The Great Cost-Shift

Can you start by digging into the healthcare cost issue a little from the consumer side?

The basic problem with the consumer’s relationship with the bill is the bill is a fabrication that bears really no tie back to reality. Hospitals bill for things they can count, so you get a ridiculous equivalent of the $750 toilet seat. It’s basically a failure, in my view, of the whole way in which the industry accounts for cost and confuses cost and prices.

So things that are really expensive are, for example, a day in an ICU where you’ve got seven full-time equivalents per patient. It’s hard to charge what it really costs for that in a way that is defensible. So they end up creating these bills. …The lab test that nominally the marginal cost would be $80 is $800. It becomes a revenue-capturing vehicle that isn’t really tied to the true underlying cost of delivering the service. So that’s frustration number one.

Frustration number two is, you don’t know it in advance. And unfortunately, where the consumer is on the hook, particularly in the outpatient environment and particularly in the initial stages of deductibility, it comes as a complete shock, right? Nobody tells you in advance you’re going to write a check for $1,500.

So on the one hand, the industry does a poor job of actually measuring what things cost and attaching prices to the real thing. And then there’s a communications failure, which is basically that you don’t know in advance and you end up getting these enormous surprises at just the wrong time. It’s like a perfect storm of indignation.

Is there a lack of ability to measure among providers? Or is it more that they know what things cost but, as you alluded to, they can’t reasonably charge you what the real cost is to provide your intensive care service so they have to make up for it somewhere else?

I think that’s an accurate way of reflecting it. I call it the financial hydraulics of healthcare. If you do cardiovascular surgery in Oklahoma on an uninsured person and you sic a collections agency on him, you’ll get seven cents back on the dollar. Medicaid pays about 70 cents of the cost of care on average for inpatients across the country. Medicare pays about 90 to 95% of the cost.

So, basically, what all hospital systems do is charge private insurers at least 120%, sometimes 300%, of Medicare to make up for the difference. That’s the cost-shifting piece. Then you apply it…to a procedure, which as I explained at the beginning, is not accurately cost accounted, and it multiplies the error in some sense. And the consumer is left going, “Seriously? That can’t be right. How can an aspirin be that much?” There’s a certain lunacy to it.

But all they’re trying to do is get the revenue they need to cover the services they provide with some margin. And they back into charges out of that goal.

You mentioned there’s a range that happens here, on the private side. What are your thoughts on this model of creating a cap of Medicare cost plus a certain percentage, which would potentially create more transparency and insight and not that surprise cost for the consumer on the end?

I’m working with some colleagues at Leavitt Partners and Stanford CERC [to find] providers who actually can survive on Medicare-level reimbursement or at least have higher quality than average and below-average cost…Many of them aspire to learn to live on Medicare level of reimbursement because they can feel the winds of change and the pressure that the game of cost shifting may not be sustainable.

So they’re tightening their belts and seeing their margins erode, quite frankly. The first 2017 numbers are all horrible for most hospital systems I’ve seen the numbers for. And that’s part of this broader squeeze. You know, expenses are rising, people are being paid more. You’ve got to subsidize the docs. The technology is expensive. The drugs keep going up, and the people up the food chain are trying to dampen costs. So I think there’s real interest conceptually in trying to live in a field of level reimbursement.

But getting from here to there is a tough one to pull off because most hospitals in America are 15 to 20% away, minimum, from making money on Medicare and are reliant on that cost shift to stay afloat. So it is very threatening.

My work with Leavitt and Stanford is still in progress, but from our initial pass, I would say the hospitals [that met our cost/quality criteria]—and there were not many of them—tended to be ones that were passionate about cost management and had a long history of doing that. And they were in markets where they didn’t have the luxury of much cost shifting, whether because the population wasn’t growing or they just had a disproportionate share of their revenue coming from Medicare and Medicaid and not a lot of commercial.

And it’s appealing. The only downside I see on these rate settings things—well, there’s a lot downsides. How do you administer it? Suppose you had been a hospital that was doing all the hard work to reduce costs and all of a sudden somebody came in with an arbitrary price that was tied just to Medicare.…I always worry about the unevenness of the application with an arbitrary across-the-board scheme in that you create winners and losers and it may not be, quote-unquote, “fair.”

I think this is going to be floated as a policy proposal, especially because the more moderate Democrats are recognizing that only a third of Americans would go for single payer, but you could probably build a broader coalition for what they’re calling Medicare-X, which is allowing Medicare buy-ins and the use of Medicare fee schedules in a public option that is available to more Americans and to more employers.

Do you think this would pose a slippery slope to single payer?

I think that’s the fear that the more conservative thinkers would have. Because, let’s be honest, if you get access to Medicare prices, how could you lose as a plan, right? On average in America, commercials are paying 150% of Medicare to hospitals. In some states, like Wisconsin, it’s 200 to 300%. So if I can walk in and start a health plan with Medicare prices, I theoretically should be able to clean up. And I should have a bunch of employers knocking down my door because basically I’ve created an ability to do something the private sector can’t do currently, which is get enough clout to get the price down.

