Directors Corner | June 2020 | Can the “Free-Market” Create a Functional Healthcare Market Place? That Depends.

“The U.S. spends at least 7 percent more of its GDP on health care than other rich countries, on average, leaving us with less to spend on infrastructure and defense, houses and education, and other worthwhile governmental and personal pursuits. And we have little to show for it.”

Willis Towers Watson
“US Healthcare: A Cancer on the American Dream”

“The benefits of free-market capitalism are often rightly noted, including its ability to give people what they want, its incentives for innovation, and its ability to promote economic growth. We agree.  But the American medical system…is nothing like a free market. The existence of moneymaking corporations does not imply competitive free markets.”

Deaths of Despair and the Future of Capitalism
by Anne Case and Angus Deaton

Too often I can’t remember where I left my car keys, with whom I met yesterday, or where I’m supposed to be next.  But I still remember with a certain clarity – despite the passage of more than four decades – sitting in an economics class at Loyola’s downtown Chicago campus when the professor, talking about the conditions for effective markets, said something to this effect: “First assume that all consumers know all things about all products.”  Wait!  What?  That’s a joke, right?   But econ professors aren’t typically known for their one-liners and no one laughed.

It may have been the absurdity of that assumed prerequisite to make a market work effectively that made it stick in my brain.  And it may have been that, as a young hospital administrator trying to make sense of US healthcare by opting for an MBA for a broader perspective than the traditional MHA, I understood thoroughly that not only do 99% of healthcare users (or their kin) know nearly nothing about anything clinical but also that, given the typical circumstances under which they are seeking care, they are often not in a mental state to understand what they may hear.

“In a well-functioning market, competition drives prices to the efficient level, and the information conveyed by prices reflects the relative values of the goods and services sold.  In healthcare markets, a number of distortions result in prices that do not convey this information.”

The Hamilton Project, March 2020

All that, obviously, was well before the internet, search engines, Alexa and the ability for almost anyone to go online and truly find out darn near anything about darn near everything.  Still, hyperbole aside, I guess I understood what the professor was saying.  In most cases a diligent consumer could, even then, do research on most consumer goods and services.  But not healthcare.  Not then.  Not now.  And it raised in my mind a question that I’ve turned over and over in my mind ever since:  Can the so-called “free-market,” as it seems to for most goods and services, create incentives for healthcare producers that result in ever more efficient, evermore effective, and evermore satisfying outcomes for patients?  If it could, what would that take?

Today those questions strike me not only as legitimate but more crucial than ever.  Healthcare is the number one cause of bankruptcies in the US.  Healthcare waste represents (by nearly all accounts) somewhere between 25 and 40% of what we spend – and more than we spend on public education.  Variation is so ubiquitous that ANY given hospital is likely to provide both some of the most and least reliable outcomes in the country.  This market is so seriously dysfunctional that Willis Towers Watson can, quite reasonably, characterize US healthcare as “a cancer on the American dream.”  And while I know several intelligent, thoughtful, compassionate, and well-educated people who think the market cannot “fix healthcare,” I happen to believe that it can.  What I can’t answer, after over four decades, is this:  Will it?  (Read more.)

In 1982, several years after finishing my MBA (consumed with how markets function) and while I was still puzzling over how to apply Kotler’s “Four P’s” of marketing to make healthcare more reliable and affordable, Harvard economist Paul Starr won a Pulitzer for what many consider to be “definitive history” of the American healthcare system, The Social Transformation of American Medicine.  My simple take away from Dr. Starr’s tome?  Unlike public education, much of transportation, almost all of government services, and most of the social infrastructure we commonly rely on, US healthcare is built on an economic, not social, model.  And, as we all know, after WWII, it became an economic model that, other than for Medicare and Medicaid, is employer and (ever-increasingly) employee financed.  That reality then brought me to a conclusion about healthcare that I can neither escape nor reconfigure:  Isn’t the healthcare market dysfunctional because of the way we purchase and pay for it?  Isn’t the manner in which employers purchase and pay the root cause of the waste?

I would argue that the market CAN be re-structured economically to result in increasing value for purchasers and consumers – but not by today’s “consumerism.”  High deductible plans are tantamount to throwing more and more employees under a speeding bus hoping it will somehow slow down because employees have “skin in the game.”  (What that mostly results in is road kill for lower income employees and for our rural hospitals.)  That’s not to say the employees don’t have a role as consumers, but it is to say that employers (along with Taft Hartley plans and employer trusts) must proactively purchase for healthcare as knowledgeable, informed, and responsible “wholesale” purchasers who then create the right circumstances and provide the right tools for employees and workers to make sound decisions at the retail level.  How can they make that happen?  By committing to directly confronting the underlying causes of healthcare inflation instead of shifting the results of a dysfunctional market onto employees; by proactively purchasing, instead of blindly and passively paying for health care.  While that’s easier said than done, we know how to do it.  And we now have the means.

“Decades of work has demonstrated that our market-based, decentralized health-care system leads to high prices that seem far from efficiently determined.”

The Hamilton Project, March 2020

No one has laid out the challenges employers face as purchasers better than Dr. David Blumenthal, Lovisa Gustafson, and Shawn Bishop from the Commonwealth Fund in a succinct and prescriptive Harvard Business Review article titled, To Control Health Care Costs, U.S. Employers Should Form Purchasing Alliances.  Briefly, the authors identify three prerequisites for employers to make the market work:

  • Purchasing Power.  Drug manufacturers and many (not all) hospitals have consolidated these markets to the point where individual purchasers are powerless to effect price or quality. Without a balance of power, competition and accountability don’t exist.
  • Sophistication.  Employers are pretty good at purchasing administrative services.  But with very few exceptions, they have no experience in buying healthcare.  They’ve left it to others.  In a state where the prices for hospital services can be 4 or even 5 times higher than the actual costs of that care, you have to be either ignorant of the data or simply wasteful of dollars that are coming out of salaries to think that a 30 or 35% discount from charges is “a good deal.”
  • Courage.  Employers – bringing along engaged employees who understand what’s at stake – must be willing to disrupt a healthcare market; a market in which one health system CEO acknowledged that all the major hospital systems are “fat and happy” and unlikely to change.  As Warren Buffet said, there are 3.5 trillion reasons why healthcare is hard to change.

The Colorado Purchasing Alliance (TCPA) was established expressly to provide for the first of the two requirements above.  Established under a State statute designed to encourage and protect group purchasing and direct contracting, TCPA now includes some of the State’s largest purchasers of care.  We’ve been joined by employers, Taft-Hartley plans, and employer trusts.  Moreover, we’re working with regional and national leaders with deep insights into how delivery system work and how to engage willing health systems in improving costs, outcomes, and affordability.  Improving care, after all, is a team sport and it’s looking as though several systems and independent hospitals are willing to engage in the hard work of restructuring delivery.

Together, TCPA staff and purchasers are creating the opportunity to make the healthcare market in Colorado work.  The market CAN be made to work.   Some hospitals ARE willing to collaborate.  Change is clearly possible.  Now it’s a matter of courage – and collective, resolved action.   Will more employers and employee plans join with us to make change not simply possible, but inevitable and unstoppable?

That will depend on Colorado’s business and labor leaders themselves.