The OPEC OF Healthcare


Mike Dendy, MBA, MHA

“OPEC laughed at the US and the rest of the world when we complained that $120 per barrel oil was choking the life out of business and the public in general around the world.  Rather, they built ski mountains in their deserts out of the rest of the world’s money and threatened to drive oil prices even higher. ”  

By Mike Dendy, MBA, MHA

Healthcare costs for employers continue to skyrocket.  According to the Kaiser Family Foundation, family premiums are up from approximately $10,500 in 2005 to over $17,000 in 2015.  This with hundreds of new companies and services being created to contain healthcare spending over the last 10 years with ObamaCare blended in for good measure as well.

Hardly a day goes buy that I don’t hear someone touting “a breakthrough” that will assist employers in keeping cost trends in check and some even dare to suggest maintaining “flat” cost levels.  The problem with the host of utilization management, wellness, on-line provider options etc. is that they are all working around the periphery of the healthcare cycle and thus have no real opportunity to truly assist an employer in reducing healthcare costs.  If you are thinking that the PPOs have the answer, think again, since PPOs came into existence about 25 years ago healthcare costs are up by nearly 4x (Kaiser).  According to the Peter G. Peterson Foundation, US per capita spending on healthcare is more than twice the average of other developed countries.  PPOs are a big part of the problem by the way as their models are only intended to perpetuate their middle-man cost escalating and opacity inducing existence.

So, what is the problem and how does an employer truly start to reign in healthcare spending?  The problem is easy and here is the breakdown:


  • Hospitals: Makes Own Pricing, Unregulated Utilities
  • Physicians: Greater Utilization = More Income
  • Insurance Concerns: Higher The Cost, Greater The Profit (Even W/Fixed Margins)
  • Brokers: Mostly, Higher The Cost Greater Their Income
  • Pharmacy: Unabated Greed, No governors On Price Or Profits
  • Ancillary Services : Greater The Turmoil, The Greater The Need
  • Employee/Members: Have little to no financial interest in their purchase decisions

Who Loses?: Employers | Employees | General Public

Is there a  breaking Point?:

In the aggregate, these healthcare players are healthcare’s OPEC.  Like the oil producing cartels that for many years controlled the cost of the world’s energy in unencumbered fashion, there is absolutely no catalyst for healthcare providers to reduce their costs or for an employers covered members to be concerned whatsoever with their spending.  I know of no CEO or company that is willing to raise their hand and ask that fees or salary paid to them be reduced so that they can provide their crucial services at a more affordable level.  OPEC laughed at the US and the rest of the world when we complained that $120 per barrel oil was choking the life out of business and the public in general around the world.  Rather, they built ski mountains in their deserts out of the rest of the world’s money and threatened to drive oil prices even higher.  Until it ended.  OPEC’s strangle-hold on the world ended when other countries, led by the U.S. and Canada started finding alternative ways to produce oil themselves (fracking) and started to initiate aggressive efforts in alternative energy.  Note if you will that just a few months ago, the OPEC countries were willingly and aggressively pumping oil and selling all that they could for less than $30 per barrel.  Since it only costs the OPEC countries about $10 per barrel to extract oil, there is still a significant margin in the pricing of oil at $30 per barrel.  A similar metamorphosis is available for healthcare costs but such will require an external catalyst in the form of employer righteous indignation with a bit of help from the government.

Let’s start with hospitals.  A well run hospital can make money from Medicare payment schedules.  The problem is that most hospitals are not financially well managed and have no reason to be when they can pretty much charge for services at will.  Through commercial payer sources (the PPOs), hospitals around the country are collecting on average about 260% of what Medicare would pay for the same procedures.  Look at that number closely, a hospital can make a profit on Medicare yet they are collecting 2.6 times that amount from commercial (employer) payers.  While there are some markets where the average commercial payment is below the 260% of Medicare number, there are many more where that number is significantly greater going as high as 1,000% of Medicare at times.  It is stunning to think that an area of cost for many companies that represents as much as 15-20% of the total cost of a business is spent in such a clouded and non-transparent way. Providers and the large health insurance companies have hidden this incredibly crucial data from employers for the last 25 years and continue to do so.  An employer not having transparency into this information is beyond preposterous.


