For a small group of vascular surgery centers in metropolitan Washington, D.C., it was local churches that turned out to be surprisingly lucrative.
It was at health screening fairs hosted by these houses of worship where Marty Makary, M.D., found surgeons drumming up business for pricey—and often unnecessary—leg stents. It’s among the collection of systemic and human examples Makary examines in his new book “The Price We Pay: What Broke American Health Care—and How to Fix It” as driving forces behind rising U.S. health costs.
Makary, a surgeon at Johns Hopkins and New York Times best-selling author, hits every segment of the market, from a health system in New Mexico that has sued 1 in 5 residents in town to a health insurance conference where brokers described over drinks why they usually aren’t helping employers get the best deal.
“Healthcare has adopted a business model that uses middlemen, price gouging and sometimes delivers care that can be inappropriate, and this bloated economy has a tremendous amount of waste,” Makary said. “So our research really asks the question: ‘What is the experience of the everyday American interfacing with our healthcare system?’”
I caught up with Makary recently to discuss some of the problems he highlights in his new book, which is being released Sept. 10, and some of his ideas on how we solve them.
FierceHealthcare: Why did you write this book?
Marty Makary: Hospitals are amazing places and there is a tremendous amount of public trust in hospitals. But I’ve been seriously concerned about the erosion of public trust by the price gouging and predatory billing practices that patients are describing all over America. Our research team found bills are marked up as much as 23 times higher than what hospitals will accept from Medicare. We kept hearing over and over again that, ‘No one is expected to pay these bills. Hospital CEOs assured me when I showed them inflated bills that nobody is expected to pay the sticker price.’ But that didn’t seem to match the stories we were hearing on the ground.
FH: One of the hospitals you highlight in this book in Carlsbad, New Mexico, had a practice of hiking prices and suing patients who were unable to pay. What did you find there?
MM: We decided to shift our research into the question: “Are Americans asked to pay the sticker price and if so, what happens when they can’t afford it?”
A woman sent me a message where not only was the bill inflated, but the care was—in her opinion, unnecessary—and the hospital had sued her. When I reached out, she said, “They’ve sued all my friends as well and garnished our paychecks.” I couldn’t believe this, and so I flew out to Carlsbad. The driver of the Chamber of Commerce taxi service that picked us up from the airport, the receptionist at the hotel, the waitress at the breakfast place, the clerk’s office staff, families in the courthouse: You couldn’t believe it. Everywhere you turned, people had been terrorized financially by this local community hospital. I thought: “Where is the spirit of medicine? Do these executives even know the consequences on the ground of these billing practices?”
FH: In the book, you mention many hospital executives don’t even know they’re suing patients.
MM: Oftentimes, there’s detachment. And when we’re detached from the consequences or problems, that’s when horrible things happen in societies historically. I found sometimes hospital executives, board members and certainly our research supports doctors not knowing about this practice. And when they find out, the clinicians are outraged. By and large, board members want it to stop … I think if you look at any major issue in the United States, whether it be race, poverty or healthcare, if we are not proximate to the problem, we tend to rationalize financial systems that enable the problem. In healthcare, what I’ve noticed is, when I would share these stories at conferences, other healthcare experts argued it was not a problem that was diabolical, they just weren’t proximate to the issue.
FH: You also document that many hospitals are doing the right thing.
MM: Most hospitals try to do the right thing. But I think it tells us a lot about the practice of suing patients and that it’s unnecessary. When all the revenue generated from suing patients amounts to less than the amount of the CEO pay increase in one year, which is something we’ve seen, the argument that it’s essential to sue patients in order for the hospital to be sustainable melts away.
FH: But obviously, the problem is not just about hospitals, right?
