EP346: How Did Health Systems Get Addicted to the Inflated Prices They Charge Employers and Some Patients? 2021 Update, With Peter Hayes, President and CEO of the Healthcare Purchaser Alliance of Maine

In this healthcare podcast, I speak with Peter Hayes, who is president and CEO at the Healthcare Purchaser Alliance of Maine and a national presence in healthcare strategy, innovation, and a frequent keynote speaker. One thing, among many, that Peter said during our conversation struck me. He said it will take a village to fix what ails the healthcare industry in this country. There are too many interdependencies. This point obviously resonates around these parts because it’s the rationale for the Relentless Health Value podcast. We started this show on the recognition that if you want to achieve anything in healthcare, you cannot do it without collaboration/cooperation/grudging acquiescence of other stakeholders in the patient journey or the payment journey.

And when I say, “You can’t do anything,” I mean you can’t sell anything, you can’t improve patient care, and, most relevant to this particular episode, you can’t contain prices. If we’re talking about health systems (for example, hospitals and the like), they are not going to curtail their price hikes or improve the value of care delivered or safety or infection control really unless patients and employers and CMS and others demand that they do—and unless employers and others do some of the five things that Peter Hayes mentions at the end of our conversation. Spoiler alert there.

For context to this discussion, let’s check in with some of the biggest, most powerful health systems in this country. If I limit this comment to the “nonprofit” ones—and I say “nonprofit” with air quotes because what does that mean exactly?—look, I know there are many health system execs that listen to this show, but there’s some inalienable facts here. And let’s talk about them with the intent of fixing them because nothing is going to get fixed that isn’t talked about.

It’s not my nature to mince words, so I won’t. Many hospitals are, by almost every account, pretty darn inefficient. And they don’t do cost accounting, but then they’ll scream and claim to be losing money when paid the exact same prices for certain services that other hospitals can get paid and make a fair profit. Crappy workflows cost money. Talk to anybody who has watched even the trailer to a Six Sigma course. Another thing that costs money is when all the burned-out doctors quit and you have to recruit new ones, but that’s a topic for a different day. Listen the EP323 with Arshad Rahim, MD. 

But there’s also inefficiencies in how many health systems purchase supplies. (Listen to EP281 with Rob Austin for more on that.) Further, paying the C-suite millions of dollars but maybe underpaying or understaffing nurses has consequences. There’s complaints about Medicare payer mixes, but then somehow there’s enough spare shekel to put a waterfall in the lobby. Nonprofit hospitals also don’t pay any taxes, keep in mind, which is a huge financial windfall, especially when they provide vanishingly small amounts of charity care compared to revenue. See the top 10 health system hall of shame in this category here.  

Here’s another point to ponder: Amongst the hundreds, thousands, of requests I get from PR firms pitching guests to come on this show, there are plenty from what appears to be a pretty large cottage industry that I had never heard of before. I’ll call it the real estate for nonprofit hospitals cottage industry. From what I can gather by the promo copy, this involves buying up medical office buildings, not paying any real estate taxes, and then leasing out the space. I should have one of these guys come on the show just to shine some light on whatever this apparently pretty common shenanigan is. As Vikas Saini, MD, from the Lown Institute has said, “No margin, no mission” can become an excuse for all kinds of questionable behavior.

So bottom line, we have employers, employees, taxpayers, cash-pay patients whose federal and/or state and/or local taxes are going to support these nonprofit hospitals—but then there’s this double tax. Because they claim to be losing money on Medicare patients, they justify cost shifting some pretty big bucks onto the commercially insured patients, who are then paying, on average, some wildly inflated prices for healthcare services. This might be considered a double tax if you think about it: tax dollars going to the IRS directly and then after-tax dollars buying that knee replacement for $125,000 that should cost $25,000. Consider that a $100,000 double tax.

But why should a hospital with a motive to maximize margins quit it with their questionable and secretive billing practices if employers just pay whatever the bill is no fuss no muss?

