America's Bitter Pill

by Steven Brill

  This new structure would also acknowledge that most doctors have lost the independence the American Medical Association said it was protecting for them throughout the twentieth century, when, beginning with Harry Truman’s push for universal government health insurance, it opposed reform. But that loss of independence came through privately consummated mergers of doctors’ practices and buyouts by hospitals, not by government fiat. Those doctors would now be incented to provide quality care, not pile on the bills for extra treatment, because they would be working for the entity paying the bills—because the hospital system would also be the insurance company.

  These fully integrated brands could also pursue recent innovations offering less expensive, more consumer-friendly healthcare, such as storefront urgent care centers that are smart alternatives to expensive, time-wasting hospital emergency rooms. These urgent care centers are now being opened piecemeal by for-profit and often lightly regulated companies. Why not put them under the banner and branded accountability of the big hospital systems? In fact, Cosgrove’s Cleveland Clinic has already opened a dozen “urgent care” and “express care” (for more routine needs) centers. I’d rather pay him to care for me than pay a walk-in center owned by a private equity fund.

  The second regulation would cap the operating profits of what would be these now-allowed dominant market players, or oligopolies, at, say, 8 percent a year, compared to the current average of about 12 percent. This could be done in the form of consent decrees, in which the regulators allow the oligopolies to exist under a specific set of conditions, such as this profit cap. That would force prices down—except at Geisinger, which already charges only enough to record operating profit margins of 4 to 5 percent a year. Better yet, an excess profits pool would be created. Those making higher profits would have to contribute the difference to struggling hospitals in small markets, such as rural areas.

  A third regulation—which, again, the hospital systems would have to agree to in return for them being allowed to achieve oligopoly or even monopoly status—would prevent hospital finance people from playing games with that profit limit by raising salaries and bonuses for themselves and their colleagues (thereby raising costs and lowering profits). There would be a cap on the total salary and bonus paid to any hospital employee who does not practice medicine full-time of sixty times the amount paid to the lowest salaried full-time doctor, typically a first-year resident.

  For example, the lowest-salaried doctor in the University of Pittsburgh Medical Center system makes $52,000. Thus, Romoff’s salary and bonus would be capped at $3.12 million, significantly lower than his current draw of more than $5 million. The Cleveland Clinic’s Cosgrove, on the other hand, who made $3 million in 2012, according to the Cleveland Clinic’s latest filing with the IRS, would not be affected much, if at all. Nor would Glenn Steele at Geisinger or Gary Gottlieb at Partners. With his starting residents now making about $58,000, Corwin would only have to take a cut of about $100,000.

  A salary of $3 million, along with the satisfaction of doing on a grand scale what they hoped to do when they became doctors in the first place, ought to be enough to keep these doctor/hospital leaders engaged. If it also incents them to pay residents more, so much the better.

  A fourth regulation would require a streamlined appeals process, staffed by advocates and ombudsmen, for patients who believe adequate care has been denied them, or for doctors who claim they are being unduly pressured to skimp on care. In fact, an ombudsman’s office would be embedded at each oligopoly company.

  A fifth regulation would require that any government-sanctioned, oligopoly-designated integrated system had to have as its actual chief executive (not just in title) a licensed physician who had practiced medicine for a minimum number of years. Sorry, Mr. Romoff. The culture of these organizations needs to be ensured, even if that means choosing leaders based on something in addition to their business acumen and stated good intentions.

  Sixth, any sanctioned integrated oligopoly provider would be required to insure a certain percentage of Medicaid patients at a stipulated discount.

  “Wait a minute,” I can hear my readers thinking. “All of these guys [except Steele at Geisinger] generate thousands of those obscene chargemaster bills a year. Now you’re going to put them in charge?”

  Which brings me to my final regulation: These regulated oligopolies would be required to charge any uninsured patients no more than they charge any competing insurance companies whose insurance they accept, or a price based on their regulated profit margin if they don’t accept other insurance. In other words, no more chargemaster. All four of these doctor/hospital leaders had told me they thought the chargemaster was a ridiculous, embarrassing relic that they would dispense with if other hospitals did. Now they would have to.

  All of this may seem complicated, but the rules required to set up this structure would be a drop in the bucket compared to the thousands of pages of laws and millions of pages of rules and regulations now on the books. And it is certainly more realistic than pining for a public single-payer system that is never going to happen. This kind of consolidation is already happening. We just need to seize onto that momentum, control it, and push it in the right direction.

  CUTTING OUT THE MIDDLEMAN

  Combining the work that the Corwins, Gottliebs, Steeles, and Cosgroves of the world do with Romoff’s plan boils down to this: Allow doctor-leaders to create great brands that both insure consumers for their medical costs and provide medical care.

  Fully integrating this way incorporates the core goals of the public-payer plans that the reformers have long championed—control the incentive to run up costs and eliminate the for-profit insurance company middleman that has an incentive to skimp on care. Yet it is done in combination with private sector competition and innovation, as exemplified by these doctor-leaders.

  Let them act on their ambitions. Let them compete with other legitimate players in their markets, or even with one another if they want to expand.

