Why Healthcare Costs Rise Faster Than General Inflation Part 5

By David Toomey and Tom Emerick


Readers of Cracking Health Costs know that healthcare is a big business. It’s both complex and consuming, and an ever greater share fo GDP in the US, while our health outcomes are falling behind our peer countries.

According to the 2015 Health Care Services Acquisition Report, the deal volume for the health care services sector rose 18%, 752 transactions in 2014, for a total of $62 billion; physician acquisitions accounted for $3.2 billion of the total. As healthcare suppliers continue to consolidate, what does this mean for the employers who pay for these services?

With the attention around value-based contracts and ACOs, we should expect the number of “ACO” contracts will continue to expand beyond the 750 in existence today. While the value-based concept sounds good, Dr. Eric Bricker’s blog pointed out that 41% of all physicians did not know if they participated in an ACO, as referenced in the February 10, 2016, issue of Medical Economics magazine. Is there real motivation to change?

As noted in the February 24, 2016, Health Affairs’ blog, hospital mergers have average price increases over 20%, while physician prices increase nearly 14% post-acquisition. The result: the value-based contracts will be based on higher fee levels for the combined entities.

In the last Seattle example (Part 3 in Series), the provider we mentioned built a strong market reputation, which resulted in their ability to command higher per unit fee levels.

When that provider enters into value-based contracts, their future renewal increases will be based on their ability to hit mutually agreed upon cost targets based off a higher fee level with the insurance companies. While the per unit price is important, the Seattle provider’s biggest opportunity is to establish a more consistent process of care among their physicians for the treatment of patients by condition, so employers stop paying for the wide variation in the treatment and for the unnecessary care being provided.

Here’s what we know: 1) there has been value based contracting, 2) there has been data to assess performance, and 3) yet there remains extremely wide variation in care among providers, especially for patients with complex health problems. Where such variation exists in healthcare, and such variation is ubiquitous, many people are getting substandard care.

So why is there still variation? If you sold a consumer product, like a flat screen TV, that had wide variation in results yet commanded a premium price, how motivated are you to change your process if sales remain at strong levels? In the TV example, there is ample competition to purchase another TV brand if the TV is over-priced or has poor results.

In self-insured benefit plans most employers have not had an appetite to take tough but necessary steps to engage in “disintermediation” ( Wiki definition of disintermediation) with those prices and quality differences. Benefit managers generally want the best care for their employees, but about half the providers in their networks are below average.

It’s high time for employers to replicate how purchasers in other industries have collaborated with their suppliers in addressing the process and quality  variations, and cost inefficiencies too.

In fact this kind of approach is way overdue.



Tom Emerick and David Toomey are founders of Thera Advisors. Their focus is to help employers maximize their role as the purchaser of healthcare services in working with suppliers to impact their population’s health and to lower costs.


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