Twenty years ago, Massachusetts General Hospital had a problem. Health maintenance organizations, or HMOs, were on the rise and pushing for lower charges for services. HMOs said that if the hospital didn’t lower rates, they’d simply send patients to a competing research hospital, such as Beth Israel, Brigham and Women’s, Boston Medical, or Tufts. In response, Mass. General reduced its competition with a historic merger, teaming up with Brigham and Women’s to form Partners HealthCare, which went on to extract steep rate hikes from insurance companies.
Over the following decade, Partners continued to jack up rates and made money hand over fist. Much of it came not from high-tech medicine but from charging premium rates for ordinary tests and procedures like colonoscopies and CT scans. It then followed the standard path of prosperous nonprofits. It continued to hire top specialists. It paid its staff and administration richly. And yes, it plunged into more cutting-edge research, which it continued to bankroll through premium pricing for commodity services.
Throughout the country, the Partners model has been spreading. Booz & Company (now called Strategy&) predicts that 1 out of 5 hospitals will seek out mergers or be acquired by 2020. Meanwhile, big hospitals are extending their dominance by buying up local medical practices by the hundreds. Forty percent of primary care physicians are now employed by hospitals, up from 20 percent in 2010, and send streams of their patients to their hospitals for care.
If the growing hospitals were like other behemoths — Walmart, say, or Amazon — we might be wringing our hands over the pitiless power of markets. The big ones, which are more efficient, gobble up the small fry or bury them. Consumers lose the human contact of the local store but at least often gain lower prices and a bigger selection. In the medical example, however, that upside vanishes. As big hospitals take over small, prices shoot up and choices vanish.
One result is that in hospitals we pay for a Ritz experience, but the service we get is often below the YMCA. The business model of practically every hospital is predicated on mysterious and outrageous charges that someone else, either an insurance company or the government, will eventually pay or haggle down. There is almost no consideration of the patient as a customer, someone who could conceivably compare prices and service and value. In our convoluted system, the insurance company is the customer and the patient is a widget to be processed, administered, and billed for.
This status quo in health care is threatening to bankrupt our economy. The US Bureau of Economic Analysis reported in April that health care expenditures climbed at a 9.9 percent annual rate last quarter, the fastest since 1980, mostly because of increased spending at hospitals. Americans spend more than twice as much per capita for medical care as citizens of other rich countries, and yet we aren’t any healthier.
Why? The fact is most hospitals have never had to operate as a business. Consider this: The number of workers in the US health system grew 75 percent between 1990 and 2012. Despite outsourcing and an Internet revolution that automated millions of jobs, there are now 16 people supporting each doctor — 10 of them are administrators and management staff. This isn’t just negative productivity, it’s insanity.
From the point of view of an entrepreneur, this scene is dripping with potential. All you have to do is to bite off a chunk of that hospital business, reduce the overhead, and offer routine services at reasonable rates. In a market economy, as prices become transparent and shoppers entertain more choices, the big hospitals will increasingly struggle to draw business. And these battles are already underway.
Let’s say you need a CT scan. On one hand, there’s a new imaging center in a strip mall not far from your house, in the carcass of an old Blockbuster. They charge $150, and your insurance covers it. If you prefer the traditional alternative, you can drive downtown to the prestigious medical center, pay $20 for parking, and get your scan done there. It costs $500, and you’ll have to pay the difference, or $350. It’s exactly the same equipment, but it comes with the brand of a world-class hospital. Which option do you choose?
This does not mean that the big medical centers will disappear. Many of them will survive, and that’s a good thing, because we need their excellence. But they will have to shift their strategy. In 2010, Cleveland Clinic, one of the nation’s preeminent cardiology centers, signed an agreement with Lowe’s, the home improvement chain. It established Cleveland Clinic as the destination for any of Lowe’s roughly 161,000 full-time employees and their dependents requiring heart surgery. The deal covers travel and lodging for patients and one companion. It provides world-class health care to Lowe’s workers, and because Lowe’s is providing bulk business, the company gets the care for a discount. Employees pay nothing. What’s not to like?
Hospitals, increasingly, are going to be evaluating their strengths this way, piece by piece, as they seek their foothold in the future. They’ll face tough choices regarding what commodity services to jettison and what to build on. Some of them will go belly up, and — though it may sound cruel — that will be a good thing for our health and our economy. We can and must do better than a system that treats patients as cogs and is blind in too many areas to cost and quality.
Adapted from Where Does It Hurt? An Entrepreneur’s Guide to Fixing Health Care by Jonathan Bush with Stephen Baker, in agreement with Portfolio, an imprint of Penguin Random House. Copyright © athenahealth, 2014.