient to a hospital, orders tests, prescribes drugs, refers a patient to a specialist or, of course, performs a service, test or procedure himself or herself. With more doctors now working as employees of large health systems and more hospital networks also getting into the health insurance business, there will be more pressure to control costs.

    The biggest upward pressure on healthcare costs in the near term is coming from specialty drugs which only account for 1% of prescriptions written but close to one-third of drug costs. Only 2% of patients need a specialty drug in any given year.

    On the plus side, new technologies from self-driving cars to home robots should soon make it possible for the elderly especially to continue to live independently longer than before which could be a big deal from a healthcare cost standpoint as it would reduce the need for long term custodial care in nursing homes and assisted living centers. While I don’t think it’s possible to cut our healthcare costs in half, I do think we can stabilize and ultimately reduce costs as a percentage of GDP though they will probably always be higher in the U.S. than anywhere else.

  11. Those four are important. The first three would not get us to healthcare that costs half as much. The fourth is indeed a part of the solution, as the article pointed out.

  12. Joe – I don’t think the healthcare system needs massive new energy or new players. What it needs instead is cultural change specifically in the following four areas:

    Tort reform – We need to get medical disputes out of the hands of juries who can be easily swayed with emotional appeals by glib trial lawyers. We need health courts overseen by specialized judges with the power to hire neutral experts to sort through conflicting scientific claims. Doctors need safe harbor protection from failure to diagnose lawsuits if they follow evidence based guidelines and protocols where they exist. Then maybe the medical specialty societies will be able to revise physician practice patterns to make them less testing intensive. Unfortunately, trial lawyers are powerful enough to prevent this approach from seeing the light of day.

    End of life care – We need still more people, especially among the elderly, to execute living wills and advance directives and make it clear to family members what care they want and don’t want as the end of life approaches. I’ve said many times that people in other more socialistic developed countries are more accepting of death when their time comes. We aren’t, at least not yet.

    Fraud – There is definitely a fraud culture in the U.S. especially in certain hotspots including New York City, Chicago, Detroit, Los Angeles, Miami, Tampa, Southern Louisiana, Southern Texas and a couple of others. With better analytics and rules that allow Medicare and Medicaid to wait to pay bills if they suspect something suspicious, we could save a lot of money here. Even the AARP estimates that 10% of Medicare spending and possibly more are lost to fraud and improper payments. If we can significantly increase the perceived probability of being caught and the assurance of swift and appropriate penalties for those who are caught defrauding Medicare and Medicaid, we will have a lot less fraud.

    Price transparency – We need to outlaw confidentiality agreements between payers and providers that preclude disclosure of actual contract reimbursement rates. That way, both doctors and patients will be better able to identify the most cost-effective high quality providers in real time and direct more of their business to them.

  13. Joe, this entire economy is “me” not “we”, but most other products can be done without or easily reduced – not so health care . To think that setting prices at Medicare rates will give us the same health care system is foolish by consumers – there will be pain, but it’s clear we won’t be able to get all we want when we want it. But either way consumers will loose, except “we” won’t go bankrupt.

  14. You have read my above comment completely backwards. My question stands: When someone says, “We must …” or “We should…” I have to ask, “Who is the ‘we’?” Certainly not the providers. And certainly not the government. We have profound and decades-long experience with the interaction between the government and providers over cost. It is tempting and easy to think that the government “should” impose price controls. But in the face of experience that goes back to 1983 and imposition of DRGs, the impotence of both federal and state governments to truly bring down real costs makes it clear that this is a vain hope.

    The healthcare economy is in a dynamic Nash equilibrium whose stability will only be upset by the entrance of massive new energy or more likely new players with different ways of corralling the resources.

  15. Joe, you’re too optimistic about providers saying “we”, unless it’s the plural of “me”.

    Imposed government price controls will be the only way to curb costs – not sure when that reality will take hold.

  16. Barry, if you’re saying this means revenue loss and svaings then I’ll argue the system has great resiliency finding ways to keep the dollars flowing.

  17. For 2005 through 2014, the maternal mortality ratio of Maryland ranked 43 worst of the 50 States. For 2001-2006, they were 45th, and for 1987-96 they were 41st. Mean while, Alabama ranked, respectively 47th, 33rd, and 8th. Similarly, California experienced an improvement ranked respectively 38th, 35th and 5th.

