I blog about free markets in medical care and transparent pricing.
Years ago, I hired a carpenter to build a deck in my backyard. This scraggly guy showed up with a pencil behind his ear, a spiral notebook and a tape measure. I told him what I was looking for, what kind of wood and how big I wanted it to be. He made two or three suggestions, we agreed and then he went to work measuring and taking notes. Fifteen minutes later, he handed me a piece of paper with how much it would cost. Then he was gone.
In two days, he called me and said he would like a payment for the lumber and told me how much it was. I sent it to him. Five days later, he showed up with the lumber-already cut. This guy knew what he was doing.
At the time, it blew my mind that he showed up with all of the lumber already cut, ready to assemble/nail. As I look back, I realize that this man, like so many others in a true market economy, did the most amazing thing, the very same thing we have done at our surgery center and what so many hospitals say is impossible: he gave me an up front price.
Now you want to say, “Smith! Building a deck isn’t surgery.” Contractors like this man, however, have run into unanticipated problems that make certain jobs more difficult than others. Experienced contractors anticipate these future problems when evaluating a potential job, factoring this into their price. Most of the time they get it right. Sometimes they get it wrong. If their error rate isn’t factored into their price, they go broke. If their error rate is low, they are able to be much more competitive in the marketplace.
I think of this carpenter often. I certainly had him in mind when I formulated our internet pricing. I knew that some cases would be more difficult than others. I knew that we would probably lose on some and make a little better marginal profit on others. This is what all businessmen do every day in every sector of the economy-except healthcare, it seems.
Eleven years ago, we began construction of the large facility in which we now work in Oklahoma City. The general contractor and the architect gave us a number. Not an estimate. A number. They had factored in to their calculation variables that could represent setbacks, still allowing for a reasonable marginal profit. I had been providing occasional prices for the uninsured and poor having surgery for years by this point, but found the contractor’s confidence in what our new facility would cost, fascinating and incredible.
When I think about the number of times I have heard the hospital folks say that fixed, upfront pricing in health care is impossible, I think about these builders/contractors. I think about my carpenter. Having provided transparent pricing to surgical patients, I have found that in some cases I was wrong. In some cases I was too high, in some cases I was too low. Adjustments were made. Not at the expense of the patient, though.
Transparent pricing is necessary for any concept of value to have meaning. Transparent pricing is necessary in order for appropriate signals concerning scarcity or abundance/surplus to have meaning. Non-transparent pricing is a hallmark of command economies, as Professor Robert Higgs explains in his brilliant book, “Crisis and Leviathan,” one which I highly recommend. There can simply be no meaningful competition when the prices aren’t transparent and known up front.
Not all medical facilities need to exhibit transparent pricing in order for a competitive and market economy to emerge in health care. Indeed, our internet pricing has allowed individuals to leverage their local medical facilities, as otherwise they would have gladly jumped on a plane and come to us for surgical care, the price for which was quantifiable. In spite of big hospitals’ attempts to denigrate this idea, they have found themselves in a competitive environment, whether they like it or not. Whether patients are willing to fly to Costa Rica, New Delhi or Oklahoma City, they have a price in mind and the local hospitals are shoved against the wall with this pricing, forced to explain why they are ten times more expensive while simultaneously claiming to not make a profit. In the absence of any evidence that they are ten times better, their position (6-10 times more expensive) is a weak one.
In Oklahoma City, upfront pricing is available at our facility and several others. A group of gastroenterologists, a group of oncologists, a group of radiologists with a breast imaging center, a group of cardiologists and cardiac surgeons with a physician-controlled heart hospitals, a group of orthopedic surgeons-they all have their pricing configured. A tertiary hospital has recently joined in this effort, providing upfront pricing for inpatient procedures too complex to complete at our facility. This is a very exciting development.
Since hospitals are responsible for the vast majority of medical costs in this country, slashing these outrageous charges brings incredible savings without even touching physician pay. Since we own our facility, we are content with solid fees for our professional services with no desire to plunder and bankrupt our patients with gigantic facility fees, unlike the so-called “not for profit” hospitals. We actually act more like a “not for profit” entity than those claiming this tax-free status.
