From November 8, 2013
By Chris Hobbs
I was recently discussing our business model with a prospective investor and he asked me why we’ll achieve success. My response was that MediBid represents one of the few areas in healthcare where you actually get what you pay for. He didn’t understand, so I had to explain.
First, some background. Health care represents almost 18% of the overall American economy, and it’s clearly the largest health care market in the world. In addition, for decades the rate of health care inflation has run well above that of the rest of the economy, although that has moderated recently. There are a number of reasons for this upward trend, but the primary reason is a process called Chargemaster pricing. We’ll expand on that in a moment.
You would think that with health care representing 18% of the American economy it would be subject to the same laws of supply and demand as other major industries. You would be right. And relax, I’m not going to explain economic theory and the inelastic slope of a healthcare demand curve. What’s important is that the demand for medical care has increased, and the supply of medical care has increased even more. So if supply has increased more than demand, why haven’t prices fallen?
A market needs a couple of things to operate efficiently. The first is transparency, so that a patient acting as a consumer has the information that he or she needs to seek value (i.e. the best quality for a given price, or the lowest price for a given quality). In reality, with the status-quo transparency is a challenge. Second, an efficient market needs a patient to behave as a consumer and actively seek value. This means talking price before a procedure is performed, and in most cases this simply isn’t done. As a result, healthcare is neither a free nor an efficient market.
So here’s where the rubber hits the road with healthcare economics, so-called Chargemaster pricing. Most facilities ask for as high a fee as they believe they can get away with. After all, they’re profit-maximizing enterprises and we should expect nothing less. Then the person who ultimately pays for the healthcare (i.e. the HMO, insurance company, self-insured corporate plan, or individual patient) negotiates with the provider to determine the final price. So the price paid has everything to do with your ability to negotiate and has nothing to do with the quality of care received. In short, there is no way to ‘get what you pay for’ with this system of health care.
Guess what? It gets worse. In a previous blog post we discussed how facilities and anesthesiologists bill in 15 minute increments. This means that a skilled surgeon who works quickly will have a smaller facility charge than a poorly skilled surgeon who took longer to perform the procedure. The facility fee is frequently the biggest percentage of the overall bill. It also stands to reason that the skilled surgeon’s clinical outcomes and recovery times will be better. In short, you could pay a lot more for poor quality care – the very opposite of ‘you get what you pay for’.
Of course, there is a reason why the current payment model exists, and that is profit. If a hospital had only one price for a procedure, they wouldn’t be able to charge more to those without the knowledge, money or power to negotiate properly. Companies have no problem asking a facility to reduce their bill, but patients have a hard time having that same discussion.
So why do you ‘get what you pay for’ with MediBid? We provide the tools to allow a patient to become a true consumer. Patients get upfront pricing specific to them and their medical history, and patients see their prospective physician’s training, background, and other quality indicators. Patients know what’s included and what has additional pricing, all in advance. Facilities and physicians know they must provide a ‘fair market’ price, because patients and self-insured health benefit plans choose not to play the status-quo pricing games.
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For access to high-quality, low-cost, timely medical care, and to preserve the patient-physician relationship, patients and physicians must reject ObamaCare. Continue reading
From OMTEC 2013 – Blair Rhode, M.D., discusses the current state and future of generic implants in the orthopaedic industry.
In a previous post I introduced game theory. Although game theoretic models can be complicated and filled with math, the basic approach is simple. Examine a situation and determine:
Then consider a situation where each player thinks about what the others do, assumes that other players will try to make themselves better off, and makes his own decision to make himself better off based on what others will do.
A game that’s important in health care is the Principal-Agent Problem. I’m not a doctor and I don’t know my gluteus maximus from my articulatio cubiti. So if I visit a doctor, I have to worry about them recommending unnecessary procedures that I’d rather not pay for. In the simplest version of the game I hire a doctor who then performs a walletectomy because I don’t know any better. But both the doctor and I are smarter than that. In real life I choose my doctor, establish a relationship with them, and can switch doctors if mine isn’t giving me the service I want.
And that’s fine as far as it goes, but an important part of game theory is keeping an eye to the rules of the game. Insurance plans change the rules in several important ways. If insurance only covers unplanned catastrophes then there’s little to worry about, but modern plans also restrict your ability to choose (or leave) your doctor. They also make it so the doctor works for the insurance company (they’re signing the checks, after all) and not you. These problems amplify the principal-agent problem and will result in higher costs and lower quality.
I hope game theory seems obvious to you. Much of economics is little more than common sense rigorously applied, but it has value for ensuring that our thinking is clear and effective. Game theory tells stories that make certain outcomes seem obvious, but more importantly it directs our attention to the rules shaping the incentives that direct the actions that result in that outcome. James Buchanan won the Nobel prize for developing the idea that when the rules of the game lead to a poor outcome, we should think more about how to change those rules. Ice T put it even more succinctly when he said “don’t hate the player, hate the game.”
Game theory is one of the funner tools in the economists tool box, but it’s no mere game. Game theory is a mathematical tool that allows us to analyze the strategic interaction of multiple people making decisions that affect one another.
In brief, game theory entails outlining the rules of a basic interaction (who has what options at what point) between two or more actors (e.g. a patient and a doctor, or voters and politicians) and their payoffs. The situation is then analyzed to see what it is in each person’s interest to do when they consider what it is in each other person’s interest to do.
A classic story is the tragedy of the commons, in which a large number of people have access to some common resource and so can profit by over-exploiting that resource. If I expect you to put out few sheep, I can make profit by putting out more sheep. If I expect that you’ll put out too many sheep (and so risk destroying the capacity of the pasture), my best choice is still to put out too many of my own sheep. The predicted outcome is that we both put out too many sheep and next year the grass hasn’t grown back so we have to find some other source of income.
There are unrealistic simplifications here: everyone chooses at the same time and can’t share their planned choice with others before hand, and this is a “one-shot” game where we decide how many sheep to graze for the year all at once. In real life people are often able to come up with rules that protect the commons. But the story is still useful because it reflects a number of similar real-life situations.
In particular, voting is an event where the outcome is determined by the decisions of many people, made in secret, all at once, and determining political leadership all at once for the years to follow. What is the predicted outcome? Voters will have little to gain by researching the wide number of issues at hand, so we should expect largely uninformed voters. They will know that some politicians have promised to support policies that benefit them. This sets up politicians to play the same game for their constituents: getting goodies for their home jurisdiction while all the other politicians do the same. When it’s clear that all politicians face the same incentives, this can be pretty scary!
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