The business of healthcare

In this article by Tom Emerick and David Toomey, founders of Thera Advisors, we describe a new view of business of healthcare.


Let’s face it, healthcare is a big business – it’s 17.5% of our GDP and expected to be at 20% by 2025. For the physicians and hospitals, the competition is on for the “under 65” patient as that payment is generally 150+% higher than a Medicare patient.

As a business owner, the healthcare suppliers have to determine if their pricing model is to offer a low price per service based on a higher volume, a high price per service based on a lower volume, or somewhere in between. Of course, you can have the occasional healthcare supplier charging a very high price per service with the goal of a higher volume. Yes, the insurance carriers will do their best to negotiate a competitive price per service with each supplier, but the reality is that there is up to a 300% price variation by a line of service amongst network providers.

The healthcare suppliers also have the option to just deal directly with the patients and not participate in a carrier’s network, and this scenario is more common with niche facilities and specialty providers. For facility-related expenses, there is not a Reasonable & Customary (R&C) reimbursement level, so out-of-network facilities are generally reimbursed at their higher submitted amount. There is a movement to implement a cap tied to a Medicare percentage for these types of scenarios, and more employers are adopting this option.

Once the healthcare suppliers define their pricing model, the next objective is to increase patient flow, which drives revenue. As seen with other industries, there are a number of initiatives to influence the healthcare buyers’ behavior. If you drive down a highway, it’s always interesting to see the number of healthcare billboards, and we are also seeing an increase in TV commercials. Some physicians have invested in their own facilities and specialty services, and they can drive patient volumes by scheduling procedures at their centers. In addition, a few providers may give patients financial incentives to use their services and facilities.

In a recent landmark decision, Cigna was ordered to pay an out-of-network provider more than $13 million to cover certain alleged underpaid claims and ERISA penalties. ERISA is the Federal law governing large employers who self-insure their medical plans (generally those with over 250 employees). In the lawsuit, Cigna made allegations that the supplier was failing to collect the patients’ deductibles and coinsurance, and this provider was accepting as “payment in full” the amount processed by Cigna on behalf of the employer. The Summary Plan Documents (the carrier’s contract with the employer and the employee) state that “the plan” covers a percentage of the bill, and the insured has a financial responsibility as well. Cigna took the position that if the healthcare supplier does not collect any payment from the patient, the plan has no payment due since the provider’s bill is to be a shared financial responsibility between the patient and the plan – if patient’s portion is waived, the plan’s portion is waived as well. The carriers’ intent is for the supplier to collect the deductible and coinsurance from the patient, so there is awareness of the supplier’s charges and of their shared responsibility for the bill.

When suppliers “forgive the patient liability”, these healthcare providers often have a revenue model of very high prices with the goal of higher volumes. Their mentality is that they’ll entice the patient to use their services since the patient does not have to pay anything, and the payment received from “the plan” will more than cover the patient’s forgiven liability.

Even though the average employee deductible is high at $1,300, most patients have not grasped that healthcare suppliers are running a business and that prices vary. While the employee (the patient) may save money when the provider waives their financial responsibility, they lose in the end as their employers’ costs increase, resulting in higher health insurance cost share with larger deductibles and payroll contributions for all employees.

The Court rejected Cigna’s claims denial for this provider, who allegedly forgave the patient’s financial liability. This ruling creates further risk to the affordability of healthcare for employers, as employees will be financially motivated to access care from suppliers with higher prices since the patient’s liability is forgiven. Can we expect other healthcare suppliers to implement a revenue model tied to high prices with no patient liability?

In speaking with a number of healthcare suppliers, many do not realize that most large employers self-insure their medical plans, and they perceive that the insurance carriers covers the costs. For us to solve this disconnect, the purchasers (the employers) have the opportunity to engage the healthcare suppliers (hospitals/physicians) in a collaborative discussion around supply chain management, quality, and patient safety, so the providers fully comprehend that the one ultimately paying the bill is monitoring their performance. I’ll look forward to sharing the results of this type of collaboration now underway in a major market. It’s time for employer-driven healthcare.


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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