The Maze of Health Finance

The Maze of Health Finance

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From the outside, the flow of funds in healthcare appears simple: Society puts money into healthcare and we get out health outcomes and revenue for the healthcare industry.  This simplicity is misleading, however.  Just as Dalton Caldwell tells us about music start-ups, it’s easy to think that you’ve figured out how to revolutionize healthcare, based on observing that one simple relationship: we put a huge amount of money into healthcare and get fairly little health out.  In reality, healthcare is a lot more complex.  It is a maze of interlocking financial relationships, contractual obligations, and misaligned incentives.

Let’s imagine a guy named Joe.  Imagine Joe has a dog, Buddy, and Buddy gets sick.  Joe takes Buddy to the vet, let’s call her Michelle. Michelle tells Joe he is in luck. It looks like Buddy has a condition that has been the subject of recent study and a newly developed surgery can help Buddy.  Michelle’s partner, a surgeon, has been trained on the procedure.  Buddy needs a CT scan to figure out whether he needs the surgery.  If the CT scan is positive and Buddy needs the surgery, there’s a 10% chance that the surgery will kill Buddy.  Even if the surgery is successful, in the best case, dogs only live about 18 months after the surgery (that’s about 10 dog-years).  “Wow,” says Joe.  “That sounds expensive.”

“It is,” says the Michelle.  “The CT scan costs $1500.  If necessary, the surgery costs $6,000 and that’s assuming there are no complications.  You could be easily talking $10,000 or more.”

“Gee,” says Joe.  “That’s a lot of money, and I could spend it all and have Buddy die anyway.  Isn’t there a less expensive option?”

“Yes,” says Michelle.  “First off, even if the CT scan is positive, you don’t have to do the surgery.  There’s a chance that Buddy might just have a simple infection, and that’s what the CT scan is intended to rule out.  We could, I guess, skip the CT scan and just give Buddy the antibiotics in the hopes that he just has the infection, but if he doesn’t, he’ll die.”

“Hmmm…” Joe ponders. “That’s more than I saved up all last year.”


Now imagine that Joe is your insurance company.  Buddy is you.

It gets more complex.  Maybe Michelle’s veterinary practice has invested in an imaging center.  (The anti-kickback laws don’t apply to veterinarians.)  Michelle’s failure to refer patients for CT scans could affect the imaging center’s ability to make payments on the vendor-financed digital scanner.  Michelle’s partners were planning on the revenue from the imaging center to help pay their now-underwater mortgages.  Daytime use of the CT scanner is reserved for human scans, but insurance companies have negotiated such low reimbursement for scans that the fully-booked daytime use, after expenses, doesn’t cover the payments on the scanner.  The interest rate went up because, thanks to lower reimbursement, the credit rating of the center deteriorated.  The imaging center was relying on nighttime veterinary use in order to achieve positive cash flow.  Should Michelle have hard-sold the scan?  The surgeon in the practice was relying on Michelle’s referrals.  Without the scan, there’s no chance that Joe will even consider surgery.  Michelle, as a partner in the practice, would have gotten a piece of the imaging revenue and a piece of the surgery revenue.  Clearly, Michelle’s and Joe’s interests were not aligned.

Misaligned incentives don’t always result in bad care.  Today I work with a wonderful group of physicians.  Movement disorder neurologists are, in my experience, some of the most patient-focused physicians I’ve ever encountered.  There is a real debate about the value of services that generate tremendous profits for the hospitals that employ many of these doctors, and even some of those physicians who might be under the most pressure to deliver these services seem to be unafraid to express doubt in their value.

Having said this, I also know that there are physicians who do go the other way.  Drug, device, and test companies work hard to develop great products and sell them.  Banks finance capital purchases at hospitals and clinics.  Confirmation bias can be an insidious thing.  If a salesman has extolled the virtues of a drug, scan, or procedure, and, convinced, a physician invests in it, how likely is he or she to tell that patient who might benefit from it to wait and see?  Even more insidious, often the “salesman” is a respected colleague who developed it.  This is the least of the problem, as this scenario assumes an honorable physician: I’ve personally spoken to doctors who unabashedly explain that they make more money from their patients who maintain a moderate level of illness.

As an investment banker, I once got a call from a physician.  He was pitching to me the idea of my helping him raise money for a physician take-over of a failing hospital.  We said, send us the hospital’s financials.  The physician responded, “You don’t need to see the hospital’s financials.  They are terrible.  What you need to do is read Atul Gawande’s New Yorker article on McAllen, Texas.  Physician-owned hospitals make money.  It’s as simple as that.”  We were led to understand that the physicians would want the hospital to be profitable.  Whatever the debt service was going to be, the revenue would be greater.  If, for example, a neurosurgery practice was required for the hospital to get in the black, they’d get one.  Not only that, but they’d make sure it had patients.  I turned away the business; I don’t know if the deal ever got done.  There are rules that limit a physician’s ability to share in revenue from certain sources, but observation suggests that there are ways around this.

For the entrepreneur, these bad apples are actually the easiest to work with, as you can understand their motivations.  It’s the good and well-meaning parts of the system that make reforming medicine so challenging.  When I was a kid, my dentist looked in my mouth, probing my teeth and looking for trouble spots.  It took him 15 minutes.  My daughters’ dentist now has a technician x-ray their mouths. While my dentist used to have a staff of two hygienists, my daughters’ dentist has a staff of six.  My daughters’ dentist spends less than five minutes with her. Is the new way better?  Maybe it is: that’s the problem. I can’t help but noticing that this new way lets my daughters’ dentist charge a whole lot more for a whole lot less time spent per patient.  The sad thing is, between staff costs, negotiated rates and interest payments on capital investment, I wouldn’t be surprised to hear that both dentists, adjusted for inflation, got about the same income.  Yes, there are many new and revolutionary therapies that are changing people’s lives.  However, the major consequence of medicine’s increasing complexity seems to be, in many cases, increased complexity.

8 thoughts on “The Maze of Health Finance

  1. HTA made an easy story but still difficult to understand why we dont have at least the same quality of medicine as we used to 20-30years ago (you said it yourself…)

  2. Peter’s comments should encourage the medical community and payers’ for delivery of medical services to explore complex motivations advancing various solutions for improving and extending the reach of good healthcare. Reducing costs for delivering medical services and expanding access to healthcare coverage are not objectives necessarily at odds with eachother. Proposals relying on diminished standards of good medical practice should be rejected as an unacceptable solutions…for achieving either reduced healthcare costs or expanding access to good medical services. Cost effective solutions are near quickly available for maintaining good healthcare standards while expanding access to good medicine. Practically blending privatation and subsidies can produce wholesome objectives beneifiting healthcare providers and the general public.

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