Monday, February 25, 2013

A Bottomless Pit of Money

I should have known what would happen.  Three cities in three days, each with a pre-dawn start to my schedule, culminating with my arrival on Saturday in Rochester, NY where the temperature was 6°F.  So, I caught a head cold.

Well, at least I know it was a cold now.  But, at the time, I thought it could be anything. “It’s either the flu or pneumonia,” said the doc.  Even in my Robitussin induced stupor, the idea that I might have pneumonia scared me a bit.  People my age die of pneumonia all the time. 

“Your lungs sound clear but I could take an X-ray to be sure it’s not pneumonia.  Do you want to do that?” she asked.  Now, I suppose if my head were clearer I might have asked, “If my lungs are clear, why do you think I have pneumonia?”  But, I didn’t. But, because I was asked and said yes, I’ll get a whopping big bill from the radiology department.  So, why am I telling you all this?  Because it’s a microcosm of the challenge we have reforming healthcare. (No, Obamacare didn’t reform healthcare.) 

In the not too distant future, I will be eligible for Medicare.  Then I won’t sweat this stuff at all.  After all, the government is a bottomless pit of money, right?  Of course, being a fiscal conservative, I wonder what might happen when the Medicare fund runs out of money, which should happen in 2024 according its Trustees. 

But then, why worry about that?  The country shows no sign of slowing its production of new money to fund government deficits.  And, no one in Washington (or anywhere else) seems to care.

So, how do we wrestle this beast to the ground?  And, why bother?

I think economist John Mauldin phrases the problem statement best:  In the US, the real question we must ask ourselves as a nation is, ‘How much health care do we want and how do we want to pay for it?’ Everything else can be dealt with if we get that basic question answered. We can substantially change health care, along with other discretionary budget items, or we can raise taxes, or some combination. Each path has consequences.”

The cover story in this Week’s edition of Time magazine, “Bitter Pill, Why Medical Bills Are Killing Us”, digs deep into the challenges we face.  Before reading the article, I thought of the medical insurance companies as the Evil Empire in this quagmire.  But, the economic power is shifting to hospitals, particularly non-profit hospitals, according to the article’s author, Steven Brill.

Hospitals are buying up physicians’ practices and aggregating services to control the entire medical supply chain.  In some rural areas, they are the only game in town serving the community much like a utility company – except there is no public service commission to control prices.  Brill goes into great detail examining why the so-called non-profits have higher net margins than their for-profit brethren, on which they pay no taxes of course.   The nation’s second largest non-profit hospital, The Cleveland Clinic, nets over $570M and pays its CEO more the $2.5M per year.  Does that sound like a non-profit to you?

To make matters worse, the hospitals grossly overcharge for everything.  How do we know?  Well, hospitals are required by law to submit their actual costs to Medicare, which pays cost plus a standard profit margin. The net of it:  Medicare pays only about an eighth of the average hospital’s full charge.  So, the huge “profits” of the non-profits are the result of them grossly overcharging their non-Medicare patients.

A few weeks ago (in a fit of whimsy) I used the popular TV show Downton Abbey as an example of how entrenched interests -- the lords and ladies of the British aristocracy -- hampered the economic progress of Great Britain, the pre-eminent economic and military power of the 19th Century. 

Now, the US has its royals – the lords and ladies of the healthcare system --absorbing 20% of GDP, spending it inefficiently and undermining the financial security of the middle class.  The entrenched power of these institutions – represented by lobbyists that outnumber members of Congress 7 to 1 – are hampering the economic progress of the US, the pre-eminent economic and military power of the 20th Century.

It makes me wonder…  WHO WILL LEAD?


  1. Excellent blog and the message is dead on. Thanks for passing along, Bruce. Nice job, John. Matt Semensohn and I spent yesterday visiting with the team that are developing Hospital City in Grand Cayman, a partnership of Dr. Shetty's Indian-based 17 cardiac hospitals organization and the Cayman government. Dr. Shetty was referred to as the Henry Ford of cardiac procedures in a terrific profile published by the WSJ three or four years ago. My friend Matt interned with Dr. Shetty and key staffers during a four month stint at IBS as part of his MBA program.

    Hospital City will be highly disruptive to the traditional surgical models employed in the US. They have long-proven methods that deliver outstanding outcomes at a fraction of the costs incurred in the US and other American markets.

