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Solution Framework of Market Forces

Health Care Entrepreneurs a NCPA PDF file, Dec, 2008

 The Changing Nature of Providers

Long before a patient has entered the doctor’s treatment, a third party has determined what services they will receive and how much it will cost.  The result is a highly artificial market plagued by problems of high costs, inconsistent quality and poor access. In addition, critics complain about fragmented care, uncoordinated care, failure to use simple technology (including the telephone, e-mail and the Internet), lack of electronic medical records (EMRs), the absence of safety-enhancing software, the lack of adequate patient education and problems related to rationing care by waiting.

Can the market for medical care be different? Interestingly, in health care markets where patients pay directly for all or most of their care, providers almost always compete on the basis of price and quality. And because they are not trapped in a system that pays for predetermined tasks at predetermined rates, providers are free to repackage and reprice their services — just like vendors in other markets. It is primarily in these direct-pay markets that entrepreneurs are creating many innovative services to solve the very problems about which critics of the health care system complain.

In fact, these solutions are usually a necessary part of the entrepreneurs’ business models. What follows are some examples.  Cosmetic surgery, Lasik, Lab tests, drugs, walk in clinics at shopping malls, telephone based practices, even internet based practices, EMR and house care, etc.

Every day, millions of American consumers go shopping. In doing so, they compare the price and quality of goods and services ranging from groceries to cellular telephone service to fast food to housing. But there is one major sector of the economy where consumers typically do not make decisions based on comparison shopping, even though it accounts for one-sixth of the U.S. economy. That sector is health care.

However, the problem goes much deeper than a lack of price transparency. “Real” prices are hard to obtain because they do not serve the same purpose in health care as in other markets. In markets where consumers shop, compare prices and pay their own bills, they are the decision-makers. But in health care, patients rarely make their own decisions about which medical service they receive. And in most cases, they do not pay the bills.

Problems Created by Third Party Payment. Doctors and hospitals do not disclose prices in advance of performing services because they do not compete for patients based on price. The reason: Patients rarely pay their own health care bills. Instead, they are paid by third-party payers. And, it turns out, when providers do not compete on price, they do not compete on quality either. Conversely, when patients do not pay their own bills, they do not act like typical consumers because they care little about the cost of the care they receive. 

In 1960, consumers paid about 47 percent of overall health care costs out of pocket. That proportion fell by almost half to 23 percent in 1980.

In 2006, consumers paid only 12  cents out of their own pockets every time they spent a dollar on health care.

The evidence appears to bear out this “rationing by waiting.” A recent survey found two-thirds of Medicaid patients were unable to obtain an appointment for urgent ambulatory care within a week. Those who turn to hospital emergency rooms for their care find the average wait is about 222 minutes. One consequence of rationing by waiting is that the time of primary care physicians is usually fully booked, unless they are starting a new practice or working in rural areas. This means almost all the physicians’ hours are spent on billable activities.

In health care markets where third-party payers do not negotiate the prices or pay the bills, provider behavior is radically different. In these markets, entrepreneurs compete for patients’ business by offering greater convenience, lower prices and innovative services unavailable in traditional clinical settings. Until recently, such markets were confined to the types of procedures health insurance doesn’t cover, such as cosmetic surgery and vision correction surgery. Today, competitive markets are emerging outside the third-party payment system covering services ranging from primary care to major surgery.

This consumer-driven health care (CHDC) revolution gives individuals the opportunity to benefit financially from consuming health care wisely. Many of these plans include personal accounts, such as Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). 

Innovation occurs in a wide variety of ways, including MinuteClinics:   MinuteClinic is the pioneer of clinics operating within larger retailers — allowing shoppers in Cub Foods, CVS pharmacies and Target stores to get routine medical services such as immunizations and strep tests. No appointment is necessary and most office visits take only 15 minutes. MinuteClinics clearly list prices, which are often only half as much as a traditional medical practice — most treatments cost $59.35.   MinuteClinics use proprietary software to guide practitioners through diagnosis and treatment protocols based on evidence-based medicine. In contrast to standard physician practice, medical re- cords are stored electronically and prescriptions can also be ordered that way. There is also evidence that the quality of routine care in walk-in clinics is comparable to treatment in traditional physicians’ practices. MinuteClinics received high marks for quality of care in the recent Minnesota Community Measurement Health Care Quality Report.

Some telemedicine firms also have computerized protocols to assist the physician in diagnosing ailments. Thus, competition to reduce waiting or enhance convenience using telemedicine leads to personal and portable electronic medical records. AmeriDoc is a new startup that provides telephone consultations and email follow-up to individual subscribers and health plan members with immediate telephone access to licensed physicians. According to AmeriDoc, patients often find it difficult to contact their regular physician by phone after hours.   Doctokr Family Medicine is the Virginia medical practice of Dr. Alan Dappen, who practices medicine mostly by telephone and e-mail contact. Patients can schedule an appointment or e-mail the doctor, all from the Doctokr.com Web site. In fact, Dappen’s waiting room is a Web page.

