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March 9, 2016

Why Healthcare Costs Soar (Part 5)

Summary:

Hospital mergers and acquisitions of physician practices keep driving up costs. It's high time we changed the equation.

Photo Courtesy of UC Davis College of Engineering

Readers of Cracking Health Costs know that healthcare is both complex and consuming, and an ever-greater share of GDP in the U.S., while our health outcomes are falling behind our peer countries.

According to the 2015 Health Care Services Acquisition Report, the deal volume for businesses in the healthcare services sector rose 18%, with 752 transactions in 2014, for a total of $62 billion; acquisitions of physician practices 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 affordable care organizations (ACOs), we should expect the number of ACO contracts will continue to expand beyond the 750 in existence today, and the value-based concept sounds good. But 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 Feb. 10, 2016, issue of Medical Economics magazine. Is there real motivation to change?

Hospital mergers lead to average price increases of more than 20% for care, while physician prices increase nearly 14% post-acquisition. The result: The value-based contracts will be based on higher fees for the combined entities.

In Part 3 of this series, the provider we mentioned built a strong reputation, which let it charge higher per-unit fees. But, when that provider enters into value-based contracts, renewals will depend on the ability to hit cost targets agreed on with the insurance companies. While the per-unit price in those contracts will be important, the Seattle provider’s biggest opportunity is to establish a more consistent process of care among its physicians, so employers stop paying for the wide variation in treatment and for unnecessary care.

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, many people are getting substandard care.

So why is there still variation? Well, if you sold a consumer product, like a flat screen TV, that had wide variation in results yet commanded a premium price and saw sales stay strong, how motivated are you to change your process?

With TVs, there is ample competition. Consumers will purchase another TV brand if one is over-priced or of poor quality. But, in self-insured benefit plans, most employers have not had the appetite to take tough but necessary steps to engage in disintermediation despite the huge differences in price and quality.

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

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About the Author

Tom Emerick is president of Emerick Consulting and cofounder of EdisonHealth and Thera Advisors.  Emerick’s years with Wal-Mart Stores, Burger King, British Petroleum and American Fidelity Assurance have provided him with an excellent blend of experience and contacts.

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About the Author

David Toomey is a senior healthcare executive with 30 years of extensive healthcare expertise in addressing the fragmentation within the healthcare system. He spent 25 years with two national insurance companies, before he spent close to 5 years in an early stage healthcare company.

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