Economics

The Rebellion of the Buyers

By JOE FLOWER

Did you catch that headline a few weeks back?

An official of a health system in North Carolina sent an email to the entire board of the North Carolina State Health Plan calling them a bunch of “sorry SOBs” who would “burn in hell” after they “bankrupt every hospital in the state.”

Wow. He sounds rather upset. He sounds angry and afraid. He sounds surprised, gobsmacked, face-palming.

Bless his heart. I get it, I really do. Well, I get the fear and pain. Here’s what I don’t get: the surprise, the tone of, “This came out of nowhere! Why didn’t anyone tell us this was coming?”

Brother, we did. We have been. As loudly as we can. For years.

Two things to notice here:

  1. What is he so upset about? Under State Treasurer Dale Folwell’s leadership, the State Health Plan has pegged its payments to hospitals and other medical providers in the state to a range of roughly 200% of Medicare payments (with special help for rural hospitals and other exceptions). In an industry that routinely says that Medicare covers 90% of their costs, this actually sounds rather generous.
  2. What is the State Health Plan? It’s not a payer, that is, an insurer. It’s a buyer. Buyers play under a different set of rules and incentives than an insurer.

Payers are not Buyers

That #2 is key: Insurers are paying for your healthcare with your money, the premiums you pay them. Under the Affordable Care Act their entire administrative cost, executive salaries, and the profit for shareholders comes out of a strictly limited percentage of the total cost. Think about that. The higher the total cost of the healthcare they buy for you, the more money to go around for executive salaries and shareholder profit. The more your healthcare costs, the better their bottom line looks. How’s that for an incentive?

Buyers, on the other hand, are paying for your healthcare with their own money and yours together. Self-funded employers, union health plans, state health plans, pension plans and other buyers pay the actual medical bills through a third-party administrator (TPA). The higher the total cost of your healthcare, the worse their bottom line looks. The lower, the better. If they can help you avoid an expensive unnecessary surgery, or get it done at a provider that charges one fourth as much, or help you get your expensive drugs at half the price or less, you will be happier and so will they.

Buyers’ incentives are closely aligned with their members, employees, and beneficiaries. As large buyers buying for thousands, tens of thousands, or hundreds of thousands of people they have the freedom and power to do something about those costs.

This has been the drumbeat of my books, talks, columns, articles, YouTube videos, and tweets, for years: The healthcare economy is hollow, inflated, and flammable, like the Hindenburg approaching Lakehurst in a thunderstorm. What will set it off? A rebellion of the buyers.

Analyze This

Can we analyze this for just a moment? Bear with me for a little systems analysis.

Picture healthcare as a complex adaptive system with multiple interdependent parts (hospital systems, pharmaceutical companies, device manufacturers, government payers and regulators, insurance companies and so on). Each part is busy taking in energy (mostly money) from the other parts and putting out products and services, or money to fund other parts. The input of each part is someone else’s output. The more one part puts out, the more other parts can take in.

Each part is at a local optimum. Picture this as a 3-D “fitness landscape,” where the height of each part represents its “fitness,” its ability to survive and prosper. In healthcare each part is on a tall mesa, that is, they have optimized their position over time so that they are doing as well as they possibly can in the system that exists. That’s why they operate the way they do and make the choices they make.

Think about the people who run each of these organizations. By definition, they are at the peak of their careers. They got all their training and experience, and climbed the career ladder to the C suite, by being excellent at the existing way of doing things in an industry that has not changed its fundamental structure for 40 years or more.

Not all the mesas are the same height. Some are doing very well, some not so well. But nearly all of them see a wide gulf between where they are and any other higher level of fitness that they might hope to reach, a gulf that is fraught with danger and unknowns.

This complex adaptive system is stuck in a Nash equilibrium. That is, each player, doing as well as possible for themselves in the system as it is, sees no advantage in changing the way they do things. In every direction in this fitness landscape, any change they make will see them and their organization climbing down off their mesa, their “local optimum” into a lower level of fitness, into a valley of uncertainty, into being beginners at this game.

Yet at the same time the system is more and more unbalanced, with some mesas growing ever taller, drawing in more and more energy from the other actors—the vast health insurers, the increasingly consolidated healthcare systems, the world-girdling pharmaceutical companies.

What Breaks the Stuckness?

So what moves a Nash equilibrium off of its equilibrium? Either new sources of energy, new players, or longtime players waking up to new energy and awareness and options. Today we are seeing all three.

Think of yin-yang. The more unbalanced the system becomes, the greater the energy driving any potential instability. Any complex adaptive system in an unbalanced state at a sufficiently high energy level will resolve its potentials into a more-stable lower-energy state. The greater the potential instability, the more likely the resolution will not be incremental but sudden and catastrophic.

What’s that mean? It means that the “burn in hell” guy is losing in this contest.

