Bob Matthews

April 30, 2018

Will Healthcare Be Disrupted (Soon)?

Medisync Blog

There is a national concern that US healthcare costs too much. At the current levels of healthcare spending – $3.35 trillion per year in 2016 or $10,348 per person – and at an inflation rate of over 5% per year, costs have risen beyond the ability of government, employers or patients to pay.

In 2016 Milliman, a leading actuarial firm, found that the average health benefit for a family cost $25,826. Keep in mind that the mean household income in Ohio, where I live, is just over $51,000.

Many US employers provide health benefits. They are unhappy with today’s costs and terrified of the ongoing rate of health cost inflation. Economists and health policy experts are similarly concerned that federal, state and local budgets are increasingly depleted by health spending to the detriment of other priorities like education, infrastructure, research, the environment, etc. They foresee a time when it is healthcare OR highways, education, etc.

There are four major players in healthcare: (1) health insurers, (2) hospitals or, as they are now called, health systems (i.e. typically large corporations consisting of multiple hospitals, a large medical group, outpatient service centers for surgery and diagnostics, home health, skilled nursing facilities, etc.¬), (3) physicians – many of whom now work for health systems, and (4) the pharmacy companies. All have experienced significant consolidation over the past ten to fifteen years.

In most “markets” or economic sectors, companies need to improve the quality of products or services and manage costs in order to win business. In markets with real consumer choices, customers benefit from the competition among suppliers and see lower price inflation and better quality goods and services.

This is simply not true in healthcare. None of the major players is motivated or rewarded to reduce costs. In fact, they are only rewarded if they increase costs. In today’s health economics active quality and/or cost improvement would actually hurt the bottom lines of the major players.

Hospitals and medical groups are paid almost entirely on a “per piece” basis. The more procedures, visits, admissions, and diagnostic tests they do, the more revenue they recognize. Until very recently there was no accountability for cost or quality. Many healthcare delivery systems have yet to capture the most basic quality metrics for physicians. Of those that do, tracking limited quality and cost data has only begun recently.

Thus, health providers operate in an opaque market in which neither the purchaser of benefits nor a patient can know either the cost or the quality of the care received. Most health or hospital system strategy and marketing focuses on image, size of network and location as the marketing differentiators.

Traditional health insurance companies are simply “distribution channels” for health services. Insurer revenue is typically a percentage markup based upon the underlying cost of care. Thus, increases health delivery costs also increase insurer revenue. Since they do not provide care, insurers cannot improve it. Insurers are dependent on the quality and cost results that the existing health delivery organizations and pharma produce.

This is why the idea of having health insurance companies operate across state lines won’t reduce costs. Just as adding more auto dealerships into a town won’t improve the cost or quality of cars sold. The cost and quality of cars is set by the manufacturer, not the dealer. A new health insurer can only sell the same healthcare delivery services that already exist, most likely at a higher cost. As a new entrant in the market, the new, out-of-town insurer’s barrier to entry in a new market will be that health systems, to the extent that they offer discounts to anyone, do so on volume. The new entrant, having no current volumes, would be charged higher prices by the delivery systems.

Meanwhile, the delivery systems and pharma have been merging like crazy in order to have more clout in their negotiations with the insurers and to be in a position demand higher rates for their services.

Health policy experts and employers have repeatedly expressed the hope that someone will disrupt healthcare insurance and/or delivery to improve the quality or reduce the total cost of care.

The most recent announced initiative of Amazon, Berkshire Hathaway and JP Morgan Chase is but one of many such efforts. Cost is their most urgent need, but the link between cost and true quality is obvious to virtually every experienced executive outside the healthcare sector. Based upon what has been announced to date, this effort is more driven by the sense of need than by a specific strategy.

Recently, two insurers have proposed to become involved in providing care – United Health Group’s Optum subsidiary and Aetna via its proposed merger with CVS Health. Both of these ventures are too recent to have produced results. In future blogs we’ll explore their strategies.

The question is whether and when a new party can find a way into healthcare and win business by virtue of a better model, lower costs and higher quality. Or, will the current system persist until we just run out of money and the market collapses of its own weight and cost burden?

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