What Really Drives The Health Care Cost Spiral

Having spent over 40 years in health plan marketing and then setting up a pioneering managed care network, now called a Preferred Provider Organization (PPO), plus a utilization management system for the PPO, I have a considerable edge over the average person in what drives health care costs.  In addition, my father was an old school physician and surgeon and his number one son, whom he nicknamed “The Owl,”  was an excellent observer on the dynamics associated with health care delivery in the 20th century.  Unless you live, eat and breathe health care, you don’t think about health care until you are sick.  I can’t tell you why, but I absorb issues on health care like a sponge.

I’m writing this because, despite all the talk, healthcare is on auto-pilot and ready to crash  into the mountain.  I have to acknowledge known health care operating costs, but I also want to shine a light on numerous hidden operating costs that are rarely visible.  You should be as angry as I am that direct and hidden operating costs are stripping  one half of every dollar we pay for our health care.  It simply can’t continue like this.

The public has been told health care costs rise at twice the rate of inflation because of advances in medical science, inflation and an aging population.  That’s true; those are the known operating costs, but far from the complete picture.  I’m going to point out some hidden operating costs.  The hidden costs are each small cost-drivers, but they are so numerous I can’t include them all.   And, collectively they make the problem far worse than you ever imagined.

Let’s pretend you stand at the supermarket checkout counter -your purchases on the conveyor belt.  The checker puts your bag of potatoes onto the scanner and it rings up.  Then without explanation, half of your potatoes are taken from your bag and put under the counter.  Your shock grows as the same bizarre process is repeated on every item.  You are charged as if nothing had been removed.  Think you’d say nothing?  No, you’d demand an immediate explanation.  Well, in health care delivery  this scenario is playing out every day as if it were quite acceptable. But, it can’t be acceptable any longer, because it is truly killing the US economy.  Even the known costs mask horrendous operating cost of our present health delivery system.  Yet, we don’t capture data in a manner that separates actual care from direct and indirect operating costs.  But, I project that for every full dollar paid in for our healthcare, we’re only getting fifty cents back.

It is true that direct operating costs due to advances in medical science, inflation and an aging population drive costs higher.  The federal government pays roughly half of every health care benefit dollar,so it isn’t unreasonable to expect them to exert better control.  But, Congress is much too cozy with the money interests that profit from the way things are and don’t want change.  That has to be reversed.   Congress can’t stop the aging population from doubling, but they administer our Medicare program, by default you would think bold and innovative ways to get more funding into Medicare would have commenced long ago.  Instead congress’ quick fix is to crudely chop back Medicare (and Medicaid) benefits.  Even if  Out of 10 recommendations I make (see healthaccessforum.org) in an article called, “Bold Strategies For Cutting Health Reform Costs,” maybe a few of the items might find traction in Congress.

I believe actual care is limited to just diagnosis and patient treatment.  Everything else is a known or a hidden operating cost.  The many hidden costs made part of operating our health delivery system were added like straws on a camel’s back.  Now, the burdened is too great and we ought to reduce operating costs by half.  Start by removing or streamlining every hidden cost possible.   Besides actual care, your health care dollars pay for regulatory compliance, managed healthcare, marketing, lobbying, conversion from non-profit entities into for profit, profit itself, medical malpractice premium and resulting tort awards.  They also pay for brick and mortar, medical mistakes, fraud, mergers and acquisitions and everyday administrative expense.

Hidden operating costs are not just buried in your medical bills, they are also found in your co-payments.  They even impact your medical insurance plan’s cost.  Once in a while you get a glimpse of these costs.  Remember the outcry over two aspirin for which a hospital billed the patient $10?  People thought there must be some mistake.  It didn’t cross their minds that hospitals must pay for everyone who goes to their ER because they simply can’t pay the bill for treatment.  You see, federal law requires hospitals to treat everyone regardless of their ability to pay.  So ER rooms across the country are swamped and makes your cost greater.

