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A Problem Too Big To See: The Sobering Reality of Hospital Pricing

By Jeffrey Selberg | Thursday, March 21, 2013

Guest post by Jeff Selberg and Clifford M. Marks. Further discussion of this entry and the issues can be found on WBUR’s CommonHealth Blog.


Steve Brill’s recent piece on the irrationality of health care costs has inspired so many disparate reactions, it feels almost like a health policy Rorschach: Some see a clear case for a single-payer system. Others point to all-payer rate setting. And many health care executives, as reflected in a response from the Healthcare Financial Management Association (HFMA), saw an “unfortunate and misleading” narrative about rampant greed in health care.


The British writer G. K. Chesterton once observed that “[m]an can always be blind to a thing so long as it is big enough.” We wonder if that isn’t happening here, because there is a far more fundamental truth to be had in Brill’s descriptions of nonsensical charges, of patients forced to the brink of bankruptcy by prices that, frankly, seem extortionary. It’s a lesson so big we seem to have trouble even seeing it.


Payment in health care is not tied to what should be its goal of delivering better value, or better outcomes at lower costs. What’s more, everybody knows it. And it is this sobering reality that Brill’s article lays bare: Nobody has any faith in the current reimbursement system – and they shouldn’t. As Brill hammers home in vignette after vignette, health care charges are almost entirely unhinged from patient welfare. You can move to single payer. You can ratchet up taxes on hospital profits. You can enact tort reform. But none of it will work if we fail to blow up the current payment system, and replace it with one that incents value improvement.


When Jeff was CEO of Exempla Healthcare, he told his board – let’s have no rate increase for our chargemaster (the hospital listing of charges so appropriately maligned in Brill’s piece). We all know the chargemaster is crazy, it’s distorted, it’s meaningless. And his CFO responded, great, but if you want to freeze the rates, we’re going to take a $10 million hit.


That’s the problem hospitals face. No executive survives long by giving away money, and even not-for-profits need to perform well financially. The incentives are all wrong. We all know it. But we still must believe that the risk of overhauling the system is greater than that of protecting the status quo since there is no consensus to change it. Otherwise, why would we continue with payments that have no relationship to actual cost and the quality of the clinical outcome? Why would we allow the poor performers to profit from their defects and get reimbursed more than the high-performing providers? The Health Care Financial Management Association, while having done some very effective research on value-based payment, focused on where Brill (incorrectly, we think) implied nefarious motive in how executives operate within the current payment system. They ran right past the enormous truth that we all see every single day: the health care reimbursement system is broken for the very people we serve – the patients who ultimately pay for health care through their wages for health insurance or directly out of their own pockets.


So accepting that reality, where do we go from here? First, we need provider and payer leaders who will be relentless in their pursuit of value, even when there is uncertainty around the future financial benefit. There is a Quixotic aspect to this – a leap of faith. And enlightened leaders are beginning to move their organizations toward a greater focus on engaging patients and teaching self-care, toward telemedicine, toward home health care, and other promising care delivery models.


But faith will not be enough – and finger-pointing won’t help much either. Everyone in health care needs to focus on creating a reimbursement system that rewards value. It’s a daunting prospect, which helps explain why reform efforts have often felt so piecemeal. Medicare’s new penalties for high readmission rates, for instance, certainly betters care by providing a financial incentive to prevent unnecessary readmissions. But it is just one more correction welded onto a flawed fee-for-service chassis. This alone will never solve our quality problem in health care – the payment structure needs a new foundation.


We have yet to coalesce around exactly what that foundation will be, though bundled payment shows great promise. Even those payers and providers who grasp the need to move to value-based reimbursement wonder, understandably, just how they can transition organizations long built around (and paid for) volume. One of the greatest aspects of the Affordable Care Act was its chartering of the Center for Medicare and Medicaid Innovation, which is experimenting with a variety of payment models in the hope of rewarding higher value in the form of better clinical and functional outcomes at lower cost.


The scale of this challenge is immense – but the status quo cannot be justified any longer. Brill sums up his take on health care charges with the quote, “All the prices are too damn high.” But that isn’t so. Some of them are – and exorbitantly so, and such instances are well represented in his piece. But high-value services such as primary care visits or e-mail consultations are woefully undercompensated. No, the real problem in health care spending is this: the prices make no damn sense. And it’s time we put a stop to that.



Jeff Selberg is Executive Vice President, Chief Operating Officer, Institute for Healthcare Improvement.
Clifford M. Marks is Health Care Researcher, Harvard Business School.

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