MM: A lot of people are getting rich in healthcare. We’ve created tens of thousands of millionaires that are not patient-facing. If you look at the earnings on Wall Street of some of these healthcare companies, for example, UnitedHealth Group reported a 25% increase in earnings in a recent earnings report. How do earnings go up 25% in an actuarial insurance business? They said on their call it was in part due to their pharmacy benefit manager (PBM), a well-known middleman that profits from spread pricing and money games. Hospitals are on target this year for their highest margin in history—5.1% based on early 2019 data. At the same time rural hospitals are closing, large hospitals are making barrels of money. Although they are claiming razor-thin margins, the cost shift accounting is so sophisticated, that they can use their profit to buy new buildings, pay down debt, buy more real estate, increase executive pay. What we have right now is an arms race of profiteering in healthcare where all the stakeholders are making a lot of money except for one, and that’s the patient.
FH: In the book, you talk about efforts to address practice outliers like those vascular surgeons through the use of big data, which led to the creation of the “Improving Wisely” initiative. What did you do?
MM: Most doctors do the right thing or always try to. But the fraction that are responding to the consumerist culture or the perverse incentives or are just not practicing state of the art care can cost the system a lot more money than those who aren’t … Instead of hammering doctors that do the right thing with reporting burdens and other hassles, we can shunt those resources to address outliers identified in the data using metrics endorsed by the experts in each specialty, and gold card the good doctors so they don’t have to deal with reporting hassles and the expense of the reporting hassles.
In studying the issue of inappropriate care and delivering measures of the appropriateness of care, we’ve been meeting with individual specialists around the country and many of these doctors are telling us about the practice pattern that a fraction of specialists in their field are doing that represents overuse. Our work called “Improving Wisely” partners with associations to send outlier physicians their data around a specialty-endorsed measure of overuse. What we’ve seen is, among doctors, among outlier physicians who see their data with a confidential dear doctor letter, that 83% reduce their pattern of overuse. The initial project two years ago that cost $150,000 has resulted in $27 million worth of savings. This is an example of a high consensus approach that results in real savings that you just don’t see in other areas. By and large, politicians are talking about different ways to fund the broken healthcare system and not ways to fix it. We need to talk about how to fix it.
FH: In the book, you really seem to try to take on everyone: doctors, hospitals, air ambulances, workplace wellness companies, PBMs.
MM: Almost all the voices in healthcare are beholden to some special interest or stakeholder. We desperately need a global critique of how this system has gone awry and there’s a lot of finger-pointing going on right now, especially at the insurance companies and pharma. But the reality is, we all have a piece of this pie. I don’t think there’s really any one villain in the healthcare system. I don’t even think there’s much deliberate malfeasance that goes on. I think we have a system that’s largely run by people doing what they are told to do and they are doing it in a place where they may not be proximate to the hardship the system creates.
FH: So the big question: How do we fix the problems?
MM: For every problem I described, I tried to describe one of the most exciting disrupters in this space. With the pricing failure problem, I highlight the Free Market Medical Association and the individuals who are saying they are going to make all prices transparent and fair regardless of who’s paying whether it’s a patient or an insurance company. There’s one fair price. Keith Smith of the Surgery Center of Oklahoma is offering one fair true price. Not a sticker price but a true price, regardless of who’s paying. You look at MDsave and Clear Health Costs. They are offering ways for people to shop. If the government does nothing on healthcare, I’m still optimistic we are moving in the right direction because businesses in American are realizing that they’re getting ripped off on their healthcare and pharmacy plans. They’re increasingly doing direct contracting and looking closely at their health insurance benefits and pharmacy design and realizing there is a lot of money wasted.
One of the root issues in healthcare is the way we physicians are educated. It uses a model that’s highly flawed, relying highly on rote memorization of things that are easily available on the Internet today and omits training in effective communication, public policy and healthcare literacy. It turns out that many doctors feel paralyzed in fixing this broken system even as they’re suspicious of the waste in it. One of the goals of writing the book was creating healthcare literacy because we in the field are taught medical literacy but we’re never taught healthcare literacy. One of the exciting disrupters I had the privilege of spending time was the Sidney Kimmel Medical College (in Philadelphia). They have an academic standard in the admissions process. Once people meet that academic standard, everybody is considered based on their empathy, self-awareness and communication skills. It’s revolutionary as simple as it sounds. But they’re focusing on what matters.