So, where does the excess money go within a hospital, many claim to be financially insolvent at some level.  According to a study first reported in Health Affairs September 2014 edition, U.S. hospitals have administrative costs that are significantly greater than their counterparts in other countries. Administrative costs account for 25% of total US Hospital expenses according to the study.  The US has the highest administrative expense of all countries studied and US hospital expenses are twice those of Canada and Scotland.  The Netherlands had the second highest administrative expense ratio coming in at 20%.  The article continues that were US Hospital expenses reduced to the level of those of Canada, US hospitals would have saved $158 billion in 2011.   In a well vetted interview with CBS News 60-Minutes, the CEO of the University of Pittsburgh Medical Center admitted to having a base salary of $8,000,000 annually.  I also understand from well informed sources that Sutter Medical Center in California has over 30 executives on staff that are paid more than $1,000,000 annually.  Seems a bit much when hospitals are protected like utilities yet have the ability to set their own pricing levels to support poor management and potentially overpaid executives.  For what it’s worth, the study reported no apparent link between higher administrative costs and better quality care.

Physicians are much less of an issue but still need to be considered.  “Managed care” supposedly took care of physician cost escalations by creating reasonable and customary tables for every possible physician directed procedure.  In many cases, managed care and Medicare and Medicaid don’t pay physicians enough for procedures to allow them to adequately cover their costs and make a reasonable profit.  So, the logical answer for the physicians who can’t be paid enough on a single visit to cover their costs is to just increase utilization via second and third visits many of which are absolutely unnecessary.  It is ironic to consider the fact that an average physician’s salary in the US ranges from $174,000 to $413,000 according to a recent study published by Medscape when comparing to the pay level of at least some hospital executives.  Another issue that should raise the ire of employer/payers is the fact that hospitals are buying physician practices hand over fist to first control referral patterns and second become a new profit center.  These purchases are almost always accompanied by significant  increases in the pricing of the physicians’ services.

Health insurance and administrative services are mostly a commodity and thus must be price sensitive.  The large insurers seek to maintain a steady margin of somewhere between 4% and 8% but of course, as the cost of insurance goes up their revenues go up even with a fixed margin. So, as the cost of medical service payments to providers goes up, the insurance company’s profits go up in lockstep.  We have already reviewed the fact that the PPOs negotiated rates often pay 2x to 4x what Medicare would pay. So for an insurer/PPO to push providers for more reasonable reimbursements of a smaller margin over Medicare would mean they would be negotiating their own revenues downward as well.   In another note of irony, employers entrust their health-plans and share fiduciary responsibility with large health insurers that, as we have shown, have the absolute opposite financial objective as the employer.  How can an administrative service only (ASO) provider that owns a PPO, which intentionally overpays to perpetuate their own existence, operate to protect an employer’s plan assets?  Remember that these same organizations hide the data necessary for an employer to understand and then act upon this illusion of partnership and cost management.

Most quality brokers are now working off of a very transparent fee basis and don’t have their incomes tied to an employers’ overall spend. However, I recently visited with an employer in Texas that has about 300 employees and a broker that is paid over $300,000 annually on their account.  I hear of such egregious over compensation occasionally and wonder if the employer does not know what their broker is being paid or does not care.  I would suggest that it is a breach of an employer’s fiduciary responsibility to their plan members to make gross overpayments to brokers (or anyone else for that matter) as healthcare funding is typically co-mingled funding from both the employer administrative cost and employee/members health spend.

Pharmacy costs are beyond outrageous due to greed and government negligence.  Seemingly due to effective pharmacy lobbying efforts, the U.S. government has not instituted favored nations pricing caps similar to other developed nations.  That one item could save 8-10% of overall healthcare spend in our current economy and would appear to be a relatively simple adjustment to the paradigm that does not affect access to services and could significantly improve quality of services provided.

Due to the inadequacies of cost containment on all the above mentioned elements of healthcare, employers are forced to employ multiple services that work around the periphery of healthcare to try and reign in costs as best they can.  Programs are expensive, fragmented add-ons to the health plan, and some are just unnecessary which adds to the cost burden for employers. For example, many health plans employ wellness services which encourage annual health assessments, wellness checks, and promote health and wellness overall. While the services are valid, they tweak the overall cost structure vs. making fundamental strides to change the approach to healthcare delivery and financing.