Why? Because of something else we can learn from systems dynamics, which is this: This disruptive resolution and rebalancing will come from the system actors who:

  • are the most disadvantaged,
  • have unified incentives,
  • and have the greatest freedom of action.

Who am I describing? Where do we find such system actors?

Where?

Not in the political realm. In their nature, like Obamacare, attempts at reform mostly end up being efforts to stabilize the existing system a little longer by taking the edge off some of its inequities and arbitrary cruelties. So for instance the various proposed reforms, even the most radical ones, are mostly just about making sure that everyone is covered in one way or another. No mechanisms for actual cost savings or elimination of rampant waste is contemplated beyond government fiat, which has proven a slender reed on which to depend.

Not from the healthcare providers, nor the insurers, the payers, who actually are mostly doing quite well on their ever-exaggerating mesas in the fitness landscape, drawing in more and more energy from the rest of us, and whose true incentives are to keep the imbalance going and keep costs up.

It’s the buyers, who are professionally, personally, and financially aligned with their members, beneficiaries, and employees. They have traditionally been quiescent, unaware of their power, without the knowledge, the strategies, the tools to take up their power, simply paying the bills without questioning them. All it takes is for them to wake up.

And they are waking up.

Imagine Yourself…

Put yourself in their place. Imagine you are running one of these entities, buying healthcare for tens to hundreds of thousands of people, in charge of trying to keep that budget in line and those costs down. With all the new pricing information coming out in various ways, imagine that you are contemplating the fact that MRIs in your area may vary from $400 to $2200 depending not on quality but just on the site. Or you see hospital bills that ring up a single bag of saline for $91 to $758 for no reason, for a generic item that costs less than $1 to manufacture. Or you see, as we have seen online, a young man with a rare genetic condition sharing his hospital bills on the Internet. He requires an infusion that requires an overnight hospital stay twice a month. His life circumstances have required him to move between states, change insurers, and get treated at different centers. For the exact same procedure with the exact same materials his insurers have paid from $3,319 to $20,736, while he has co-paid from $222 to $4,261.

For no reason. If you have studied quality theory, you know that variation for no reason is always a marker of damage in a system.

If you were a self-funded buyer, paying directly for medical care for your employees or beneficiaries, what would you do when confronted with these random absurd variations in cost for no reason?

You’d say, “I’ll take door number 2.”

You’d say, “Wait, who’s the chump here?”

You’d say, “This is bullshit.”

You’d say, “I will figure out what it takes to pay the lowest price possible for high quality care.”

And that’s what’s happening in 2019, facing 2020. The buyers are not buying the story anymore. They’re saying, “Show us the goods. Show us:

  • The cost of the whole thing, diagnosis to rehab, whatever the package might be.
  • The appropriateness. Does this really need to be done? How do we know? Where are the real checks in the system?
  • The quality. How good are you really? Show us.
  • The real outcomes. Not metrics you choose for your marketing. Real metrics.”

Why now?

What’s different this year is that increasingly the tools they need exist, the strategies are there and tested, and there are insurgent vendors ready to show them how to execute on the strategies.

This year and the next are likely to be a tipping point.

The huge cost of healthcare is rooted in the way we pay for healthcare in a line-item, fee-for-service, treat-to-code payment system. Fee-for-service is like taking your car’s bent fender to an auto body shop and being charged for each sheet of sandpaper, each can of Bondo, and each ounce of paint, instead of getting an overall estimate and a single bill.

So I am telegraphing the punchline here: Any serious and widespread attempt to substitute new and different payment systems based on risk and true competition through transparent bundled prices and quality of outcomes will implode today’s healthcare market.

Here Comes Everybody

The North Carolina State Health Plan is not isolated in its efforts. Similar stories are playing out in Montana, Kentucky, and other states. Haven, the amalgamation of JP Morgan Chase, Amazon, and Berkshire Hathaway, is just such a buyer with just such incentives. Giant retailers like Walmart, Kroeger, and Loews, tech giants like Apple, Microsoft, and Google, and many other large employers are waking up to their power as wholesale buyers of healthcare. Buyers across the country are using multiple strategies such reference-based pricing, bundled pricing, medical tourism, cost plus caps, even onsite, near-site and direct pay primary care. Consultants and other vendors are proliferating who are eager to help buyers of any size, even small employers, map out these strategies. None of these are yet majority practices across all buyers, but they are trending rapidly and appear to be at a major bend in the curve of adoption.

The more buyers get up on their hind legs and insist on their power as true customers, the faster that change will happen. As more buyers experience and demonstrate that they can get high quality healthcare for 10 percent, 20 percent, even 30 percent less in the system as it exists today, the more other players in the system will have to adjust, accommodate, change their pricing and cost structures, stop wasteful expensive practices and focus on providing what their customers want, need and are willing to pay for: real healthcare and real attention at a reasonable cost.

Change is gonna come.  

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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