If you’re an insurance company, the simplest way to make more money, is to PAY MORE for medical services. In fact, provider negotiations should go like this:
Doctor: I want $100 for this procedure.
Insurance Company: No, we won’t pay you a penny less than $250.
By David S. Brooks
First off, I am not in any way suggesting that I can fill the shoes of one of my all-time favorite heroes. Quite the contrary. I’m lamenting that Richard Feynman isn’t here to explain our healthcare tragedy in simple language that everyone can understand. Were but there a visceral way to expose the source of this tragedy the way Feynman’s famous O-ring demonstration cut through the Rogers Commission following the Space Shuttle Challenger disaster. But alas, we are left on our own. I will do my best to explain how healthcare works, and how it doesn’t. I welcome comments and discussion. Let’s start at the beginning…
Most people mistakenly believe their employers pay for the majority of their health insurance costs as an altruistic “benefit”. The truth is that your employer withholds part of your pay and uses it, along with the money it withholds from your coworkers, to buy group insurance. This is a subtle but important distinction.
Your employer isn’t paying for your insurance. You are. Worse yet, while you’re the one paying for it, it’s your employer – not you – who picks the health plan. Don’t get me wrong, they are most likely acting in good faith; nevertheless, they are acting for the whole and not for you, the individual. Does everyone in your organization have exactly the same needs, the same goals, and the same risks? Of course not.
One benefit of your employer pooling everyone’s money is that it can presumably purchase cheaper insurance than you can on your own. This is really only true in inefficient markets, which is an important idea that we’ll come back to later.
When your employer buys “health insurance,” they are simply pooling their resources with all the other insurance company’s customers. (Let’s set aside self-insured employers for the moment.) The insurance company, in addition to pooling resources is also pooling risk. In theory, the pooled resources should be able to cover the cost of the collective risk plus administration.
Insurance companies are supposed to identify healthcare service providers who offer reasonably priced, quality services. They enter into contracts with them where they agree to pay certain amounts for certain services. The collection of all these providers make up the insurance company’s provider network.
The size and quality of an insurance company’s network is extremely important. Beyond the risk-bearing they are selling to your employer, their network is really their primary product. For instance, your employer shouldn’t buy insurance from a company that doesn’t offer a full complement of “in-network” providers, nearby. Could you imagine if you had to see a cardiologist, but your insurance company only had one “in-network” cardiologist on the other side of the state?
Historically, doctors get most of their business via insurance companies. Employers encourage their employees to go to “in-network” providers. In fact, both your employer and your insurance company punish you for seeing “out-of-network” providers by making you pay for a larger amount of the bill.
If you are a doctor, you pretty much have to contract with the major insurance companies in your market, unless you’re just crazy enough to buck the system and go it alone – something kooky like DPC (direct primary care), concierge medicine, or cash services. Apparently not many doctors are kooky (sadly).
I think at one point in time, insurance companies negotiated rates with providers. They preferred to pay less for services than more. But they had to weigh that against the importance of having a “good” network. A good network is a large one. Remember, they sell to employers and employers want to give their employees lots of high quality, low cost options.
Small, independent healthcare providers were not very important to insurance companies. Not unless they were super special and rare. There are not many rheumatologists in Albuquerque, for example, so a rheumatologist could practically name their prices when negotiating with insurance companies in that market. Primary care doctors? Not so lucky.
Health systems, on the other hand, pretty much own their geographic market. As a result, they have enormous leverage over the insurance companies. Blue Cross Blue Shield of North Carolina, for example, MUST have Duke Health in their network, otherwise they can forget about selling insurance in a big chunk of the state. Using this leverage, health systems typically command a 30-50% premium, if not more, for their doctors compared to independent doctors in the same market.
Are health system doctors better? Nope. In fact, many of them were independent providers themselves before they succumbed to the overwhelming administrative burdens the federal government has continuously stacked on them. Consider that today, a higher percentage of doctors are employees than at any time in history.
I said, I think at one point insurance companies cared about negotiating prices. Although it seems impossible to believe, I think there was a time when insurance companies probably thought there was a limit to what the market could bear. I think they thought, in order to make money, we need to be good financial custodians. We need to build a great network with the best doctors who charge the lowest rates. That would give us a compelling product to sell to employers. They understood the only way to “make money” was to keep medical costs down (negotiate tough, but fair rates with providers), keep utilization down (through proactive intervention, like population health management), and keep administrative costs down (by running a tight ship).
Ok, that’s not at all what happened. The truth is that they have been able to “dial-in” their profitability for years by simply increasing premiums. They’ve had almost no incentive to keep people healthy. But just when things couldn’t get worse, along came Obamacare and something called medical loss ratio (MLR). MLR basically requires insurance companies to spend 80% of member premiums on direct medical costs, leaving 20% for administration, marketing and profit.
What does that mean? It means if you’re an insurance company, the simplest way to make more money, is to PAY MORE for medical services. In fact, provider negotiations should go like this –
Doctor: I want $100 for this procedure. Insurance Company: No, we won’t pay you a penny less than $250.
Presumably, the only balance left in the system is employers’ refusal to pay, but is that really even an option? If all insurance companies are doing the same thing, there’s no viable alternative other than self-insuring and building your own provider network. And that’s exactly what they’re now doing.
I previously said that, historically, doctors get most of their patients from insurance companies. That’s not entirely true. Most doctors get their patients from other doctors in the form of referrals. Obviously, insurance is still a factor. If a doctor refers you to another doctor who is outside your network, you might want to find a different one. Many people don’t understand this, and so they get screwed.