    These sorts of innovations, and the ones we are developing at MetCare and Continuecare, will ultimately address and hopefully solve the cost problem. But as John points out in his blog, we have to as a country decided what benefits we want, and want to pay for, first.

    Now, I'm off to snorkel. This trip is not all work!

  2. Brilliant, John. And truer than true.

    Well done.

    David Altshuler

  3. John:
    Sounds like a large amount of sour grapes, so a CEO of a non-profit is not entitled to be paid what he is worth or what the market will bare...? I'm sure just like any for profit CEO, he or she can rationalize their compensation... You don't mention who the Cleveland Clinic serves or how well they do work of caring for their patients... Your opinions are always well written and

    Bill Bendon

  4. Bill,

    Thanks for the reply. I have served on the boards of a few non-profits. Most have been rated highly by an independent organization called Charity Navigator. A key measure of the effectiveness of non-profits is the percentage of income that goes to providing services. In the case of my last board assignment — Operation Homefront — 94% of our income went to providing services. In the case of the Cleveland Clinic, the $570M "profit" was roughly 25% of their income. I would advocate that if they want to act like a for-profit entity, they should pay taxes like one.

    I strongly suggest you read the Time article to which there is a link in the blog. While you may find lots to disagree with (and, clearly, the author has an axe to grind), it offers great insight into the billing practices of hospitals. They're not doing anything that's against the law. But I am left wondering if that shouldn't be the case.

    I am a free market capitalist like you. But, many healthcare enterprises are taking advantage of their pricing power to the detriment of our nation and our financial security. I won't pretend to have a ready solution; however, I would say that I am not aware of any serious effort to provide one.

    John Calia

  5. Christopher Smith • The moral of our story seems to be: don't get sick.
    Our society seems to be leveraging technology to bury itself in complexity. I can tell you that, if our bureaucratic programs were software programs (you pick the development language) that noise Would. Not. Compile.
    Our leadership either (a) lacks a broader picture of what it's doing and where all this is headed, or (b) knows its course precisely, and methodically steers it.
    Not sure which variation is more terrifying, but I've no confidence in these jokers.

  6. Vincent Scott • Who will lead? I am very afraid that the answer is "no one." As long as all is well today, we are unable to muster the will to face hard problems that will come tomorrow.

  7. Eric Hulbert • All good points as usual John. Healthcare costs also are a problem due to opaque pricing. Most markets force customers to choose between service level/quality and cost, but there is no easy way to do that with healthcare. I know I can save money by using less healthcare, but there is no obvious way to find lower cost healthcare. In your example, you knew the x-ray would add cost, but in most places how much cost is a mystery as is whether there were other diagnostic centers that would deliver an x-ray at a lower cost.

  8. Frank Edrington • Given the time, energy, interest and ability required to dig up the information necessary to fairly compare the costs of using different healthcare providers, the "good consumer" will probably have died of old age before the most economical choice can be determined.

  9. I still don't understand why we continue to so be totally stumped in tackling the problems of runaway healthcare costs. It's almost as if we're the only country on earth with a population whose citizens sometimes become sick, suffer the occasional accident, and whose citizens inevitably pass away.

    How about we look across the pond and study what Denmark, or Norway, or Germany, or France are doing? Why not peak north and see what Canada is doing? In fact, why not study the models that virtually every first-world country on earth are using to handle healthcare?

    And please, we're past the "we've got the best healthcare on earth" stage. Clearly we don't, when 40 million Americans have no coverage whatsoever, and those who do pay anywhere from twice to four times what other modern nations pay - almost all of whom have lower infant mortality rates and longer life expectancies than here in the USA.

    Bruce Scottow

  10. Gerda Grimshaw • This may seem simplistic, however, Kaiser Permanente is a non profit. It runs quite efficient by being practical, realistic, and honest. I don't think they are paying their Administrators and Doctors million dollar salaries. I would be surprised if they would "up-sell" or turn up the fear factor to stiff you with predatory bills. Patients just want to be fixed. That can be done in a modest hospital. If you want the star/spa experience, go ahead and pay for it. Choice would be a good thing. Up front disclosure would help to deal with the reckless pit. We are sick of being fleeced.

