Seven Solutions to Healthcare Reform (Part 5 of 7)

In the past four editions of this series, we explored the opportunity for using updated technology as a solution to the ever-increasing cost of healthcare. Within the second segment, we discussed providing consumers access to their information, in order to enable them to take more control of their own health and well-being, rather than the information and data existing in the mainframes and server farms of large insurance companies.

The third issue we analyzed, was using technology to empower the patient to assume more control of their health. We proposed taking the further step of providing a tangible reward to patients by paying them to improve their health, a concept that has been utilized by a number of large self-pay corporations.

Finally, in the fourth part, we discussed materially facilitating, promoting, and even demanding, coordination between providers and their patients, in order to encourage a higher quality of care. We also noted the CNBC article that stated, “patient-centered technology, is the best way to reduce the ballooning costs of healthcare that has occurred over the last five decades”.

Now, we will introduce our recommended fifth solution of advancing a more efficient and transparent system, toward the reduction of waste and administration.

When I entered healthcare over 25 years ago, the first thing I learned the “hard way” had to do with cost, pricing, and collection for services provided. I recall my first day as an apprentice practice administrator (if I can even say that today). The Medical Director of the office asked me if he should sign a contract with a managed-care company. My first question to him was, “Will we make money from it?”

The reply I got was, “I don’t know.”

The first issue with healthcare is that almost no one actually knows how much it costs to see, and/or treat, a patient. I was shocked, and still remain shocked, that most medical practices, and maybe even much larger facilities, do not know exactly what it costs to produce a product, service or procedure. In most cases, they have only a general knowledge of these costs, not the expense by procedure, or even hourly, in the reporting they produce for their monthly or annual summaries.

However, as a former real estate developer/contractor, I was very comfortable in cost accounting practices and principles. We knew how to price a building based on the general specifications, using a number of different metrics, such as by the linear feet of either interior or exterior wall, or by interior square foot and so on. We would break down every single component in a project to individual material items such as number of studs, feet of drywall along with tape and mud, and, of course, labor by category. In this way, we always knew what our cost would be on a given project.

So, my first task was introducing cost accounting to the medical practice as a resolution to the problem above. After accounting for all material cost, such as fixed, variable, direct and indirect, the short answer I gave the doctor was “No”, unless he wanted to lose about $5 per visit.

The contract brought in revenues and in this case, managed care costs, but it was structured so that we would not make a penny, just burn out the doctor and his staff. We ended up negotiating a better price, and volume guarantees. I pointed out to the doctor that his time was limited. It’s not a variable. Even in diagnostic enterprises where there is a great deal more profit margin; the pricing, timing and terms of payment variables are not unlimited.

The second shock was that 95% of the time, a medical practice or facility does not get paid what it bills. Again, I came from an industry where contracts were detailed, and payments were typically whatever was billed. Even modifications had change orders with agreement on terms and conditions of payment. I was shocked that the healthcare industry had, and still has, a very Byzantine payment history.

The consumer had no idea what our gross charges were, or what the insurance company generally paid, even though by law they received an explanation of benefits that detailed every single transaction paid by the insurance company. They typically had little to no idea of what their financial responsibility was going to be, in advance of any treatment or procedure when visiting a hospital.

Price transparency is an embarrassment in healthcare. I also recall, as a payer, we were negotiating contracts with hospitals, paying around 50% of the billed charges based on the charge matrix they provided. We were happy, and they were happy. Why were they happy? Well, generally they were historically, on their best day, only collecting about 40% of the total charges when you took into account indigent care, Medicare/Medicaid insurance company payments, and private pay patients.

We don’t believe that the healthcare costs curve will be reduced until the consumer has more visibility to the cost, and is empowered to have more control over the selection of provider. We have spoken in the past about data, but now, we’re actually talking about pricing.

Consumers need to be provided with a real estimate of cost, and a means to shop, not only for quality, but also by cost. This should be central to any U.S. plan to transform healthcare and reduce spiraling costs. Not only is there a problem with cost and lack of transparency in healthcare pricing and collection, we have also had to build monster administrative systems to receive, adjudicate and make payments for the services provided. The estimates of those administrative costs alone, even in the best case scenarios, adds a minimum of 20% to the total cost of care, and in some cases, I have seen the numbers closer to 30%.

So, this means that nearly $1 trillion of U.S. health care costs is for administration. As consumers, we are flooded by EOB’s, which then require a CPA to reconcile. Really, is this all we can do, in an era in which we have practically eliminated cash and paper checks?

The problem is at both the national and the state level; the solution will require cooperation from both. We also think it will require changes in old legacy and outdated rules. Rules we could easily write a book about. The federal and state government, and the alphabet soup of payers and regulators, are also a part of this problem. The consumer is a solution. In one example in March 2011, the U.S. Supreme Court stated that employers did not have to submit claims data to states, as they were protected from this by provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

We recently received the estimates for national health costs, projected out to 2026. This report predicts that, “costs are expected to rise over 80% in the next 20 years” from today’s levels. Although we will discuss this more in a future blog, for now, suffice it to say, we found the numbers staggering.

Are we scared yet?

What is a solution?

I visited a Silicon Valley tech company recently and the discussion came around to why it’s so hard for Silicon Valley to change healthcare, as it has changed many other industries. I responded with several interesting points.

The first, is that federal and state government employees and their beneficiaries account for nearly 50% of all healthcare expenditures in the United States.

Secondly, there is no IBM, Oracle, Facebook, or Google of healthcare. The largest companies in healthcare pharmaceuticals are worldwide, and the largest insurers have revenues in the tens of billions of dollars, but this is relatively insignificant compared to a $3.5 (USD) trillion-dollar industry. Healthcare for all purposes is still the largest cottage industry in the United States.

Third, there are too many state and federal laws that control the industry, including in many cases resource allocations that restrict, if not discourage, true innovations.

Finally, you have to innovate within the established lines, from the inside out, not the outside in. There will never be an Uber of healthcare. Well, maybe we should not say never, so let’s just say it is extremely unlikely that we will see an Uber in healthcare in the lifetime of any baby-boomer.

That said, the seeds of change have been laid down and are getting some roots. Some interesting opportunities have emerged with companies like Medlio, Castlight,, Healthcare Blue Book,, and one we helped start, MediXall Group, Inc., all who are trying to change things from the inside out.

We are convinced that the true price transparency could save, is hundreds of billions of U.S. dollars. These savings would be realized not only to the industry and to the payors by reducing the administration of claims, but more importantly, in real, tangible out-of-pocket costs to consumers.

We believe today that 25% of all healthcare can and should be eligible to be negotiated, eventually increasing to maybe 75% or 80%. To start that process, we have to change how traditional healthcare is priced, consumed and paid for.

This goes along extraordinarily well with our push for a more patient-centered healthcare industry that provides the consumer full-time 24/7 access to a personal wellness portal. This portal will give patients access to their medical records, the ability to reconcile cost and payment, and to serve as a platform for seeking providers, products, and services. Think about it as the healthcare version of what was once cash management accounts. When invented, those accounts consolidated cash, investments and credit in one simple access point. This, we are confident we will see in our lifetime.

– Noel J. Guillama, President