As I spoke recently with colleagues at a conference in Florence, Italy about health care innovation, a fundamental truth resurfaced in my mind: the U.S. health care industry is just that. An industry, an economic force, Big Business, first and foremost. It is a vehicle for returns on investment first and the success of our society second.
This is critical to consider as presidential candidates unveil their health care plans. The candidates and the electorate seem to forget that health care in our country is a huge business.
Health care accounts for almost 20% of GDP and is a, if not the, job engine for the U.S. economy. The sector added 2.8 million jobs between 2006 and 2016, higher than all other sectors, and the Bureau of Labor Statistics projects another 18% growth in health sector jobs between now and 2026. Big Business indeed.
This basic truth separates us from every other nation whose life expectancy, maternal and infant mortality or incidence of diabetes we’d like to replicate or, better still, outperform.
As politicians and the public they serve grapple with issues such as prescription drug prices, “surprise” medical bills and other health-related issues, I believe it critical that we better understand some of the less visible drivers of these costs so that any proposed solutions have a fighting chance to deflect the health cost curve downward.
As both associate chief medical officer for clinical integration and director of the center for health policy at the University of Virginia, I find that the tension between a profit-driven health care system and high costs occupies me every day.
Housing prices are market-driven. Car prices are market-driven. Food prices are market-driven.
And so are health care services. That includes physician fees, prescription drug prices and non-prescription drug prices. So is the case for hospital administrator salaries and medical devices.
All of these goods or services are profit-seeking, and all are motivated to maximize profits and minimize the cost of doing business. All must adhere to sound business principles, or they will fail. None of them disclose their cost drivers, or those things that increase prices. In other words, there are costs that are hidden to consumers that manifest in the final unit prices.
To my knowledge, no one has suggested that Rolls-Royce Motor Cars should price its cars similarly to Ford Motor Company. The invisible hand of “the market” tells Rolls Royce and Ford what their vehicles are worth.
Ford can (they won’t) tell you precisely how much each vehicle costs to produce, including all the component parts that they acquire from other firms. But this is not true of prescription drugs. How much a novel therapeutic costs to develop and bring to market is a proverbial black box. Companies don’t share those numbers. Researchers at the Tufts Center for the Study of Drug Development have estimated the costs to be as high as US$2.87 billion, but that number has been hotly debated.
What we can reliably say is that it’s very expensive, and a drug company must produce new drugs to stay in business. The millions of research and development(R&D) dollars invested by Big Pharma has two aims. The first is to bring the “next big thing” to market. The second is to secure the almighty patent for it.
U.S. drug patents typically last 20 years, but according to the legal services website Upcounsel.com: “Due to the rigorous amount of testing that goes into a drug patent, many larger pharmaceutical companies file several patents on the same drug, aiming to extend the 20-year period and block generic competitors from producing the same drug.” As a result, drug firms have 30, 40-plus years to protect their investment from any competition and market forces to lower prices are not in play.
Here’s the hidden cost punchline: concurrently, several other drugs in their R&D pipelines fail along the way, resulting in significant product-specific losses . How is a poor firm to stay afloat? Simple, really. Build those costs and losses into the price of the successes. Next thing you know, insulin is nearly US$1,500 for a 20-milliliter vial, when that same vial 15 years ago was about $157.
It’s actually a bit more complicated than that, but my point is that business principles drive drug prices because drug companies are businesses. Societal welfare is not the underlying use. This is most true in the U.S., where the public doesn’t purchase most of the pharmaceuticals – private individuals do, albeit through a third party, an insurer. The group purchasing power of 300 million Americans becomes the commercial power of markets. Prices go up.
