“Where Have You Gone, Marcus Welby?”

According to the 2012 edition of AHA Hospital Statistics, hospitals now employ 212,000 physicians, reflecting a 12-year, upward trend. Since 2000 the number of physicians employed by hospitals has soared by 32 percent.

This trend appears to be irreversible. A recent report by MedSynergies, Inc. and HealthLeaders Media reveals that 70 percent of American hospitals and health systems plan on hiring more physicians in the next one to three years and that 76 percent of hospitals and health systems use a full-employment, medical-staff model.

There are at least three forces taking the market in this direction.  One, many physicians are crying “uncle” and deciding that the independent practice of medicine is no longer worth the long hours, administrative burdens, and ongoing downward pressure on reimbursements.  These physicians are capitulating and seeking the relative safety that a hospital system provides.

The second force driving consolidation is the lax scrutiny being applied to hospital-physician combinations.  Unlike the past, state and federal regulators are being more accepting of combinations that in the past would have invited antitrust scrutiny.

The third, and most powerful force favoring consolidation, is the future outlook for reimbursements from government and private payers.  One needs look no further than the recent actuarial estimate of the Medicare Trust Fund. 

According to A Summary of the 2011 Annual Reports, Social Security and Medicare Boards of Trustees, “Medicare’s HI Trust Fund is expected to pay out more in hospital benefits and other expenditures than it receives in income in all future years...The share of HI expenditures that can be financed with HI dedicated revenues is projected to decline slowly to 75 percent in 2045, and then to rise slowly, reaching 88 percent in 2085. Over 75 years, HI’s actuarial imbalance is estimated to be equivalent to 21 percent of tax receipts or 17 percent of program outlays.”

Stop for a moment to think about what you just read.  Unless fundamental changes occur, the Medicare program will spend more than it collects in revenue for each of the next 75 years!  Unless we choose to continue ignoring reality, higher Medicare premiums, eligibility cutbacks --including means testing--and lower reimbursements are a given, and overt  rationing is a real possibility.

Health systems read the same reports the rest of us do, and know that they can’t print money.  Therefore, they must recreate themselves as fixed fee providers of bundled care.  This is hard to do unless you control physicians, one of the primary means of health care production.

This is really what the Accountable Care Organization movement is about – nudging health systems to redefine their business models to create savings by operating at a lower cost.  While the savings are shared today, the shared savings model is just a warm up for the hard decisions yet to come.  Better to learn the rules of the new game with the government’s help and support now, than wait until later when the learning curve is much steeper and the penalties for failure are much greater.

These changes represent a huge transformation in business orientation and organizational culture for physicians and health systems.  While physicians will enjoy being relieved of many of the administrative burdens of owning and managing a practice, they will adapt less easily to the loss of freedom and independent decision making that must certainly accompany their integration into a health system.

For their part, health systems are being challenged to transition from service-driven revenue centers to output-focused organizations in which quality and cost are equally important.  They will do so by engaging physicians in an employment setting that is much different from the past model in which hospitals competed against each other for revenue-generating practitioners

There’s a saying I’m fond of, that goes like this: “Culture eats strategy for breakfast.”  The hardest work to come will not be getting the strategy right, but managing the change it requires.

Medicare May Be Serving Seniors, but It’s Putting the Rest of Us in a Financial Death Grip

Information released this past week point out the damaging impact that government health-care programs are having on the commercial, health-insurance market, and the market for private health benefits.

The first bit of news comes from the latest Healthcare Economic Indices released by Standard & Poor's (click here for the indices).  The indices show that the average cost of health-care services covered by private-insurance companies jumped by nearly 7.5% for the year ending June 2011.  By comparison, the average cost of services covered by Medicare increased only 2.5 percent for that same time period.  Experts speculate that hospitals will likely continue to shift costs to private payers as government programs squeeze hospitals and doctors with lower reimbursements to manage their program shortfalls.

For every action, there is an equal and opposite reaction.  On Monday of this week, the National Business Group on Health released the results of a survey of its membership.  The news here is that large employers expect their health care costs to increase 7.2% in 2012.  Is it just coincidence that hospitals are increasing their charges to private insurers by 7.5% and that commercial health-care costs will be up by an expected 7.2% in 2012?

The secondary affect of these developments is that employers now plan to offer even more consumer-driven health plans in 2012.  Of those surveyed by the National Business Group on Health, 75% said they expected to offer a high-deductible health plan (HDHP) with a health savings account (HSA) in 2012, compared to 64% this year.  Realistically, we should expect all, large employers to offer HDHP/HSA products within the next two to three years.

Some time ago, the virtues and vices of high-deductible health plans used to spark fierce debates. Not now.  For the time being, those debates have been overshadowed by the reality of health-care costs that continue to rise, and to increase disproportionately for commercial insurance programs.  High-deductible health plans are now the default choice for employers seeking to shield themselves from the costs of commercial health insurance.

