Introduction and Episode Overview
[00:00:00] Stacey Richter: Episode 483. "To Contain Skyrocketing Healthcare Costs or Renewals, You Gotta Understand How the Flywheel Works." Today I am speaking with Jonathan Baran, and you can call this Part 1 the Flywheel Downward Spiral.
[00:00:33] Stacey Richter: We're gonna talk about EHR systems today, electronic health records. It was unexpected when Jonathan Baran brought them up, I gotta say. And yet, part of the flywheel for sure. I see that.
To listen to this episode or read the show notes with the mentioned links, visit the episode page.
Understanding the Flywheel Concept
[00:00:43] Stacey Richter: But let me start from the beginning.
Did you listen to the show with Preston Alexander? Here's the short version carriers and the not transparent brokers and EBCs, employee benefit consultants, they actually, this crew, actually benefits, they make more money when employers pay more for healthcare prices going up, not usually a problem.
Whoa. Did I just blow your mind? That's not what the marketing says and sure. No one wants a mid-year unexpected anything that the actuaries didn't predict.
But if we're talking commercial markets where the ultimate purchaser is not the carrier, but some self-insured employer or other plan sponsor, then yeah. I mean, it's always true that someone's cost is someone else's revenue stream. It'd be problematic to forget that.
And carriers make a percentage of premiums. This is their underwriting profit, but they also make a percentage off of float. Right? Take those premium dollars and invest 'em in the bank until the bills come due. Again, there's a whole show on this with Preston Alexander from a couple of weeks ago.
All this said, how does a carrier ensure max revenue from its commercial service lines? Well, don't actually control underlying healthcare costs. The best way for a carrier to make the most money is for premiums to be as high as they possibly can be, because anyone making a percentage of a higher number makes a higher number. Anyone investing a higher number makes a higher number in interest.
But conundrum. What do you put in your marketing so that it looks like you're controlling costs, but you actually don't have to control costs because you kind of don't want to if you're obeying your fiduciary responsibility to your shareholders to margin it up.
It's impressive actually how they have achieved this. You know, have your marketing cake and eat the profits too. And spoiler alert, this is the concept our flywheel spins around. It's the axle of our flywheel. It is so very, very clever. Here it is.
The Role of Discounts in Healthcare Costs
[00:02:48] Stacey Richter: Talk in terms of discounts, not underlying costs. Sell discounts. Honestly, whoever came up with this, get the employers to buy discounts. This deserves a prize from the, your margin is my mission set. Someone at some conference in Boca Raton 20 years ago probably got some Stanley Cup sized trophy.
So again, if I was gonna make one concept, the greased up axle of the flywheel we're gonna talk about today, it'd be discounts. And when I say discounts, I also kind of mean anything that is a discount just spelled with different letters, like rebate or shared savings to a certain extent.
Listen to the show with Chris Crawford and Cynthia Fisher for more on those two terms. Ann Lewandowski talks about this also.
In fact, now that I'm thinking about this, the Employer Coalition of Louisiana quoted Ann Lewandowski from that episode. They said, "Health plans continue chasing rebates simply because they are presented as savings and dangled like a golden carrot. However, it does not address the cost problem."
Before I get into what discounts/rebate/shared savings even mean as a general construct and why I'm nominating them for the honor of claiming that middle of the flywheel prime real estate, let me just quickly explain the term flywheel in case anyone is unfamiliar.
Jim Collins, the author of that famous book, "Good to Great”, he coined the concept of a flywheel, and he wrote, "No matter how dramatic the end result, business sea changes where some company makes lots and lots of money never happen in one fell swoop. There is no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment. Rather, the process resembles relentlessly pushing a giant heavy flywheel turn upon turn, building momentum until a point of breakthrough and beyond."
And this is why renewals can be 9% or 22% or 36% when inflation is a fraction of that. It's because we have ourselves a flywheel in the healthcare industry that is spiraling on behalf of companies who are starting that flywheel spinning. And the faster it spins, the more revenue flies out of it.
Jonathan Baran, my guest today really nails what the healthcare flywheel is and how it works in the episode that follows. So I am not gonna get into it right now. I'm gonna focus on the middle of the flywheel. This whole discount thing as kind of our tee up and lead in.