    A nephew of mine is an anesthesiologist who retired from the Navy several years ago while stationed in Bethesda. He looked for a position in Maryland and Virginia. It was his observation that the hospitals were obviously constrained by their economic status in Maryland to a much higher degree as opposed to Virginia. Lots of unknowns here, but the anesthesia folks tend to have a more acute sense of turmoil in a hospital as opposed to other observers.

  18. Correct. If we are going to have a collective direction in healthcare, it needs to come from the collective, not industry. People in general do not want to suffer, do not want to be a burden on their families, and want to go quickly. Our healthcare system, as designed, is not aiming at, nor achieving these goals. So medical innovation does not necessarily need to be stopped, it just needs to become aligned with the publics general interest. So much is based on what “stakeholders” want. The problems and solution are industry centered, little to do with individual preferences or goals. The concept of framing solutions from a “marketplace” perspective is highly misguided.

  19. Steve2, that’s a very fair price. Could your hospital system make money based on Medicare rates from all comers and for all care with no uncompensated care? Could other hospital systems that you’re familiar with do so?

  20. Screening colonoscopy at our hospital, not the surgicenter, is $1050, everything included.


  21. In most other areas of commerce, technological advances can increase the speed of products or processes, shrink their size, improve quality and reduce cost.

    In healthcare, by contrast, new drugs and devices, along with improved surgical techniques, can lengthen lifespans and, hopefully, improve the quality of life as well. By lengthening life spans, though, it gives us more time to develop other diseases and conditions like Alzheimer’s and dementia which creates the need for possibly years of expensive custodial care when we can no longer care for ourselves. Sending cancer into remission gives it time to come back somewhere else. Rehabilitating patients after a heart attack or stroke gives them time to have another one later which is expensive to treat. Before all these great innovations, many of us would have died much sooner and our healthcare costs would cease along with us.

    So, while medical innovations are great at allowing us to live longer and healthier lives, they are not only expensive in and of themselves, they give us more time to rack up additional healthcare costs before we ultimately die. Unless we want to stop or slow medical innovation, which I don’t think we do, we need to think differently about how to slow cost growth in healthcare than in any other industry. At least that’s my opinion.

  22. In this as in other posts in this thread, my principal reaction is to the use of “we,” as in Tonto’s famous if apocryphal riposte to the Lone Ranger, “What you mean ‘we,’ white man?” That is, who is the “we” that really controls this complex adaptive system? We have considerable experience with the inability of government at the federal or state level getting a whip hand over the cost increases, by all sorts of means tried across the system over the past four decades. Who is the “we”? Any suggestion that “we should” do this or that leaves me with that same question.

    That is why I point to economic forces (“market forces” is really too narrow a name). If they are pointed to the right ends (because they align with their own economic interests, not because they are told to or are trying to be good citizens) they have coercive, ungameable power.

  23. As I understand it, this is not a sudden new demand but a finalization of an Obama-era rule arising out of the ACA and the HiTech Act. The industry has been hanging back anticipating that this anti-regulation administration might delay it again or even let everyone off the hook. But Verma and Azar have come out and said flatly that time is up, you’ve got to do it.

  24. There is some good news to report on the healthcare and health insurance cost front. From 2007-2018, Medicare’s Part B monthly premium increased only 43% to $134 which translates to a 3.3% annual compound growth rate. During the prior 12 years starting in 1995, Part B premiums approximately doubled which works out to about a 6% annual compound growth rate.

    There is a long term trend driving more and more care out of hospitals thanks to a combination of better drugs, less invasive surgical techniques, fewer infections, etc. resulting in a shorter average length of stay. Also, a lot of care that was done on an inpatient basis in the past can now be done on an outpatient basis which is significantly less expensive or an ambulatory surgical center which is even cheaper.

    Moreover, a much higher percentage of seniors especially are executing living wills and advance directives as compared to 20 years ago and many more of them are choosing hospice care at the end of life rather than a full court press even when the prognosis is dire.

    On the negative side, new very high cost specialty drugs to treat cancer and other diseases are coming to market. We will probably have to figure out how best to pay for those and eventually set some realistic payment limits based on some rational criteria like QALY metrics or even the patient’s age. We already use elaborate protocols to ration organ transplants because there aren’t enough to go around. It seems that the same principles could apply if there aren’t enough dollars to go around.