Sadly, it’s now almost impossible to run a sustainable, independent primary care practice. In any other industry, primary care would be a lucrative profession. Primary care doctors refer more patients (business) than anyone else, and they refer them to high-cost providers, like orthopedics, cardiology, surgery, etc… In any other industry, these high-cost doctors would richly reward primary care docs for the referrals. Hell, Facebook’s entire market cap is based on selling referrals in the form of advertisements. Luckily, laws prevent this from happening. Instead of money, primary care docs get lots of chocolate at Christmas from their specialist peers, but not enough to cover payroll.
You wouldn’t want your doctor getting paid to send you to one doctor over another based on the size of his kickback. I get that. But, then again, if your doctor is so unethical, you should probably get a second opinion anyway.
Now, it’s perfectly OK for a health system’s primary care doctor to refer a patient to a health system specialist. Stop. Think about that for a minute…
Are you saying that if a health system acquires a struggling primary care office in town, replaces the sign and letterhead and does nothing else, they can immediately charge (technically, I mean “get paid” but it sounds funny to anyone outside healthcare) 30-50% more? Additionally, the “value” of the referral – yesterday, unrealilzable by the struggling practice – is now captured by the health system? And… no one’s going to jail?
Not only is this not a problem, it is overtly the central strategy of every health system today – capture the sources of referral and keep all patients in-system. Health systems believe they own every patient that they see. If a health system doctor refers a patient to a non-health system doctor, they consider it lost revenue. In fact, it has its own term – “referral leakage.”
The fact that it has a name and is being measured, damn-well guarantees that it’s somehow incorporated into clinician compensation. In other words, doctors absolutely are being financially incentivized to steer patients to one doctor over another. Counter-argument: our doctors are better than the other doctors, and we are acting in the best interest of the patient. I’ve heard this argument many times, and at a certain-level, I believe the people making this argument believe what they are saying. Just like Elizabeth Holmes.
The net effect of government policies and market dynamics is that today there are fewer independent, small practices than ever before. Many have been swallowed by the local health system, leaving us with less choice, poorer service and higher costs. This should surprise no one. Research has shown in the airline industry, for example, that as consolidation occurs prices rise and the size of seats shrink. It’s what businesses do, and healthcare is the biggest, baddest business of them all.
I used to have hope that escalating deductibles and out-of-pocket expenses would galvanize consumers to demand a market correction. The problem is that consumers are removed just perfectly enough from the equation to make us utterly useless: we don’t think we’re the ones footing the bill; we don’t care enough about healthcare until we do, which means at any given moment only 5% of us are taking to the streets with pitchforks, but in time, 100% of us will have launched a failed coup; and, we don’t understand enough about how healthcare works to unify around a specific solution…
I also had hope that individual providers (not to be confused with MBA-led health systems), who are much more aware of the issues and unable to escape their fallout, would coalesce. As it turns out, few providers understand what’s going on. For example, most still think that a $150 insurance claim is worth more than $75 cash in hand. Apparently, Stockholm Syndrome is a real thing. Most providers are being crushed by healthcare. Physician burn-out is at a record high, and fully 172% of those polled would pursue a different career if they could do it all over.
I find it a little strange to admit this, but at this point, I think employers are our last, best hope. They tried getting rid of healthcare several years ago by moving to high-deductible health plans. The thought was, let’s move to a defined contribution and cap risk exposure. But the responsibility of health care is as easy to unload as a tar baby. Employers understand the economics better than the other stakeholders. They also hold no special allegiance to insurance companies or health systems, and I think, deep down care more about the health of their employees (yes, of course they are incentivized to care more; which is why it’s best not to meddle with or bet against free market forces).
There is no silver bullet for healthcare. Period. We almost certainly need a clear two tier system. The first, universal coverage that provides a basic level of benefits for everyone. The second, a premium tier funded by a combination of employers and individuals willing to pay for additional coverage. I have nothing to say about the first tier. The federal government will run it, and it will do what it does. That’s just a fact.
The second tier should have a single provider network. No more bullshit special contracts between health systems and insurance companies – where the administrators and middle men get richer at the expense of doctors and patients. With a single provider network, health systems (as we know them) go away. Insurance companies go away.
Sure this sounds absolutely insane, if it weren’t for one little thing – the internet. Do you remember when Walmart was eating the world? I do. They leveraged their purchasing power to basically destroy all the small businesses. A little bit like health systems destroying independent practices, but at least Walmart sold cheap socks.
“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” – Archimedes
Can you imagine how pharmacy benefit managers, and CVS and Walgreens felt when Amazon acquired Pillpack? These are groups whose sole purpose for existing was gaining market leverage and using that leverage to garner special pricing. In an instant, Amazon turned market giants into dwarfs.
The internet is to business what aircraft was to warfare. Think about that. For 10,000 years, everything mankind thought about battlefield tactics was limited to a two-dimensional space. With the advent of aircraft, everything changed.
Do you know what the internet has done for healthcare? Up to this point, pretty much jack-shit.
That’s because the industry has done a phenomenal job insulating itself from the outside world. Health systems are the ultimate embodiment of this. They desperately try to keep people ignorant of prices and the availability of alternative, lower cost care options. But those days are numbered.
I know you can’t hear it, but I’m playing Bob Dylan’s, “The Times They Are-a-Changin’” montage from Watchmen in the background, trying to feel better about where we are heading. Oh, Dick, I wish you were here.