So middle of the flywheel. What do discounts even mean? I bought a shirt the other day that had a list price of $600. I'm not making this up, but before you think I'm all that and a bag of chips, let me tell you, it was 90% off. So I got a bargain and I bought it for $60. I'm thinking I'm amazing, right? Super shopper.
Except it was a $60 shirt, like it was made of cotton with no thread count, and the hemline was a little crooked. You get my point.
Scott Galloway, I get his newsletter. Anyway, he wrote the other day, "The way you become a billionaire or create massive shareholder value is by inventing a product that exploits a flaw in human instincts."
And right selling discounts does that for sure. Buyer thinks they're amazing, and seller is laughing all the way to the bank because keep in mind, in healthcare world, you wouldn't know the original price of the shirt and you wouldn't know the final price. All we'd know is we saved 90%. Next year I could be super pleased with myself because I got a 95% discount on my new replacement shirt.
Did I get a better price though? Who knows, the new blouse list price could have been $1,800 or whatever, but just try to get that data point and you'll find out fast enough, whether your broker, carrier, or PBM or out-of-network network has any interest in transparency. Listen to the show with Dave Chase that's coming up for a whole lot about that.
[00:06:48] Stacey Richter: Okay, so that's your lead up to where you're gonna drop into the healthcare flywheel today with Jonathan Baran. So, what you're gonna hear today, you can call this part one of the conversation, and this is the flywheel. As it spins, I'm gonna say a direction that does not behoove plan sponsors, plan members, taxpayers.
Next week though, come back because we're gonna have part two of this conversation where we reverse the flywheel and send it spinning the other direction. That's gonna be part two of the show, so do come back next week to hear that uplifting segment.
Also, in the podcast feed today, there's a bonus clip, and in this bonus clip it's, it's like four minutes or five minutes long, but Jonathan Baran and I do spend a little bit of time talking about how, as we have conversations like this, it's really important to keep in mind that we're talking about an entire, you know, stakeholder, if you wanna use that term. We're not talking about every single individual. As I just said at least three times, my guest today is Jonathan Baran. He has always been a healthcare entrepreneur. Today he is co-founder and CEO of Self Fund Health, which is committed to challenging the expensive healthcare system in Wisconsin.
If you are in Wisconsin, do look them up. Self Fund Health, I am so pleased to tell you, as I am always so pleased to tell you did make such a kind offer to help out Relentless Health Value financially. You and the tribe here are really, really great folks who I truly appreciate. Please support Self Fund Health again if you are in Wisconsin.
And with that, here we go. This episode is sponsored by Self Fund Health, and my name is Stacey Richter.
Jonathan Baran, welcome to Relentless Health Value.
[00:08:29] Jonathan Baran: Stacey, thank you for having me today. Truly, it is an honor to be here today because your podcast is one I've listened to over the years, and it has been one of the single best resources for actually understanding what is going on in this healthcare ecosystem.
[00:08:42] Stacey Richter: Thank you for the lovely compliment.
So Jonathan, let's discuss, and I'm going to use, usually I say the health industry, but in this particular conversation, I think I'm actually gonna say maybe this is a little bit of foreshadowing, The System that we have here. Because we're all talking about this in the context of a flywheel, which is very systematic.
[00:09:02] Jonathan Baran: Let's enter the flywheel.
The Impact of Renewal Season on Employers
[00:09:15] Jonathan Baran: At the renewal of the employer. So it's renewal season and we've got our first renewal that's coming up. And what my goal is in this conversation is to use that point as a jumping off point to understand how did we get to this relatively large, usually at a minimum renewal. And then what are the behaviors of all of the sequential stakeholders that led us to this and is actually going to perpetuate the cycle unless we do something to break it.
There's no good spot to enter a flywheel, but that's where I'd like to start.
[00:09:35] Stacey Richter: I'm picturing in my head a flywheel as you, and you just used that term, this sort of spinning wheel, and as you said, if you have a circle, it's sort of hard to find the beginning.
So let's begin with renewal season as kind of the push of the beginning of this flywheel. What goes on? Why are you thinking renewal season is the starting point here?
[00:09:56] Jonathan Baran: It's emblematic because for most employers, they only think about healthcare during renewal season. And we should also take a giant step back first, as to say in our country, healthcare is financed or is largely driven from dollars from two entities. The governments, and from the employers. Right?
