Our Dysfunctional Health Care Market: How Employers Can Fix Healthcare’s Five Biggest Issues

I often hear it said that the reason senior executives do not even attempt to exercise the same level of control over their healthcare costs that they do over every single other cost center in their companies is that they don’t think anything can be done about them; that healthcare is too complex; that “fixing it” is outside their area of expertise.  Horse feathers!!!

However dysfunctional it may be, healthcare in the US functions as a marketplace subject to the dynamics of demand and supply.   There is absolutely no legitimate reason for senior executives to accept the excessive prices and inconsistent outcomes they, and their employees, are paying in that market.   In fact, nowhere does the expression “you get what you pay for” apply more than in healthcare.  If healthcare is consistently inefficient, inconsistently effective, and increasingly expensive (which it inarguably is), then we need to be clear:  those are the outcomes being incentivized in the market by how employers (sometimes directly or largely indirectly through surrogates) have been purchasing care.  The system is perfectly designed for precisely the results it is getting.

Want a better value?  Beginning in 2020 there are five practices that Colorado employers can put in place to change healthcare to the benefit of their employees, their communities, and their own bottom lines.   The first four have to do with how employers purchase care.  The last has to do with how they provide benefits for that care.

Pool purchasing power and leverage social capital.   Twenty years ago, healthcare costs were largely driven by quality waste:  the underuse of high-value care, the overuse of low-value care, and the misuse and mistakes in (particularly) hospital care.  While those problems largely still exist because they have not effectively been addressed, today, as health care economist Uwe Reinhardt so eloquently put it,  It’s the Prices, Stupid.  In the wake of hospital consolidation across Colorado, hospital pricing is a particular problem – as the Rand Corporation recently quantified.  Hospital prices – by far the largest component of the medical expense ratio – typically range from 1.5 to as much as 5 times what an independent commission on the adequacy of hospital payments quantifies as being needed to break even.    The solution?  No surprise here.  In what is now an oligopolistic market, employers must purchase healthcare directly as a group.  Group purchasing is a proven strategy that employers across the US have used for years to improve their negotiating power.

Base pricing on rational benchmarks in lieu of “discount from charges.”   Most employers are paying discounted charge masters – limited, as one Fortune 100 CEO recently put it, “only by the imagination of the hospital CFO.”  But payments based on discounts only tell you what you are NOT paying.  Discounts in healthcare are akin to measuring how far below the sky you are.  To determine what you ARE paying – and particularly to determine if that price is reasonable – you must measure how far above sea level you are.  Calculating pricing as a percent or multiple of what Medicare pays provides a transparent, empirically-established baseline for determining reasonable prices relative to the costs of care.

Move away from “fee-for-service” (FFS) payments to payment methods that require accountability.   Fee-for-service payments, particularly for hospitals, are toxic to an effective marketplace for two reasons.  First, fee-for-service payments are absolutely antithetical to continuous quality improvement (i.e., infections, unnecessary or duplicated services, and safety errors under FFS are a significant source of revenue under fee-for-service such that quality improvements hurt your bottom line).  Second, paying fee-for-service places hospitals in a win-lose situation relative to their biggest payer, Medicare, which pays on a case rate basis.  It’s time to “bundle” payments to hospitals for specific procedures and encourage both accountability for effectiveness and improvements in efficiency.  For the sake of administrative efficiency, those bundles need to be based on common definitions across payers and markets.  This is beginning to happen.  Employers – if they coalesce into purchasing groups – can require it.

Stop cost shifting, thereby creating powerful incentives for greater efficiency.   While hospitals typically claim that they lose money on Medicare and must make up those revenues somewhere else, an independent commission call MedPAC (the Medicare Payment Advisory Commission) has carefully documented that most or even all of those losses are not due to the costs of caring for patients.  In 2019, MedPAC documented that efficient hospitals lost only 2 percent on Medicare (after breaking even for several years) and that average hospitals lost 9 percent.  Colorado hospitals suggest that they lose 30% or more on Medicare and must, therefore, shift costs to employers and individuals.  (Which still begs the question, “Why do you need to charge employers 270% of Medicare statewide if you only lose 30%?)   To be blunt, cost shifting is an excuse for inefficiency and/or profit taking.  By joining together, large employers can change these dynamics to the benefit of the smaller counterparts, their communities, and even the State.

Create and reward competition on being good vs being big.  Since we know that quality varies as much within hospitals as it does across hospitals, a critical component for creating the kind of competition that makes other markets more cost-effective is benefit design.  By providing employees with financial incentives to access the highest quality services within hospitals and to use the most cost-effective services outside of hospitals, employers can create a robust market that encourages excellence.  The time for designating and incentivizing use of “Centers of Excellence” is now.

Employers hold the key to an improved value-proposition in the healthcare market in their hands.   If they want higher quality, more cost-effective care they must change the way they purchase and provide benefits from the way they have for decades.  But in today’s consolidated health market – dominated by a “we will price to what the market will bear” mentality, employers can only do what’s needed by working together.  As Dr. David Blumenthal writes in To Control Health Costs, Employers Should Form Purchasing Alliances, “individually, with the exception of a few companies in a few markets, such as Boeing and Amazon in Seattle, no one employer has enough leverage to wrangle price concessions from area doctors and hospitals or induce them to reshape the way they do business.”   Using the economics of group purchasing are essential to changing the two core issues: prices and practices.

Next month we’ll describe how CBGH intends to empower employers across Colorado to change the market.