The economic fundamentals of healthcare in the United States are unique, amazingly complex, multi-layered and opaque. It takes a lot of work and time to understand them, work and time that few of the experts opining about healthcare on television have done. Once you do understand them, it takes serious independence, a big ornery streak, and maybe a bit of a career death wish to speak publicly about how the industry that pays your speaking and consulting fees should, can, and must strive to make half as much money. Well, I turn 67 this year and I’m cranky as hell, so let’s go.
The Wrong Question
We are back again in the cage fight over healthcare in Congress. But in all these fights we are only arguing over one question: Who pays? The government, your employer, you? A different answer to that question will distribute the pain differently, but it won’t cut the pain in half.
There are other questions to ask whose answers could get us there, such as:
- Who do we pay?
- How do we pay them?
- For what, exactly, are we paying?
Because the way we are paying now ineluctably drives us toward paying too much, for not enough, and for things we don’t even need.
A few facts, the old-fashioned non-alternative kind:
- Cost: Healthcare in the U.S., the whole system, costs us something like $3.4 trillion per year. Yes, that’s “trillion” with a “T”. If U.S. healthcare were a country on its own it would be the fifth largest economy in the world.
- Waste: About a third of that is wasted on tests and procedures and devices that we really don’t need, that don’t help, that even hurt us. That’s the conservative estimate in a number of expert analyses, and based on the opinions of doctors about their own specialties. Some analyses say more: Some say half. Even that conservative estimate (one third) is a big wow: over $1.2 trillion per year, something like twice the entire U.S. military budget, thrown away on waste.
- Prices: The prices are nuts. It’s not just pharmaceuticals. Across the board, from devices to procedures, hospital room charges to implants to diagnostic tests, the prices actually paid in the U.S. are three, five, 10 times what they are in other medically advanced countries like France, Germany, and the U.K.
- Value: Unlike any other business, prices in healthcare bear no relation to value. If you pay $50,000 for a car, chances are very good that you’ll get a nicer car than if you pay $15,000. If you pay $2200 or $4500 for an MRI, there is pretty much no chance that you will get a better MRI than if you paid $730 or $420. (Yes, these are real prices, all from the same local market.)
- Variation: Unlike any other business, prices in healthcare bear no relation to the producer’s cost. None. How can you tell? I mean, besides the $600 price tag on a 69-cent bottle of sterile water with a teaspoon of salt that’s labeled “saline therapeutics” on the medical bill? (Yes, those are real prices, too.) You can tell because of the insane variation. The price for your pill, procedure or test may well be three, five, even 12 times the price paid in some other city across the country, in some other institution across town, even for the person across the hall. Try that in any other business. Better yet, call me: I have a 10-year-old Ford F-150 to sell you for $75,000.
- Inefficiency: We do healthcare in the most inefficient way possible, waiting until people show up in the Emergency Department with their diabetes, heart problem, or emphysema completely out of control, where treatment will cost 10 times as much as it would if we had gotten to them first to help them avoid a serious health crisis. (And no, that’s not part of the 1/3 that is waste. That’s on top of it.)
So who’s the chump here? We’re paying ridiculous prices for things we don’t necessarily need delivered in the most inefficient way possible.
Why do they do that to us? Because we pay them to.
Wait, this is important. This is the crux of the problem. From doctors to hospitals to labs to device manufacturers to anybody else we want to blame, they don’t overprice things and sell us things we don’t need because they are greedy, evil people. They do it because we tell them to, in the clearest language possible: money. Every inefficiency, every unneeded test, every extra bottle of saline, means more money in the door. And they can decide what’s on the list of what’s needed, as long as it can be argued that it matches the diagnostic code.
That’s called “fee-for-service” medicine: We pay a fee for every service, every drug, every test. There’s a code for everything. There are no standard prices or even price ranges. It’s all negotiated constantly and repeatedly across the system with health plans, employers, even with Medicare and Medicaid.
We pay them to do it and the payment system demands it. Imagine a hospital system that bent every effort to providing health and healthcare in the least expensive, most effective way possible, that charged you $1 for that 69-cent bottle of saline water, that eliminated all unnecessary tests and unhelpful procedures, that put personnel and cash into helping you prevent or manage your diabetes instead of waiting until you show up feet-first in diabetic shock. If it did all this without regard to how it is paid it would soon close its doors, belly up, bankrupt. For-profit or not-for-profit makes little difference to this fact.
If we want them to act differently, we have to pay them differently.
