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.

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6 thoughts on “Will the Bubble Burst?

  1. Brian

    You speak in circles.
    There is no free market in medicine precisely due to third parties such as insurers paying instead of the patient.

    In your system the doctor Is not free to set his price.
    In your system the patient does not know the price.
    In your system the doctor is not free to practice how he feels best fits the patients needs, but instead locked into EBM protocols.
    In a free market there is innovation everywhere as competition ensues on quality and price.
    In your system you double and triple down on what is not working, and have every doctor treat everything exactly the same way.

    You are not liberating healthcare!
    You are putting further chains on it!
    You are just looking to take further control from doctors and patients, and just possibly give what little financial savings and rewards to insurers and corporations instead of to the parties involved, the doctor and the patient!

  2. What an interesting and informative article! I learned a lot, which is why I always make sure I read your blog notes. Thank you for the knowledge that you have shared.

  3. Dr. Horvitz comments point directly to the most insidious dynamic that has made the laudable cause of providing decent and basic healthcare to all humans so difficult in this country. Physicians are as much to blame for the fact that the healthcare system is not only so vastly expensive but also intractable to improvements and change for the better. The biggest obstacles to change have been the physicians and their organizations who are so worried about their bottomlines that they have forgotten why they selected to be healers in the first place.
    Dr. Horvitz, there are no circles other than those you are creating with your arguments. Obviously, you must be smart enough to understand basic maths and economics if only you could take off your glasses of self-interest and apply yourself.

    1. RadhikaN

      Please keep the discussion pleasant.

      Show me one instance where government has brought down the overall costs of healthcare. Just one.

      Government intruded on a private free market system and created this mess we have today. More government involvement and price controls will not fix it. Free markets are proven, as long as there is not cronyism and special interests in the way, to lower the cost of products and services, while enhancing quality.

      If you truly want a better system, with lower costs for everyone, and advancing technologies to help improve health, then you should run far from a govt controlled system.

      Medicare is broke!
      Medicaid costs are over budget every year. Medicaid has price controls, and pay so little yet they are still overrun with deficits. If govt price controls are so effective, then Medicaid would be the gold standard for a healthcare system.

      Get the govt out of the system, other than for providing a safety net, a catastrophic plan, and laws strict enough to put fear in physicians and hospitals to not break a law.

      I have worked in this field for over 20 years. I have seen the system evolve into the mess it has. It is more the govt and corporate takeover of healthcare that is at fault. Docs can take some of the blame, but docs don’t make the laws!

  4. Dr. Horvitz, I would agree with you in theory except that I truly believe that in practice, the facts show that the overall cost of healthcare is a national emergency that needs to be resolved with cost controls at the national level.

    It’s going to be very difficult, but necessary, for everyone in the system (patients, doctors, payers) to find the new balance between doctor autonomy and health-promoting cost efficiencies.

    At the national level, it makes the most sense to intervene in health care to create a healthier population overall through on the one end, encouraging a mix of earlier, low-cost interventions and, on the other, leveraging a large-system’s buying power to rationalize and shed light on the highest cost interventions.

    It is not, in every single detail, even close to a nirvana for doctors and patients. But that would be unrealistic.

    It is, on the other hand, what a national-level intervention can achieve. I do think we all need to give it a try and use guidance from informed people like you to find the best places to make doctors and patients empowered.

  5. Sara:

    Cost controls with govt price fixing never work.

    Open the free market up to competition and you will see costs drop quickly, just like you see $4 generic meds.

    Doctors and govt are NOT responsible for an individuals health. It is up to the individual to partner with their doctor to do the right things to maintain health.

    As for balance it is way overbalanced towards third parties, meaning insurers and govt, as they make the rules and regs. They set the table and it’s a mess.

    They should take a big step back and let patients and their doctors come up with a better way!

    I do it in my office every day!

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