Imagine you’re in a grocery store. A man in white is wheeling your cart, grabbing things from the shelf. “You need some broccoli, it’s good for you,” he says. You meekly mention you don’t like broccoli, but he ignores you. “How about some of this steak?” he suggests. I don’t eat meat,” you say. When you arrive at check-out, you notice the store has no prices. The cashier tells you it will all be taken care of later. You begin to worry. This can’t be free? How am I going to pay for all this stuff? As you head out the door, the cashier reminds you of the no return policy. And then you wake up.

This is American healthcare. Your doctor, largely disconnected from price, makes purchases on your and your insurance provider’s dime. If the product (surgery, drugs, or other services) doesn’t work, so sorry, no refunds. For the grocer, this sounds like a good deal. For you, particularly given rising deductibles, quite the reverse.

Over the last half-century Americans have built the “best” system in the world for emergency care, sadly with focus on volume overriding outcomes. Healthcare in America now costs 18 % of our GDP (twice that of other developed nations) but ranks only 50th in the world based on expected longevity (somewhere between Chile and the Czech Republic). Moreover, with no real pricing structure, there is a disconnect between cost and value. For example, as noted a year ago in the New York Times, charges for an artificial joint at USC Medical Center averages six times what other hospitals charge in the L.A. area. Even the same surgery within a hospital can vary widely based on the patient’s insurance. And results, good or bad, cost the same. It seems Americans love capitalism in every market, but give healthcare a pass.

Although initially the grocery store scenario looks good for the storeowner, things aren’t so bright for her either. The money is running out. Insurers have consistently decreased payments over time. Healthcare businesses are being squeezed between fixed costs and declining revenue. Many investors see businesses based on volume (a.k.a. fee for service) as in something of a death spiral.

But the rules of the game have changed. The Accountable Care Act (ACA) looks to change healthcare spending by 1) incentivizing healthcare outcomes and 2) bundling payments. With regards to the first point, outcomes are uncertain for an individual patient but can be predicted and negotiated for a large group. For example, an insurer might say that of 1000 patients with a condition like congestive heart failure admitted to the hospital, only 10% can be readmitted for 30 days after discharge; if the number is higher, those extra admissions are on the hospital’s dime and not reimbursed. As for the second point, bundling payments takes currently separate payments for doctors and hospitals and “bundles” them so that a patient’s bill has a set price for all services. Under bundling all-inclusive hip surgery may cost $10,000. The split of the total fee must then be split between the doctor and the hospital. 

With transparent pricing there are obvious advantages for the insurer. However, for the today’s fee-for-service providers and hospitals based on volume, the new sudden new model is, at best, problematic, and more likely viewed as apocalyptic. Nothing about the business of healthcare is prepared for the ACA. Practice patterns developed over decades have to be turned altered. Most of the ancillary services (from drugs to your home health nurse) will have to change. In a sense, the ACA presents healthcare with their own unique a journey through wonderland where everything seems upside down. Like Alice, when you look in the eyes of healthcare executives and providers today you are likely to see utter confusion and dismay.


Like Alice in Wonderland, the ACA makes everything seem topsy turvy for the business of healthcare.Everything seems topsy turvyEverything seems topsy turvy

The transition from volume to value-based healthcare will not be easy. The government legislates, but in the end, it is the business community who will be called upon to respond and fix America’s healthcare. New business models are needed for both the allocation of human resources and technology. In my next post, we will look at ways this can be accomplished.