On March 23, 2010, President Obama signed the Affordable Care Act yet most of our healthcare cost increases are out of our hands….and here’s why.
From Tennessean Sunday, March 24,2013
Health care is broken partly because no one knows what anything costs. Everyone
agrees we should fix that. Why is that so hard?
It’s hard because most health care business models rely heavily on a lack of transparency. Let’s look at the models for insurers and hospital systems.
An insurer’s business model can be boiled down to this:
1. Negotiate discounted prices with providers.
2. Insure people, collect premiums.
3. Pay claims to providers at the discounted prices, and keep the difference.
Since that is the business, here is how you win financially:
1. Negotiate the lowest prices with providers.
2. Offer the lowest premiums so you can attract the most insured people.
3. Enjoy the virtuous cycle that ensues. What virtuous cycle? The more people you insure, the lower the prices you can get from providers. If you can get the lowest prices, you can offer the lowest premiums. Offering the lowest premiums will win you the most
insured people, and so you can continue to negotiate the lowest prices from
And so on.
The typical hospital system business model can be boiled down to this:
1. Negotiate prices with insurers to be “innetwork.”
2. Get paid at those prices on patient claims submitted to insurers.
3. Pay your doctors, midlevels, nurses and facility/equipment costs, and keep the difference.
Since this is the business, here is how you win financially:
1. Negotiate the highest prices with insurers.
2. See as many patients as possible.
3. Submit as many claims as possible for each patient. It’s a lot easier to do more tests/procedures per patient than to attract more patients. As such, your contracted prices for tests and procedures are really important.
Fortunately, as a hospital system, your size gives you leverage when negotiating with insurers. The insurers need you in their network more than they need a given imaging center. As a result, you’re able to negotiate prices that are a lot higher and still be in-network.
What if prices were perfectly transparent?
If prices were transparent, insurance negotiated the lowest prices would start to lose their primary advantage. This is because that pricing information would give medical providers and other insurance companies more power when negotiating and competing with them.
If prices were transparent, it would be difficult for hospitals to justify the high prices they charge for things available elsewhere for a fraction of the price. In other words, if everyone knew that “Procedure ABC” costs $3,800 at the hospital and $600 for the same quality procedure at a standalone facility next door, the hospital would lose a lot of business.
Times are changing
Our broken system is, in part, a reflection of these dynamics. Things are changing, though, and we are working toward a world where health care prices are more transparent.
What is causing this change?
- Growth of Health Savings Accounts (HSAs) and patients asking about price.
- Transparency startups like Healthcare Blue Book and Change:Healthcare.
- Hardworking individuals at the insurers and hospitals.
That’s right, the insurers and hospitals are working on transparency, too. They want a better health care system as much as anyone, but they can’t afford to inflict huge damage on their own business models by making prices transparent overnight. As such, they are doing so with all deliberate speed as they develop other competitive advantages to replace the loss of this one.
This is great news, as price transparency will lead to a better-functioning and
lower-cost system with happier providers and patients.
Now, here’s some history to put things in perspective…….
Cost of Hospital Care
In the United States the traditional hospital was a non-profit hospital, usually sponsored by a religious denomination. One of the earliest of these “almshouses” in what would become the United States was started by William Penn in Philadelphia in 1713. These hospitals are tax-exempt due to their charitable purpose, but provide only a minimum of charitable medical care. They are supplemented by large public hospitals in major cities and research hospitals often affiliated with a medical school. The largest public hospital system in America is the New York City Health and Hospitals Corporation, which includes Bellevue Hospital, the oldest U.S. hospital, affiliated with New York University Medical School. In the late twentieth century, chains of for-profit hospitals arose in the United States. For profit or investor-owned hospitals, are investor-owned chains of hospitals which have been established particularly in the United States during the late twentieth century. In contrast to the traditional and more common non-profit hospitals, they attempt to garner a profit for their shareholders. The three largest such firms are Hospital Corporation of America, Tenet (formerly NME), and HealthSouth. HealthSouth, as the third-largest U.S. national chain, is also the leading provider of rehabilitation services. The Canadian Medical Journal has this to say about For-profit hospitals .http://www.cmaj.ca/content/170/12/1814.full. For profit hospitals are responsible for the major increase in healthcare costs.
Cost of Doctor Care
In the modern world, England’s Royal College of Physicians –a state-approved licensing agency – has long been the model medical monopoly,exercising iron control over its members’ economic conduct. But this Guild-like system wasn’t salable in laissez-faire America.In 1765, John Morgan tried to start an inter-colonial medical licensing agency in Philadelphia, based on the RCP. He failed, thanks to bitter infighting among the doctors, but did begin the first American medical school, where he established the “regular mode of practice” as the dominant orthodoxy. Those who innovated were to be punished. After the Revolution, said historian Jeffrey Lionel Berlant, “a license amounted to little more than a honorific title.” In Connecticut and Massachusetts, for example, unlicensed practitioners were prohibited from suing for fees. And in the free-market 1830s, one state after another repealed penalties against unlicensed practice. By the mid-19th century, there were virtually no government barriers to entry. As economist Reuben A. Kessel noted, “Medical schools were easy to start, easy to get into, and provided, as might be expected in a free market, a varied menu of medical training that covered the complete quality spectrum.” Many were “organized as profit-making institutions,” and some “were owned by the faculty.” From time to time, doctors attempted to issue tables of approved fees – with price cutting called unprofessional – but they failed, because price-fixing cannot long survive in a competitive environment. Organized medicine’s lobbying against new doctors and new therapies began to be effective in the middle of the century, however. The official reason was the need to battle “quackery.” But as historian Ronald Hamowy has demonstrated in his study of state medical society journals, doctors were actually worried about competition lowering their incomes. The American Medical Association was formed in 1847 to raise doctors’ incomes. Nothing wrong with that, if it had sought to do it through the market. Instead, its strategy, designed by Nathan Smith Davis, was the establishment of state licensing boards run by medical societies. He attacked medical school owners and professors who “swell” the number of “successful candidates” for “pecuniary gain,” fueled by the “competition of rival institutions.” These men advance “their own personal interests in direct collision” with “their regard for the honor and welfare of the profession to which they belong.” The answer? “A board of examination, to sit in judgment” to restrict entry and competition, which he did not point out could only have a pecuniary motive. As philosopher William James told the Massachusetts legislature in 1898: “our orthodox medical brethren” exhibit “the fiercely partisan attitude of a powerful trade union, they demand legislation against the competition of the ‘scabs.'” And by 1900, every state had strict medical licensure laws. The Flexner Report of 1910 further restricted entry into the profession, as legislatures closed non-AMA-approved medical schools. In 1906, there were 163 medical schools; in 1920, 85; in 1930, 76; and in 1944, 69. The relative number of physicians dropped 25%, but AMA membership zoomed almost 900%. During the great depression, as Milton Friedman notes, the AMA ordered the remaining medical schools to admit fewer students, and every school followed instructions. If they didn’t, they risked losing their AMA accreditation. Today, with increasing government intervention in medicine – often at the AMA’s behest – the organization exercises somewhat less direct policy control. But it still has tremendous influence on hospitals, medical schools, and licensing boards. It limits the number of medical schools, and admission to them, and makes sure the right to practice is legally restricted. The two are linked: to get a license, one must graduate from an AMA-approved program. And there is a related AMA effort to stop the immigration of foreign physicians. The AMA also limits the number of hospitals certified for internships And licensure boards will accept only AMA-approved internships.The licensure boards – who invariably represent medical societies – can revoke licenses for a variety of reasons, including “unprofessional conduct,” a term undefined in law. In the past, it has included such practices as price advertising. Medical licensure is a grant of government privilege. Like all such interventions, it harms consumers and would-be competitors. It is a cartelizing device incompatible with the free market. It ought to be abolished
Cost of Prescription Drugs
Congressman Ron Paul responded to efforts by the pharmaceutical industry to block changes that would lower the cost of medicine for millions of Americans. Paul strongly supports changes to FDA regulations that would allow prescription drugs to be reimported from foreign countries, where widely-used drugs often sell for much less than in the U.S. Paul, a medical doctor for nearly 40 years, is an advocate of innovative market-based solutions to rising drug costs. He is a member of the House Caucus for Affordable Pharmaceuticals, which seeks to eliminate rules and regulations that benefit drug companies at the expense of consumers. “Drug reimportation is critical to lowering prices,” Paul stated. “Reimportation allows American consumers, particularly seniors, to benefit from worldwide price competition.
The Medicare D Rx program is prohibited by Congress from negotiating lower prices for drugs. It’s outrageous that the FDA does not permit U.S. citizens to reimport drugs that sell for 30 to 300 percent less outside our borders. The pharmaceutical companies should not be allowed to profit by this government-enforced price fixing. How much longer should American consumers be expected to pay much higher prices for identical drugs available in Europe, Canada, and Mexico for a fraction of the cost?”