You have a presentation slide that says employers are most concerned with hospital prices, specialty pharmaceuticals, and cancer care, respectively. Given their skin in the game and how much they are forced to pay attention to all this stuff, do you feel that they have a responsibility for pushing payment reform forward? And, if so, do you think they have the will to do it?

The short answer is yes. If you think about two sides of the problem being either utilization or price, we often frame the problem as utilization. There’s overuse of this, or there’s too many of that. When you think about commercial insurance, and particularly self-insured employers, it’s about price. …They have trouble affecting price. And payment reform is a method to try and engage providers in doing things differently…the role of the private sector is incredibly important as a source of potential experiments in payment reform and as a kind of test bed and co-collaborator. But if you don’t get CMS [the Centers for Medicare & Medicaid Services] driving this in Medicare and, in turn, Medicaid, you don’t have enough critical mass to change the game. And that’s the basic dilemma here.

It’s a very different CMS under a Trump administration than it was with Obama. Andy Slavitt at CMS in the Obama administration was trying to push his team to imagine what’s possible in payment reform and go 10% faster than that. Sometimes they overreached. But Secretary Price and Seema Verma’s signal to the market was, “No, we’re not doing mandatory. We’re doing voluntary. Yeah, we’ll do that but maybe later. Well, MACRA [Medicare Access and CHIP Reauthorization Act of 2015] is good, yeah, but we’ll exempt even more people and slow the timetable down.” So that’s not gone unnoticed by the [field].

It’s not that people think payment reform is being undone. It’s just that the sense of urgency and speed is undone. And I don’t think employers are capable of driving it without that.

Do you believe the only way we get acceleration around this is with federal government intervention? And is that the only viable lever that will really change the paradigm?

I wish it were not true, but I think it is true. …The basic problem, and you guys know this better than anyone, is employers are very different in their needs. Disney is a perfect example of the blended problem. Disney has a billion in spend, half of the employees are working the theme parks making just above minimum wage, and the other half are Johnny Depp or on ESPN or work for Lucasfilm. And they’re all on the same health plan. That’s a tough gig to organize given you’ve got people who are making $20,000 a year and $20 million a year.

I think employers are coming to the payment reform issue. They are doing it with increased vigor and attention. Their problem is they can’t coordinate in a meaningful way to impact providers in given geographies because they have different strategic priorities and it’s hard for them to operationalize a kind of kumbaya strategy, just in the Bay Area, even, for example.

Look at a company like GE, which is massive, but it doesn’t have more than 12,000 or 15,000 lives in any one place. And the companies who do are public employers. So states, big governments, school boards and so forth, they’ve got more concentrated fire power but ironically they are the most brain dead with regard to employee benefit innovation—with the exception of CalPERS and a few others. The people with the most generous health benefits in America are school teachers and firefighters, probably, legitimately, but they’ve been less aggressive on the cost management side than almost anyone.

I think a lot of our members right now are extremely frustrated in the ACA repeal and replace exercise around there being no discussion above the committee level about cost and price. Is that just a manifestation of the politics and lawmakers ignoring that part for now, or do they just not understand it well enough. Or it is a blend?

It’s a very, very good question. The Democratic proposals that became Obamacare were very much about coverage expansion, not necessarily cost containment in the aggregate; although, there were significant pilot experiments, like CMMI [Center for Medicare & Medicaid Innovation] and [ACO] legislation and IPAB [Independent Payment Advisory Board] that were meant to provide some kind of intellectual support and policy support for cost in the aggregate.

But your point is right. Both [Republicans and Democrats] in their own way are ignoring the fundamental problem, which is the health system is too expensive. The Republicans made enormous political gains in the last seven years, and all they had was repeal and replace and cutting taxes. The goal was not to cover more people and reduce cost. The goal was repeal and replace, politically. It was to say you’ve done that. And to cut government spending. They were trying to get rid of something and cut what they saw as another entitlement that was badly crafted. And if you can’t deliver the first one, you know, come on. You’ve got all the leverage of government. So that’s where I think the frustration on the right is coming from.

Now, the Democrats would say, like in Massachusetts, once you get the coverage thing done you can manage cost. I was just in Massachusetts last week, you know, and they’ve got this commission and the commission basically says we’ll monitor if you go over whatever the number is—3.5% GDP healthcare growth per capita. And they came in at 2.8, and everyone was declaring victory.

Well, that’s fine and dandy, but Massachusetts has the highest per capita healthcare cost in the known universe. It’s fair enough to slow your costs when your costs are enormous. It doesn’t solve the problem that we all have, which is the stuff is too expensive. And the bottom line is healthcare cost equals healthcare incomes. If you start taking cost down, somebody’s income has to go down. Either fewer people or they make less money. That’s how it works in every other country. The reason it’s cheaper in other countries is people make less money doing the same thing. Way less money. The prices are much lower. It’s not that utilization is lower. It’s the prices are lower for the same thing. That is very threatening to everybody.