Healthcare Needs Transparency

By Todd Hixon

The 2010 Affordable Care Act (ACA) triggered a wave of mergers among health care providers that is creating regional juggernauts. Customers urgently need increased price and quality transparency to buy smart and offset the growing market power of providers.

Photo credit: Wikipedia

In Massachusetts the hospitals are battling the state government over prices*. The cost of health care in Mass surged ahead of the national average after Mass established universal health care (the prototype for ObamaCare) in 2006. Mass is trying to limit the growth of health care spending to the growth rate of the state’s GDP. The hospitals say they need more revenue, and they are “lawyering up” with lobbyists to do battle on Beacon Hill, the state capitol (more). This is like Sumo wrestling: big guys straining for advantage.

Hospitals are very complex businesses. This makes their economics opaque: it is very difficult to understand what drives costs and whether prices are reasonable and necessary. A classic argument for why room rates are so high was based on charity care: the law requires that hospitals treat any person who needs urgent care even if they cannot pay. The cost of this had to be built into the price for the rest of us.

Universal health care in Mass has largely eliminated charity care, however. When I ran into a friend who works for a leading hospital group at a cocktail party last week I heard a new rationale, the psych ward: it always loses money, even though the staff is underpaid, but you need to have one, so everyone has to pay for it. Who knows how to question the economics of a psych ward?

Quality is equally murky. Hospitals have very strong brands. The Harvard teaching hospitals (Mass General, Brigham & Women’s, Children’s, Beth Israel) are the leading brands in Eastern Mass. If you have an exotic medical problem, that’s where you want to go. My wife had a very serious and difficult problem, and her GP advised that the only hospitals she should consider were Mass General and Beth Israel.

But, the medical director of a large, prestigious employer in Eastern Mass told me that, for common procedures, he believes there are other hospitals with equally good or better outcomes records that charge substantially less. Some leading Boston employers, like IBM, now offer 2-tier health plans. Employees pay substantially lower contributions if they agree to use selected hospitals, not including the top brands.

This is getting worse, fast. A key provision of the 2010 ACA (“ObamaCare”) creates strong incentives for healthcare providers to combine into Accountable Care Organizations (“ACOs”) that take responsibility for end-to-end care of patients for a fixed fee. Doctor groups, hospitals, and insurers are joining together to form ACOs and to gain scale and bargaining power. (Insurers are in the mix because the ACO concept causes the providers to bear economic risk, which puts them in the insurance business.) Some examples:

  • Tufts Medical Center is in talks with Vanguard Health Systems to partner up in the Boston market, which has already seen mergers between Mass General, Brigham & Women’s and several lesser players forming Partners Healthcare and between Beth Israel and New England Deaconess.
  • In Pittsburgh, UPMC, the dominant care provider, now offers a health plan (i.e., insurance), and Highmark, the dominant insurer, has begun acquiring hospitals.
  • In Minneapolis, Park Nicollet Health Services is merging with HealthPartners, bringing together clinics, hospitals, and a health plan with 1.4 million members (more).

Making providers accountable for outcomes is a good thing; it pushes the health care system away from its focus on delivering procedures. But, solutions often cause problems, and the problem I see coming is a healthcare system that is so intertwined, regionally concentrated, and opaque that it can charge what it decides it must, with little restraint.

Transparency will help greatly. Healthcare is a huge part of everyone’s spending (whether we see it or not). We all need to become smarter buyers. Individuals can make choices like how to buy long-term medications (there are good, lower-cost options) and how much health insurance they need (a lot of people are over-insured for routine health costs, especially in the Medicare supplement market).

Companies, unions, and other plan sponsors can choose, for example, which hospitals and doctor groups to put in their mainstream health plan or which pharmacy benefit managers to use (the ones with low error rates).

To make this work, buyers need better information and better options. Government and regulation have a role here. Entrepreneurs can make a big difference, too. For example, Thomson/Reuters is beginning to offer data services to corporate customers to help them identify healthcare providers who offer top quality with good value. Entrepreneurial companies are offering both sophisticated data on healthcare service cost and quality, and new options for buyers. We have found some good investments in this space (which we call “re-engineering the business of healthcare”). We expect many more.

*Hospitals are 31% of National Health Expenditures, the largest category. They tend to be the “price leader” for the health care industry.


[First posted @ blogs.forbes.com/toddhixon on Sept. 20, 2012.]

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