The Bear: Why Does Health Care Cost So Much? (Part 1)

In part one of this two-part Breaking Down Health Care conversation, John Hennessy, MBA, and Michael Kolodziej, MD, dig into two of the main stakeholders in health care costs: hospitals and health insurance companies. They discuss how these entities contribute to the current high costs of care in the US and how they can help control those costs for patients.

Read the transcript:

John Hennessy, MBA: Welcome to Breaking Down Health Care. We'll be discussing evolving topics on health care in the United States. I'm John Hennessey; I'm a principal at Valuate Health Consultancy. And for this video series, I'll be in conversation with Michael Kolodziej, an oncologist and currently an advisor to ADVI and Canopy, an electronic patient-reported outcome startup. We're going to talk about his new Substack, Decoding Health Care. We're using our expertise to dive into some of the nuances of the health care industry in the United States.

So, Mike, we've covered the basics of the major payers, pros and cons, but all of them are trying to deal with the same problem, the cost of health care in the United States. So, can you tell us a little bit about the main differences between fee-for-service payment and alternative payment models like accountable or value-based care?

Michael Kolodziej, MD: Sure. So, I think we should go back a step and recognize that a lot of what we've talked about is how to provide access to health care. And providing access is half of the challenge that we face in health care; the other half is how do we deal with the cost of providing health care? And the idea of migrating from a fee-for-service model to an alternative payment model is to address this issue of cost.

It's presuming that we've already solved the issue of access, and now we want to find a way to manage cost. And what I've tried to do in the Substack is address four areas, four contributors to cost. Now, those four areas are hospitals, the health insurance companies, the pharmaceutical industry, and then doctors themselves.

Now, John, you and I, we go to the same meetings. And when we go to those meetings, there are certain villains that are just traditionally trotted out there for public ridicule. And those primarily are the insurance companies and the hospitals. Often because the pharmaceutical companies have a heavy presence at the meetings that we go to, they get a little bit less of a tarring and feathering. And physicians, of course, are never responsible for any of the cost problems, ever.

So, I thought, in the spirit of fairness, we should talk about all four of them. So that's how this whole issue of alternative payment models is sort of the overarching way that we're going to try to fix the cost problem. But we need to get a little bit more into the weeds with each of these individual contributors, if you will.

Hennessy: Well, you make a really good point that there are, depending on the meeting you go to, there's always a punching bag somewhere in the room. You just have to figure out what label's been put on it at a particular point in time.

You mentioned the four groups that's a lot of ground to cover. You mentioned access too, which I think is interesting. This all assumes you can actually get an appointment with a physician, and you can afford your deductible and co-pays. That you can actually get through the front door.

But let's talk about some of these players right now. Let's start with hospitals. And, you know, they're sort of challenged to address their own costs of care and find a way for those costs to be bearable by their customers. So, when you think about those stakeholders, the hospitals, let's start there. You know, one of the things that are sort of challenging for them, or how do they fit into this ecosystem?

Dr Kolodziej: Yeah, so I think as those of you who've read my Substack know, I love to review sort of the history of how these things happen. And hospitals are a great example. The evolution of hospitals from being kind of public institutions to being more private institutions. I would say—and again, I'm going to be equally mean to everybody—hospitals have become just incredibly, remarkably focused on profit. They are just driven by the bottom line, and I think a lot of the problems that we face in health care today can fairly be pinned on how hospitals have evolved in terms of how they provide care.

Now, people who work for hospitals are going to listen to this, they're going to say, "Oh, gosh, just another doctor, sour grapes,” all this stuff. But the fact of the matter is that I think if we started even the most fundamental thing, right, which is for profit and not for profit. Hospitals are either for profit or not for profit. There are still some kind of the city hospitals, public hospitals, but most are for profit, not for profit, and most are not for profit. And being not for profit is a good thing if you're a hospital because you avoid a big tax bill, a huge tax bill. But not for profit has a very specific definition, and it means that you should be giving something back to your community. And I would say that if you look at what not-for-profit hospitals "give back," it's pretty lame.

I mean, for me, just an honest, normal guy, not-for-profit hospitals should provide charity care. Not-for-profit hospitals do not provide a lot of charity care. Less than 2% nationally of not-for-profit hospital billing is written off as charity care. That's a miniscule amount. I mean not-for-profit hospitals doesn't mean they're for charity. Not-for-profit hospitals means that it's an accounting deal. At the end of the year, you know, it has to zero out.

And so, the not-for-profit thing has refocused how hospitals deliver care, bill for care, and are structured. And I think just about everybody who reads my article or thinks about it, they just won't like what's happened in hospitals. They won't like it. It's not good for people.

Hennessy: It's interesting you talk about that. Back when I've had a hospital gig in my background, I remember going through hospital archives and seeing bills that were $8 a day for maternity care. Mind you, that was a long time ago, but we have come quite a long way. And I think your point of, you know, just because someone's not for profit doesn't mean they don't have many of the capitalistic urges that we see.

And certainly the reporting has been around, you know, billing practices. And to your point, are those not-for-profit hospitals giving back to the community in better than or at least equal to the tax benefits or the avoid tax avoidance benefits that exist? Great points there.