Today we're gonna talk mostly about the employer side. And for employers, they only think about healthcare, largely speaking during renewal season. When they get this big increase on their second or third biggest expense item.
Usually like a good renewal is 9%. I'm just gonna throw at a number. Usually it's anywhere from 6 to 9%. That's viewed in the industry as a good number. Now, you've spent a lot of time on this podcast talking about the fact that the insurance carriers aren't exactly incentivized to control costs.
And I would argue the best spot to look for evidence of this is in the fact of this, let's take this 9% renewal. We would be told as the employer, 9% is a good renewal. You did well. Things are performing well. But in what other industry is a 9% renewal, a good thing? It's gets framed with this. Its medical trend. It's the, this is just the rate that healthcare insurance goes up. But let's dig a layer deeper.
Are we saying doctors are getting a 9% raise? Well, that's not the case. Because we've seen historically physician reimbursement is actually is flat or maybe even declining. Is it going to the nurses? Well, all the strikes and things across the country that are leading to nursing shortages, which tell us that's not the case.
And so fundamentally, that 9% is not going to improving patient care or patient outcomes.
[00:11:35] Stacey Richter: We're starting with renewal season and just a consultant or broker who is representing a care, whatever is happening in there, the employer is told that spend is gonna go up 9%. And to your point, the narrative that we often hear from all of these entities, so like not just the carrier, saying, Yeah, you know, it just, it is what it is. It's, it's going up 9%. Year over year, by the way, so this is the opposite of compounding interest.
The point that you're making making is, well, what's the value of that? What's the impact of this? The cost to insure a family of four is now $35,000. If the narrative of any of, or all of these entities is controlling healthcare costs, and then you've got it going up year over year.
[00:12:21] Jonathan Baran: That's my point is that it, it just, let's, let's just raise the flag and then let's see where, let's see where this takes us.
[00:12:27] Stacey Richter: Alright, let's see where this goes. So, all right, my healthcare cost just went up 9%, I guess. Thanks. 'cause it only went up 9%, which is three times as much as inflation. But okay, then, then what happens?
[00:12:37] Jonathan Baran: In general, every employer healthcare is their second or third biggest expense, but most don't run it like a P&L, as you said, to an EBC, to a healthcare broker. The simple incentive structure of an EBC, of a broker is to either keep or grow their book of business.
So what does that mean? That means keep the employers that they're working with happy. As well as go out and bring in new employers to work with.
For the average broker though, they're now caught between a rock and a hard place. The rock and the hard place is, employer just got a 9%. They're going back to their broker and they're saying to them, Mr. And Mrs. Broker, what's going on with our costs? Why are they going outta control? What can we do about this?
The honest truth is that for the average broker, there is not a reliable, sustainable solution that they have found to control healthcare spend. Costs have just continued to keep going up and up.
So what does the average broker do? The average broker, because of how the in particular, the insurance carriers present the data relative to the plan, brokers are trained to talk in these shell games of discounts and network access among many other things. So the tools, the data that a broker is presented by the carrier gives the illusion of price control.
It's actually, it's far from, and so just a great example that we always hear right, is when an employer presses a broker on controlling costs, the primary language that they speak is the language of discounts.
A conversation might go something like this. Your spend was outta control. The plan performed really poorly, and you're currently with carrier A. And carrier A has a 42% discount on average off of billed charges. But we have another carrier, carrier B, and they have a 46% discount off of billed charges, so a 4% improvement.
This then gets presented as a meaningful difference. Oh, this 4% bump. But what are we actually talking about here? Because when we're talking about discounts, we're talking about discounts off of billed charges or the charge master rate.
So I'm gonna use this example a lot in this conversation, but a simple MRI. An MRI may have a list price of $10,000, and so you're getting a 46% discount off of a list price of $10,000, gives you an MRI that's $5,400.
And that sounds great until you realize that the actual market rate for an MRI is 5 or $600. Now, by this presentation or this framing, the employer is thinking that, oh, between carrier A and carrier B, I'm actually making a meaningful difference or improvement. But the reality is both are not very good.
This is just one example, but it starts to begin to speak to the framing for what's gonna lead us into next, which is how employers then start to continue to think about this and perpetuate this motion.