Hospitals and their shills who claim that up front pricing can’t be done, know that it can be done. They just don’t like what that means for them. They want to work on a “time and materials” basis, a recipe for waste and inefficiency, as waste and fraud generate more revenue with this model’s lack of accountability. The more materials used (with their outrageous mark-ups) the more they make. Forcing medical facilities to be transparent with legislation is a mistake, I believe, as this is a violation of the “non-aggression principle” and also will more than likely provide legislators the opportunity to sell exemptions, with little or no transparency resulting. With the movement for medical price transparency on a roll now, better, I think, to let the much more unforgiving market deal with those who refuse to be transparent. Those who won’t divulge prices will lose out to those who will.
At The Surgery Center of Oklahoma we will continue to advocate a free market in medicine, one that’s possible only when accompanied with and characterized by transparent pricing. We will continue to encourage and recruit others to join us in this effort, one that will likely bring such significant health care price deflation, that the “crisis” the government is attempting to create in order to usher in single payer, will be delayed indefinitely if not thwarted completely.
As I told someone recently, “..the genie is out of the bottle. Price transparency is here and here to stay, whether the government or the health cartel they have created like it or not.” My partners and I are proud to have played a role in the transparency effort, one which we believe will bring price sanity to surgical care in particular, but ultimately to the pricing for all medical care.
G. Keith Smith, M.D.
Patrick McGuigan writes this piece about the Entrepreneurial Excellence in Oklahoma Award presentation this past Friday. Labor commissioner Mark Costello is running radio ads featuring our facility and once I have a copy of this I will post it for all to hear.
Commissioner Costello credited Dr. Lantier with introducing him to Austrian economics in his remarks just prior to presenting the award. Costello had no idea that I was headed out the door with two of my sons to the “Mises Circle” in Houston, just after the award presentation. When I spoke to Lew Rockwell in Houston about having received this award from the State and the Commissioner’s economic “Austrianism,” he said, “..that is shocking, and remarkable.”
The economists speaking at the Houston event seemed focused on the difficulties the current economic climate has created for entrepreneurs, true entrepreneurship becoming more difficult with opaque price signals and “regime uncertainty,” to use Dr. Robert Higgs phrase. I’ll blog soon about this Houston conference and how I think the information presented there applies to free market health care.
It is our adherence to the free market principles of the Austrian tradition that are responsible for our uncompromising business plan. These same principles have undoubtedly translated into a quality commitment coupled with rational pricing. I doubt seriously that another state’s labor commissioner has the foggiest idea what I mean by the last two sentences written.
Thanks to Pat McGuigan for attending the award presentation, his fine journalism and to all who attended the event. We are pleased to receive this award, particularly as it was presented by a proud “Austrian.”
G. Keith Smith, M.D.
Professor Robert Higgs toward the end of his brilliant book, “Crisis and Leviathan,” discusses the errors of the renowned social scientist Joseph Schumpeter with regards to his prediction of a socialist U.S., post WWII. Higgs describes a post-war march toward a more mixed economic result, one characterized by a government that gives lip service to private property but whose intense regulation of this private property resembles the fascistic regimes of wartime Italy and Germany. Higgs faults Schumpeter for clinging to a Marxist model with the bourgeoisie or “business class” on one side and the labor unionists, intellectuals and government bureaucrats on the other. Consistent with this “two-class theme” Schumpeter portrays those in the business class as the last defenders of capitalism (much like Ayn Rand). Quoting the brilliant Higgs,”He (Schumpeter) failed to appreciate how much the abandonment of traditional economic liberties over the long run had resulted not from the acquiescence or defeat of businessmen but from their enthusiastic sponsorship.” Later, “Businessmen have done more than their full share to foster the active regulatory state from its very inception.”
Examples of medically related businesses that have embraced this fascism are too numerous to list. Operationally, it is critical to understand that while the political contributions and bribes these medical mercantilists pay are substantial, the loot they later receive dwarfs their “investment.” The poor-mouthing and complaining about the regulations or new government hoops and hurdles that these medical “businesses” must overcome create the needed distraction, one that deflects attention from the promised future payoff. Giant hospitals are a prime example of this “business” model. Being the only medical facilities big enough to deal with the most onerous government curve balls, behind closed doors the administrators of these facilities cry in their champagne as they watch their smaller rivals whither due to these same government curve balls.
