Will the Bubble Burst?

Brian Klepper

Posted 8/19/12 on Medscape Connect’s Care and Cost Blog

My recent 3-hour outpatient prostate biopsy generated nearly $25,000 in charges. My health plan will probably settle for four to five thousand dollars – this is the real market value – but if we were uninsured we’d be on the hook for the whole thing. All in all, a minor diagnostic procedure – nothing cured or treated – for the cost of a pretty nice car.

The capricious insanity of health care pricing is delivered with straight faces by health care professionals and executives to flabbergasted patients and benefits managers. It is the by-product of a system utterly devoid for decades of transparency, accountability or market pressures.

Its extremes were highlighted recently by a University of California San Francisco study of 20,000 routine adult appendectomies, each with inpatient stays of 3 or fewer days (to avoid the influence of outliers), delivered in 289 California hospitals and medical centers. The charges, from $1,529 to nearly $183,000, covered a 120-fold range. Just within San Francisco, there was a $172,000 difference between the high and low charge.

Are these irrational cost events evidence of an impending rightsizing? What happens when economic forces collide? Imagine a sector that has been protected from market forces, that has developed excessive pricing and capacity. Eventually, economic downturns and spending ceilings force decreases in available revenues. Market opportunities emerge. Savvy purchasers buy higher value at lower cost. Vendors trade higher margins for higher volumes. Markets ultimately trump pricing, even when prices have been propped up by policy.

This is happening in health care now. Employers are actively seeking better arrangements. I watched faces fall last week at a large imaging/radiology conference as I described my firm’s volume-based contract for MRIs at 20 percent or less of what our clients had previously paid through their health plan networks.

Yesterday I asked doctors in a national cancer care network whether they’d be willing to do oncology care differently if they could get higher patient volumes. They would have to provide care that strictly follows evidence, passing through operational costs without markup, managing the care process as efficiently as possible, and being accountable for the results. They are eager but wary.

Hospitals face similar challenges. Procedural volumes have dropped with the recession. Assuming nothing changes, they face a $40 billion cut in Medicare reimbursement each of the next 10 years. Commercial plans will almost certainly reduce their payments as well. So their challenge is how to maintain revenues and margin. The only rational answer is getting more market share from businesses. One path is specialization, but the more mainstream answer is measurably lower cost and better quality.

Suddenly, health care could become a market, changing everything. The need to drive lower cost with improved quality would reverse health care’s paradigm over the past 50 years. “Care appropriateness” would have meaning. Specialists and health systems that deliver services inappropriately or unnecessarily, or with sky high pricing, would become uncompetitive and, possibly, pariahs. Our glut of specialists – 63 percent of all US physicians, compared with about half that in other developed nations – would normalize as utilization becomes tied to appropriateness rather than how lucrative certain procedures are. The marketability of drugs and devices would be tied to demonstrable impacts on quality and cost.

The inability of our electronic medical record systems to seamlessly exchange patient information would evaporate. (This has been a strategic sticking point of vendors, who have sought to safeguard market share by blocking interoperability.) The need to coordinate care effectively across the continuum would depend on an ability to trade information. Vendors who provide solutions would win. Those who stonewall would ultimately lose.

The irony here is that the Affordable Care Act, shepherded by Democrats, acknowledges the importance of payment reform that can positively realign incentives. But as an expression of the industry’s capture of regulation, it stops short of mandating better ways to pay for care. It bolsters the health industry’s book of business, and its ability to achieve per capita revenues that are double those in other industrialized nations. Despite ACA’s good intentions, the traditional  mechanisms of excess – fee-for-service reimbursement, a lack of transparency, compromising primary care’s traditional role – are allowed to persist at thwarting market forces, and drive utilization and revenues independently of appropriateness.

But there appear to be limits. No system can be abused to excess indefinitely. Market forces, as organic and fundamental as gravity and photosynthesis, are kicking in and will bring things toward homeostasis.

While the industry’s control of policy has served it well, we are seeing the first tentative signs of a health care market. Is it possible that health care’s cost bubble could burst? That would be a profoundly traumatic event, downsizing an industry that consumes nearly one-fifth of our Gross Domestic Product, more than half of our federal tax revenues, and four-fifths of our national household economic growth.

But it would also liberate America, providing long overdue relief from an overwhelming, unnecessary burden that threatens to capsize the economy.

About Brian Klepper

Brian Klepper is a health care analyst, commentator and a Principal in Worksite Health Advisors.
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5 Responses to Will the Bubble Burst?

  1. Tom Thorpe says:


    I wish to propose the following specific reforms which I believe directly address the greatest problem with the American health care system, the illusion of free health care created by third party payment. I believe these reforms, if enacted, would provide a substantial amount of cost containment , provide much greater access to insurance coverage for the currently uninsured, and not require any significant additional government expenditure:

    1. All health care providers within a given geographic region would be required to publicly post prices, on a central internet website, for any and all services and products which they wish to provide. For complex services, such as surgery, all of the providers involved would be required to collaborate and provide a package price. For emergency or unanticipated services, providers would be required to charge no more than the average regionally posted price for any service rendered. The listed prices would be valid for anyone not covered by Medicare or Medicaid, regardless of age or whether or not they are insured.

    2. All insurance companies would be required to pay out, for policyholders for which a specific service or product is covered, the average posted regional price minus a standard co-payment set approximately equal to half the range of prices (perhaps within a standard deviation of the average) posted for that specific procedure. The amount paid by a policyholder for any service or product would then be the price charged minus the average regional price plus the standard co-payment. The health care consumer could therefore control his bill by comparison shopping. As an example, suppose a specific procedure has an average posted price of $1,000, with most providers posting a price between $900 and $1100. If the standard co-payment is then set at $100, the health-care consumer has the ability by comparison shopping to vary his or her out of pocket expense from nothing to $200.

    3. Insurance companies would be required to offer the option of catastrophic insurance only, with an arbitrary annual deductible chosen by the policy holder, to anyone currently insured through their employer or who can pass a physical exam to the satisfaction of an insurance company. Anyone insured through their employer would receive a premium discount appropriate to the annual deductible chosen. Policyholders would be credited with the average regional price for any service received before the annual deductible is satisfied.

    4. Health care consumers could receive a discount from providers by optionally signing an agreement with the provider, before any service is rendered, guaranteeing not to sue for malpractice, or possibly just not to sue for punitive damages, under any circumstances. Discounts would be regulated to be proportional to any reduction in malpractice premiums paid by the provider.

    The above proposals will greatly aid the uninsured in two ways. First, health care providers currently bill uninsured consumers at a rate far in excess of what is charged to anyone who is insured or covered by Medicare or Medicaid. Although this practice may have resulted unintentionally due to the “discounts” demanded by insurance companies and the government, it is despicable and morally indefensible. Second, the availability of catastrophic insurance, with an annual deductible chosen by the policyholder, will place health insurance within the financial reach of a large number of the uninsured.
    Cost containment for both the insured and uninsured is achieved primarily by financially motivating the health care consumer to comparison shop.
    Finally, if Medicare was converted from its current form, paying 70- 80% of all medical costs, to one providing 100% of catastrophic care, with an annual deductible determined by income, Medicare recipients would then also be motivated to comparison shop. If Medicare was completely separated from the rest of the federal budget. the annual deductible could be adjusted periodically to guarantee long term solvency of the program.

    Tom Thorpe

  2. Dan McGrath says:

    Just make the user of care responsible & costs would plummet – by the way that is coming in 2014

  3. Pingback: Demanding More From Medical Homes - The Doctor Weighs In | The Doctor Weighs In

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