Healthcare’s Biggest Lie


“PPO networks are a quaint artifact of pricing failure……….if you study the numbers, it is impossible to not come to the conclusion that healthcare is the single greatest threat to America. As Klein pointed out, inflated pricing is public enemy #1.”

Healthcare’s Biggest Lie: Employers Can’t Do Anything About Massive Pricing Failure

Published on December 11, 2015

Dave ChaseFollowDave Chase

The Antidote to the Bitter Pill

Astute observers have stated controlling healthcare costs is almost impossible. TIME magazine devoted their longest story in their history to this topic in The Bitter Pill by Steven Brill that was turned into a book. The solution to the problem that is outlined below addresses the massive pricing failure present in healthcare. That is, in most markets higher prices equates to higher quality. In healthcare, frequently the opposite is true. For example, it stands to reason that surgeons who do a procedure frequently are far more efficient and have far fewer complications than those who perform surgeries more infrequently.

The other dynamic that is created by the solution below is it shows how PPO networks are a quaint artifact of pricing failure. In a properly functioning market, there are transparent and fair prices and no need to create what amounts to a glorified Yellow Pages of healthcare organizations who’ve had a pricing table rammed down their throat. The healthcare organizations outlined are happy to provide a fair, transparent price that doesn’t have to build in costs that don’t add value to the care they deliver — complex claims processing, co-payments, deductibles, patient accounts receivable and more.

Ezra Klein is data-junkie journalist who drilled down on this issue — 21 graphs showing how ludicrous healthcare prices are. If the byproduct was merely hospitals having large profits, we could shrug our shoulders and move on. However, if you study the numbers, it is impossible for me to not come to the conclusion that healthcare is the single greatest threat to America. As Klein pointed out, inflated pricing is public enemy #1.

Angiogram – Price comparison by country in 2012

Here’s the good news: Fortunately, #5 in the list of 7 Organizations That Will Turn Healthcare Upside Down In 2016 demonstrated the way to fix massive pricing failure. Before we delve into how they are doing what the experts have said is impossible, let’s drill down on Tulsa, Oklahoma as representative of most cities in America to see what is happening. We’ll look at the collateral damage from pricing failure, but we’ll also see that the highest quality surgeons do the most procedures and have the fewest complications resulting in the lowest prices. The “magic” is the need to create the market for those high value centers.

Tulsa as a microcosm of America

I recently visited Tulsa to speak at a Medicare meeting. This caused me to look into some data specific to Tulsa/Oklahoma but it would be similar to most places in the U.S. In Teacher Unions On Wrong Side Of Negotiating Table, I summarized the devastating consequences to education of squandering resources on healthcare. You know it’s bad when Bill Gates devotes an entire TED talk to this issue. The graphic below is one of many that shows how it’s a Zero Sum Game — healthcare is stealing from all other budgets though it’s particularly acute in education. If you ever wondering why class sizes have gotten bigger, extracurricular and arts programs have been cut and you are being asked to donate to public schools via various fundraisers, look no further than healthcare.

Healthcare Inflation Starving Social Determinants of Health

Now, let’s look at Tulsa, Oklahoma to see the impact on Oklahoma schools…

Unfortunately, that hasn’t been the only cost

Traditional health insurers have been ineffective at controlling prices as Tulsa will see the largest premium increases in the entire country (35.2%). Health insurers will justify mergers under the guise that it will help them negotiate with providers. However, as outlined in theses #81 and #83 of the 95 Theses for a New Health Ecosystem, health plans have strong disincentives to control costs. In reality, any employer over 100-200 employees is, in effect, a mini “insurance” company. This is why Collective Health is #2 on the list of the 7 Organizations That Will Turn Healthcare Upside Down In 2016 . They help organizations do what they should have done long ago — become self-insured and manage it well.

The good news is that even a small manufacturer can be the “David” to the healthcare Goliaths in their community. Enovation Controls only has 600 employees yet has shown they can solve the price issue (more on that below) and slay the cost beast.

MacArthur Genius grant winner, Dr. Jeffrey Brenner described the dynamic in a Freakonomics episode as follows:

“So you know, the most dangerous thing in America is an empty hospital bed. In the center of New Jersey, near Princeton, a couple years ago, we built two brand-new hospitals. These are two $1 billion hospitals, 10 miles apart, very close to Princeton. So one is called Capital Health, and the other is Princeton Medical Center. I don’t remember anyone in New Jersey voting to build two brand-new hospitals. But we are all going to be paying for that the rest of our lives. We’ll pay for it in increased rates for health insurance. And, boy, you better worry if you go to one of those emergency rooms, because the chances of being admitted to the hospital when there are empty beds upstairs that they need to fill are going to be much, much higher than when all the beds are full–whether there’s medical necessity or you need it or not. So I’d be very worried if you live in Princeton that there are now two $1 billion hospitals waiting to be filled by you.”

One would think that healthcare’s perverse incentives that make it more profitable to amputate a diabetic’s leg than prevent diabetes wouldn’t impact a mission-based organization. Unfortunately, the evidence suggests otherwise with the diabetes epidemic. Oklahoma is one of the worst states for obesity and diabetes. Despite what one reads in a typical hospital mission statement, hospital CEOs act more like a hotel GM (trying to fill beds) than as careful stewards of their community’s health.

Despite all healthcare executives knowing that we are operating at roughly double the capacity of hospital beds in the U.S., too many health systems continue to build more capacity. In contrast, the smartest health system CEOs study Geisinger Health System whose CEO said, “My job ultimately is to close every one of our hospitals,” and he acts on those words.