Finally, we have to consider the role we play in these overcharges as employed consumers of healthcare.  For the most part, an employer covered member of a group healthcare plan can purchase all the healthcare they care to consume, whenever and wherever they care to consume it with absolutely no concern for the cost of those services.  Somehow, we have allowed ourselves to believe that such is a birthright and anything less is penal and unfair.  Consider this within the context of data provided by the government on multiple levels and private reports as well that show that oftentimes had a member consumer just altered their purchase patterns by walking a couple of blocks down the street, they could have reduced by half or more the cost of that service.  Were that same consumer spending their own money for a service, they would consider it reprehensible to have not vetted the best value for their money.  Until this paradox is addressed, employers will be forever saddled with significant over payments on group healthcare plans.

Defined Contribution Healthcare Plans are the only Answer

An employer can spend all the time they want utilizing peripheral options for controlling healthcare spending but, until they address how they allow their members to purchase healthcare, nothing is going to change the cost curve for the better.  The solution for employers is incredibly simple, just budget what a health plan will pay for a service and push the consumer to make financially reasonable choices.  This is not as ridiculous as it sounds. CALPERS did exactly that with a handful of services for their California based employees.  They announced what they were willing to pay for commonplace events like knee or hip replacements and asked providers to raise their hands if such were not sufficient.  The handful of hospitals who initially would not accept the CALPERS payment levels quickly changed their minds and acquiesced when they saw the volume of business they were losing.  Eliminating the “healthcare payment fairy” from the purchase equation would force the buyers of services and the sellers of services to meet on neutral ground and find common value.

Insurance is intended to indemnify against loss that we can’t afford.  That concept can stay in place while allowing U.S. healthcare costs to come under control through appropriate use of defined contribution healthcare programs. The step beyond the CALPERS model noted above is for an employer to determine a financial ratio payable for all healthcare services within their own sponsored plans.  In a well managed plan, payments to providers take into account unique overhead (such as for teaching hospitals) and geography.  A quality plan would seek to be fair to both the provider and the payer of healthcare services and the data to make that determination is readily available.

Assume for example that 70% of hospitals in the country would agree to provide the services of a standard baby delivery for $16,000 (the same service is delivered in Europe for about $3,000 by the way), why would we allow payment to a hospital of $20k, $30k, or even $50k, just because a member chose, without any consideration for cost, to have their baby at one of the more expensive hospitals.  If that same employee were traveling on behalf of the employer a budget would be provided as to what would be reimbursed relative to airline, hotel, and food/ beverage charges during the sponsored trip.  Few employers would be accepting of that employee flying first class, staying at The Ritz Carlton, or eating caviar and lobster constantly during the trip.  Rather, a reasonable budget would be provided taking into account that while hotels are more expensive in New York than in Omaha there are plenty to choose from and at multiple levels of expense.  Controlling travel expenses are a critical cost management item for most company’s yet those same companies take no interest whatsoever in trying to control their healthcare expenditures in a similar way even though the bottom line effect would be significantly greater for doing so.

There is more than amble data available to allow an employer to provide a well vetted defined contribution healthcare plan for their members.  Hundreds of employers are now providing such an option for their group healthcare plans through Reference Based Reimbursement or Cost Plus programs and those employers are being rewarded with cost reductions to their overall healthcare spend of 20% to 40% annually.  Those savings accrue to both the employer and their employee/members alike of course ultimately increasing take home pay and the profitability and sustainability of the organization.  The defined contribution options are also superior to the newly manufactured narrow network program concoctions of the large insurance companies in that they allow members to utilize any provider of their choice rather than have a very limited provider, HMO, type of option.

The cost of healthcare in the US is financially choking our businesses and our employees the same way high oil and gasoline prices choked us all just a few years ago.  Like with oil, the answer to reducing healthcare costs without affecting healthcare services, quality, and outcomes is immediately available to employers once they dutifully consider the option of defined contribution as their delivery model.


Mike Dendy is the Vice Chairman and CEO of Advanced Medical Pricing Solutions, of America’s premier healthcare cost management companies.   Mike is the former Chairman/CEO of HPS Paradigm Administrators a Third Party Administrative services company managing group healthcare benefit plans for commercial and government agencies.  Mike has a Master of Business Administration and a Master of Healthcare Administration degree as well as dual undergraduate degrees in Journalism and Social Psychology and has served employers as a healthcare consultant for the past 26 years.