I hope that most people would agree that physicians provide a societal good. Whether it’s in the setting of a trusted health confidant, or the doctor whose hands are surgically stopping the bleeding from your spleen after that jerk cut you off on the highway, we physicians pride ourselves on being there for our patients, no matter what, insured or not.
Allow me to state two fundamental facts that often seem to elude patient and policymaker alike. They are inextricably linked, foundational to our national dialogue on health care costs and oft-ignored: physicians are among the highest earners in America, and we make our money from patients. Not from investment portfolios, or patents. Patients.
Like Ford or pharmaceutical giant Eli Lilly, physician practices also need to achieve a profit margin to remain in business. Similarly, there are hidden-to-consumer costs as well; in this case, education and training. Medical school is the most expensive professional degree money can buy in the U.S. The American Association of Medical Colleges reports that median indebtedness for U.S. medical schools was $200,000.00 in 2018, for the 75% of us who financed our educations rather than paying cash.
Our “R&D” – that is, four years each of college and medical school, three to 11 years of post doctoral training costs – gets incorporated into our fees. They have to. Just like Ford Motors. Business 101: the cost of doing business must be factored into the price of the good or service.
For policymakers to meaningfully impact the rising costs of U.S. health care, from drugs to bills to and everything in between, they must decide if this is to remain an industry or truly become a social good. If we continue to treat and regulate health care as an industry, we should continue to expect surprise bills and expensive drugs.
It’s not personal, it’s just…business. The question before the U.S. is: business-as-usual, or shall we get busy charting a new way of achieving a healthy society? Personally and professionally, I prefer the latter.
The Trump administration is pushing ahead with a new rule that could require hospitals to reveal the prices they negotiated with insurance companies. The White House says the move could help bring the free market into the murky world of health care.
The Trump administration is pushing ahead with a new rule that could require hospitals to reveal the prices they negotiated with insurance companies. The White House says the move could help bring the free market into the murky world of health care.
But the CEO of one of the nation’s largest hospital systems says the rule will just lead to more confusion for consumers.
“You won’t still know what your cost will be even when you look at our prices,” Dr. Kenneth Davis, CEO of the Mount Sinai Health System, told Yahoo Finance’s The First Trade. He says insurers like Cigna (CI), UnitedHealth (UNH), Anthem (ANTM) and Aetna parent CVS Health (CVS) should be the ones to house that information and help customers make sense of it.
“There are so many nuances in the insurance policies that going on our site isn’t going to tell you what you’re really going to pay,” he said. “You need the insurance information, and that’s the information that’s available from the insurance company. They know negotiated prices. So you’re really asking the wrong people to disclose the information.”
The rule could show how widely prices vary between regions and even at hospitals and clinics in the same city. In an interview with the Wall Street Journal, Centers for Medicare and Medicaid Services Administrator Seema Verma called it a “turning point in health care and a turning point to the free market in health care.”
But the hospital industry’s main lobbying group, the American Hospital Association, said in a statement that move could “seriously limit the choices available to patients in the private market and fuel anticompetitive behavior among commercial health insurers in an already highly concentrated insurance industry.”
Hospitals and insurance companies are notoriously secretive about their contract deals, something Dr. Davis attributes to competition between care providers and the insurance companies. Insurers are looking for the best deal, he said, while providers want the highest payment.
“Everyone’s worried about what they will then negotiate with the insurance company,” he said. “The insurance companies are worried, in turn, that other health networks like ours might ask for higher prices.”
Dr. Davis says regulators should be pushing the insurance companies and not the hospitals to disclose pricing.
“We have thousands of items that we would list items on,” he told Yahoo Finance’s Alexis Christoforous and Brian Sozzi. “If I have an insurance policy and I go online, I don’t know — still — what my co-pays and deductibles are going to be. Where that information should be is on the insurance company website.”
“I don’t have a problem disclosing that information,” he said. “I just think it’s important that people be able to use that information validly.