Oklahoma has a major financial crisis looming as the price of oil, one of its primary resources, remains low. Rising state healthcare expenditures are exacerbating the shortfall. The state can no longer support some of its state parks. Walnut Creek State Park is one example and the public will no longer enjoy its beauty, seen in the picture below. Oklahoma may be in the odd situation of keeping only “profitable” parks open.  Was Walnut Creek a victim of oil or healthcare? The dots connect to both.

Is it employers job to fill hospital beds or create jobs?

Enovation Controls demonstrated that it’s possible to lower per capita healthcare spending by 30% while having great benefits. Even though they don’t have thousands of employees, they were able to obtain fair prices at high quality organizations. Enovation Controls was fortunate that they were in Oklahoma where a pioneering surgical hospital said “enough” to the madness of the claims process and went fully transparent on their prices. Employers learned of this and asked their benefits consultant, Jim Millaway, if they could find an easy way to access these prices. Initially, they enabled this on a one-off basis employer by employer.

Later on, Millaway realized he was on to something and became a pioneer in Transparent Medical Networks. He created The Zero Card to make it available to any employer. With these employers, Millaway indicates they have found $1000 of pricing failure per employee just on standard surgeries (more when imaging, high cost procedures, etc. are added). That is, if they implemented a program like his, the employer could save an average of $1000 per employee per year . If they were to put that in an employee’s wallet each year, over 30 years that would compound to over $200,000 on that item alone (assuming S&P index growth rates).

[Disclosure: I have worked with the originators of The Zero Card on the open source Health Rosetta project and consulted in the past with them. As I’ve disclosed many times, the Health Rosetta is a non-commercial open source project that provides a reference model for how purchasers of healthcare should procure health services.]

Let me give one example to show how it works. An individual needed a spinal fusion. If they had stayed with their traditional PPO network (which was an option), the billed amount was $179,165.74. The “Allowed/paid amount” was $134,487.33. That is the amount the provider organization would have received between what the employer would pay and what the employee would pay. Due to the high amount, the individual would have hit their out-of-pocket maximum of $2,500. However, the individual was given the choice of going to a high quality local surgery center that agreed to do the procedure for $61,200. In other words, the “pricing failure” was $73,287.33. Because the savings were so great, the employer was more than happy to waive all charges for the employee. That’s right, they paid zero — thus the name of the card they use. Rather than the steep financial cost for an individual on a modest income, they didn’t have to pay for making the right choice. Further, rather than facing a mountain of bills and the anxiety of dealing with so-called Explanation of Benefits, bills that say they aren’t bills and so on, the individual simply received a thank you survey.

I asked The Zero Card team for the figures to back up their claims. This link goes to a Google Sheet that includes anonymized data over the course of two years in three locales — Tulsa, Seattle and Rockford, Illinois. These could have been any cities.

When I wrote a few years ago about surgery center that had gone fully transparent, the doctor I spoke with was proud of how people were using the prices on his website to negotiate with their local hospitals. In that article, the doctor detailed how someone across the country was able to get a 90% discount on their prostate procedure. That is how disconnected prices are from any semblance of sanity. Though The Zero Card is presently only available through employers, I was able to find The Zero Card app in the app store so doctors (who are frequently asked by a patient where they should go) and patients can get this in their pockets now. For those with high deductibles, they could similarly use this to price negotiate. Of course, employees could also ask for a Transparent Medical Network that would allow them to also pay zero.

Interestingly, in The Zero Card’s most mature market — Oklahoma — this pricing and contracting approach has extended to chronic disease management. For example, the University of Oklahoma has a best-of-breed diabetes management program. The same transparent, bundled pricing approach can be used for all of the costs of managing someone with diabetes. Note: They assign five levels of severity that determine the five levels of diabetes management fees.

I asked Millaway how long it takes to enter a new market. He didn’t want to disclose the details of their roll-out publicly, however what I inferred is they can “turn on” a market quicker than most employers can get a new agreement through their procurement department. That is good news for benefits consultants who like to bring innovative solutions to their clientèle. This is why I stated that benefits consultants could save America. Having spoken with dozens of employers, it’s very clear they rely on the expertise of their benefits consultants.

Sometimes when employers exert their influence not only to protect their own bottom-line but also protect their employees’ nest eggs, they get push back. This despite the fact that healthcare providers haven’t demonstrated a productivity gain in 20 years and have contributed to losing jobs that might have otherwise gone to their community as outlined in the IBM example. In a future piece, I’ll report on a public company that had a 1.9% increase in their earnings as a result of better management of  their healthcare costs (while improving the health of their employees). Small, medium and large companies have all not only shown that it is possible to slay the healthcare cost beast, it is their fiduciary responsibility to their shareholders to manage the second largest cost after wages. A development that would make corporations shudder is who I heard from due to earlier articles I wrote — a class action attorney asking for details of what corporations are doing around health benefits and the fact that they aren’t fulfilling their fiduciary responsibility. If the Cadillac Tax wasn’t scary enough for employers, this development would concern Risk Management departments throughout Corporate America.

Whatever the motivation, we have found the silver bullet to one of healthcare’s most vexing problems. My bet is it will be the “annoying” millennials demanding a better way who will catalyze a movement away from the severe pricing failure plaguing the U.S. healthcare system today.

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This article was also posted on Forbes.