expect better healthcare

INDUMBENT
HEALTHCARE THINKING:
PRICES DONT MATTER

JOHN KOSTER MD
DAVID W. JOHNSON
Market Corner Commentary
for April 19, 2017
 In a March 29th New York Times article, author
Elizabeth Rosenthal chronicles Americas
dystopian system for coding and billing medical
treatments. Rosenthal concludes that the
medical-billing system itself is a primal cause of
the nations sky-high medical costs,
That system, with its lines of alphanumeric codes
and arcane medical abbreviations, has given
birth to a gigantic new industry of consultants,
armies of back-room experts whom medical
providers and insurance companies deploy
against each other in an endless war over which
medical procedures were undertaken and how
much to pay for them. 1
Rosenthals analysis illustrates a core truth
about American healthcare: prices rarely
matter. Healthcare companies strive to optimize
reimbursement revenue per treatment. Payments
for healthcare services ping pong between
payers and providers as they manipulate
complex reimbursement formularies for their
own advantage. While titans battle, patients
wrestle with incomprehensible bills, treatment
denials and uncoordinated care delivery.
In this revenue-first operating environment,
prices separate from costs, value is ephemeral,
waste is breath-taking ($1 trillion annually)
and patients are an after-thought. Entrenched
incumbents across all sectors (payers, providers,
device manufacturers, drug companies,
intermediaries and consultants) engage in
these reimbursement contests with virtuoso
skill and devastating success. Healthcare wins
and society loses.
Incumbent thinking, however, is becoming
indumbent thinking. New business models are
emerging that deliver better healthcare for less
money with transparency and great customer
experience. Old-world managerial mindsets with
reimbursement-first instincts are ill-equipped
to compete on price, outcomes and customer
service. Healthcare markets are changing. Health
companies must adapt or die.
1
Elizabeth Rosenthal, New York Times, Those
Indecipherable Medical Bills? Theyre One Reason Health
Care Costs So Much, March 29, 2017a
THE REIMBURSEMENT-FIRST MANAGERIAL MINDSET
Differential payment for identical procedures is the defining feature of
American healthcare. Complex reimbursement codes are the currency
through which commercial and governmental payers reimburse hospitals
and doctors for the treatments they provide.
Maximizing reimbursement is Job 1 in almost all large health systems.
They build robust revenue cycle capabilities to capture the most revenue
possible. Sophisticated revenue cycle systems employ data mining, coding
formularies and predictive analytics to optimize claims collection.
Minor adjustments to treatment protocols can increase reimbursement
substantially. Doctors change behaviors to incorporate these adjustments.
They spend more time documenting treatments for billing purposes than
providing care. This is a principal cause of physician burnout.
Commercial health insurance claims are substantially more lucrative for
providers. Health systems and health insurers employ legions of highly-
trained coders to negotiate payment for specific claims. Health systems
bill to maximize reimbursement. Health insurers deny claims to minimize
payment. Resolution often takes months.
This payment battle between large health insurers and health systems
dominates U.S. healthcare. Incumbents exhibit entrenched behaviors that
benefit both payers and providers. This is a zero-sum equation. American
society pays for healthcares profligacy through lower wages, lower
productivity and declining global competiveness.
Incumbent or indumbent mindsets calcify attempts to bring value to
healthcare delivery. They fail to see the link between better outcomes and
lower prices. They frustrate attempts to disrupt unproductive business
models that add cost without adding benefit.
Most importantly, indumbent mindsets prevent health companies
from undertaking transformational change. Health companies make
incremental improvements on flawed business models rather than
embrace transformative business models with different capabilities
and lower cost structures.
Indumbent thinking is self-inflicted and destructive. Indumbent thinking
prevented Kodak from recognizing the competitive threat posed by
smartphone cameras. Indumbent thinking prevents many health companies
from appreciating existential threats to their high-cost and inefficient
business practices.
THE MARKET-ORIENTED MANAGERIAL MINDSET

In normal markets, prices have the power of language. They signal information from sellers to buyers regarding the perceived value
of offered products and services. Transactions occur when buyers have the inclination and means to purchase desired products and
services. In this way, buyers become customers. Transactions are value-based exchanges undertaken willingly by both parties.

Successful companies employ market-oriented managerial mindsets where managers maximize value creation (and profits) by
finding optimal relationships between prices, costs and product/service demand. Customer needs and perceptions are the principal
considerations. Apple has become the worlds most valuable company by making its products desirable, affordable and accessible.

Pricing transparency and value-based service delivery are coming to healthcare. For example, Best-in-Class Care is an early-stage,
Chicago-based company that combines medical tourism with Expedia-like travel services to offer a one-stop shopping experience
for those requiring specific treatments, second opinions and/or tele-consults. The company has built a world-wide care network with
highly-accredited providers, transparent pricing and concierge support-services.