Without knowing what their insurance policy covers, he said, “they won’t know what they’re going to pay anyway.”
NorthBay Healthcare, a not-for-profit hospital system in California, recently gave a candid look into how it operates, telling investors it has used its negotiating clout to extract “very lucrative contracts” from health insurance companies.
Details: NorthBay owns two hospitals and several clinics in California’s Solano County. Kaiser Permanente owns the only other full-service hospital in the county, and Sutter Health operates some medical offices. (A NorthBay spokesperson argued the system is “more akin to the David among two Goliaths.“)
Three health insurers have terminated their contracts with NorthBay over the past couple years. During a June 19 call with bondholders, executives explained why this has happened.
“We’ve been able to maintain very lucrative contracts without the competition. And what the payers are saying is, they would like us to be like 90% of the rest of the United States in terms of contract structure.”
— Jim Strong, interim CFO, NorthBay Healthcare
Between the lines: NorthBay’s revenue has increased by 50% over the past few years, from $400 million in 2013 to $600 million in 2018, due in large part to its natural monopoly and oligopoly over hospital services.
NorthBay also serves as a cautionary tale for price transparency, the policy fix du jour.
Responses indicate that the opportunity for CFOs to establish the finance function as both a leading change agent and a source of competitive advantage has never been greater. Yet they also show a clear perception gap that must be bridged if CFOs are to break down silos and foster the collaboration necessary to succeed in a broader role. While CFOs believe they are beginning to create financial value through nontraditional tasks, they also say that a plurality of their time is still devoted to traditional tasks versus newer initiatives. Meanwhile, leaders outside the finance function believe their CFOs are still primarily focused on and create the most value through traditional finance tasks.
How can CFOs parlay their increasing responsibility and traditional finance expertise to resolve these differing points of view and lead substantive change for their companies? The survey results point to three ways that CFOs are uniquely positioned to do so: actively heading up transformations, leading the charge toward digitization, and building the talent and capabilities required to sustain complex transformations within and outside the finance function.
The latest survey results confirm that the CFO’s role is broader and more complex than it was even two years ago. The number of functional areas reporting to CFOs has increased from 4.5 in 2016 to an average of 6.2 today. The most notable increases since the previous survey are changes in the CFO’s responsibilities for board engagement and for digitization (that is, the enablement of business-process automation, cloud computing, data visualization, and advanced analytics). The share of CFOs saying they are responsible for board-engagement activities has increased from 24 percent in 2016 to 42 percent today; for digital activities, the share has doubled.
The most commonly cited activity that reports to the CFO this year is risk management, as it was in 2016. In addition, more than half of respondents say their companies’ CFOs oversee internal-audit processes and corporate strategy. Yet CFOs report that they have spent most of their time—about 60 percent of it, in the past year—on traditional and specialty finance roles, which was also true in the 2016 survey.
Also unchanged are the diverging views, between CFOs and their peers, about where finance leaders create the most value for their companies. Four in ten CFOs say that in the past year, they have created the most value through strategic leadership and performance management—for example, setting incentives linked to the company’s strategy. By contrast, all other respondents tend to believe their CFOs have created the most value by spending time on traditional finance activities (for example, accounting and controlling) and on cost and productivity management across the organization.
Finance leaders also disagree with nonfinance respondents about the CFO’s involvement in strategy decisions. CFOs are more likely than their peers to say they have been involved in a range of strategy-related activities—for instance, setting overall corporate strategy, pricing a company’s products and services, or collaborating with others to devise strategies for digitization, analytics, and talent-management initiatives.
Our latest survey, along with previous McKinsey research,2 confirms that large-scale organizational change is ubiquitous: 91 percent of respondents say their organizations have undergone at least one transformation in the past three years.3 The results also suggest that CFOs are already playing an active role in transformations. The CFO is the second-most-common leader, after the CEO, identified as initiating a transformation. Furthermore, 44 percent of CFO respondents say that the leaders of a transformation, whether it takes place within finance or across the organization, report directly to them—and more than half of all respondents say the CFO has been actively involved in developing transformation strategy.
