I have been a CFO and now a COO in healthcare for a few years, following 18 years as a CFO then COO in another industry. After just a few years in this world of healthcare, it amuses me that the nonclinical folks who are largely in charge of it think healthcare is completely different from every other consumer-driven business in the entire world. Make no mistake, the nobility of the cause and the unique attributes are distinct, but the laws of economics apply more than those who make policy, write articles on the industry and are largely in charge seem to think they should.
Perhaps the greatest example is this notion that "fee-for-service" payment models where you pay for consumption are errant, and instead a "bundled" package pricing model is the best future for healthcare. Every medical trade publication, speech, seminar, governmental agency and most hospital administrators pontificate about why fee-for-service is or needs to be a dying model and needs to convert to a bundled payment model, also known as a capitated model, global payments, clinically-integrated payments and about 10 other variations of the same name. These pontificators, as I will refer to them, think a fixed fee for an episode of care is a concretely brilliant way to reduce costs and provide better service, even though every single clinical encounter has nuances that are likely to vary in complexity by more than the best mathematician on Earth could calculate with any reasonable degree of accuracy. Could you imagine if you went to a plumber and told them about a repair you need and said, "Look, instead of paying individually for each thing I need, I want a bundled payment for this project. I have some serious plumbing issues under my slab and also need a sink repair. I want a capitated model where I make a flat global payment, regardless of what details you find once you get in there." Or, "I am remodeling my house, and I don't know what size expansion I want or what type of finishes I want. How much is the fixed capitated price for one of those?" That would be preposterous. There is no way to tell what parts you might need and what modifications might be needed along the way. As compared to other industries, I submit that healthcare is similar, and bundled payments will reduce the quality of the projects and actually increase the cost.
As another example, let's say you go to the auto repair shop and say, "Look, my brakes have multiple issues. What is the global or capitated fee for that? My rotors may or may not need turning, my front or rear or both may be out, my master cylinder might or might not be leaking, but I want a fixed fee." Or, "My car seems to have a suspension problem. It could be the tires, probably it's the shocks, but the tie rods do appear off a bit. I want a fixed fee proposal, and I want the same parts as everyone else." Surely the shop is going to buy the cheapest parts they can and, rest assured, they will develop a pricing model that charges some less and some more than what they need. They will be motivated to rush through it since the fee is flat, and naturally will not be as inclined to take any extra steps needed to focus on good service. Overall for the shops to stay in business, the pricing will go up to ensure a margin, otherwise the shop will simply go out of business. Within reason, supply and demand should determine prices. Overall bundled pricing for highly specialized services is an ignorant endeavor. I once operated a small contracting and excavation company. We usually charged by the hour, but sometimes folks would want a fixed or capitated price. Which ones do you think we were certain to price to ensure we made more money?
Some argue fee for service gives physicians some incentive to do unnecessary tests and treatments. I have found the vast majority of physicians, just like in any other high-level profession, are actually going to do the right thing regardless of the incentive. Are there the rare few who get off course? Sure, just as there are in any profession. But that is the rarity, not the norm. There are bad plumbers and mechanics, but the ones who endure are the ones who do what is right and necessary. People say fee-for-service causes cost to be higher and efficiencies to be lower. I argue that is pure ignorance. Changing to a bundled payment is not going to change the efficiency rate, and I would argue it is going to make the cost higher because physicians and hospitals are going to want a higher rate to offset the risk of the bad cases. That's right, the very thing these pontificators are trying to argue is the problem will end up hurting pricing models and/or quality if they are successful in brainwashing everyone into believing a bundled payment program is better. The pontificators say in a bundled environment, physicians will be less likely to perform procedures. In that, I will say they might be partially right but some of the procedures that will be foregone are the necessary ones, and the proper care administration will be diminished in more cases than not.