Short answer: They won’t. So, it’s going to be up to someone else in the village to make it untenable to continue. It’s going to be up to another party to slow that roll.

In this conversation, Peter Hayes talks about the RAND Hospital Price Transparency Study. 

One last thing that may or may not be relevant here, but I can’t resist a good sidebar. New catchphrase I have been hearing lately: the “deconstruction of hospitals.” Have you heard it, too? In fact, I was listening to Zeev Neuwirth’s podcast recently that featured Raphael Rakowski. Raphael said that the average fixed cost of any given brick-and-mortar hospital is 65% of revenue. So, just having the building, the physical plant, and paying for all the things you need to pay for to run that physical plant is really high. I heard Jason Wells say in a HealthIMPACT forum the other day that it costs a million dollars to build a bed in California due to all the regulatory requirements. Add to that something Christin Deacon highlighted the other day on LinkedIn about how operating rooms are empty 30% of the time.  

So, it makes me wonder whether some of the issues that hospitals have when they claim that they are losing money on Medicaid or Medicare is because their fixed costs are out of whack. This potentially disproportionate situation, however, is one reason why hospitals really have to watch it for hospitals at home or virtual offerings. After all, this is exactly how Amazon ate everybody’s lunch. Erase 65% of your costs, or even 50% of your costs, and that cost-plus profit threshold becomes a weapon of mass destruction.

At the end of this podcast—the very end, so if you’re in a rush, jump to 28 minutes or something [32:45]—Peter gives five ideas for employers to limit the ability for hospitals to take advantage. If you’re a hospital exec that’s listening, I would urge you to please help your local employers do these things. Let’s all get on the same team here to improve the health of our communities with pricing and business models that are reasonable and fair. Don’t be like the hospital that Katy Talento is going to talk about in an upcoming episode who won’t do direct contracting with employers because the coding is kind of a hassle. Seriously now.

You can learn more at purchaseralliance.org.

Peter Hayes is president and CEO of the Healthcare Purchaser Alliance of Maine and formerly a principal of Healthcare Solutions and director of associate health and wellness at Hannaford Supermarkets. He has been in innovative, strategic benefit design for the past 20+ years. During the past several years, Hannaford has received numerous national awards in recognition of the company’s commitment to working collaboratively with healthcare providers and vendors in delivering health benefits that are focused on value (high-quality efficient care). Hannaford Supermarkets has been successful in this arena by focusing on innovative solutions for patient advocacy, chronic disease management, and health promotion programs. Hannaford was recognized by receiving the National Business Group on Health Platinum Award for the health promotion and wellness programs three years in a row. These programs, along with healthcare delivery strategies, contributed to a flat trend line over five years.

Peter has also been involved in healthcare reform leadership roles on both the national and regional levels with organizations like the Center for Health Innovation, Care Focused Purchasing, and Leapfrog. He’s also cofounder of the Maine Health Management Coalition (now Healthcare Purchaser Alliance of Maine) and has been appointed by two different Maine Governors to serve on Health Care Reform Commissions to recommend public policies to improve the access and affordability of healthcare for Maine citizens.

07:51 Who are the commercial payers?
08:48 Are hospitals actually losing money on Medicare and Medicaid?
11:26 Is cost inversely connected to quality when it comes to hospital care?
13:46 “A lot of hospitals don’t do cost accounting.”
13:59 If hospitals don’t know their costs, how does Medicare know their costs?
15:52 “In the hospital financial world … they start the budget upside down.”
18:48 “There’s plenty of accountability to spread around for where we are.”
20:30 Do employers have any options in the current health system situation?
21:39 “If this market’s going to change, purchasers have to step up and start demanding more accountability, more transparency.”
26:21 How is the new transparency legislation impacting plan sponsors and employers?
29:41 EP342 with Christin Deacon.
32:38 “I think the whole dialogue around how we pay for hospital services is going to really change.”
32:45 What is Peter’s advice to employers?

You can learn more at purchaseralliance.org.