Respondents agree that, during transformations, the CFO’s most common responsibilities are measuring the performance of change initiatives, overseeing margin and cash-flow improvements, and establishing key performance indicators and a performance baseline before the transformation begins. These are the same three activities that respondents identify as being the most valuable actions that CFOs could take in future transformations.
Beyond these three activities, though, respondents are split on the finance chief’s most critical responsibilities in a change effort. CFOs are more likely than peers to say they play a strategic role in transformations: nearly half say they are responsible for setting high-level goals, while only one-third of non-CFOs say their CFOs were involved in objective setting. Additionally, finance leaders are nearly twice as likely as others are to say that CFOs helped design a transformation’s road map.
Other results confirm that finance chiefs have substantial room to grow as change leaders—not only within the finance function but also across their companies. For instance, the responses indicate that half of the transformations initiated by CFOs in recent years were within the finance function, while fewer than one-quarter of respondents say their companies’ CFOs kicked off enterprise-wide transformations.
The results indicate that digitization and strategy making are increasingly important responsibilities for the CFO and that most finance chiefs are involved in informing and guiding the development of corporate strategy. All of this suggests that CFOs are well positioned to lead the way—within their finance functions and even at the organization level—toward greater digitization and automation of processes.
Currently, though, few finance organizations are taking advantage of digitization and automation. Two-thirds of finance respondents say 25 percent or less of their functions’ work has been digitized or automated in the past year, and the adoption of technology tools is low overall.
The survey asked about four digital technologies for the finance function: advanced analytics for finance operations,5 advanced analytics for overall business operations,6 data visualization (used, for instance, to generate user-friendly dynamic dashboards and graphics tailored to internal customer needs), and automation and robotics (for example, to enable planning and budgeting platforms in cloud-based solutions). Yet only one-third of finance respondents say they are using advanced analytics for finance tasks, and just 14 percent report the use of robotics and artificial-intelligence tools, such as robotic process automation (RPA).7 This may be because of what respondents describe as considerable challenges of implementing new technologies. When asked about the biggest obstacles to digitizing or automating finance work, finance respondents most often cite a lack of understanding about where the opportunities are, followed by a lack of financial resources to implement changes and a need for a clear vision for using new technologies; only 3 percent say they face no challenges.
At the finance organizations that have digitized more than one-quarter of their work, respondents report notable gains from the effort. Of these respondents, 70 percent say their organizations have realized modest or substantial returns on investment—much higher than the 38 percent of their peers whose finance functions have digitized less than one-quarter of the work.
The survey results also suggest that CFOs have important roles to play in their companies’ talent strategy and capability building. Since the previous survey, the share of respondents saying CFOs spend most of their time on finance capabilities (that is, building the finance talent pipeline and developing financial literacy throughout the organization) has doubled. Respondents are also much more likely than in 2016 to cite capability building as one of the CFO’s most value-adding activities.
Still, relative to their other responsibilities, talent and capabilities don’t rank especially high—and there are opportunities for CFOs to do much more at the company level. Just 16 percent of all respondents (and only 22 percent of CFOs themselves) describe their finance leaders’ role as developing top talent across the company, as opposed to developing talent within business units or helping with talent-related decision making. And only one-quarter of respondents say CFOs have been responsible for capability building during a recent transformation.
But among the highest-performing finance functions, the CFO has a much greater impact. Respondents who rate their finance organization as somewhat or very effective are nearly twice as likely as all others to say their CFOs develop top talent organization-wide (20 percent, compared with 11 percent). Among those reporting a very effective finance function, 38 percent say so.
It’s clear from the numbers that CFOs face increased workloads and expectations, but they also face increased opportunities. In our experience, a focus on several core principles can help CFOs take advantage of these opportunities and strike the right balance: