Stanley Feld M.D., FACP, MACE Menu


Dr. Feld, Why Only Pick On The Healthcare Insurance Industry?: Part 1

Stanley Feld M.D.,FACP,MACE

Matt Modleski of Stovall Grainger Inc a company that “ maximizes people's potential through the application of strategy in sales, leadership and life" wrote the following comment.

"Dear Dr. Feld,

I believe many of your points are right on the mark, but your credibility is undermined when you speak so infrequently about the “supply side” of healthcare delivery as if the insurance companies were always wrong."

I will divide my comments into two articles. I assume Matt means the patients, physicians and hospitals on the supply side. You may recall that I have blamed all of the stakeholders for the dysfunction of the healthcare system. The physicians, hospitals, the government, the healthcare insurance industry, pharmaceutical companies, malpractice attorneys and patients are all at fault. The questions are who started this dysfunction?, who made it worse?, and who can fix it?

The answers to the questions are the government started it; the healthcare insurance industry made it worse. and continues to make it worse. The only stakeholder that can fix it are consumers.

The government initiated the dysfunction of the healthcare system in the early 1980’s. It imposed price controls to combat rising costs. The rising costs were the result of increased technological advances leading to procedure based diagnoses. Some hospitals, physicians and patients took advantage of this diagnostic procedure based shift in medical care.

Historically, price controls never work. They usually create stakeholder incentives to develop innovative methods to get around the price controls. This leads to increased dysfunction and greater costs to the system.

The dynamics between hospitals and the healthcare insurance industry became perverse. The more spent for medical care the more the healthcare insurance industry could charge employers. The result was increased hospital and healthcare insurance industry profit at the expense of the employers and patients.

Employers started providing healthcare insurance to their employees after WWII as an employment benefit. This led to post war healthcare price inflation. In 1965, Medicare healthcare coverage for all seniors over 65 increased healthcare price inflation.

When the government decreased Medicare reimbursement in the early 1980’s increased prices (price shifting) for employer provided healthcare was rampant. Price shifting led to the healthcare insurance industry increasing healthcare premiums to employers.

In the late 1980’s employers said they could not afford to pay healthcare premiums costing 18% of their gross revenue. The insurance industry asked what they could afford. The answer was 12%. The insurance industry said no problem. Managed care and all of the managed care problems were born.

Managed care is managing costs. It is a form of price controls. Managed care introduced another form of stress into the healthcare system. Patients experienced limitations on access to care. Physicians experienced increased paper work, bureaucratic interaction with a defective care approval system, and decreasing reimbursement. Physicians’ frustration increased as non medical related time and overhead increased and reimbursement decreased. The managed care system interfered with effective care. It also led to increase mistrust for the administrators of the healthcare system.

Hospitals experienced the same pressures. Hospital administrator figured out how to creatively adjust to the new system.

The healthcare insurance industry changed some rules in order to manage costs. It started paying for out-patient procedures rather than paying exclusively for in-patient procedures and hospital bed days. The bed day cost at that time was $100-$200 a day (as opposed to $1,000 to $10,000 today). In-patient procedures were two to three times the cost of outpatient procedures done in a physician’s office. Managed care companies wanted to take advantage of this savings in order to manage costs.

In the early 1980’s with surgical and technological advances, the legal profession saw an economic opportunity to make quick money. There were no limits on liability. Malpractice suits and malpractice insurance premiums escalated for both hospitals and physicians. These costs were passed on to the consumer. Malpractice suits also led to an increase the practice of defensive medicine. CAT scans, MRI’s and other expensive tests were ordered by physicians to protect themselves from malpractice suits. The cost of medical care further increased.

Hospitals captured most of this increase in revenue production at an inflated price. Some physicians were unhappy they were giving away their intellectual property and not sharing in the revenue production. Additionally, they could do most procedures at half the hospital charges thereby saving money for their patients and the healthcare system. They started opening their own clinics, and testing facilities in order to capture the revenue from the new technology. The hospitals and the giant national laboratories were upset because their revenue production was threatened. They accused physicians of over testing in a well executed public relation campaign. Some physicians did abuse the system. However, the percentage of physicians’ abuse was small. I believe the reality of the situation is physicians did the procedures and testing more carefully and more conveniently for patients than hospitals or the national testing laboratories.

Physicians’ use of increased testing became necessary in order to protect themselves from malpractice suits. Physicians’ testing facilities charged substantially less than the hospital facilities. The healthcare insurance industry encouraged physician owned clinics because it was able to save money. The healthcare insurance industry then abruptly cut them off.

The Stark Laws slowed the proliferation of these facilities but only as applied to Medicare. Pete Stark created a restriction that most figured out how to get around. The price of procedures increased. The dysfunction in the healthcare system increase by Pete Starks own admission of the failure of his legislation

Matt, you might have thought the answer to your comment was simple and physicians are at fault. Unfortunately, the sound bite is usually not the answer. The stakeholder that has intensified the dysfunction is the healthcare insurance industry.

I will continue to answer your comment in Dr. Feld. Why Only Pick On The Healthcare Insurance Industry?: Part 2.

The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.

  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.