Concierge medicine is normally associated with personalized services for the wealthy. Depending on the practice, these services can be expensive — in some cases more than $2,500 a year per person. However, in the Dallas suburb of Collin County, Texas, physician Nelson Simmons offers a version of that service for less than $500 a year. About 70 small business owners pay $40 per employee per month for Simmons’ plan. In return, employees get same-day primary care services and steep discounts on diagnostic tests and specialist care. Enrollees must pay out-of-pocket for specialist care, surgeries and diagnostic tests. But Simmons negotiates the rates, which are typically much lower than what others pay. For example, a tonsillectomy for a child costs less than half of the normal fee ($2,100 versus $4,800) and an MRI scan can be less than one-fourth of the standard charge ($350 versus $1,600).

India is the largest hospital market in the world where people pay out-of-pocket. In India, 78 percent of medical care is paid out of pocket, compared to 12 percent in the United States. People are free to purchase the level of service they desire and can afford.  BridgeHealth International, based in Denver, has a provider network of offshore hospitals, clinics and physicians. It works with individuals, insurers and employer health plans to facilitate workers’ treatment abroad. BridgeHealth International’s medical staff care-fully screens the travel-readiness of potential clients using a proprietary algorithm to assess their health risks. Staff members then help clients choose appropriate physicians and destinations to obtain high-quality medical care.  Most of the patients traveling abroad for surgery are uninsured. However, that is about to change as more health plans begin to cover medical travel. BlueShield of California has a health plan, Access Baja, designed for Americans and Mexicans who choose to receive medical care in northern Mexico. In 2007, BlueCross BlueShield of South Carolina established Companion Global Healthcare, a net- work of foreign-based hospitals that includes internationally accredited medical facilities.

Moreover, a new company, Healthplace America, has been formed to facilitate medical tourism within the United States. It offers price and quality transparency for a network of 15 hospitals. Savings are typically 30 percent to 50 percent of what patients and their insurer/employer would otherwise pay. It is important to note that all this is happening without any coaxing or mandate from the U.S. Department of Health and Human Services. This is the marketplace at work.

Chronic Disease Management. HealthPoints is a firm that provides chronic disease management for health plans and third-party payers. For instance, diabetes is a costly burden on insurers and especially on public programs such as Medicaid, Medicare and Veterans Affairs. HealthPoints takes advantage of the latest information technology to monitor diabetics remotely. Enrollees use a small, high-tech blood glucose-testing monitor with a wireless Bluetooth connection. A Web-based computer or Personal Digital Assistant (PDA) sends the blood glucose readings electronically to the HealthPoint office. A patient who forgets to take a reading at the appointed time receives a reminder by e-mail or phone. An extremely high reading will notify a health coach or diabetes nurse at HealthPoints to call the patient and inquire about foods recently eaten.

Obstacles to Health Care Entrepreneurs

Some transparency advocates argue that doctors, hospitals and insurers must be compelled to fully disclose prices and quality measures.  But the evidence suggests that where markets are competitive, transparency is a natural outcome.   In normal competitive markets, the role of government with respect to price and quality is mainly the prosecution of fraud. In health care, the greatest barriers to transparency, innovation and competition are government laws and regulations. Deregulating health care and equalizing the tax treatment of self-insurance and third-party insurance are important steps in the right direction.

Needed Reforms: Remove State Laws Restricting the Practice of Medicine. In many states, current laws prevent medical practices from being organized in innovative ways. The courts have removed many anticompetitive restrictions on medical professionals, such as the prohibition on advertising, but the practices of physicians, physician assistants, nurses and technicians are still highly regulated. For example, restrictions on telemedicine make it generally illegal for a physician in one state to consult with a patient online in another state without an initial face-to-face meeting. It is also illegal in most states for a physician who has examined a patient from another state to continue to treat the patient via the Internet. The physician must be licensed in the state where the patient resides, or his treatments are considered practicing medicine without a license.

Needed Reforms: Remove Tax Penalties on Self-Insurance. Traditionally, the tax law has favored third-party insurance over individual self-insurance. Every dollar an employer pays for employee health insurance premiums avoids income and payroll taxes. For a middle-income employee, this generous tax subsidy means government is effectively paying for almost half the cost of health insurance. On the other hand, until recently, the government taxed away almost half of every dollar employers put into savings accounts for employees to pay their medical expenses directly. The result was a tax law that lavishly subsidized third-party insurance and severely penalized individual self-insurance. This has encouraged consumers to use third-party bureaucracies to pay every medical bill, even though it often makes more sense for patients to manage discretionary expenses themselves. If the tax laws made it easier for people to self-insure instead of relying on third-party payers, competition would improve the efficiency of the medical marketplace.

Needed Reform: Reward Quality Improvements in Medi- care and Medicaid. The goal is to encourage a competitive market on the provider side — in which every doctor and every facility is encouraged to continuously search for ways to rebundle and reprice medical services in quality-enhancing, cost-reducing ways. Medicare stands to gain the most since it is the largest health care payer. At last count, Medicare pays for about 7,500 specific tasks. Tele- phone consultations are not among them. Nor are email consultations or electronic record-keeping. Under the current system, Medicare and Medicaid stifle entrepreneurial activity and financially punish efforts to lower costs or improve quality.

However, in health care markets where third-party payers do not pay the bills, the behavior of providers and patients is radically different. In these markets, entrepreneurs compete for patients’ business by offering greater convenience, lower prices and innovative services unavailable in traditional clinical settings. Until recently, such markets were confined to the types of procedures health insurance doesn’t cover, such as cosmetic surgery and vision correction surgery.

Today, competitive markets are emerging outside the third-party payment system covering services ranging from primary care to major surgery. The reason: Patients are paying for more services out of pocket.