0 Comments | Apr 28, 2010

Healthcare: The New Economics

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When it comes to contrivances like securities derivatives and health insurance, “price is where supply meets demand” is an old Econ 101 truism that’s unfortunately untrue.

Our healthcare system has systematically obfuscated what would otherwise be a relatively straightforward enterprise: caring for the health of our employees.

Get sick. See a doctor. Get treatment. Get well.


Except for the part between “Get sick” and “Get well.”

We’ve created a complicated web of price variance that makes the details of “See a doctor” and “Get treatment” beyond problematic. Providers must price probabilistically based on the health insurance plan’s historical payout percentage and rate, irrespective of the numbers in bold on the policy. Buried in that process somewhere is the actual cost of service, but pricing becomes more an exercise in probability math than anything else: What’s the chance that the insurance company will pay their portion? When will they pay? How much wrangling will it take?

We have an association with an air ambulance company. Ten percent of their full-time staff is comprised of lawyers with one job: get insurance companies to pay up.

Layers of artificial complexity have one purpose: to hide true cost. Why has the healthcare profession taken that route? Because they sit opposite an entity whose business it is to minimize claims paid. Confusing the issue allows them to price creatively in order to stay on the black side of the ledger.

I’m not disparaging the insurance industry – we run in the same circles, serve the same clients, and desire the same outcomes: healthy employees. But their business is to collect the maximum amount of insurance premium revenue, fund the minimum amount of care, and pay the minimum claim costs in the process. That’s how they pay bills and employees, and how they make profits. Many of them are also interested in keeping their clients healthy – preventatively, so they don’t get sick and file a claim. But we need to understand that insurance companies pay only to the extent required by law (mostly). Why? Because it’s business, not philanthropy.

I’m also not disparaging the healthcare industry. There’s a reasonable expectation of remuneration for the lifelong education and dedication required of its workforce. There’s a real cost associated with developing and deploying cutting edge technology. And there’s a real cost associated with getting someone to pay you for the costs you’ve incurred. At the end of the day, the business objective in the healthcare field is to make as much money as possible providing care. Ying and Yang.

So, opaque cost structure allows healthcare provider profit amidst the cat-and-mouse. And recalcitrant claims payment enables the insurance industry to keep some for a rainy day as well.

And “keep some” they do, if a vociferous watchdog segment is to be believed. John Byrne reports that the top five health insurers earned 56% more profit in 2009 than in the previous year. Industry advocates are quick to point out that 2008 was the depth of a recession, but there are few industries with comparable bounce-back rates.

Evil? Unethical? Good? Bad? None of the above. It’s the system we as a society have signed up for, and it’s the one we live with.

But it won’t last, and my theory is that at the end of the day, its opacity will be its undoing.

There’s another major American industry that’s a few years ahead of the healthcare industry on the life cycle curve. Investment banking built empires on contrived financial instruments with impenetrable definitions, and consequently manipulable value structures that left consumers holding the bag – twice (lost homes, plus bailout burden). It was a rapid slide to oblivion once the curtain was finally lifted. Tulip bulbs and pork bellies were far sounder investments than the inventions of the “responsible professionals.”

Am I drawing a parallel between the current healthcare cost conundrum and the ruinous mass deception of the investment banking world?

In a word, You’reDamnRightIAm.

Any time you veil value in mystery, cloud cost with crap, and invent wildly complicated service structures designed to hide reality from the consumer, you’re heading for trouble. It’s just a matter of time.

The fix? Easy. Pretend you’re grocery shopping. You make buying decisions based on bottom line economic disclosure made in good faith. You know what you’re getting, and for how much. Cost clarity allows educated choices. Value rises under its own power. Bad stuff rots on shelves.

“But healthcare is more complicated than that.” I know it is. But I also know that it doesn’t need to be nearly as complicated as we’ve allowed it to become.

Regardless of regulation, there is ultimately no alternative to transparent fees and prices for healthcare goods and services. We can begin now, and alter the outrageous trajectory of benefits and care fees, or we can wait for the meltdown.

If we choose the latter, it’s doubtful that taxpayers will be quite as generous this time around.