  That kind of competition is already happening, as the fight over the billboard between New York–Presbyterian and NYU Langone illustrates. Only it is blurred by the insurance companies in the middle, which makes it competition by proxy, at best. As things stand now, an employer who wants to get healthcare for his workers, or an individual who is shopping on the Obamacare exchanges, has to figure out which insurance company has which hospitals and doctors in its network and what discounts it has negotiated. This change would create a new, clearer competitive process.

  Put differently, I’d rather give my money to Steven Corwin based on the promise that all of his doctors and facilities are available to me than hope for the best with UnitedHealthcare.

  The narrow networks that began being offered on the Obamacare exchanges in October 2013 as a way of lowering premium costs are an embryonic version of this idea, at least in theory. In the narrow network version, insurance companies bargained with the providers in return for including them in their networks. If the insurer’s narrow network seemed to have good hospitals and doctors and the premium price was right, that network could become a brand the consumer bought.

  In practice, it had not worked out that way. In the best of circumstances, finding out which hospitals or doctors were in a network often involved difficult online journeys through multiple website pages and look-up tools. In the worst of circumstances, the information either wasn’t there or was inaccurate, which, in fact, spurred pending suits against Blue Cross Blue Shield in California soon after Obamacare launched. The result has been competition only on the price of monthly premiums, with consumers often disappointed when they later realized they could not go to the doctor or hospital of their choice.

  But even if everything about those networks was clear, they could never be as clearly defined and consumer friendly as these sanctioned and regulated hospital system–centered oligopolies would be. Now, I could just go on the exchange and pay Corwin for keeping me healthy. Period. Full stop. There would
be total clarity about which facilities and doctors are in my network.

  Or my employer could pay him after negotiating the price.

  If Corwin and his integrated system charged too much or didn’t do a good job, my employer or I (if I was in the individual market) could switch to another competitive New York brand like Mount Sinai or NYU Langone. And all of that competition would be fortified by advances in data transparency that would make each competitor’s quality ratings for various types of care readily available.

  Corwin’s high price for my open-heart surgery would truly be tested in the market, because he would be competing with other high-quality health systems, like Mount Sinai or NYU Langone, to capture all of my business or my employer’s business. He and his network of hospitals, clinics, and doctors would be insuring me not only against heart surgery, but for routine treatment and x-rays if I twist my ankle or get the flu.

  I BET THAT WITH this plan we could cut 20 percent off of the two thirds of our overall healthcare bill not paid by Medicare or Medcaid.

  The savings would come from each of the two sides of current healthcare commerce—the payer (or insurance) side and the provider side. Here’s a sketch of how the math could work:

  First, administrative costs for insurance—including vetting claims, paying bills, paying managers and executives, and distributing profits to shareholders—now account for 15 to 20 percent of private healthcare costs. Couldn’t half or more of that be saved by cutting out the middleman insurance companies? Corwin or Cosgrove would still have to employ managers, actuaries, accountants, and sales people on the “insurance” side of their now-integrated operation, but surely not to the same extent that an insurance company responsible for paying bills from multiple third-party hospitals and other providers would. Nor would they have to deliver profits to shareholders.

  So, let’s say we could save 10 percent by eliminating the middleman.

  Second, on the provider side of the equation, the dynamic that Peter Orszag rightly identified as the main culprit in driving costs so high—the incentive for overtreating and overtesting that comes with fee-for-service billing—would have been eliminated. And the overall incentive to maximize revenue would be tamped down by the new regulation capping operating profit at 8 percent.

  That could likely save another 10 percent (although economists like Orszag might posit a higher estimate).

  The total, then, could be 20 percent of nongovernment healthcare costs—or $400 billion a year, and maybe a hundred billion more to be saved by allowing Medicare and Medicaid to pay those integrated providers this way—which would be the ultimate in bundled pricing.

  That would go a long way toward bringing American healthcare costs as a percent of our gross domestic product closer to those of the countries we compete with.

  “I COULD LIVE WITH SOMETHING LIKE THAT”

  “Insurance and healthcare are two fundamentally different businesses, and I’d rather be in the healthcare business, where my job is to worry only about the patient,” said Corwin, when I bounced the idea off him. “The incentives are totally different. Mine is to care for the patient. The insurance company’s is to spend as little as possible on that care.”

  But aren’t hospital systems like his, Gottlieb’s, and Cosgrove’s already making deals with insurance companies or with Medicare and Medicaid, under which they take the risk—and enjoy part of the savings—of treating patients at a set price rather than on a fee-for-service basis? So aren’t they already dealing with those conflicting incentives? Why not go all the way? “That’s a fair point,” Corwin said.

  Besides, I asked, as a patient, wouldn’t I rather you make the decisions about my care than have them have to be approved by an insurance company? Wouldn’t I feel better if you were the ones accountable for that, with the right regulations in place?

  “I see your point,” he said, adding that one of his competitors—the North Shore–LIJ hospital system, which was fast expanding throughout the metropolitan area—had recently begun offering its own insurance plan. “At this point I would be reluctant,” Corwin continued, “but maybe we would look at it if we got larger … and if we could be sure we could integrate everything we added with our culture and standards.”