  25. Maryland’s all payer system was implemented in 1977. To make it happen at the time, Medicare and Medicaid each agreed to pay more than they were previously paying so private commercial insurers could pay less. That would most likely be a non-starter today if other states wanted to try it.

    Maryland’s system also only applies to hospital based care and not even all of that depending on whether or not care is delivered in regulated or unregulated space. It also hasn’t significantly reduced healthcare cost growth vs. other states as far as I can tell.

    The main virtue of Maryland’s system is that it protects uninsured patients from getting screwed by being charged grossly excessive chargemaster rates. While there is rate variance between and among hospitals, any given hospital must bill all patients and payers at the same rate for a particular service, test or procedure.

    I agree with your basic point that price controls won’t work if applied across the system..

  26. It is time to seriously recognize that the portion of our nation’s economy increasingly devoted to ‘health spending’ is eventually harmful to our nation’s stable autonomy within the world-wide market-place for its global Resources. In 1960, health spending represented 5% of our nation’s economy, its GDP. As of 2016, it was 18% of the national economy. As corrected for economic growth and inflation, the increase represents an increase in health spending as a portion of the GDP at an annually compounded rate of 5%.

    The portion of our economy applicable for health spending, no matter how its defined, represents a Commons, aka common pool resource. A set of Design Principles for Managing a Common Pool Resource already exists. These principles have been vetted and validated by Nobel Prize honoree Professor Elinor Ostrom and her many colleagues. If interested, just look up the U-Tube video for her Nobel lecture in 2009. The key must be to take 5 years to reduce health spending to a growth rate of 0.5% less than annual economic growth AND continue that effort for another 10 years. That would eventually reduce our nation’s Federal Deficit by at least $500 Billion, annually. The inertia created by our nation’s healthcare and its connection to Parkinson’s Law is staggering. I can only suggest that we begin an honest and wide-ranging consideration of Professor Ostrom’s Design Principles for Managing a Common Pool Resource.

  27. The price controlled systems (as in Maryland) around the world increasingly suffer from the loss of system-wide investment in infra-structure and the elaborate use of queuing tactics to control demand, aka contemporary pre-authorization processes.

  28. Great article by Joe. But as fellow futurist Ian Morrrison says the benefit of being a futurist is that you never have to change your slides,,, I fear we will be able to run this in 10 years time without changing a word

  29. With respect to consolidation among providers, I like the idea that the big systems can afford electronic records so patients can more easily print out test results for their own records and to bring copies to other doctors and hospitals outside of the system that created them. On the other hand, I definitely don’t like the pressure that doctors who work within those systems feel to keep as much care as possible within the system whether it’s in the patient’s best interest or not.

    The rules around pricing leave a lot to be desired. A couple of months ago, I had a colonoscopy at a local ambulatory surgical center. The list price for the 20 minute procedure including the removal of two polyps and providing a pathology report was approximately $12,000. Who knows what the local hospital would have charged. Medicare and my supplemental plan paid roundly 10% of charges or about $1,200.

    For providers, very high list prices are rational from their perspective for two reasons. First, insurers won’t pay more than usual and customary charges so there is an incentive to set the list price much higher than any government or commercial payer is likely to pay. If a doctor were to set his list price for a routine office visit at $100 and some payers were willing to pay $125, he would only receive $100 from that payer thereby leaving money on the table. The other reason is the list price factors into the formula that Medicare uses to calculate outlier payments for complex cases that require much more care than the DRG payment rate contemplated. Thus, hospitals are rewarded for very high list prices. Then, of course, they can also try to soak uninsured patients and mega-wealthy foreign patients who come to the U.S. for sophisticated treatment and can afford to pay sky high list prices.

    If it were up to me, I would fix this mess in the following ways: (1) outlaw confidentiality agreements that preclude providers from disclosing contract payment rates to patients and doctors, (2) eliminate the requirement to bill everyone at the same (list) price and allow them to bill directly at the negotiated contract rate instead even if there are numerous different contract rates for different providers doing the same work, and (3) establish special rules that limit how much can be charged for care that must be delivered under emergency conditions when, by definition, there is no opportunity for price shopping.