Best-in-Class Care recently began booking procedures and the early reviews are terrific,

I was one of my plans first members to try
Destination Medicine! I received a first-rate
shoulder reconstruction surgery a few weeks
ago and am back home on the mend. This is
the perfect opportunity for anyone with a little
sense of adventure and an eye for savings.
All went well at Pittsburgh. Really nice
facility in a nice area of Pittsburgh.
Everyone was at their best since they
knew about my Best-in-Class Care
connection. Even had a visit from the
surgery center administrator.

Customers book the procedures directly, get their questions answered, consult in advance with caregivers and know exactly what their
costs will be. Procedure price is an essential component of customers purchasing decision. Value is apparent. Customers win.

INDUMBENT THINKING IN ACTION
In healthcare, transactions occur without customers. Patients see
doctors. Doctors tell patients what to do. After limited co-pays and
deductibles, a third-party insurer pays for the prescribed service.
Healthcare transactions sever the direct buyer-seller interactions
that establish supply-demand relationships in normal markets.
To supplant market-based pricing dynamics, healthcare substitutes
complex payment formularies that lend themselves to manipulation
and fraud. In their efforts to win disputes over treatment
reimbursement, both health systems and health insurers have
lost sight of the paramount role prices play within efficiently-
functioning markets.
This blind spot limits incumbents ability to respond to market
demands for greater value in healthcare delivery. They lack the
internal capabilities to respond effectively to market signals
demanding better healthcare at lower prices. This deficiency creates
opportunities for new business models to deliver superior healthcare
services to value-driven customers who care about prices.
Best-in-Class Cares difficulty in building its U.S. provider network
illustrates both the challenge and opportunity for market-oriented
health companies. International providers readily quote all-in prices
for specific procedures that Best-in-Class Care can publish on its
website. U.S. providers almost never do.
With very few exceptions, U.S. providers will quote cash prices
for specific procedures, but are unwilling to publish those rates.
They worry about setting precedent with payers who could use
transparent procedural prices to reduce reimbursement payments
for equivalent procedures.
This is indumbent thinking in action. Providers protect their near-
term negotiating advantage with payers while leaving themselves
vulnerable to the longer-term trend toward pricing convergence for
routine procedures.
OLD MATH
NEW MATH
HEALTHCARES NEW MATH
The chart above contrasts healthcares old and new
math. In traditional healthcare economics, revenues
are flexible and subject to manipulation. This accounts
for health systems enormous investment in revenue
cycle capabilities. They win by optimizing revenues,
not controlling costs. Getting paid is the
organizational mantra.
In well-functioning markets, the supply of products and
services offered adjusts to an intrinsic level of customer
demand. Prices for commodity products and routine
services are highly elastic. Higher prices reduce demand.
Consequently, prices coalesce around fixed price points.
In such markets, managing expenses effectively
is essential for profitable operations. Robust cost
accounting capabilities drive constant performance
improvement, tight pricing algorithms and efficient
resource utilization.
In competitive markets, creating value distinguishes
winning companies. They deliver high volumes of
high-quality products and services at low prices with
exceptional customer experience (think Amazon).
In the land of the blind, the one-eyed woman is queen.
Health systems that become more price transparent,
align prices with costs and sell value-oriented treatments
will increase market share. Lagging health systems will
lose relevance.
GRAVITY WINS

Most healthcare services are routine. They occur frequently, have predictable outcomes and invite standardization. Fighting against
commodity-based pricing for routine services is like fighting against gravity. It takes enormous energy and is doomed to failure.

Mark Twain famously observed, Its not what you dont know that will kill you. Its what you know for sure that just aint so. Indumbent
mindsets believe current reimbursement practices will continue for the foreseeable future. It just aint so.

American consumers are value-seeking missiles. As the American healthcare marketplace normalizes, they will use well-honed
purchasing instincts to find and reward higher-value providers.

A more effective provider strategy would be to accept that prices for routine care will rationalize and build business models that
deliver routine care efficiently and profitably. Enlightened health systems will get ahead of the curve by giving customers the high-
value care they increasingly demand.

Value-based care is coming to America. Like the Pilgrims at Plymouth Rock, early practitioners of transparent healthcare pricing are
establishing a permanent foothold and expanding outward. Outcomes matter. Customers count. Value rules!

DAVID JOHNSON is the CEO of 4sight Health, a boutique healthcare advisory firm. Dave
wakes up every morning trying to fix Americas broken healthcare system. He is a frequent
writer and speaker on market-driven healthcare reform. His expertise encompasses health
policy, academic medicine, economics, statistics, behavioral finance, disruptive innovation,
organizational change and complexity theory. Daves book, Market vs. Medicine: Americas Epic
Fight for Better, Affordable Healthcare, is available for purchase on www.4sighthealth.com.