Another cost that is totally hidden —computers and software used in health care delivery.  If you thought about it, you’d marvel at computer generated bills and reports you get from your doctor?  Much of that information is required by law or by your health plan -not the doctor.  Often, your plan eligibility is determined by your HMO or other health plan and is sent by computer to your doctor..  Your own ID card isn’t enough, because you might have been laid off.    Tracking this information, plus your medical records, takes a lot of computing power.  Today’s generation of computers must also provide the protection of Fort Knox to keep your medical data private.  A very costly federal law, known as the Health Insurance Portability and Accountability Act (HIPAA), has harsh penalties for non-compliance.

There is a hidden cost for contracting health providers so prices for all out-patient and in-hospital care are fixed, for a year or longer.  In 1976 I became a managed care pioneer by building my own provider network, because my clients were complaining their health insurance rates were going up by as much as 20% per quarter and it was bankrupting them.  From my father I learned how much medical rates were inflated when health insurance become an employee benefit.  So, I could work directly with individual doctors and hospitals -one by one, to fix costs at a lower level.  Today , so many medical plans have provider networks, hospitals had to set up separate departments to negotiate those same contracts.  Doctors collectively formed IPA’s (Individual Practice Associations) to negotiate and manage these new contracts with health plans. Doctors pay the IPA to participate in such associations.  The staffing, computer hardware and software that accompanied these new departments and intermediaries represents a significant added cost for your care that you don’t see.

One of the first hidden medical costs began in 1974  when I was sales manager for an HMO that wanted greater price competitiveness.  That HMO filed (with the Department of Insurance) the first medical plan in the US to require prior authorization.  This meant before you got into a hospital bed the member ( well, actually the member’s doctor) had to secure authorization for any elective surgery.  In my sales presentations I told employers prior-authorization guaranteed plan members a no-hassle hospital admission.  (Our HMO had to compete with the Blue Cross/Blue Shield card which still holds nearly universal acceptance at US hospitals.).  From non-emergency hospital admissions authorizations grew to include many diagnostic procedures and specialist referrals.

We took the authority away from the attending physician and put it in the hands of an intermediary where decisions often were made by nurses and lay people.  Managed health care systems employ so many nurses there is a shortage at many hospitals.  Besides taking authority away from the doctor, these outside authorizations delay your diagnosis and treatment.  Operating overhead for any managed health care system is so high that all savings and more are lost.  Sad to say, it took me a long time to conclude managed care systems provide no savings to health care cost; they add to the cost.

Federal and state government has talked about cutting cost by streamlining healthcare delivery for over two decades, but it is just that -talk.  It’s tough to translate talk into action when indirect operating costs in health care remain hidden away from close analysis.  For example, the state of California passed a law (the Knox-Keene Act) to regulate all managed care plans (HMO, PPO etc.).  One provision requires plans to certify the credentials of their contract providers every two years and each plan must physically inspect its providers’ facilities annually.  That’s part of every California managed health plan’s operating overhead.  One of my large physician groups told me they had 120 managed care contracts.  How does a practice handle 240 on-site inspections a year without adding to health care cost?  There is a better solution.  Have the state take over the credentialing and charge a reasonable annual fee to all managed care health plans.  After all, the state holds sole responsibility for licensing and penalties of every doctor and hospital.

In the overall health care cost picture, credentialing cost is a small item.  But, even regulatory compliance laws, which takes 35% out of actual care annually, is made up of a paper blizzard of laws, because federal and state legislatures passed a thousand health regulations annually for more than 20 years. Each adds their little bit to what we pay for our health care.  While analysis is long overdue, there is no glory for Congressmen who introduces legislation to cut healthcare regulations, because it will take 10 years or more, well beyond a Congressman’s term of office.

Removing and streamlining hidden costs from our health care delivery system is going to be a lot like picking fleas from a dog with a pair of tweezers.  However, the first step is creating a transparency law to identify each hidden health cost and calculate the amount each represents.  The second step should be making the Employee Retirement Income Security Act (ERISA) the absolute governing law over health care delivery -no exceptions. No doubt, some operating costs are vital, but when all hidden costs have mushroomed to eat up half our health care dollars, we can’t sit back and do nothing!

