Change in Trading Dynamics: The Key to Successful Health System Reform

After $6B spent on federal campaigns, the country has chosen its leaders. Yet, problems with our health system still linger and fester. Physicians, the last bulwark of patient advocacy, have a ubiquitous role in reforming the system and must pick up the cudgels.

Even after passage of PPACA (Obamacare), issues like access to care, quality of service, insurance coverage, malpractice, over-utilization of resources, etc. continue to be at the forefront of the debate. However, all of these segmentations boil down to 3 general categories, viz., waste, fraud and abuse in the system, mired by “moral hazard” of having health insurance. Hopefully, all the preceding contending interests will be addressed with civility.

In my humble opinion, shaped by years of experience in the system, the above general categories do not constitute the root or core problem facing the entire healthcare industry. Worse yet, the proposed measures for reform will arbitrarily limit provision of services cloaked behind “evidence-based medicine” and will make future payment based on outcome that is uncertain or performance that is unpredictable. Assuming, for the sake of argument that all these issues come close to an ideal solution, these will still default to where they started due to the structural nature of the problems that rest on human nature.

People take action based on rational choice and personal interest unique to each person. The strategy then for health system reform is to accept this reality of human nature and align it to an understanding about a key flaw in the financial underpinning related to payment methodology of our current health system. Human nature being what is, the only remaining recourse is to change the structure of trading dynamics that initiates payment.

Price and Payment

To start with, our current payment system, whether public or private, healthcare or otherwise, is oblivious to the opaque pricing mechanics and corresponding arbitrary payment. Global markets thrive in such a scenario. “Buyers” have needs, wants and expectations of quality and service that have to be filled by “sellers“. Only the “sellers” determine and set the price according to modifications in demand and supply. The buyer either pays that price, wait or haggle for discount or not buy altogether. When both “seller and buyer” agree with the price, payment is made and trade is completed. Unfortunately, the nature of this trading system favors more the seller than the buyer because of “asymmetric costing” information. To illustrate, a seller may price a product or service for $100 and may discount it down by 50%. As price went down to $50, the buyer sees a 50% discount as a good deal, and pays up. If the production cost of the product/service amounts to $10, but hidden from the buyer, then he just paid the seller a 5x profit mark up. This fog in “costing” and lack of transparency in “pricing determinant” favor the seller as he is the only one who knows the production cost and the spread/profit.

Extrapolating this to healthcare product/service, exorbitant medical inflation occurs as “suppliers” mark-up the price way above their costs. Their expectation is to be paid, at least, above “break-even point”. True, it is crucial for the viability of any business to have profit. But there can be overpricing, overcharging, some call “gouging” that affects the entire spectrum of the “supply chain” in the healthcare system. Supplier-to-end-user, each along the way, marks up the price to profit from the trade. Everyone is affected as all can be buyer or seller depending upon where each one is along the throughput of the trading system. No wonder, healthcare expenditures turned exponential since private insurance came into being and in 1965 when a federal insurance, i.e., Medicare, became an mandated program.

Mechanism of fraud?

Historically, payment is made, by and large, from decision of bureaucrats in the federal or private insurance based on the price charged by the provider of the product or service. They get that money from federal income taxes or private insurance premiums. As payment comes not from their own money but from others’, public and private insurance just “opened there wallet“. As their “skin not in the game”, little effort is expended to negotiate down the price and even when done through contracting, the “spread” may still be too high. When it became apparent that the upward trajectory of spending is unsustainable, cost control measures were instituted, akin to price control. Federal responses like RBRVS and SGR for physicians and DRG for hospitals came into being. Private insurance increased premiums, tweaked qualifying requirements through adverse “selection bias” and/or exclude pre-existing conditions. Other stakeholders like pharmaceuticals, device companies and different suppliers responded in a similar fashion to maintain profitability.

Lack of transparency in “true cost “

What is apparent in these arbitrary responses is a pervasive theme of a pricing structure sans openness as to production cost. Only when there is transparency in production cost in relation to price charged, can a more rational payment system develop through a change in trading dynamics. When the buyer knows the “spread” between actual cost and selling price, he is in a level-playing field with the seller and can better negotiate down the price much closer to “true cost“. This is the essence of a competitive market-based economy. Medical inflation will be replaced throughout the whole gamut of trading by deflation in prices to a more reasonable level, while profit will still be made, although lesser than before. The eventual agreed price will then be more affordable and the health system sustainable and durable. With “information symmetry” between buyer and seller, the trading dynamics will change. As in the preceding illustration when the seller priced a product or service at $100, but discounted it down to $50, now that the production cost is transparent and is actually $10, instead of the buyer happily paying $50 as before, he can now negotiate the price even lower, e.g. $11 or 10% profit from “true cost”. The ability of buyers to participate in the decision as to how much actual profit comes from the trade, brings parity to the parties involved in the trade. The seller can continue to present projected % profit for his product, but transparency gives buyer/payer additional parameter to make final decision to complete the trade.

Summary

Reform of the healthcare system is complex when all the “moving parts“, as important as they are, detract us from the core problem, which is a payment system that marginalized and ignored trading dynamics. The payers, public or private, must fulfill their fiduciary responsibility and obligation to taxpayers and premium payers by demanding information about production cost and selling price before paying up.

Knowledge of % Profit (spread) should be part of “buying drivers” for consumers to be in equal footing with the seller. The system should not limit “price determinants” to supply/demand, needs, wants, expectations and ability to pay. They should include price differential with production cost throughout the whole gamut of the supply-chain. Physicians are the only ones that have attempted costing-transparency with RBRVS which slowed down their contribution to the rate of medical inflation. Other larger components of healthcare expenditures, i.e, hospitals, allied personnel, pharmaceuticals and device companies continue to wrap themselves in mystery. Consequently, healthcare inflation continued unabated. Even when the political winds sway towards conservatism or progressivism, the moral imperative is to bridge this chiasm. The challenge to our present generation is whether to keep the same culture in “buying/selling” or develop a new one, to adopt parity vs. disparity, opacity vs. transparency in the trading system. Which world and global market do we want to create? Shall we think outside-the-box or not? Only by looking at the culture and foundation of “buying-and-selling” through the prism of impartiality and even-handedness, will the payment system in healthcare system and other markets be equitable and reformed. With more healthcare dollars saved, a new dawn is in the horizon when payment is equitable, services not curtailed and access to healthcare available to all, whether the economy is yawning or booming.

Original post: June 8, 2018

N.B.

June 2011: Condensed version of Master Thesis accepted at New England College, Master in Healthcare Administration