    For those who want a Medicare for all single payer system, I don’t think they understand that Medicare currently works as well as it does because there is still a large commercial payer base to shift costs to. Most hospitals claim that they cannot cover their costs if they had to accept Medicare rates from all comers even with no uncompensated care. Medicaid rates are even lower and many practices don’t accept or severely limit the number of Medicaid patients they will treat.

    There are also legitimate questions around the extent to which a single payer system could have a significant adverse impact on innovation from new drugs and devices to less invasive surgical techniques. If we’re not willing to pay for innovation, we won’t get much of it. That won’t serve patients very well to put it mildly. Even liberal expert Ezekiel Emanuel opposes it for that reason among others.

  30. For many years, I have anticipated that the healthcare tsunami will occur during the next recession. The last one began 10 years ago, they have occurred every 8 years since WWII. Its plausible that during the next recession, a hospital enterprise will need temporary financing for its cash flow. Unfortunately, its banker subsequently encountered liquidity problems and recalled the temporary loan causing the hospital to close its doors. Soon several other large hospitals will encounter the same scenario. With a degree of hysteria, the Federal government would enter on the basis of “Two big to fail.” THEN, change will happen quickly. Federal loan guarantees are relatively easy, what comes next is not.

    In the spirit of Disaster Planning, we best quickly develop a national consensus around a “risk-sharing covenant” among the Federal, State, Indemnity Companies, Community, Complex Healthcare, Primary Healthcare and citizen payers for healthcare. We might have better cooperation from the State governors than the other players. We really only need to slowly decrease the annual “health spending” to a level that is 0.50% less than economic growth each year for 10-15 years. I would say that the only hang-up is what to do about the citizens who do not have sufficient disposable income. Without an industry driven consensus to resolve the institutional codependency between the big payers and the big providers of healthcare, our nation’s impending bankruptcy will be the ultimate disaster.

    We need to think out side of our current Paradigm to fix the loss of Social Capital in many communities that result in its homelessness, maternal mortality, infant mortality, obesity, chemical addiction, homicide/suicide, entrenched poverty, and “..the mindless menace of violence…” that plagues too many neighborhoods. Since these are all community-centric issues, the spirit of Disaster Planning should include a means to rouse a renewed energy within each community. Just remember what the Cooperative Extension Service has done for Agriculture (initiated in 1914 by Congress), county by county.

  31. Joe, we appreciate your effort here and what you are trying to accomplish. You have to remember, though, that a true market actually has by definition many buyers and many sellers and that the prices are “taken” (meaning they are discovered by millions of votes from buyers and sellers as prices), not made (meaning dictated by price schedules from above.)

    Big buyers, i.e. monopsonies–can bring prices down but they have severe problems also. See any Econ macro text.

    It may be that there are so many mergers and groups already formed, and collusive provider and patient and insurer arrangements–already established–that we are whistling for Dixie in hoping for miracle with a free market. In other words there may be too many stakeholders enscounced in non-free market ventures to allow for any reasonable transition into a free market.

    But we don’t need to be gloomy. We have a chance to do some great experiments and lead the world: try making hospital care a public good and see how much this costs. I bet we could do this with less dough than we are spending now, especially if we can figure out how to bring Pharma into the picture.

    And, secondly, try running the sector using refundable vouchers and really test if these can replace cash in a free market approach. Again, we have to bribe Pharma to take part in the experiment.

  32. What marketplace are you talking about? The one all parties abhor and try to destroy at every opportunity? If there was a “market” ready to “bring a hammer down”, why has it not done so already? What is it waiting for, 25% of GDP? There is no way to suggest that hyperconsolidation produces anything resembling a marketplace. And the “other weird arrangements” you cite are even worse. They are just one massive industry colluding with another under an unregulated umbrella. You are mistaking the illusion of a marketplace for what is actually occurring: state capitalism. It is one of the worst possible scenarios, because you don’t stand a chance as a consumer or a citizen. You can’t vote your way out, and you can’t purchase your way out. As long as the “hostage situation” persists in healthcare, you will pay, and pay dearly, and there will be nothing you can do about it. If you think sending a bunch of business majors and economists in to solve a philosophical problem will work, the best of luck to you. I will see you at 30% GDP.

  33. ” by January 1, 2019, every medical entity has to build the necessary interface so that you can download your medical records”

    Wow! That is very little time.Trying to do that while addressing security concerns probably means major problems. This is the kind of big government that just sucks.