One can only imagine what kind of dough the HIT (health information technology) companies threw down to obtain a government mandate to buy their product. This is a more blatant and obvious bribery. The distraction effort took the form of an intense propaganda campaign to convince the public that this HIT emergency was all in the interest of patient safety. This campaign continues today.
“Businessmen” that have made their millions through government contracts are nothing more than fascists as they essentially lobby for the stolen property to capitalize their “pubic-private” partnership. As intensely ingrained as these men are in the medical business, their footing is precarious, as the source of their funding is unstable, essentially the product of a robbery. True and free markets raising their heads out of the medical mud are devastating to even the biggest of the crony’s flagship “businesses” and facilities.
As more and more physicians and medical facilities display their prices the tactics and true colors of the fascist conglomerates will become more clear. I believe that this medical industrial complex will fall just like the Berlin Wall, as the unsustainable and unstable business model, embraced in this country for the last few decades, has run its course. The free market, with its creative destruction, will once again bring to ruin those who deserve it dearly.
G. Keith Smith, M.D.
I though it might be a good time to revisit topics no one in health care management at the hospital, government or insurance level wants discussed or understood. I find it interesting that for all the talk of “health care reform” none of what I am about to outline is addressed in the Unaffordable Care Act. That the following is not addressed by this “reform” is compelling proof, I think, that the health care legislation oozing out of Washington is like most of the rest: a pay to play scheme, one characterized by bribery and favors, as Murray Rothbard made so clear in his writings.
The diagram I have put together below is by no means complete. This scaled-down version has been useful to me, however, to keep the players and how they benefit, straight. Not shown is how the government is complicitous in this arrangement. Tricky Dick Nixon’s 1972 HMO Act and the continually maintained perversion of the tax code that provides for the deductibility of health insurance premiums by employers and not for employees play a huge role in propping up this dysfunctional system, a role, the magnitude of which is hard to estimate. This preferential tax treatment is a huge gift (in essence a subsidy) to the insurance companies, as they can write one policy covering thousands, rather than thousands of policies to cover thousands. Every opportunity to change this has presented itself, the most conspicuous being the period of time the so-called, small government Republicans controlled both houses and the white house.
A local legislator recently remarked on Aetna’s introduction of a bill in Oklahoma to introduce a new insurance product, the E.P.O., or exclusive provider organization. He said, “it’s a free market, they should be able to offer whatever product they like.” On the contrary. PPO’s (preferred provider organizations), ostensibly set up to control costs and maintain quality, have performed the function the insurance companies hoped they would: the cartelization of health care, an arrangement that limits the entrance of new competitors and one where “arrangements” beneficial to the cartel members are much easier to control and manage. I maintain that the breakup of this cartel, whose back is broken by price transparency, is not only necessary and desirable but is the only way to harness the free market power to transform the pricing (lower) and the quality (higher). Breaking up the cartel requires that we first understand it.
In the diagram below, the benefits of a Giant Hospital Bill (GHB) are shown. On the left are the benefits to the hospital, on the right, the benefits to the insurance company that is “paying” the bill. Explanations follow to explain the terminology to those unfamiliar.
a) Uncompensated Care: this is the “rebate” the hospitals receive in the form of “DSH” payments, or disproportionate share hospital payments. Bascially, the hospital subtracts what they collected from what they billed and throw this number at the feds and get the taxpayers to “compensate” them for all that they otherwise couldn’t collect. It is clear that the existence of this scheme provides a huge incentive to the hospitals to exaggerate their bills, particularly to those patients who do not have the means to pay at all.
b) The profits of the large hospitals must be offset with fictional losses in order for them to maintain their “not for profit” status. This status is maintained through gigantic salaries and benefits packages to key administrative staff and from the “losses,” that is, that part of the GHB that they can’t or don’t claim to collect.
c) Brokerages utilize fewer resources and fewer brokers by having ten accounts, each of which covers thousands of “lives.” One broker can cover 10 accounts, whereas if the individuals were buying these insurance products, 100’s of brokers would be required. This helps to maintain the profitability of the brokerages and the insurance companies whose products they represent. GHB’s cause a fear that most individuals take seriously, a fear mollified by belonging to a larger “group” of insureds. Insurance companies, therefore, benefit from the GHB in this way, as an effective “corralling” of clients results.