Paying for Healthcare Differently
But wait, isn’t that the only way we can pay? Because, you know, medicine is complicated, every body is different, every disease is unique.
Actually, no. There is no one other ideal way to pay for all of healthcare, but there are lots of other ways to pay. We can pay for outcomes, we can pay for bundles of services, we can pay for subscriptions for all primary care or all diabetes care or special attention for multiple chronic conditions, on and on, the list of alternative ways to pay for healthcare is long and rich.
There are now surgery centers that put their prices up on the wall, just like McDonalds — and they can prove their quality. There are hospital systems that will give you a warranty on your surgery: We will get it right or fixing the problem is free.
Look: You get in an accident and take your crumpled fender to the body shop. Every fender crumples differently, maybe the frame is involved, maybe the chrome strip has to be replaced, all that. So there is no standard “crumpled fender” price. But it is not the first crumpled fender the body shop has ever seen. It’s probably the 10,000th. They are very good at knowing just how to fix it and how much it will cost them to do the work. Do you pay for each can of Bondo, each disk of sandpaper, each minute in the paint booth? No. They write you up an estimate for the whole thing, from diagnosis to rehab. Come back next Thursday and it will be good as new. That’s a bundled outcome. It’s the body shop’s way of doing business, its business model.
There are new business models arising now in healthcare (such as reference prices, medical tourism, centers of excellence, “Blue Choice” and other health plan options) that force hospitals and surgical centers to compete on price and quality for specific bundles, like a new hip or a re-plumbed heart.
Healthcare is a vast market with lots of different kinds of customers in different financial situations, different life stages, different genders, different needs, different resources, yet we have somehow decided that in pretty nearly all of that vast market there should be only one business model: diagnostic-code-driven fee for service. Change that, and the whole equation changes. It’s called business model innovation. If we find ways to pay for what we want and need, not for whatever they pile onto the bill, they will find ways to bring us what we want and need at prices that make sense. That’s called changing the incentives.
Is this pie in the sky? No, it’s already happening, but in ways that are slow and mostly invisible to anyone but policy wonks, analysts, and futurists like me. The industry recognizes it. Everyone in the healthcare industry will recognize the phrase “volume to value,” because it is the motto of the movement that has been building slowly for a decade. It’s shorthand for, “We need to stop making our money based on volume — how many items on the list we can charge for across how many cases — and instead make our money on how much real value, how much real health, we can deliver.”
Self-funded employers, unions, pension plans, and tribes are edging into programs that pay for healthcare differently with reference prices, bundled prices, onsite clinics, medical tourism, direct pay primary care, instant digital docs, team care, special care for those who need it most, all kinds of things. The Affordable Care Act set up an Innovation Center in the Centers for Medicare and Medicaid Services, and the government has been incrementally pushing the whole system more and more into “value” programs.
Are We There Yet?
So why hasn’t it happened yet? Why aren’t we there yet?
Because it’s hard, it’s different, and it hurts. And there is a tipping point, a tipping point that we have not gotten to yet.
It is very hard to loosen your grip on a business model as long as that business model pays the bills. We built this city on fee for service, these gleaming towers, these sprawling complexes, these mind-bending levels of skill and incomprehensible technologies. To shift to a different business model requires that everybody in the healthcare sector change the way they do everything, from clinical pathways to revenue streams to organizational models to physical plants to capital formation, everything all the way down. And it’s all uncharted territory, something the people who run these systems have not yet done and have little experience in. It’s guaranteed to be the end of the line for some institutions, many careers, many companies.
So far, the government “volume-to-value” or “value-based-payment” programs are incremental, baby steps. They typically add bonus payments to the basic system if you do the right thing or cut payments a few percentage points if you don’t. My colleague health futurist Ian Morrison calls these programs “fee for service with tricks.” They do not fundamentally change the business model.
Private payers such as employers have only gradually been getting more demanding, unsure of their power and status as drivers of change in this huge and traditionally staid industry. Systems such as Kaiser that have a value-based business model (so that they actually do better financially if they can keep you well) still have to compete in a system where the baseline cost of everything they need, from doctor’s salaries to catheters, is set in the bloated fee-for-service market. So movement is slow, and we are not yet at the tipping point.
Back to Who Pays
This is not a libertarian argument that everyone should just pay for their own healthcare out of their own pocket and let the “free market” decide. The risks are far too high, and we are terrible at estimating that risk, financial or medical. All of us are, even your doctor is, even I am. A cancer can cost millions. Heck, a bad stomach infection that puts you in the hospital for 10 days could easily cost you $600,000. Bill Gates or Warren Buffet can afford that, you and I can’t.