Let's talk about another, you know, one of the players in this, it's the health insurers, or in many cases you've talked about self-funded employers. Sometimes these health insurers are kind of middlemen, but how do they play a role here? Are they, you know, part of the solution, part of the problem, or maybe both?

Dr Kolodziej: Oh, I think they're both. Again, given the folks that we hang out with, they're frequently cast as the baddest of the bad guys. And I think that's kind of deserved, you know. If you look at what's happened in the health and insurance industry, we've seen massive growth, massive growth in the size of health insurance companies, with an idea that by being bigger, they can actually develop leverage in negotiating with providers, with physicians, with hospitals, and they can develop leverage in dealing with their self-insured employers. And leverage, of course, means profit.

Now it's interesting because the profitability of health insurance companies was actually significantly impacted by the Affordable Care Act, because the Affordable Care Act said you have to spend 85% of the premium dollar on delivering medical care, which means that your insurance premiums—you, John, your insurance premiums—have to go towards your medical care. And if they don't, then you should get money back.

Now, it's not you individually, it's you and the group that you're insured with, of course. But we actually saw this happen during COVID. You may remember that a lot of elective medical procedures were canceled during COVID. And there was a period of time where the large national health plans, like United, had to give people money back from the premiums that they had invested.

Now, never let a situation of potential adversity go to waste. So, the health plan, taking a page from the hospital book, incidentally, decided what they were going to do was, “Okay, well, if I can only make 15% profit, maybe I should start buying the providers, start buying the services that ultimately I have to pay.”

So, when that happens, when a hospital buys physician practices or an insurance company buys doctors’ practices, or hospitals or surgicenters or PBMs, we call that vertical integration, vertical integration. Hospital purchasing of doctors’ practices: vertical integration. And then vertical integration in the health insurance industry.

Now, that has become the major issue, I think, with ultimately what will happen with health insurance companies. So, as of today, United Healthcare, through their Optum affiliate, is the largest employer of physicians in the United States. Just think about that for a second. That is just mind-boggling, right? Because what happens? Well, you're a doctor, you're employed by United Healthcare. They determine your fee schedule, they pay themselves the fee schedule, they determine the profitability of the fee schedule, only limited by the amount that they're ultimately going to charge back to the self-insured plan sponsor for the delivery of that health care. In much the same way, the pharmacy benefit within those vertically integrated networks are all about, “We're only going to cover drugs for which we get, you know, the best possible deals” and all of that stuff, right, all that stuff ultimately trickles down to the physician through things like network management—which doctors you could refer to; utilization management—which medicines you could prescribe, etc.

So, it gets to be kind of an unholy alliance between the health plans and the physicians and the pharmacies and all that other stuff solely for the purpose of making more money. And so, one of the recurring themes in all of these four posts about managing cost is the profit motive is really distorting how care is delivered. It's just really messing things up.

And one of the proposals I have in the health insurance post is that the government start looking at these things like utilities or the banking industry and start putting in some real safeguards to protect consumers. The other thing that the government can do, and the Department of Justice [DOJ] can do this without any new laws, is stop this nonsense, eliminate all this acquisition behavior.

And in fact, just recently, the DOJ has started to look at United Healthcare and their acquisition of physicians. So, we may actually see action on that in the short term.

But hospitals do the same thing, right? They acquire the practices. There's always something in the newspaper about, “Oh, you know, my cardiologist used to be freestanding, and the hospital bought them and my echocardiogram, which used to cost me $200, is $1,000.”

Well, why is that? It's because hospitals don't get paid enough by Medicare. And so, they ship those costs to you and me, people who have commercial health insurance. And they do it through something called the charge master, and they do it through something called percent of billed charges, and they do it through facility fees.

Listen, hospitals are all about the money right now. And, you know, there are hospitals that shouldn't be cast in with all this business we're talking about, like rural hospitals or disproportionate share hospitals where there are poor people being cared for, but most of the hospitals that you and I have interacted with in our career, man, I don't know.

Hennessy: So, a couple of things I take from that one is that we've written these buckets of hospitals, health insurers, pharmacy or pharmaceutical manufacturers, and physicians, and some of those are lines are blurring. The other thing I take from the conversation is, there's an old game theory called the Prisoner's Dilemma, where theoretically we all cooperate and we can control costs and make this affordable, but each individual party has incentives to sort of maximize their own return. And it seems like we somehow see that behavior amongst these different players.

Dr Kolodziej: Yeah, there's another one that I like, which is the Tragedy of the Commons, right? So that we got this public grass, and everybody got their livestock, and for everything to work out at the end of the day, we got to share that grass. None of these parties really want to share the grass. They all think they're innocent, but to some extent, greater or lesser, they're all guilty and things are going to have to change if we're going to approach the cost problem.

Hennessy: Thank you for watching this installment of Breaking Down Health Care. We hope you enjoyed the conversation and learned something you didn't know about health care and how it works in the United States. If you have questions or a topic you'd like Mike and I to discuss, you can use the Contact Us feature on the website. Tune in for future conversations because we're just getting started.