Health economics answers some of the "why" questions in healthcare

Today, I would like to do some role playing. Tom the "reporter" will be asking questions of Tom the "blogger." What is great about this exchange, is that Tom the "blogger" will appear to have answers to some difficult questions but, in fact, there are "no silver bullets." Hopefully though, this exchange will stimulate discussion with the "real" experts, the readers of this blog.

--- Tom

Reporter: Why do you believe that knowing the basic concepts of health economics is important to understanding some of the more difficult questions in healthcare?

Blogger: Health economics is a great tool to break down complicated issues (and healthcare issues on their face can be complicated) to their simplest denominators. Health economics can also be a great tool to predict future healthcare opportunities and challenges and given our evolving fast-paced healthcare world, knowing these opportunities and challenges ahead of the curve would be valuable to your organization and to you personally. 

Reporter: Could you provide an example on how to apply health economics concepts to better understand healthcare's challenges and opportunities?

Blogger: In my blog titled "Health economics is not just for nerds" , I discuss the health economics concepts of scarcity, choices and opportunity costs. An example of these economics concepts applied to healthcare at the national level would be the following: Because of scarcity of societal resources we are forced to make choices from a budgetary perspective, such as not addressing the fundamental cost drivers of Medicare (I did not say these would be smart choices) which results in the federal government having fewer financial resources to allocate to other national priorities (opportunity costs). Worse yet, we kick the can down the road and create generational challenges by increasing the national debt (opportunity costs), which will fall on our children and their children.

Reporter: So are you saying that health economics concepts help explain why we have high healthcare costs in Medicare?

Blogger: Yes. It not only helps explain why we have high healthcare costs in Medicare, but also why we have high healthcare costs in the U.S. In my blog titled, "Why we have high healthcare costs" I discuss the health economics concepts of moral hazard (change in behavior by consumers because of health insurance - incentive for over-utilization), asymmetric information (information imbalance - consumers do not know cost differences between providers) and self-interest. The combination of these three health economics realities along with socio-economic/demographic factors (poverty, lack of education, aging, etc.) translates to high healthcare costs.

If someone else (Medicare/employer, etc.) is paying the bill (moral hazard), you really do not care about the lack of information (asymmetric information) about cost differences between providers of care and services rendered, which impacts the demand side of healthcare. When you combine this demand side reality with a payment methodology of fee-for-service, “the more you do the more you make” (self-interest), you have not only high healthcare costs, but far less than optimum quality of care than it would be on the supply side in a more competitive market.

Reporter: What would be a major first step in addressing our society's high healthcare costs?

Blogger: Real Medicare reform. As I discussed in my historical review of our healthcare system in the blog titled, "Lessons learned, a quick walk down memory lane" Medicare is the 800 lb. gorilla.

The key "lesson learned" during that walk down memory lane was that “A healthcare system is shaped by what you pay for and how you pay for it” and, as the largest payer in healthcare, Medicare is the 800 lb. gorilla. Since Medicare is the largest payer, healthcare providers will follow out of self-interest any incentive built into a payment system, including the "more your do the more you make" incentive vs. one ideally based on value-based care.

One could point the finger at providers of care for the high cost of healthcare in the U.S. as well as the inconsistent quality, but the real culprit historically has been the healthcare payers, and specifically the 800 lb. gorilla Medicare.

As we learned from health economics, providers of care are rational beings and, like decision-makers in other industries outside of healthcare, they will make decisions from a self-interest perspective, which is quite natural, that is best for their organizations. This applies to both for-profit and non-profit entities, since if there is "no margin, there is no mission."

As noted in prior blogs, if we want to evolve our healthcare system to be more value-based we need to start with substantial changes to Medicare's payment policies and regulations. We cannot have a hands-off approach to Medicare (do you hear this, AARP). While there has been much rhetoric relating to Medicare transforming its payment system to be value-based, the sad fact is that it has been mostly rhetoric.

We need to get beyond pilot programs and implement real payment reform to create real financial incentives for providers to transform their organizations and services to be value-based.

Reporter: If Medicare is the 800# gorilla why has it not taken the lead long before this time to transform how we pay for healthcare?

Blogger: A simple answer is, high healthcare costs also translate to high revenue on the supply side of healthcare. Congress and the Administration historically have been heavily lobbied by entrenched healthcare stakeholders, who while talking about the need for value in healthcare, do not want their "slice of pie" affected by it (back to self-interest). An example of this culture, is the fact that MedPac, the "think-tank" arm of Medicare has historically called for more material changes in payment methodologies and regulations that would foster a more value-based system but, more than not, their recommendations are not implemented or if they are, they would have done so in a water-downed form.

Reporter: Is competition good for healthcare?

Blogger: It can be, but it also can have a negative impact if certain factors are not addressed. In my blog titled, "The return of the for-profits" I discuss how competition without cost and quality transparency and an utilization of a "fee-for-service" payment-based system (the more you do the more you make) (back again to self-interest) will result in the "medical arms race" that we see today.

But if you combine the active purchasers of healthcare services vs. the historical passive purchasers with cost & quality transparency and the appropriate payment methodologies you will have the needed catalyst on the demand side of healthcare to stimulate competition based on value on the supply side of healthcare.

The supply side, though, must be allowed to evolve and respond to the new assertive voices on the demand side. The supply side cannot be restricted by regulations that impede the needed "real" competition which is focused on value in the marketplace. The combination of this demand and supply side disruption will foster more of a value-based healthcare system.

Reporter: So is this why we are having so much disruption in healthcare?

Blogger: Yes. All sectors of our economy have and will experience disruption (auto, banking, communication, manufacturing, service, etc.) and now it is coming to the healthcare sector.