A prevailing argument is that physicians perform way too many unnecessary diagnostic tests and procedures. If pontificators truly want to be helpful, they should focus on advocating for improving the algorithms that determine which tests are the best to perform in which cases, and to use more technological tools to reduce unnecessary tests. I myself went for almost 20 years in an environment where a physician was resistant to ordering a test. I suffered unnecessarily for all of those years from a massive syrinx and Chiari, simply because my physician was too lazy or not smart enough to order a test. I woke up one morning with no function in my arms and legs. My new physician ordered an MRI, which revealed the lifelong problem instantly, and yielded me having brain surgery within a few weeks after the test (and my quality of life increasing dramatically thereafter). Thank God my new physician ignored the pontificators and ordered the test that the previous one did not. Otherwise I was headed toward certain quadriplegia. Does this taint my view? Probably.
Now more than ever there are so many buzzwords and acronyms the pontificators are converting into money-wasting initiatives like "clinical integration" and "accountable care organizations." Clinical integration, when not an ignorant label and just words, should be something that simply means physicians and care teams work together for the benefit of the patient in their healthcare journey. Instead, it now conjures up among the simple-minded a new world order where people put money into an administrative fund and share it, to do what they already should be doing! ACOs are where Medicare and private insurance companies are trying to incentivize healthcare providers to offer a bundled payment or capitated payment model wherein the healthcare systems will be rewarded before adopting these silly models and receive some of the surplus when actual results are better than budgeted results. They should run advertisements that say, "Welcome to Health Care System X, we practice medicine here where if we come in under budget we get a bonus." What a fallacy to base healthcare on estimated budgets. A budget is already an imperfect tool, and to apply that to the delivery of healthcare diagnoses is at its best ignorant and at its worst insane.
The other big flaw in these bundled and other ignorant payment initiatives of many forms (including value-based purchasing) is that they try to transfer the risk from the government and insurance companies to the healthcare providers. Let's say you are the auto repair shop and you are now under a bundled payment program. The government, clearly here to help, forces you to pilot a program where you bundle various projects into a set pricing. You are incented to keep the cost down as low as possible. If you reduce the costs and become really good at keeping consumers from getting things they do not need – regardless if they or their certified provider want them – you get a little bonus after the annual measurement period. The pontificators think that all of the auto repair shops in the country will get excited about this. If they work really hard to reduce their income by not giving consumers anything they might not need, they will get a bonus down the road. Surely this brilliant method will attract more competition to the industry and encourage growth, right? Instead of trying to provide the most durable and best products and services, a company in such a situation is incentivized to provide the cheapest and most minimal amount of services.
Healthcare pricing is driven by other problems. For example, we live in an era of entitlement, where we now have more things to make the aging process easier, but these things cost money. Hip and knee replacements are now sophisticated surgical luxuries that did not exist as mainstream several decades ago, and the cost of them, the true hard dollar cost, is enormous. The problem is no one wants to pay the true cost for these services.
Payment models that pay per capita or in bundles based on risk profiles of a certain population are imprecise and will naturally have cushion factors built in, leading to higher costs. It is no different than construction pricing. If you want a fixed price, ultimately the market will either provide less options or it will price it so businesses will factor in uncertainties to ensure avoiding a loss. I would argue the companies that have converted to the very bundled payment schemes that are pontificated to reduce costs will be the ones who attempt to make the most profit until the scheme is vetted by the economics of the world. How about instead of all this foolishness, we simply make insurance be insurance again, and have the consumers who want it buy it at full price and share the risk? Insurance is no longer insurance, it is simply a means for processing payments.
It is sometimes the consumers that are the problem. If they did not want the services, they would not be demanding them. Do physicians make good money? Yes, often they do. But they go to school for countless hours, and they usually are the ones intelligent enough or diligent enough to go through that. When you are the patient on the table, I would think you would want the person doing the surgery to be the higher paid person who made the sacrifice of a long and expensive education and is paid well because they are more educated than you.
Slick terms and ill-conceived concepts like "bundled payment model," "value-based purchasing," "ACOs," "clinical integration," etc., do not change markets. Supply and demand change markets. Healthcare is a problem in America because of improper governmental initiatives, entitlement mentality and consumerism. Physicians and patients do not need their services governed by a bundled payment method.
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