Far from being better purchasers of health care, the government simply establishes a price it is willing to pay, leaving hospitals and physicians to right size their income statements and balance sheets by digging into the pockets of their customers.  As long as employers continue to finance the lion’s share of the private sector health-care tab, they will adjust their benefit programs to achieve a premium price point that’s affordable.  This will drive the continued adoption of high-deductible health plans and health savings accounts.

In the short run, advocates of greater health-care consumerism are benefiting from the continuing cost shifting from government programs that’s taking place.  This phenomenon may be single-handedly creating millions of HDHP/HSA health-care consumers, who are learning firsthand how to become savvy health-care purchasers.  This may, however, simply be the proverbial “lipstick on the pig.”

Unless America’s government programs are reformed quickly, they will continue to crowd out private benefit programs and make them even less affordable.  The increased prices paid for services in the commercial market are, in reality, a hidden tax paid to support the solvency of the Medicare program.

Equitable, sustainable, payment system reform can’t come quickly enough.

Its Time to Get the Government out of Fixing Prices for Health Care

Nine family physicians have decided to leave Indianapolis-based American Health Network (AHN) in favor of practicing their profession trade as part of Riverview Hospital.  The Indianapolis Business Journal’s reporting of this seemingly innocuous decision by nine doctors offers rich insight into the convoluted nature of the American health-care payment system.

According to AHN, these doctors can now bill their services for around three times what they were asking patients to pay when they were part of American Health Network.  AHN estimates that the additional billings will add $6.9 million to the health-care tab paid by the Indianapolis community for health care.

A number of reasons may have prompted Riverside to want these physicians to come to work for the hospital, but the bottom line appears to be this: Because these physicians are employed by Riverside, the hospital can charge higher fees for their services. In fact, the fees are three times higher than the physicians charged before they worked for the hospital.  Are the services now three times more valuable to patients?  Doubtful.  Are the outcomes delivered by these physicians significantly better?  Probably not.  Why then, the difference?

As they say, “it’s complicated.”  Let’s try to uncomplicate it.

In its quest to engineer an equitable and efficient payment system, the federal government regularly adjusts the payments it will make to the medical community for serving Medicare patients.  Because Medicare is such a large and significant component of health care, private insurers often establish payment systems that mirror those of Medicare. 

To clamp down on suspected over-billing for services by physicians in outpatient settings, Medicare has taken steps, the result of which is to make the differential between services provided in an inpatient setting larger than it has been in the past.  Not surprisingly, hospitals and physicians are reacting as you or I might if we were in their shoes.  They’re following the money.

Decisions like this by players within the health-care market have little, if anything, to do with improving the quality of care or reducing its cost.  These decisions have to do with maximizing revenue. This is what one should expect within an open-ended, fee-for-service financing model.

On the other hand, what if there were open and free markets for the services these family physicians provide?  And what if the price for services were based on the perceived value of the service, not on where the service was delivered?

To make this happen, a number of significant and important changes would have to occur. First, the government would have to get out of ongoing and continuous central planning. By substituting its judgment for the wisdom of the market as to how to best allocate resources, the government has created so many market distortions that health care can no longer legitimately be described as a market.  At least not a free market. 

The U.S. health-care system suffers from a fate that’s actually worse than centralized planning.  In Soviet-style economies, central planning worked within the framework of fixed resources and this led to rationing.  In the U.S. health care system, we don’t ration services. Instead, the government has a safety valve – the private sector. Insurers and Patients are expected to pick up the tab for whatever the government won’t pay for.

Government would also have to get comfortable paying providers market prices for services it funds through Medicare and Medicaid.  It used to be gospel that these programs deserved preferential pricing because the alternative would be uncompensated care arriving at the doorstep of providers and hospitals.  This argument may have had merit early in the development of these programs. But this argument has outlived its usefulness.  The time has come to move beyond social policies that deliver preferential pricing for these programs.  Pricing policies like this inflict grave harm on the larger market for health-care services.

Second, care providers would have to rationalize their business models and actually become familiar with what they’re charging for their services.  Many types of care are necessarily open-ended, because it’s often difficult to estimate or predict what the total price for a regiment of care will be.  Diagnosing a particularly vexing ailment is a good example of the kind of service that can be hard to create a fixed price for.  On the other hand, a routine physical is pretty straightforward.  So is a normal baby delivery.  Do you think your doctor knows what he or she charges you for services like these?  Probably not.

Third, Insurers, with a helping hand from a newly-restrained government, would need to recognize that their own practices help cloud the market for health-care services.  This begs the question: What good is a posted price for services if the actual cost to the consumer is significantly adjusted by a health insurer after the fact? 

Under many benefit plans, the only meaningful price distinction drawn is among those providers who are or aren’t in the plan’s network.  Provider competition and innovation on the basis of price isn’t going to come anytime soon in this world.

Is all of this going a bridge too far?”  Hopefully not, but a realist would have to conclude that achieving even a beach head with these changes represents a lot of heavy lifting.  It’s not that it can’t be done.  It’s just that in health care, we’ve come to believe that markets don’t work, and that even if they did, we would collectively suffer. 

In the meantime, how can we blame the health care market for not working when we don’t have the discipline or conviction it takes to bring it to life?