Past attempts to cut cost have led nowhere.  For example, President George W. Bush pushed Congress to reform malpractice litigation.  Medical malpractice cost represents only about 2% of all health care operating expense.  But, AMA and other medical care lobbyists got Mr. Bush’s attention so the effort was made.  Did Congress act?  No.

Profits or lobbying costs are pretty well hidden.  The people who do the most lobbying on healthcare issues also make the most profits.  Those are the same people who have successfully limited Congress’ actions on cutting health care costs.  Where’s a good “Bah Humbug” when you need it?  The point I’m making is Congress lacks a plan outlining definitive action for getting to the meat of the matter.

Cost effective care can result from a doctor’s phone call to the plan’s care management team where an explanation of why costly tests, treatments and hospitalization are medically necessary.  That’s how I ran my own utilization management system in conjunction with my PPO (provider network).  If the medical rationale was unclear or suspect, I used a mandated second opinion to help determine the right course.  The patient became an active participant in determining the best procedure to handle the problem rather than the PPO.  I coached many of my network providers who lent their expertise on second consults, (for which the plan benefits paid a fee).  My mandated second consult:  a) reaffirmed the original diagnosis  b) explained risk and side-effects of the procedure proposed  c) advised the member of other equally viable treatment procedures and  d) discussed post-operative recovery and any limitations.  Armed with a clearer picture, the member (not the plan) determined their best option.  It cut cardiac surgery and Caesarean sections by over a third.  My mandated second consult gave members the means to make their own intelligent choices.

For years in operating my provider network I thought I was reducing cost for my clients, but ultimately was forced to conclude otherwise.  Yes, negotiated fees produced discounts that allowed my clients to pay less.  But, health providers constantly found ways to offset their revenue losses from my fee schedules by introducing many new, (and sometimes lower cost modalities) of care that were off managed care’s pricing radar.  Some new modalities did increase care quality, but patients were passed through more modalities en route to a cure, so health care costs increased overall.  Foe example, before managed care a heart attack victim spent 10 days in the hospital.  When discharged from the hospital further recovery was left to the patient and family.  Today, that same patient spends only 4 or 5 days in a hospital, but will be passed through numerous types of outpatient care.  Yes, the care is better, but the reduced in-hospital stay and discounted fees saves nothing as the medical plan has to pay for all the additional out-patient care.

Redundancy of Oversight Systems:  Managed care monitors utilization of medical services and tracks physicians’ practice patterns using powerful computer programs and can determine whether or not a patient’s medical care is necessary.  Many health plans require an Individual Provider Association (IPA of health professionals usually on staff of one or several area hospitals) or sometimes a physician practice management -PPM entity to perform utilization management services as a condition of their participation.  That’s created multiple healthcare management systems for the same patient’s medical treatment.  There’s the health plan (HMO or otherwise), the contract provider’s IPA and at times large practices will install a third care management oversight system. That all costs money, but adds nothing your medical care.

Given the high regard managed health care places on documentation, it should not be surprising that information technology (IT) has become one of managed care’s bigger costs.  One of IT’s stated objectives is to make operational an electronic billing and payment system to reduce the operating cost of healthcare.  IT in health care also wants to couple uniform national standards of care for each medical diagnosis to that electronic billing and payment system.  There is both perceived and real value to these IT developments, but it is a mammoth undertaking costing millions of dollars every year, and no small amount of resistance to standardization exists in the various regions.  Proponents can point to some IT successes and more will follow, but overall to date IT is an added expense coming out of your healthcare dollar.

No operating costs attached to health care delivery puts even a band-aid on one patient!  Given that we spend $2.7 trillion a year on healthcare, isn’t it time to light a fire in Washington to investigate how much of the more than $1 trillion in non-care expenses in our healthcare delivery system is really necessary?  I believe operating costs can be cut in half and by federal mandate should never be allowed to exceed 25% of the total health dollar.  Not only would everyone’s cost for healthcare go down, but the savings could go a long way to help fund Obamacare.

  1. Lynn Holland

    Hi, Al. Good to hear from you in your holiday letter. Kathy and I are living in Brentwood (Northern CA) and enjoying life. Drop me a note with email and phone so we can connect again. Regards, Lynn

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