The Perfect Storm of Healthcare Costs Is at our Doorstep

Posted by Jeff Gasser on October 11, 2018

Money StormAs I watched our friends in the Carolinas and the Florida Panhandle battle Hurricane Florence and Hurricane Michael, the parallels between these storms and our national health care problem was overwhelming. The storms had to travel all the way across the Atlantic, hit the perfect spot, then slow down, dump rain, and create enormous havoc.  The Perfect Storm.

I’ve been in this business a long time now. More than 40 years. Back in early 80s, in California during the HMO boom, we had the same issues we have today. Costs rising, employers struggling to pay the bills, member satisfaction. I remember telling people back then that one day these costs will rise so much that it will hit the patient’s pocketbook. At that point they will scream at Congress and no matter who’s in power there will be a call for nationalized healthcare.

Well, here we are. I would really like to see this fixed in my lifetime. Everyone seems to have “the” idea. Before we get to the solutions, you have to understand the problem. I don’t think it is well understood in its’ entirety.  In this piece I am not taking issue with any of the players.  They are simply acting rationally given the landscape in our market-based society.  In my view, what we have in healthcare, like Hurricane's Florence and Michael, is “The Perfect Storm”.

Factor One: No free market.

This is the item most widely cited – and clearly true – problem. When someone else is paying the bill, why care about the cost? So, healthcare payers created high deductible health plans, health savings accounts and other strategies – to no avail. I won’t spend much time on this factor, as so much has been written on it, other than to say it is a factor. However, it can’t even come close to being the only factor.

When you get into a car accident or your house burns down it is likely that a third party is going to be paying that bill as well. But auto and homeowner’s insurance rates aren’t going up so fast that it is a national crisis. Clearly something else is going on.

Factor Two: Unregulated monopolies.

This one is huge. Between 45-50% of health care premiums are ultimately paid to health systems as claim payments. At best, in any city in the country, the health systems amount to a cartel. In many smaller markets, there is only one hospital – a true monopoly. Even the largest payers have no negotiating leverage with these hospitals.  We like to think that there is a healthy tension between health systems and insurance carriers resulting in optimal pricing.  That war ended a long time ago.  The fight was too uphill.   Despite the carrier’s efforts, the health systems won.  All that was missing was an unconditional surrender on an aircraft carrier.

Within each hospital there are service monopolies. Radiology, pathology, ER, and anesthesia operate as monopolies within any given hospital. It should be no surprise that these specialties are generally reimbursed at much higher rates relative to Medicare than other physician specialties.

Then there is the physician. Some physicians practice at a couple of hospitals, but they generally prefer one, simply for their own efficiency. So, once you pick a physician, you are going to a specific hospital, and the hospitals know that. That’s why you, who would normally be considered the customer, walk by your physician’s car on the way into the hospital. The physician is the hospital’s real customer. Once a hospital gets the physician, it gets you. 

So, even in the largest cities, health care payers have little negotiating leverage with hospitals. Look at it this way, what would your utility rates be if there was not a regulatory body approving rates? If there was only or two body shops in your town what do you think would happen to your auto insurance rates?

Factor Three: Too much trust

The relationship between a patient and physician is generally quite strong. Most patients do exactly what their physicians say and question little. I think it is great that you love your doctor, but love should not be blind.  I once needed an ultrasound test.  My doctor told me to go to the hospital outpatient radiology unit.  I told him I preferred to go to a local free-standing facility.   He asked me why and I told him it was a quarter of the cost and I was paying.   He had no idea.

How are most medical costs incurred? A primary doctor refers you to a specialist who performs a procedure at a health system. There is a wide variety of quality among specialists, but patients don’t know or care because they trust their referring doctor so much. They assume quality because of the hospital brand.  Therefore, the quality of care you receive down the line is often based on your selection of a primary care physician because patients will often blindly follow their PCP’s referral pattern. Big mistake.

Equally as bad, patients generally don’t care about the price because they aren’t paying the bill. At Deerwalk, we are working on a solution to help our clients with that problem. Stay tuned for that.

Factor Four: Artificially created demand.

A doctor once told me he had “the power of the pen”.  He could prescribe himself an income.  There is no other place in business where the suppliers can create demand at will as much as they can in health care. This is a combination of the lack of a free market and too much trust.

Take me for example.   I am on no medications and exercise 6 days a week. If I scheduled appointments with 5 specialists, I am willing to bet one or more of them would find some test to run or procedure to perform. You can find something wrong with anyone my age. That doesn’t mean you should do something about it. Sad to say, but nowhere is this problem more evident in healthcare than late-stage cancer treatment. That’s a touchy subject, I know, so I’ll leave it at that.

My guess is that no matter where you live there are new shiny health facilities going up everywhere.  Sure, the baby boomers are getting older and require more services.  However, the truth is the health systems are flush with cash and like any business want to put it to work.  Don’t worry, they won’t have any trouble filling them up.  Can you imagine if the garage at your local car dealer was getting paid by insurance?  Or what if you took your car in for a periodic oil change and they added ten other service items that your car didn't need, and you didn’t care because someone else was paying for it?

The Perfect Storm

So, when we have a strong relationship with our physician, who can perform any service at will, at facilities that have the leverage of a monopoly over the people paying the bill, and the patients aren’t the people paying the bill, you get the problem – a problem I’m in my fifth decade trying to solve - The Perfect Storm.

I’d love to hear others’ thoughts on how we shelter from the storm – or fight it back. The time is now.


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