Directors Corner | February 2021 | MARKET-BASED HEALTH CARE REFORM – Four Observations. Three Conclusions. One solution.

“Competition [in healthcare] has taken place at the wrong levels, and on the wrong things. It has gravitated to a zero-sum competition, in which the gains of one system participant come at the expense of others. Participants compete to shift costs to one another, accumulate bargaining power, and limit services. This kind of competition does not create value for patients, but erodes quality, fosters inefficiency, creates excess capacity, and drives up administrative costs, among other nefarious effects.”
Michael E. Porter

Redefining Health Care: Creating Value-Based Competition on Results

Out of the thick dust cloud caused by Haven Healthcare’s recent implosion, a key question about US healthcare once again rises:  Can free market principles create greater value for patients and purchasers?  Can our adored “free market” approach make healthcare more reliable?  More affordable?  Or will it continue to “foster inefficiency and “erode quality?”

Despite Haven’s collapse and co-founder Warren Buffet’s admonition that there are now well over $3.6T reasons why changing healthcare is difficult, I see no reason why the market cannot work.    If we are to make that happen, I propose starting with four observations – each based on the working thesis that healthcare is, in fact, driven by and subject to traditional market forces.  And although those forces, as Michael Porter points out, are not currently working to improve value for patients or purchasers, they probably could be made to do so…given changes in employer purchasing.  (Click here to read more.)

Observation #1: The Problem.  Rather than echo how “our healthcare system is broken,” a more helpful, insightful diagnosis is likely that the healthcare market is dysfunctional.  How would I define that?  From two separate market perspectives:

  • Unjustifiable Pricing. Overall, and particularly for hospital services and prescription drugs, prices and pricing increases bear no reliable relationship to either quality or the costs of care.  Both appear unjustifiably variable.  Both are opaque.  Quality varies across hospitals and within hospitals by physician and procedure.  Prices appear related only to market share – even for our “non-profit” hospitals and health systems.
  • Disproportionate Value: The market is bringing significant benefit to both health plans and health systems.  Profits are at historic highs.   “Everybody is fat and happy,” the CEO of one of Colorado’s largest system blithely noted in the Colorado Times Recorder.  Meanwhile, healthcare costs, and too often outcomes, result in harm for purchasers, consumers, communities, and our economy.  According the Commonwealth Fund’s “State Trends” report,  recent employer premium increases in Colorado were double that of the US average and employee contributions went up 5 times the US average.  Fat and happy?  Seriously?

Observation #2: The cause is NOT Hospitals.  It is: Contracting practices past 2+ decades. Yes, our largest health system hospitals, as CBGH recently documented, are being paid 2 to 3 times their average breakeven requirements. And yes, hospital consolidation – wearing the sheep’s clothing of “clinical integration” – has served only to increase prices while leaving quality variable.   But that’s “merely” the result of opportunistism on the part of providers.  The underlying causes that provide those opportunities derive from purchasing and plan designs practices of the last two or three decades.  Such practices, at once actively and passively endorsed by employers themselves, had a number of harmful effects.  Due to a combination of health plan self-interest and employer timidity, these practices effectively:

  • Incented hospital systems to get simply bigger and bigger rather requiring that they compete on getting better and offering increased value.
  • Encouraged, even required, that hospitals manage their revenues rather than their costs because plans competed on discounts from hospital charges rather than prices.
  • Forced down physician incomes which then drove the sales of practices to hospitals and explosive increases in OP prices.
  • Paid systems significantly in excess of costs of care which, as MedPAC reported to Congress, resulted in duplicated services, high administrative expenses, and higher costs for purchasers.

Observation #3:  Alternative Solutions to the Problem.   Expecting a single-payer system to happen in the US would be like waiting for Godot.  There would seem only to be two practical solutions to the sort of market dysfunction that allows providers of non-discretionary care to price to what the market will bear for life-saving drugs or in-patient care:

  • Legislative or regulatory actions ranging from “certificate of need” or promoting increased competition to rate setting or even a public, government sponsored option.
  • Disrupting market economics by collectively changing how care is a) purchased/paid for and b) how health benefits are provided as well as requiring how it is delivered.

Observation #4:  Role and Responsibility of the Purchaser.  There’s no point in beating around the bus on this one:  Of the alternative solutions cited above, some sort of proactive change in purchasing is probably a matter of fiduciary responsibility.  Besides, just to be practical: only changing purchasing and benefit practices are under control of purchasers.   

Three Conclusions:  It seems to me that the above observations lead, rather directly, to three conclusions.

  1. Lower prices can be achieved, and costs significantly reduced through value-based plan designs, beginning a chain-reaction in the marketplace for long term improvements.  As early as their next plan year, employers could immediately improve plan performance by incentivizing the use of a) advanced practice primary care, b)  high performing specialists, and c) lower-cost free-standing facilities (instead of hospital based out-patient departments).
  2. Lower prices mitigate results but don’t fully solve underlying problems of inconsistent effectiveness and consistent inefficiency.  The employers who pay for care should directly align and work with the physicians who either provide or direct the provision of that care.
  3. The long-term solution to market dysfunction will require altering the contracting practices, over several years, that caused the problems in the first place.  Alternative payment models such as episodes of care along with along with benchmarked, reference-based pricing are essential.

Solution.    History makes one thing clear about free-markets:  purchasing power must, at the least, counter-balance the power of suppliers.   As Dr. David Blumenthal and colleagues recent advised, to solve healthcare costs US employers should create purchasing alliances.