Perverse Incentives in Healthcare Spending
[00:15:45] Stacey Richter: What I'm hearing here is the start of a perverse incentive. Right outta the gate here, the purchase of discounts.
We have discussed this so often, especially relative to pharmacy discounts, but the same thing is very much true relative to medical. Like if we're buying a discount, then what everyone's incentive is, is to maximize the discount. Chris Crawford talked a lot about this.
So like how do you maximize the discount? Well, you get a really high list price. You make the list price really high, and then you can give a huge discount without actually lowering prices.
[00:16:21] Jonathan Baran: Yes, this is the first overwhelming narrative where we're not actually talking about the underlying cost of the healthcare, which begins to then spiral us in a direction that is orthogonal to what we actually care about.
[00:16:34] Stacey Richter: All right. So I just bought the biggest discount. Not understanding, like thinking I'm doing right. And, and I think to your point, like if this is what's getting perpetuated, if somebody comes in and they're very adamant that this discount is the way to go, so now all of a sudden we're myopically focused on discounts. What happens next?
[00:16:55] Jonathan Baran: I would argue now this framing now spills over into the employer. So because the employers learn to think about healthcare from their EBC, brokers sell and speak in the language of buying insurance. I'm talking about things like discounts and network access. Is this doctor in or out of network or deductibles?
And this is then how the employers learn to buy. I'll make this statement that employers need to stop buying insurance and they need to learn how to buy healthcare instead. Because going back to my previous example, what in the realm of insurance is actually going to allow us to get more $500 MRIs? Are deductibles going to drive that?
Some would argue maybe in the past they would've, but they certainly have not. Right? HSAs, all of these things through this process, are we learning to buy more $500 MRIs, buy healthcare more efficiently? No. Employers think in terms of rebates, oh, I got this big rebate. They celebrate them, but we all know from previous shows, right, that effectively that's an interest free loan that you are paying to a PBM. So like these are not things to celebrate. So what we hear from employers, “Oh, I tried self-funding and it didn't work.
Well, the reason it didn't work is because you didn't change your underlying buying behavior. If you don't do anything to influence what services you're buying, nothing can be really be expected to happen.
You changed how you paid for healthcare. It's like me complaining about the cost of my groceries and I go to Whole Foods all the time. I'm getting the most expensive groceries and I think that by changing the way I pay for those groceries. It's the equivalent of paying with a credit card versus cash from cash to credit or vice versa, right?
Is gonna influence the cost of my groceries. Well, of course not. No, I'm gonna have to go to somewhere else that charges cheaper groceries, spend less, or get different groceries to drive down that cost, right?
And so this is the framing or how we think about this, is this employers are buying insurance, they're not actually buying healthcare. But this is set up by that framing that we started with from the EBCs for how they frame the problem, again, driven by the upstream incentives of the carrier.
[00:19:17] Stacey Richter: So if I'm laying out our flywheel here, we started with the employer, as you said at the very top of this conversation, there's two entities that ultimately are the purchasers of healthcare. One of them is the government. The second one is employers.
So we started out with the employer. Then what you talked about is these carriers, insurance carriers, PPO networks, what whatever we want to call them. I mean, they're vertically integrated, so probably there are many names that would apply here.
But what they do is they tee up the whole conversation relative to discounts and as a publicly traded entity, they have one fiduciary responsibility, which is to their shareholders. And one of the things that they have cottoned onto early. It's undeniable. If you wanna make money and you sell discounts, then underlying costs can go up.
That means premiums go up, they take a percentage. Now they're making more money. It's not very mathy math even. Right. Like carriers wanna make more money. They have to have the underlying cost of healthcare. They have to have healthcare. We really expensive, especially as a middleman. Like more money equal more money.
But then that trickles down to the brokers because they give the talking points to the brokers who then start talking discounts. So then the buyers, obviously the employers were here, are trained now to buy on discounts. Flywheel starts to spin because you start getting RFPs that are all about discounts.
Rina Tikia wrote a really interesting post the other day. That's fully aligned with what you're talking about here. She wrote, "Self-funded plans must shift their mindset. This isn't traditional insurance."