  11. Richard Halls • Watch the Charlie Rose ineterview with Steven Brill of Time magazine.

  12. Mary Ruth Kolk • I agree with Richard. Watch the Charlie Rose interview with Steven Brill author of the Times magazine article; The Bitter Pill Is Healthcare Killing Us.

    I live in Cleveland OH. The Cleveland Clinic Foundation is huge. Everywhere you look another hospital is either being gobbled up by CCF or the CCF is building their own new hospitals and doctors offices.

    CCF It's a great institution. It saved my daughter's life 11 years ago when she developed breast cancer. And we are grateful that it is in our backyard.

    That said, I believe that CCF is a primary example of what is wrong with healthcare today. As you travel through any large city in this country and look to see what company's are expanding and building new skyscraper offices, you will find that it is the healthcare industry primarily followed closely by the banks and insurance companies.

    Obamacare, if it had been able to implemented correctly would have saved healthcare. I can only hope that having a foot in the door, Obamacare will expand eventually to a single payer.

    The "tipping point" came in the late 70's when healthcare went to a for profit system. Big business and even bigger greed took over and is eating it alive.

  13. Michael Carron • This time article discusses one of the main problems with our healthcare system...I've spent 7 years of my career in Europe with single-payer systems and I found them excellent...I'm lucky because I have the single-payer Medicare, BC/BS (because my wife does not qualify for Medicare yet), and Tricare for life (also single-payer).

  14. Edward Hassi • Good post. This is an area that needs significant attention. I read the Time article yesterday, and it resonated as I have recently seen first hand the power some of these non-profits wield. I led a legal challenge to a hospital system buying its only competitor so that it could be the only game in town (and well beyond). We had to go all the way to the Supreme Court to get a ruling that the state legislature did not intend to create monopolies and end hospital competition. The non-profit paid a significant premium to buy its only for-profit competition and fought every step of the way with teams of blue-chip lawyers. When a hospital or health system has no competition, it is often very difficult for the insurance companies to check the hospital's power. And for the uninsured, who can least afford it, there is really no hope of avoiding sky-high prices. Comparison shopping, difficult under any circumstances, is out of the question when the next closest hospital is 40+ miles away.

  15. Jason G. Ramage, MS, MBA, RBP • John, see last week's issue of TIME, which was devoted entirely to this issue. The thesis of the article was essentially that the matter is less an issue of "who will pay for it" but "Why is it so darn expensive in the first place?" I think it's an excellent article, and when you combine that with the information found in "Priceless: Curing the Healthcare Crisis" by John C. Goodman, it clearly shows how unsustainable and punitive the situation is. Some sensible solutions were proposed, including reasonable (IMO) regulations in recognition of the fact that healthcare is not "just another consumer product" like iPods or phones.

    The article also points out some of the myths that surround the issue, and the book shows how the ACA (Obamacare if you wish) is likely to exacerbate rather than solve the problem.

  16. Karen VanAssche • Here's a chicken and egg question: are medical bills so over-inflated because insurance companies will only pay a small fraction of the bill or do insurance companies only pay a small fraction of the bill because medical bills are so over-inflated? I process medical bills and insurance claims as part of my job and the insurance company pays about 10% of what is billed in most cases.

  17. @Karen. Great question. And I wasn't around for either the chicken or the egg so I don't think I can answer it. In my time in the industry, I learned that there are a lot of systems analysts and programmers chasing the holy grail of optimizing revenue. The hamfisted way of doing it is to overcharge for everything.

  18. Who Will Lead?

    Who in Congress has the courage to lead us against bigpharma, whose campaign donations virtually ensure this continuing dysfunctionality in our healthcare system.

    Who in Congress has the courage to lead us to a scheduled scrapping of our current system and replace it with a proven, single payer model?

    Who in Congress has the courage to lead their Congress members to provide 300 million Americans with essentially the same coverage they themselves enjoy?


    Bruce Scottow

  19. Jason G. Ramage, MS, MBA, RBP • It does raise an interesting point. I would look at what my insurer would pay my doctor on those thankfully rare occasions where I would need a visit and I would fume at how little they were paying out (this despite the fact that I never got a bill from the doctor asking for the remainder). Then I read the TIME article (and John, my apologies for not catching the link in the post; I made my comment before actually reading the article. Shame on me!) and started fuming at the healthcare industry. Kind of hard to tell who to be more irritated with.

  20. @Bruce. Yeah... That's my question too.