Making free markets work in medicine

Editor's Note: Welcome to Medical Economics' blog section which features contributions from members of the medical community. These blogs are an opportunity for bloggers to engage with readers about a topic that is top of mind, whether it is practice management, experiences with patients, the industry, medicine in general, or healthcare reform. The opinions expressed here are that of the authors and not UBM / Medical Economics.

One of the accepted dogmas in medicine today is that the free markets in American healthcare do not work. The evidence for this usually comes from those pointing to the expense of an American system that is not even able to provide universal health coverage.

We are told that the free market incarnated in the current fee-for-service model that pays per unit of healthcare delivered is the source of the problem. In this system, incentives for profit trump ethics, volume trumps value, and the only solution appears to be some type of single-payer system that would ensure affordable healthcare for everyone.

The only trouble with this analysis is that it gets everything precisely backwards because it conflates the current broken fee-for-service system with the free market. What we have instead is a mechanism that insulates patients from the price of healthcare through a web of third-party payers. Labeling this “the free market” is about as pure as labeling the offspring of a Great Dane and a Chihuahua a purebred.

This becomes quickly obvious to anyone who has heard of the story of the Surgery Center of Oklahoma, a cash-only facility founded in 1997 by two anesthesiologists-G. Keith Smith, MD, and Steven Lantier, MD. Fed up with the system, these two chose to do a little more than the rest of their physician colleagues getting a PhD in whining. They quit cushy jobs that forced participation in a system that was financially toxic to patients and started their own surgical facility.

This surgery center doesn’t deal with any third-party payers. They simply list all the procedures with an all-inclusive price. Patients pay the cash price upfront. Their bundled prices are a fraction of the local hospitals without any sacrifices made for quality. Patients are happy because the care is cheaper and surgeons at the facility are paid more than what they would ordinarily make at the local hospital.

I recently sat down with Dr. Smith to chat about his journey and gleaned a number of important insights.

In the beginning…

A week into their new venture, Smith got a call from a woman who wanted to get a breast biopsy and to know what it would cost. Smith had no idea. He put her on hold and called a breast surgeon. Similarly perplexed, the breast surgeon responded with a quote of $500, with some prodding. The next call went to a pathologist, who told Smith it would cost $28 to look at a slide. Smith understood the cost of running an OR room for the time needed, and finally quoted a price of $1,900 to the woman who had been on hold. She paused, before noting "that's interesting, the so-called non-profit hospital down the street just quoted me $19,000". And that was it. Word got around, and the insured, uninsured, and underinsured came in droves. Cronyism to protect the status quo is a bipartisan endeavor, and competitors turned to the legislature for regulatory relief. The plucky little surgery center that could, beholden to no one but their patients, withstood the attacks until a near death blow came in 2003.

Up to this point, patients who came to the surgery center were able to count expenses towards their deductible. Once the deductible was met, insurance companies would reimburse patients for care delivered at the center at the out-of-network rate. But in 2003, in an effort to force patients to stay “in network” changed so that the deductible could only be met with in-network spending. Insurance companies would not pay a dime until the patients’ in-network deductible had been met. This meant dollars spent at Smith’s center would not count towards a usually high deductible.

As revenue began drying up, Smith and his colleagues responded by going directly to employers who were self-funding healthcare for their employees. It turns out buying health insurance is not the same as buying healthcare. It also turns out that health insurance companies are absolutely terrible at negotiating with healthcare systems. Health insurance companies serve as middle men with no understanding of the price of healthcare. This means hospitals make up a list price of $100,000 for a gall bladder surgery. A 50 percent discount makes it appear like a bargain has been struck for the healthcare consumer. Never mind that the actual cost of a gallbladder removal is ~$6,000 at the Surgery Center of Oklahoma. Employers that self-funded would buy a health insurance plan to cover catastrophes, but contract directly with providers for all other medical care. It turns out you are liable to get a better deal on most healthcare by not going through an insurance company.

Critics of the Surgery Center of Oklahoma model argue that lower prices are driven by cherry picking low-risk patients, and not having to deal with truly destitute patients unable to afford even the discounted prices. The critics have a point. The massive prices hospitals are paid do subsidize care for the uninsured and underinsured, and pay for anesthesiologists, trauma surgeons, and cardiologists to be on call 24/7. The trouble is that no one knows how many times more expensive running an American hospital should be. Hospitals are free to buy $250 million EHRs, build small cities on campus, and hire an army of hospitalists, yet cry penury as they point to low margins as justification for setting ridiculous prices.

It stands to reason that the best way to deal with unaffordable healthcare isn’t to take a second mortgage out on the house, but to make healthcare more affordable. We just may be able to have our cake and eat it too by following the lead of Drs. Smith, Lantier, and the Surgery Center of Oklahoma.

Watch a video of Dr. Koka interviewing Dr. Smith on free markets here.Anish Koka, MD, is a cardiologist in private practice in Philadelphia as well as a writer for several national publications.