Surgeons Doing Math

I bought a car as a package. It had wipers and tires and brakes. The car dealer gave me a simple price after he added the costs of components and labor plus profit. I wanted to buy surgery as a package. I wanted a surgeon and anesthesiologist and facility. There was no dealership for surgery packages, so I asked a facility to put one together. “Add sutures and gloves and some graspers,” I pleaded, “please, I have to have choice.”

Turnkey surgery packages are hard to find. That is partly because most surgery is paid for in separate fees for separate services by faceless third parties that take the patient’s money, dictate his choice, and keep price largely hidden behind a bureaucratic curtain. So why can’t a facility just put a surgery package together? Doesn’t the arithmetic of tires work just as well on sutures?

Consider the facility executive: he has no real subject expertise. For example, he rarely knows the difference between a nylon and chromic suture. He is also not used to costing and packaging, because he has had little incentive. This is because there has for decades been little market for simply priced packaged services. The big market for surgery is fee-for-service. To integrate a simply priced surgery package into legacy fee-for-service systems would require technical effort. Simplicity is complicated.

There is a second issue: legacy structures have brought atrophy to healthcare accounting. Paternalistic third parties allow payment of specific amounts and thus render informedactivity based costing and rational cost-plus-margin pricing irrelevant. The executive’s costs and profit don’t matter because his allowance has been set by another.

These are two of the reasons behind our wasteful excess capacity. Think about it. If the executive with little subject expertise indexes his price to third-party allowable, which is common, and those allowables are lower than true cost, the facility would subsidize care. If the executive indexes to third-party allowable and those allowables are higher than is marketable, the facility may sell nothing. Both propositions are losers for the facility and its patients.

The surgeon has a similar set of conditions. He knows the difference between a nylon and chronic suture, but not how much they cost. His price is also specifically allowed by third parties, so he rarely knows what to charge. With conditions changing – patients are increasingly shopping and increasingly shopping  online – a few surgeons are adapting. They are developing surgery packages and posting their prices online. For example, you can get acircumcision in Santa Ana for $900.

It is not enough to offer a simply priced circumcision surgery package in Santa Ana. This is because many people need other procedures and many people live far from Santa Ana. To serve broad surgical need will require more lines of service in more locations. It requires more choices.

There is a way to develop and deliver more choices of simply priced surgery packages. Here is how. Consider the price of that circumcision. The surgeon probably started with his preference card, a document that lists what the procedure requires: lidocaine, gloves, scalpel blade, and so on. He may have next added cost of labor and profit. In this case, it would have been relatively simple because the surgeon owns the office and employs the staff.

Simply priced surgery packages can also be developed when several parties are involved. This was the case when an uninsured man with prostate cancer was unable to pay his local hospital the $55,000 it wanted for the surgery he needed. He needed a new, value generating choice. In response, an anesthesiologist who runs a hospital and I, a prostate surgeon, customized a surgery package for him. That solution led to an event that involved that patient from Oregon, a surgeon from Florida, a surgical robot from Colorado purchased on eBay for 1% of retail, and an operating room in Trinidad. It delivered a simply priced surgery package for $24,000 that overcame economic barriers to care.

One reason the customized solution came is that surgeons know what surgery requires: they know what goes on the preference card. Later, we used the same surgeon driven model to build simply priced surgery packages in Kansas and Florida. These new surgery package choices delivered value to self-pay consumers and third party payers, such as Blue Cross.

Surgeon driven solutions can deliver many kinds of new choices. For example, using the logistics model referenced above, a specialist in joint reconstruction, a hand surgeon who runs a hospital, and I developed an outpatient knee replacement package that includes surgeon, anesthesiologist, facility, implant, post-discharge physical therapy, peri-operative visits, use of online shopping and consultation tools, and off-line customer support including help getting financing. It is provided in Austin at a flat $21,800. This is a lower cost than is common in Austin.

The question is whether or not surgeons will join a surgery package free market. In 2015, we began to test this by setting to build simply priced surgery packages. Leaving aside for now the critical objective of surgeon quality, the idea was to simplify by developing transparently priced, flat-fee, comprehensive, uniformly defined surgery packages that would be easily comparable. So far, 60 surgeons, half of those who entered initial discussions, have enrolled. Many help to define new packages, identify partners, recruit new surgeons, and credential their peers. They are behaving the same across lines of service: hip replacement,laparoscopic hysterectomy, and more.

The other question is how they will price when freed from the restrictions of third-party allowances. Early observations suggest that new surgeons often look at the previous surgeons and adjust their prices. As of this moment, this kind of surgeon self-organization is most easily apparent for penile implant surgery, the most developed line of service, in which 17 surgeons are participating. So for example, we see surgeons joining in Houston and Atlanta examine the existing packages in Birmingham and Nashville before setting their prices. This is not surprising. Surgeons know what their customers are also looking at prices.

It is still very early in the experience but there are indications that surgeon driven surgery packages built for a free market will not show the wild price variations commonly observed in other settings. So far, no surgeon has wanted to be the most expensive. A few have wanted to not be the least expensive. Overall, the surgeons seem to be self-organizing in a way that brings lower prices and less price variation.

Our healthcare delivery is opaque, inconvenient, and wasteful. Surgeons can fix some of that. They can help to define useful packages, identify partners, drive value, and deliver more choice.

Arnon Krongrad, MD is Chief Executive Officer of Surgeo, which develops and delivers flat-fee surgery packages anchored by highly qualified, peer credentialed surgeons. 

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