Rina Tikia, she wrote, "It's healthcare financial management, and [this] distinction is critical. The carriers, PBMs, and TPAs aren't taking on risk. [There's no risk here.] They're offering a service and that service needs to be held accountable like any other vendor relationship. Too often, lack of transparency and operational complexity are mistaken for inevitabilities when in reality their business strategies. Plan sponsors need to dig deeper… ‘evaluate, measure, and monitor’ continuously. The stakes are too high."
And this is something that's been coming up a lot lately. Ge Bai just wrote a big, there was just a big study that came out about the same thing.
That's very aligned with what you're saying here, like manage the spend.
[00:21:22] Jonathan Baran: Yes. Rina is spot on. Insurance is for the unknowable risks when we have known things that we have to purchase, primary care, MRIs, all these simple things, we have to learn to just like buy those based on cost and quality. Buy them like you buy anything else as a business.
And this is probably the most bullish argument that you could make for employers being the agents of change, is like employers, generally speaking are really good at controlling costs. That is something that as capitalists we have figured out. Now we've just gotta apply that thinking.
We've gotta tease apart these two things, the insurance from the healthcare, and then we've gotta just focus on how do we get more cost effective healthcare.
[00:22:06] Stacey Richter: As we're talking about this flywheel here, how it started with employers, went to brokers, kind of back to employers. So now we've got, maybe the employers are kinda showing up twice, maybe everything I just said is kinda like one big bubble at the very top of our flywheel.
How do clinical organizations, and especially hospitals like sometimes doctors a lot of times, and we've talked about this many, many times and other clinicians are maybe a little bit unaware of how their organization is, and I'm just gonna use in air quotes, “playing the game” or responding to incentives.
So if we're talking about some of these larger, maybe consolidated clinical organizations and they see this incentive coming down the pike and there's business people, what happens
Hospitals and Primary Care Dynamics
[00:22:47] Jonathan Baran: Next up, let's enter the world of the hospital, big health system. Here's what the executive of that big hospital sees. They've got a problem here. They have two types of patients. They've got those paid for by the government, and they've got those that are paid for by the employers. On government, business pricing is fixed. You can't negotiate.
But here comes the unchecked buying behavior of the employer with seemingly, at least for the last decade, plus endless pockets. And so there's two things that the incentive is going to align to. The first thing is that number one, there's no money to be made in primary care. All of the money is made in the expensive stuff. Imaging, surgeries, infusions, cancer. That's where the big ticket items are.
But importantly too, primary care acts as the funnel to expensive care. If I own and control all the primary care, then I know that I'm gonna get the downstream referrals because where you go for primary care is where you go for expensive care. And so the incentive now for me is hospital system executive, is to go out and buy up all the primary care organizations that I can. So then I control that downstream referral.
Now, importantly though, once I've captured the market, the incentive now flips. Because again, there's no money to be made in primary care. So the incentive is actually for it to degrade because as long as I am keeping the dollars flowing downstream, there's no incentive for me to invest in primary care.
So what happens? Panel sizes, the number of patients that are seen by a doctor balloon up two, three, we've seen four, 5,000 patient panels, right? So what then happens is it takes weeks or months to even see a doctor. You don't know who your primary care doctor is anymore.
Primary care is the best cost containment tool we have, but it's no longer that, right. On average studies have shown seven minutes is the average appointment. You only have time to prescribe and refer, right? Because I've got another patient that's coming in the door here, and so you can't address any of the real issues.
But as long as the, as it keeps flowing downstream where the real money is, then you're okay with that. That speaks to the then hospital side incentives, particularly from the commercial side, the employers.
[00:25:04] Stacey Richter: And I think at this juncture, the strategy, it's not just theoretical. I was just talking to somebody the other day who literally could not find a primary care doctor who was not owned by a hospital system. So that has been a very effectively deployed strategy. I mean, maybe all the hospitals had the same consultants.
The incentive is not to have amazing primary care. The incentive is to, as you said, be the top of the funnel so that these referrals happen and the shorter the visits. And keep in mind also, and this is some, this is a pretty standard emergency room tactic, understaffed, because the more the staff is pressed for time, guess what they do?
They order more tests, they're just like, I don't have time. And just send 'em for a CAT scan. And I'm throwing no shade. Like these are very difficult to spot manipulations. and this is why it's so important to separate individuals from the overarching organizations. Certainly not suggesting that there are any doctors or other clinicians or even some administrators out there who are thinking, Hey, this is a great idea.
