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How Consumerism Can Solve the Health Care Conundrum
By Brad Kuhnhausen
Health Policy Consultant for the Utah Association of Health Underwriters
October 4, 2007


(Author’s note: The Utah Association of Health Underwriters is proposing a way to reform the commerce of health care that can literarily solve the hyper-inflation problem. That solution is called Consumerism. This article explains how Consumerism uses market forces to reverse the cost drivers in health care inflation.)

  When life or limb is in jeopardy, American health care is at its best. Doctors quickly order the exact tests they need to make rapid decisions. ER teams focus on the patient, doing exactly what is needed at the time it is needed. Insurance company pre-certification and “best practice” rules do not exist in the emergency room. The doctor is trusted to do the exact right thing. And they usually do so.

 So although emergency care is expensive, it is an excellent value for those in real emergencies.

 But urgent care is only part of the system of health care. The other, larger part of the system is family practice and specialty care. This is the part of care that is planned. Appointments are set in advance, be it for lab work, an office visit or a surgical procedure.

 It is this “planned appointment” part of the system that is suffering from hyper-inflation. Insurance carriers do their best to hold down costs. Carriers figure out and require best practice treatments. They cut deals with pharmaceutical manufactures and set up formularies. They negotiate discounts with labs and doctors. They even try to give outcome data to providers to help them become more efficient.

 Yet despite twenty years of managed care, health care inflation is still triple that of the general economy. Obviously “managing care” from the insurance company end is not working. Most observers point to the lack of proper market incentives in health care commerce as the reason for this hyperinflation. High deductible health plans and Health Savings Accounts were designed to increase market forces, but unfortunately do not seem to be a complete solution. 

      The 64 billion dollar question is this:

 What is it about the current structure of health care commerce that causes hyperinflation?

       The answer is surprising. The answer is that:

 Hyperinflation in health care commerce is caused by the unintended consequences of the claims payment system.

       How can something as mundane as the method of paying claims cause hyperinflation?

       Because paying claims “procedure code by procedure code” creates the exact wrong incentives for doctors and patients. People are rational players in any economic system. If you create incentives for waste, you get waste. The claims payment system – coupled with “managed care” rules – creates tremendous waste.

      Think about surgery. A patient’s surgical team (surgeon, anesthesia, operating room, physical therapy) is paid on an “everyone for themselves” basis. The procedure code payment system encourages each member of the team to maximize the number of procedures billed. The providers take seminars and hire staff to bill extra (or more expensive) procedures in a way that the carrier’s own rules make them pay. This is done without regard to cost efficiency because; “the extra procedure doesn’t hurt the patient and it is paid for by the insurance company”.

       On top of that, the surgical “team” is hardly a team. The anesthesiologist is assigned at the last second. The doctor is not overly concerned which reasonably competent physical therapist the patient chooses. The insurance company tries to hold down costs the only way they can under this system – by limiting the number of procedures the physical therapist is allowed to bill – regardless of the need of the patient.

       When the system of claims payment encourages an “everyone for themselves” mentality, it should not be surprising that this is exactly how providers behave. It is not the doctor’s fault. It is the system. It is ridiculous for the claims payment system to pay the provider twice if they make a mistake and have to redo the surgery. No wonder there is hyper-inflation.

       The procedure code payment system is even more counterproductive in chronic care management. This is because the procedure code payment system not only creates incentives for waste and abuse with doctors; it creates economic incentives for patients to NOT follow their doctor’s treatment plan.

       For doctors trying to manage chronic disease, the managed care system is a nightmare. This is because each insurance company is trying to hold down costs by imposing more and more rules on doctor practice patterns. These so-called “best practice” rules are reasonable on their own. But when a doctor has to account for multiple “best practice” rules to accommodate different carriers this causes extra costs and inconsistent treatment plans.

       For example, if a doctor wants to prescribe a medicine for a patient, he can’t just write a prescription for the most effective drug. He has to compare his recommendation to his patient’s drug formulary list and chose a drug that is comparable but minimizes the co-payment for the patient. Doctors literally purchase expensive software that keeps track of this for them.

       The incentives are even more perverse for patients. Each office visit, lab test and prescription requires a new co-payment. Since chronic care patients need repeated visits, drugs and lab work, this can get expensive over time. If a person has an emergency expense (like a new set of tires, or fixing a broken window) they may not be able to afford the lab work or office visit co-payment that month. Charging chronic care patients for each visit causes some people to not get the care they need. Some can’t even afford the medication co-payments.

       In addition, the procedure code billing system specifically excludes the programs that improve the patient’s health: education, nutrition and support group services.

       Frankly we couldn’t have planned a system that has worse market incentives than the procedure code payment system. But these are the unintended consequences of a payment system that was conceived in the 1940’s.

       Amazingly, most proposals for health care reform call for more control by payers.  (By imposing “better” best practice on doctors and forcing smart behavior on patients by calibrating co-payments.) This is exactly the wrong thing to do. It is the equivalent of digging faster to get out of a hole.

 How Does Consumerism Change the System?

      Consumerism is the based on an “episode of care” or “global fee” billing system. For surgery, it would mean the surgeon would create a team of providers – from anesthesia to physical therapy. This team would create a single fee for a particular surgery. That fee would include all aspects of the surgery – including a quality guarantee.

       For chronic care providers, the global fee would be based on an annual treatment plan. It would include all the office visits, lab work and prescriptions needed to treat the chronic condition. It would also include education, nutrition and support group programs to help patients become healthier.

       For insurance companies, Consumerism means that they should abandon the procedure code payment system for planned surgeries and chronic care management. Instead, they would provide subscribers with lump sum Benefit Credits and let patients choose providers that bill globally. Benefit credits can be priced at or below current average costs. Once the market naturally removes waste, prices will drop.

       For patients, the lump sum Benefit Credit would allow them the opportunity to choose a provider that has a complete treatment plan that suits them best. For chronic care patients, the annual complete nature of the treatment plan means that there are no additional costs beyond the annual fee. Lab work, office visits and prescriptions create no additional co-payments. So the patient has no financial impediments to follow the treatment plan. Incentives can easily be added that financially reward improvements in health.

       Consumerism is actually the natural state of health care commerce when the procedure code based system is not present.

    Examples of consumerist health care commerce would be Lasik eye surgery, stomach reductions & banding, cosmetic surgery as well as behavior modification facilities. In each of those examples, providers create global fees and quality guarantees. In each of these examples relative prices have either gone down with technologic improvements or have at least been closer to general inflation than other medical expenses. The Giesinger Clinic in Pennsylvania is currently doing this with heart surgery. They offer global prices and a 90 day 100% quality guarantee. They report lower prices and improved quality.  We should learn from those examples.

The more Consumerism replaces procedure code billing, the faster we can tame health care trends. Please join our effort by promoting Consumerism.