d) PPO Repricing: This scheme is very important to understand as it is at the heart of the benefit derived by the insurance company from the GHB. Insurance companies proudly report to their clients the “savings” the clients have realized as a result of the PPO’s repricing of a claim. The GHB might be $20,000, but the insurance company pays $8,000, thus resulting in a savings to the health plan of “$12,000.” Incentives are present in most plans to reward insurance companies for aggressive repricing, as this “saves” the plans money. Right? Wrong. Insurance companies make billions on these incentives, so much that they would rather craft deals with high priced hospitals (whose bills they “reprice”and profit from) than less expensive providers whose reasonable pricing eliminates this “repricing” opportunity. Transparent pricing represents the ultimate nightmare for those scabs benefitting from “repricing.”
e) This is self-explanatory as are some of the other boxes, but I wanted to add that as more and more large companies seek the “self-funding” or “self-insured” option, the commissions of the insurance brokerages will vaporize. Brokerages work very hard to discourage their clients from the self insurance option, not because this is a bad idea for their client, so much, as it is a nightmare for the agent and their brokerage.
I know that this is a mammoth blog, but I wanted to say one more thing. As Professor Robert Higgs states in his book “Crisis and Leviathan,” the distinction between a free economy and a “command” economy is price transparency. Hiding the costs of the market is critical to maintain a “command” economy, and this cartel diagram, I think, indicts the current health care economy as a cartel, whose success depends on hiding many of the costs and profit-seekers. I think this further supports my contention that what ails the American medical economy is not a failure of the free market, but rather the lack of a free market in medicine.
G. Keith Smith, M.D.
Don’t read this article. Seriously. If you are having trouble getting to sleep, read the whole thing. If you want to know how silly writing about health care can be, read pages 5-7.
The folks writing this stuff are believers in economic modeling. The flaws in their assumptions are so glaring that they have to admit to many of them on their own. The only conclusions they can draw are so obvious, that it’s a bit embarrassing. For instance, if you pay doctors more to see Medicare patients, they will see more Medicare patients. Duh.
Austrian economists reject economic modeling. This article is a great demonstration of why they do. ”Ahh…but the Austrians do this out of laziness or because they lack the mathematical rigor!” Go on telling yourself that. I am reading Professor Robert Higgs’, “Crisis and Leviathan.” He makes a point early in the book that economists drawing conclusions from bad econometric data, are like a drunk stumbling around under a street lamp looking for their car keys because the light is good there. This article fits that perfectly.
What do they claim? They claim that their model shows that if Medicare (you and me) pays primary care physicians more, they will see more Medicare patients and while that will run up the cost of the primary care physician component of Medicare, it will result in an overall savings due to the prevention of more expensive care as a result of the increased numbers of doctor office visits. Saving Medicare money. Making the system more efficient. Readers of this blog know where I’m taking this, don’t you?
How about this? If you want to save Medicare money, have the person requiring the care pay for it. Why should you have to cancel your vacation to pay for someone else’s heart surgery? Someone you don’t even know. This is the essence of what is called moral hazard: one benefits from another’s risk. That is how Medicare works. It represents what economists call a transfer payment, a payment from one individual to another, with Uncle Sam as the heavy handed go-between.
Let the doctors charge whatever they want. If they are too high, no one will see them. If they are too low, they will not get home until late. Some guys will be worth more than others. Some will be able to charge very little due to the value proposition. Do you see why increasing payment to primary care docs by 10% is a ludicrous policy? Who knows what they should be paid. I know a way to find out, and Medicare or think tanks like this are not part of the answer.
Tinkering with a failed socialist system like Medicare seems like such a waste of time. Socialism doesn’t work. It must be abandoned, not band-aided or tweeked. The Austrians would say, “let the free market determine the market clearing price for office visits.” Medicare wouldn’t have anything to say. Medicare wouldn’t exist. Articles like this that grant an unearned credibility to the Medicare system are a disservice to all of us.
G. Keith Smith, M.D.