I'm saying that as an overarching organization, these are the incentives of the organization and some people are spotting those incentives and taking advantage of them. So that ultimately is what's happening in "some" organizations who choose to do so.
And we did a lot of pods on this, boards of directors, etc.
So, okay, so now we have hospitals owning all the primary care and they're referring early. They're referring often. They're not necessarily preventing or controlling disease. They have no real incentive or very little to do so.
At the executive level, I just need to state, 'cause I always state this, so then what happens?
The Role of EHR Systems in Healthcare Costs
[00:26:35] Jonathan Baran: So then we reach the, at least for this conversation, the final stakeholder in the chain, the big electronic medical record systems. Most notably, I'm based out of Madison. There's a big one here. What they have done very well, they are very responsive to the needs of their customers.
Who are their customers at the end of the day? Their customers are the hospital system executives that pay for it. They're not the providers, they're not the clinicians, it's the executives. What is the thing that the hospital systems want? They want to turn every patient interaction into as many dollars as possible for their health system.
And so they buy these big electronic medical record systems to keep as many dollars inside their four walls as possible. So do you ever wonder why it's so hard to move data between organizations, between big hospital systems? It's not because the technology can't do it, right? It's because their customers don't want it, because data leakage equals patient leakage.
And this is exactly what hospital systems don't want. And so what these big medical record systems become is they become the digital moat that ensures that those dollars are maintained within the four walls of that organization.
And now you can begin to see as we go from renewal to EBC, to employer, to hospital system, to the medical record systems that keep these moats intact digitally, this flywheel in totality, that is now ultimately the only logical outcome is guess what, you're getting a bigger increase next year.
And the discounts are gonna get bigger. We've now completed this loop full circle.
[00:28:23] Stacey Richter: That last one there came with a little bit of a surprise, not often mentioned, but having listened to an Acquired podcast for three and a half hours on one of these EHR systems, probably the market leader, I can cotton onto to what you're saying there.
And just to sort of recap, who buys an EHR system at a hospital? Again, not, I mean, there may be committees that include clinicians, but a lot of times the decisions are made by the leadership. The CEOs of those organizations, and based on that Acquired podcast, if you listen to it, it's very clear that most of the EHR systems regard as their customer, not the doctors, but the executive layer of the hospital.
They know where their bread is butted and it is being, their POs are being signed by not docs and nurses and clinicians on the floor. It is somebody in the C-suite somewhere. And then if you look at where they're really focusing their time, it is on exactly what you're saying, making sure that turning every patient transaction into as much money as possible.
I mean, there is a reason, and in some ways this is fair. In some ways I know I would get an argument, right? 'cause some of these EHR systems do have some interesting clinical, especially lately, aspects to them. But like they've been called glorified cash registers for many years and there is an element of truth in that.
But what that does, these are large pieces of infrastructure that integrate and embed themselves into every transaction. So if you have a system which is designed to maximize the profitability, the margin of every transaction, and that is used to its fullest impact, now every transaction is costing as much as possible, becoming further and further divorce from what is the value actually?
Like? Is that a this, a good transaction is a bad transaction. You know, should this patient have even had this transaction? We are just maximizing transactions as early and often and as many as possible. That is what just happened there. And now we have a very well embedded and entrenched tech system driving to that end.
So now it's renewal season.
[00:30:36] Jonathan Baran: Yep. And we're back where we started. Right. And again, this just speaks to the how I started, which is just follow the incentives and then the behavior roughly speaking follows. There's a whole lot of specifics we glossed over. We simplified, obviously for the sake of this conversation, but you get kind of the big picture strokes that then leads us into, so what can we possibly do about it.
Conclusion and Teaser for Part 2
[00:30:57] Stacey Richter: So what can we do? How do we reverse this? We definitely have now understand how kind of, I'm gonna say the doom spiral, right? Maybe I wouldn't call it that. Maybe I'll call it the really expensive 9% year over year spiral, how that transpires. But if we wanna kind of reverse the direction here, what needs to happen.
On that cliffhanger? Come back next week because we're gonna have part two of this flywheel episode where Jonathan Baran explains. How to reverse the downward direction of the flywheel and have it start going in the other direction, which is much more aligned with the needs of members, patients, clinicians, the whole quadruple aim of making healthcare high quality as well as affordable.