It’s not (just) about the money… what every physician must know about healthcare finance by Dr. Gordon Morewood, MD, MBA, FASE
Most practicing physicians have at least a functional understanding of the fee-for-service system which has historically provided reimbursement for the bulk of their professional services.
However, recent and rapidly accelerating changes in healthcare finance now mandate a broader understanding of how funds flow through the system and how economic forces are altering the relationships between the major stakeholders.
Although these changes may provoke angst amongst many physicians there are reasons to be optimistic about the future of the profession.
This essay will attempt to concisely outline the shifting landscape of healthcare finance and how physicians, in general, can adapt and indeed thrive.
Although the specific context discussed will be the US healthcare system, the underlying principles will be applicable to nearly any healthcare system around the globe where rising overall costs for healthcare are a concern (ie: nearly all of them).
The growth in healthcare spending in most western countries has been acknowledged to be unsustainable. Total spending on healthcare in the United States increased from 13% of Gross Domestic Product (GDP) in 2000 to 18% as of 2016.
In 2008 the President’s Council of Economic Advisors projected that spending would reach roughly 33% of GDP by 2040 (2).
It is unrealistic to expect that the US can support such a shift towards healthcare to the exclusion of all other economic activity.
Herbert Stein coined his namesake law of economics when he opined – “If something cannot go on forever, it will stop” (3). Indeed, several ongoing changes in how healthcare is paid for and delivered are likely to slow or even reduce spending per patient in the coming years.
The fee-for-service system of reimbursement will be greatly diminished in the future.
As a general economic principle, a system of paying for compliance with process is incapable of producing the efficiencies that can be derived via paying for a final product. Paying for a process locks manufactures or service providers into rigid patterns of behavior.
Deviation from the established pattern of pre-specified acts compromises revenue and is therefore discouraged. Even when steps in a process are identified as potentially ineffective there is a financial disincentive to eliminate them. As a result, improvements in efficiency are halted.
In contrast, paying for a final product frees those involved in managing production and/or delivery of the product to innovate. When aspects of production with little or no contribution to the final product are identified and eliminated the producer benefits from an increase in profit margin.
Efficiency increases and eventually price reductions are passed along to the consumer as a result of competition in the marketplace.
This phenomenon is now rapidly spreading through the US healthcare system. For several years many employers large enough to fund their own health insurance plans have aggressively pursued bundled payments for specific high-cost surgical procedures (4).
Approximately 85% of large employers now offer focused referrals under flat-fee contracts for at least some resource-intense healthcare services. The Centers of Excellence program, pioneered by Walmart in 2012, is the archetype for this model.
The purchasing of services from a limited number of high volume centers and the provision of lump-sum payments for defined episodes of care has been demonstrated to achieve cost reductions while maintaining high-quality outcomes.
In a very similar fashion, the Centers for Medicare and Medicaid Services (CMS) have been experimenting with various forms of bundled payments for many years and these efforts are accelerating (5).
A close examination of the CMS MIPS program reveals that Medicare fee-for-service payments will be frozen for the foreseeable future and only those reimbursements provided through some variation of Value-Based Payment model will grow at a rate equal to or greater than inflation.
It is also worth noting that a recent national survey of 115 of the largest traditional private health insurance companies in the United States revealed a uniform expectation that their future involvement with simple fee-for-service reimbursements would shrink dramatically (6).
The executives in these firms reported that no more than 50% of their business involved simple fee-for-service contracts in 2016, and that this proportion was expected to fall to 35% by 2021.
Overall patient satisfaction with the US healthcare system is poor (7). Although satisfaction with a patient’s individual physician is more favorable, the system is generally viewed as poorly organized and too expensive (8).
These perceptions are critically important to acknowledge given recent trends in the healthcare insurance system.
In 2018, amongst those individuals covered by employer-based healthcare insurance and working at large US firms (defined as >200 employees), fully 54% were required to pay $1000 or more out of pocket as a deductible for healthcare costs (9).
This proportion was only 17% as recently as 2010. The proportion of employees of small firms with $1000+ healthcare deductibles is currently even higher at 68%.
In total, almost 60% of US employees who participate in employer-based healthcare insurance are now subject to an annual deductible of at least $1000, and for just under 30% of these individuals the deductible is $2000 or more. To place these figures in context, the median US household income is currently $61,000.
This growth in personal financial responsibility has brought enhanced consumerism to the healthcare marketplace.
Healthcare systems are under increasing pressure to provide price transparency for their services and to justify these costs in terms understandable to their customers. Patients are more frequently making value-based judgments regarding where they obtain their healthcare, and which services they will purchase (10).
The combination of consumer engagement, increasing price transparency, and a shift towards paying for product (bundled payments) will soon begin to wring true efficiencies from the healthcare system (11).
Efficiency in Healthcare
Discussions regarding efficiency may provoke feelings of anxiety for many front-line health care providers. In its most general form, efficiency can be defined as the amount of output generated for a given amount of input.