  What about capping his salary and bonus at a multiple of the money earned by his lowest paid resident? “I could live with something like that,” Corwin said.

  The Cleveland Clinic’s Toby Cosgrove was further down the road toward embracing the integration idea when I asked him about it in August 2014. “The first thing we can agree on about the healthcare system in the United States,” Cosgrove said, “is that it is not a system at all. It’s just a collection of disparate providers. We have to consolidate to treat the whole patient,” he explained, echoing Gary Gottlieb’s skepticism about “à la carte” medicine.

  “So, yes, we are consolidating,” Cosgrove continued, noting that although the number of hospital beds in the United States has declined in recent years from one million to eight hundred thousand, “there is still only 65 percent occupancy.… The hospital on Nantucket,” he explained, referring to the Massachusetts summer resort where he has a house, “dates from a time when there was little specialized care and poor transportation. Now it should be an emergency room and a helicopter connected to a hospital in Boston. That’s what I learned in Vietnam,” he added, referring to his time as an air force surgeon. “We stabilized them and got them to where they could get the best care.”

  Doctors, said Cosgrove, have consolidated their practices, often under the umbrella of hospital systems like his, “because medical knowledge doubles every two years. So you continually need to specialize still more to keep up. And the more you consolidate, the more you can specialize. The more you specialize and do a lot of just one or two things, the better you are at them, and the more cost-effective you are. That’s why they call it ‘practicing’ medicine.”

  Would integrating insurance into that system be the next logical step beyond consolidation? “That seems right,” Cosgrove said. In fact, he added, “We recently applied for an insurance license.”

  “AETNA IS BLOCKBUSTER”

  Major laws like Obamacare usually get tinkered with and improved in the years following their initial passage. However, in today’s Washington that is not a likely prospect anytime soon.

  But this system of branded, integrated, and regulated oligopolies could be put in place by changes in federal or even state regulatory policies. No new law has to be passed in dysfunctional Washington to allow hospital systems to become insurance companies. Some, such as Geisinger, Kaiser Permanente, and UPMC, already are, with more, such as the Cleveland Clinic, moving in that direction. And the Federal Trade Commission or state regulatory authorities, not Congress, could put the regulations I have in mind in place.

  The insurance companies, of course, wouldn’t like it. But except for the reprieve in the individual market that the Obamacare exchanges gave them, they are rapidly exiting the real insurance business anyway. Large employers now mostly self-insure; the insurance companies just set up the networks for them and process the payments, which come out of the employers’ funds—two functions, and costs, that this change would eliminate.

  Similarly, the insurers’ actuaries have much less to do when it comes to calculating risk, because they are not allowed to take preexisting conditions into account. Their gauging of the right age bands (how much they can charge an older person versus a younger one) has now also been set by the new law. Besides, as Oscar is in the process of proving, that kind of actuarial work can be outsourced, meaning Corwin of New York–Presbyterian could buy it as easily as Joshua Kushner did.

  “Aetna is Blockbuster,” Zeke Emanuel told me when I started thinking about this idea. What he meant was that just as the video rental giant got overtaken by upheavals in how media is delivered, large insurers such as Aetna are going to be overtaken by changes in the structure and delivery of healthcare.

  Maybe, but the l
argest insurer, UnitedHealth Group, intends to be part of that change, not its victim. Its Optum subsidiary (whose QSSI unit helped rescue the Obamacare website) has become a giant player in healthcare system consulting and data analytics, with earnings in 2013 of $2.3 billion, a 61 percent increase over 2012. Although United’s insurance business is still much larger, Optum is growing far faster and enjoys far higher profit margins.

  Moreover, Optum has started going into the business of providing care by buying doctors’ practice groups and opening urgent care centers.

  Might United reverse the process I have suggested, in which hospital systems become insurance companies, by being an insurance company that buys up hospital systems? “We’ve already done that in Brazil,” UnitedHealth Group chief executive Stephen Hemsley told me. “We operate the largest hospital system there.… So, yes, I could see that.”

  United’s advantage, Hemsley added, would be that “we have the data analytics skills, the financial resources, and financing and regulatory experience that hospitals going into insurance might not have.”

  As for Oscar, Kushner and crew are nimble enough to switch to a better business model, too. Cosgrove, Corwin, and the others could hire them to burnish their brands and provide a much clearer, friendlier consumer entry point into their services. Oscar could become their provider of its un-insurance-like products: its customer service process, its friendly website, its data crunching, and its customer dashboard innovations, with all those alerts and other helpful messages for patients. Oscar could also be used to set up a system coordinating coverage across these brands when patients need medical care outside of the region where they live.

  After I learned of my heart problem, I had gone onto Cosgrove’s Cleveland Clinic website to get information from his famed cardiac care center. The emails and promotions I have gotten since (which I requested) have been helpful, but Joshua Kushner and his team could do wonders for Cleveland Clinic’s brand and what it delivers.