Reporter: Most people look at healthcare as just hospitals, physicians and health insurance. How are the other inter-related health related sectors being impacted by this disruption?

Blogger: As I discussed in my blog titled, "The changing healthcare landscape," Medical device, pharma/biotech, post-acute & long-term care, and technology sectors are all intertwined with the hospital, physician and payer side of healthcare. If the hospitals, physician and payer sectors are experiencing disruption, then other interrelated sectors are, or will be, experiencing disruption.

Reporter: Of all of the stakeholders, which one is most vulnerable to the disruption that is occurring today in healthcare?

Blogger: All of the stakeholders will be challenged. For example, in recent blogs we discussed disruption in the long-term care sector and the health insurance sector.

As I discussed in my blog titled, "The changing healthcare landscape" I believe that hospitals will be facing some of the biggest challenges in the future.

Much of hospital costs are linked to infrastructure, personnel, and technology which limits the hospital's ability to evolve during these disruptive times. Adding to this lack of flexibility is the fact that hospital inpatient volume has been trending down for a number of years and that trend will continue. The inpatient volume that does exist is also getting more acute with riskier profiles of patients. These patients with higher acuity profiles also demand more intensive services, which creates even greater financial challenges to the hospitals.

Outpatient services and home health are the growth areas in today's healthcare landscape, but these services and settings are also vulnerable to niche competitors. This vulnerability increases if services are perceived as a commodity since hospitals, with their higher infrastructure costs and overhead, many times have higher costs vs. their competitors in the outpatient and home health arenas. Finally, hospitals will be especially challenged as passive purchasers of care transition to active purchasers.

Reporter: What do you mean by passive and active purchasers of healthcare services?

Blogger: Historically the major payers of healthcare services have had more of a passive approach in purchasing healthcare services. Traditional Medicare (open network of providers), fully-insured employers (financial risk is on the insurer) and consumers with "rich" health benefits (employers are paying the bill) are examples of scenarios where purchasers of healthcare services have been less demanding in the marketplace when it comes to value.

We have been seeing a transition to active purchasers of healthcare services over the last five years, and that trend will continue. Medicare Advantage (third parties enter into risk arrangement with Medicare that results in a narrower network of providers), self-insured employers (they carry the financial risk) and consumers with Health Savings Accounts (HSAs) (they are now spending their own money), are all examples of active purchasers. All of these stakeholders have a vested self-interest to be active purchasers demanding value in the marketplace. Ultimately, these active purchasers are the catalyst for the disruption that we are seeing in healthcare today.

Reporter: We have heard a lot about risk and value-based reimbursement, but it still seems to be a fee-for-service "the more you do the more you make," environment? Why is this?

Blogger: As noted previously in this blog, the entrenched healthcare stakeholders have a vested self-interest in perpetuating the status quo. We definitely could and should be moving at a faster pace to more of a risk/value-based payment system. As also noted previously in this blog, the lesson learned historically is that a healthcare system is shaped by what you pay for and how you pay for it (fee for service vs. value-based or some form of capitation). A healthcare system that is shaped by a risk/value-based system will result in both winners and losers from a stakeholder perspective. So if you are currently winning in the "old" fee-for-service payment system, you are definitely concerned about this pending transition.

I see a lot of finger pointing in the marketplace where providers blame payers for the lack of risk/value-based payment methodologies, and I see payers pointing their fingers at providers for their unwillingness to participate in such agreements. As one would expect, the fingers could be pointed at both stakeholders.

Many payers, even those associated with Medicare Advantage and Medicaid Managed Care have not developed sophisticated risk/value-based payment methodologies. They are reluctant to invest in these payment methodologies since, in many cases, they may lack the needed technology and expertise to support it. Also, while capitation in different forms is still common on the West Coast, it is less common in other parts of the country. Many providers still remember their ill-fated experiences with capitation in the 1990s, and they are reluctant to go down that road again.

Ultimately, as previously discussed, Medicare, the 800 lb. gorilla, can play a key role in leading in this risk/value-based payment evolution. As discussed in my blog titled, "A walk down memory lane," commercial carriers will follow the lead of Medicare when it comes to payment methodologies with the inpatient Diagnostically Related Groups (DRG) system being the most classic example.

Those providers that embrace risk/value-based payment methodologies will take a giant step in their evolution to being a value-based organization. The quickest and best way to break down the silos that have existed forever in healthcare is to embrace payment systems that reward providers for doing so. As I have stated in prior blogs, I believe that capitation in some forms (or premium sharing in joint venture with payers) will be a key catalyst in shaping the winners in this new world of healthcare. These risk-based payment systems would then foster an environment of health and prevention as a key to profitability for providers vs. the current system that incents increased utilization of resources.

Closing comments:

As I noted in my introduction, there are no "silver bullet" answers to the "why" questions of healthcare. What I do know is that our current healthcare system is not sustainable, and if we continue to construct barriers to prevent real value-based changes in healthcare, we will face even greater challenges in the future. Those organizations and people that recognize and embrace this needed change will be the real winners.

As Michael E. Porter, Harvard Business School professor and author of Redefining Health Care: Creating Value-Based Competition on Results, said: “The only way to truly reform healthcare is to reform the nature of competition itself.” We need to transition from competition that is tied to the "medical arms race" to one that is based on value.

Finally, how would you answer some of the questions posed by the reporter and what important questions were not asked?

Thomas Campanella is the director of the Health Care MBA and an associate professor of health economics at Baldwin Wallace University near Cleveland, Ohio.

If you are interested in receiving a monthly summary of all of my healthcare blogs, you can respond to me on LinkedIn or e-mail Tom Campanella ([email protected]) with your contact information.

Source of pictures: pixabay.com & pexels.com