It is common for healthcare providers to frame any discussion of efficiency in exclusively personal terms. They imagine efficiency entirely as the number of patient-centered processes they can complete per unit of effort (patients per hour, per shift, per day, etc). This is a mistake.
Of all of the inefficient spending in healthcare at present, only a very small proportion can be resolved through increasing the personal productivity of healthcare professionals (12).
By an order of magnitude, the greater source of wasted spending is “low or no-value” healthcare. This concept refers to any aspect of care that is delivered in a place, at a time, or to a particular patient, such that it does not result in the desired end product – measurable improvement in the patient’s health and/or quality of life.
When viewed from this perspective, achieving the required improvements in efficiency for the healthcare system should not be perceived as a threatening prospect for clinicians.
In many instances, this imperative may actually enhance the professional role of healthcare providers and result in less production pressure.
As low or no-value care is eliminated, clinical professionals will be free to focus their efforts on those who are most in need of their specific expertise. There will also be less emphasis on processing large numbers of patients to generate revenue via process-related reimbursements.
It is important to recognize the central role physicians must play in engineering this form of efficiency.
Modern healthcare systems have become extraordinarily complex. Given the spectrum of ailments currently addressed and the technology now employed, the diagnostic and therapeutic pathways being applied are almost innumerable.
It is a daunting task to identify those components of care that add little or no value while preserving untouched those that are essential. The teams that rise to meet this challenge will require not only the tools of modern statistical process control and continuous quality improvement, but also a deep understanding of medicine.
Physicians must come to understand that they are not victims of the drive for efficiency in healthcare, but rather are being called to the vanguard in order to provide leadership for this effort.
In the future, less money will be spent per patient overall to deliver healthcare. Rising consumerism will require price transparency and will drive healthcare systems to justify their costs.
Market forces will favor bundled payments (“paying for product”) as the most effective means to achieve the required efficiencies.
In the context of each of these irresistible forces driving change, physicians will be indispensable to the process of innovating and eliminating aspects of care which provide no value.
About Dr. Gordon Morewood
Dr. Gordon Morewood currently serves as Chair and Professor of Clinical Anesthesiology at Lewis Katz School of Medicine at Temple University. His research interests include pulmonary hypertension in surgical patients, knowledge transfer in graduate medical education, and incentive systems for medical professionals.
1) The National Health Expenditures Accounts, accessed 03/01/2019, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html
2) The Economic Case for Health Care Reform. Council of Economic Advisers, Chair’s Remarks, 06082009. Accessed 03/01/2018, http://web.archive.org/web/20161110172234/https://www.whitehouse.gov/administration/eop/cea/chair-remarks-06082009
3) Hearings before the Joint Economic Committee, Congress of the United States, Ninety-Ninth Congress, First Session. January 16 and 17 1986. Page 262.
4) Why GE, Boeing, Lowe’s, and Walmart are directly buying health care for employees. Slotkin JR, Ross OA, Coleman MR, Ryu J. Harvard Business Review June, 2017. Accessed 03/01/2019, https://hbr.org/2017/06/why-ge-boeing-lowes-and-walmart-are-directly-buying-health-care-for-employees
5) Bundled payments for care improvement (BPCI) initiative: general information. Accessed 03/01/2019, https://innovation.cms.gov/initiatives/bundled-payments/
6) Journey to value: The state of value-based reimbursement 2016. McKesson. Accessed 03/01/2019, https://www.changehealthcare.com/blog/wp-content/uploads/vbr-study-2016v3.pdf
7) International Social Survey Programme (ISSP) 2011 – “Health and health care” – ZA No. 5800. Accessed 03/01/2019, https://www.gesis.org/issp/modules/issp-modules-by-topic/health-and-health-care/
8) Patients’ Perspectives on Health Care in the United States – A Look at Seven States & the Nation. Published February 2016 by National Public Radio / The Robert Wood Johnson Foundation / Harvard T.H. Chan School of Public Health. Accessed 03/01/2018, https://www.rwjf.org/en/library/research/2016/02/patients–perspectives-on-health-care-in-the-united-states.html
9) 2018 Employer Health Benefits Survey – Section 7: Employee cost sharing. Henry J. Kaiser Family Foundation. Accessed 03/01/2019, https://www.kff.org/report-section/2018-employer-health-benefits-survey-section-7-employee-cost-sharing/ – figure715
10) Rising Consumerism – Winning the hearts and minds of health care consumers. Coughlin S, Wordham J, Jonash B. Deloitte Review (16);2015. Accessed 03/01/2018, https://www2.deloitte.com/content/dam/insights/us/articles/consumerism-health-care/DR16_rising_consumerism.pdf
11) How to Pay for Health Care: Bundled payments will finally unleash the competition that patients want. Porter M, Kaplan R. Harvard Business Review July-August, 2016. Accessed 03/01/2018, https://hbr.org/2016/07/how-to-pay-for-health-care
12) Medicare Payments for Common Inpatient Procedures: Implications for Episode-Based Payment Bundling. Birkmeyer JD, Gust C, Baser O, Dimick JB, Sutherland JM, Skinner JS. Health Services Research 2010(45);1783-95.