The problem with US health care prices is math, not greed

According to the Commonwealth Fund, private equity firms have invested over $1 trillion in health care in the United States over the last decade. These acquisitions have led to two interrelated outcomes:

• Higher prices: A study showed that prices for health care services increase when private equity acquires a practice. The greater the concentration of services in the hands of one firm, the greater the increases are in a given region.
• Higher risks for patients: The Journal of the American Medical Association published a study in December that showed that “private equity acquisition was associated with a 25.4% increase in hospital-acquired conditions, which was driven by falls and central line–associated bloodstream infections.”

It would be overly simplistic to attribute these outcomes to corporate greed, as companies seem to exercise their pricing power with little regard for patient outcomes. Let’s be honest. It is utopian to ask any company to suppress its profit motive. At the same time, it is dystopian to force patients to live in a world where they either can’t afford to get proper health care or endanger themselves when they do.

Fortunately, this apparent paradox – letting private equity companies earn more money without reducing access or putting patients at risk – has a real-world answer. It lies in changing two things: the predominant pricing model in health care, and the outdated assumptions about pricing that keep that model in place.

The key is to shift the pricing model from charging per act to charging per patient over time or, even better, charging per population. I’ve explored these concepts for several years and expressed the logic behind them in a TED talk, an article, and in a full chapter of the book I recently co-authored: Game Changer: How Strategic Pricing Shapes Businesses, Markets, and Society. The underlying idea is that all stakeholders – providers, payers, pharmaceutical companies, and patients – are better off when the revenue comes from keeping a patient healthy over time and treating entire populations (say, over five or ten years) instead of treating an ailment of one patient at points in time.

The change in mindset applies to all business, not just health care. Most people, including private equity managers, tend to think of pricing as a zero-sum game with the goal of extracting as much money as possible. In Game Changer we contend that companies can make more money for a longer period when they focus on growth instead of a zero-sum game and when they share value fairly with customers instead of always extracting the maximum from them.

Making these changes in any industry will be difficult, and even more so in health care with its webs of regulations and the vast pools of profit at stake. The prevailing wisdom with drug prices, for example, is that they “are what the market will bear,” as this article last month in the New York Times reiterated. But that outcome is a function of the pricing model, not some confluence of “market forces” beyond people’s control. As an alternative, some companies have been experimenting with population-based pricing models in health care for a while, as Ashish Jha, the dean of Brown University’s School of Public Health, pointed out in his interview earlier this month on Amanpour & Co.

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I will continue to advocate for companies to explore these alternative pricing models. Even when change is difficult, it’s easier to try to change the math than to try to change human nature.