We need insurance to spread that risk not only across individuals but across age groups, across economic levels, and between those who are currently well and those who are sick. For it to work at all, the insurance has to be spread across everyone, even those who think they don’t need it or can’t afford it. You drive a car, you have to have car insurance, even if you are a really safe driver. You buy a house, you must have fire insurance, even though the average house never burns down. You own and operate a human body, same thing, even though at any average time you hardly need medicine at all.
If we are to have insurance for everyone, we need to subsidize it for those who have low incomes — and this has nothing to do with whether they “deserve” help, or even with whether healthcare is a right. It’s about spreading the cost of a universal human risk as universally across the humans as possible. At the same time, such subsidies need to be given in a way that helps people feel that they are spending their own money, that they have a stake in spending it wisely. This is not simple to do, but it can be done.
This is also not necessarily an argument for a single payer system. Single payer, by itself, will not solve the problem. It doesn’t change the incentives at all. It just changes who’s writing the check. What the system needs most is fierce customers, people and entities who are making choices based on using their own money (or what feels like it) to pay for what they really need. This forces competition among healthcare providers that drives the prices down. That means the system needs variety, a lot of different ways of paying for a lot of different customers. If we can figure out how to do that in a single-payer system, well then we’re talking.
Obviously the ultimate customer in healthcare is the individual, since medicine is about treating bodies, and we have exactly one to a customer. But the risk is too high at the individual level, and the leverage is too low.
So employers, pension plans and specialized not-for-profit mutual health plans whose interests really line up with the interests of their employees or members can act as proxies. They can force providers of healthcare (hospital systems, medical groups, labs, clinics) to compete for their business on price and quality. They can refuse to pay for things that the peer-reviewed medical literature shows are unnecessary. They can pay for improvements in your health rather than just fixing your health disasters. They can help their members and employees become fierce customers of healthcare with information and with carefully-titrated incentives.
Here’s one example of an incentive: A payer says to its members, “You need a new knee? Great, fine. Here are all the high-quality places you can get that done in your area. You can choose any that you like. But here’s a list of high-quality places in your area that do it for what we call a “reference price” or even less. Choose one of those places, and we will pay for everything from diagnosis to rehab. You can choose a place with a higher price if you like, but you’ll have to pay the difference yourself.” With reference prices, the employee or member partners with the payer in becoming a fierce, demanding customer, and prices for anything treated this way come crashing down.
Both payers and individuals, by being fierce customers, can force the healthcare providers in turn to become fierce customers of their suppliers, forcing pharmaceutical wholesalers and device manufacturers to bid on getting their business. “This knee implant you are asking us to pay $21,000 for? We see you are selling it in Belgium for $7,000. So we’ll pay $7,000 or we’ll go elsewhere.” The “price signals” generated by fierce customers reverberate through the entire system.
What’s the look and feel?
“Healthcare for half” sounds to most people like a Greyhound bus station with stethoscopes, like flea market surgeries, and drive-through birthing centers. Paradoxically, though, a lean, transparent system catering to fierce customers of all types would feel quite the opposite, offering more care, even what might feel like lavish care, but earlier in the illness or more conveniently. It might mean a clinic right next door to your workplace offering private care on a walk-in basis, no co-pay, even your pharmaceuticals taken care of — or you could choose to go elsewhere to another doctor that you like more, but you have to schedule it and pay a copay for the visit. Why will providers make healthcare so convenient and personal? Because if they are paid to be responsible for your health it’s worth the extra effort and investment to catch a disease process early, before it gets expensive.
It might mean, when your doctor says you need an MRI on that injury, getting on your smart phone to conduct an instant spot auction that allows high-quality local imaging centers to bid for the business if they can do it in the next three hours. It might mean, if you are in frail health or have multiple chronic diseases, being constantly monitored by your nurse case manager through wearables, and visited when necessary or once a week to help keep you on an even keel. It might mean your health system not being so quick to recommend a new knee, and offering instead to try intensive physical therapy, mild exercise and painkillers to see if that can solve the problem first (Pro tip: It often does).
Changing the fundamental business model of most of healthcare will be difficult and painful for the industry. But if we look to other countries and say, “Why do their systems cost so much less than ours? Why can’t we have what we want and need at a price we all can afford?” — this is the answer.
Change the way we pay for healthcare, not just who pays, and we can rebuild the system to be at the same time better and far cheaper.
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