The Perverse Pricing Game of Hospitals & Insurance Companies

LA Times columnist David Lazarus uses a recent visit to an Ear, Nose & Throat specialist as a jump-off point to discuss the problem of healthcare costs. The visit lasted a mere 20 minutes for which he was billed $975. His insurance company paid the doctor $243.64. Lazarus then asks: why the huge discrepancy between what he was billed and what his insurance company paid. What accounts for the $700 difference?

The upshot is that providers are overcharging insured patients because they have no other way of meeting total expenses, while insurers are paying significantly less than the billed amount because they know they’re being hit up for unrelated costs.

Insurers’ underpayments, in turn, only force providers to increase bills even more. It’s a system that both condones and perpetuates inflation while all but eliminating transparency in the marketplace.

It also spells doom for the 45 million Americans lacking health coverage, who have no choice but to pay the full amount of a hospital’s cost-plus charges and thus can be wiped out financially by a major medical problem.

“Healthcare is the one sector where market mechanisms work least,” said Peter Lindert, an economics professor at UC Davis who specializes in public-health issues. “Prices are whatever you can get away with.”

Hospitals and doctors pad their bills knowing that insurance companies will negotiate huge discounts. In other words, everybody knows that’s not the “real” price. The problem is…nobody knows that the “real” price is, and by real, I mean classic Econ 101 where supply meets demand. Hospitals and doctors jack up their prices as high as they can “get away with” while insurance companies bargain prices down for their customers and their customers only. Caught in the middle is the uninsured patient who: a) doesn’t have the bargaining power of insurance companies and b) doesn’t have any insight into the “real” cost of the procedure. In other words, the uninsured American patient has zero bargaining power and is basically roadkill.

One of the advantages of traveling abroad for surgery or medical care is, of course, that prices tend to be a lot lower than in the US. But just as importantly, there is greater transparency in pricing. Because these doctors abroad cater to medical tourists who in most cases will pay out-of-pocket, they offer clear pricing that are a lot more aligned with the “real” price of the procedure. Call up 10 doctors in Thailand and ask them how much your surgery will be and you’ll most likely get 20 clear answers– and 5 prices pretty much in the same range. Now try calling 5 doctors in the US…

A 21st Century Hospital…in Thailand

Fast Company has an interesting profile of Bumrungrad Hospital in Bangkok, Thailand. Bumrungrad is one of the top hospitals in the world catering to medical tourists. In 2006 Bumrungrad Hospital provided medical care for 430,000 international patients. The hospital is state-of-the-art:

A journey to Bumrungrad is hardly a descent into some third-world medical hell…Administrators have spent the past 15 years acquiring state-of-the-art technology, adding beds, and wooing Thai doctors abroad to come home. Bumrungrad replaced its paper records seven years ago with a homegrown, all-digital system, an upgrade U.S. hospitals have struggled with for years, despite the assistance of giants like Cerner, Siemens, and General Electric. (Replacing prescription pads with tablet PCs is harder than you’d think, which might explain why last year Microsoft bought the company that designed Bumrungrad’s software…

The hospital’s outpatient clinic is more stylish than the bar at my five-star hotel. Instead of waitresses, some two dozen nurses tend to a polyglot mix of patients. Arrivals from Asia or the Middle East have separate floors to make them feel at home. There’s an in-house travel agency offering visa extensions in case they suddenly need to stay. Modernizing late offered Bumrungrad a chance to leapfrog the competition and build the world’s first truly global hospital.

Bumrungrad is just one example of the crop of hospitals that have recently sprung up in places like India, Singapore, Costa Rica and Argentina that are specifically oriented to the medical travel market. And because in many cases these hospitals are new, they’re able to bypass many of the of the problems old hospitals face. As the article points out, there are hospitals in places like Thailand that are far more hi-tech and streamlined than hospitals in the US. I wouldn’t be surprised if Microsoft makes a big move into the medical records market in the next couple of years–using the technology first developed at Bumrungrad!

American healthcare is over-priced and inefficient. American patients are clearly overpaying for medical services. Consider a study by McKinsey consulting cited in the Fast Company article:

Some economists have hailed our extreme health-care spending as the central pillar of a postglobalization economy built around services. In their view, hospitals and their support systems of doctors, administrators, and insurers have been, and will continue to be, the greatest creators of domestic jobs this century — nearly 2 million so far — especially in the Rust Belt and other areas hit hard by manufacturing’s migrations. Yet when McKinsey consultants dug into health-care costs last year, a research team concluded there were no real incentives for either hospitals or consumers to think hard about the ultimate price of treatment. Even adjusting for our higher per capita incomes, we’re still overpaying by $477 billion a year, McKinsey concluded. At the same time, the United States ranks just 37th in the World Health Organization’s list of the world’s best health systems — behind such medical hubs as Singapore and Costa Rica, and only 10 spots ahead of Thailand.

One of the biggest shifts that will take place as medical travel picks up speed is a psychological shift in the mind of the American patient/consumer. Right now most Americans believe the quality of the healthcare they receive is tied to how much the spend. The more you spend, the thinking goes, the better the care you’re receiving. But this is not the case.

The American consumer aggressively shops around for just about any other purchase: not just cars, homes and big-ticket electronics but also professional services like tax-preparers, real estate agents and lawyers. What matters is getting the best deal, i.e. the right mix of quality and cost. As medical travel expands the options available to American patients/consumers they will begin to treat healthcare as something you can also aggressively shop around for, knowing that quality care is not always tied to the highest price.

A Doctor Shortage?

Medical school is getting more expensive and insurance companies and Medicare/Medicaid are getting harder and harder to deal with. No surprise then that according a new survey, fewer graduates of medical school are choosing primary care as their field:

Only 2 percent of graduating medical students say they plan to work in primary care internal medicine, raising worries about a looming shortage of the first-stop doctors who used to be the backbone of the American medical system.

The results of a new survey being published Wednesday suggest more medical students, many of them saddled with debt, are opting for more lucrative specialties.

How bad is the shortage? The Associate Press story goes on to estimate that there is a shortfall of about 2,600 primary care doctors in the US. The gap is being filled by doctors trained abroad:

A separate study in JAMA suggests graduates from international medical schools are filling the primary care gap.

About 2,600 fewer U.S. doctors were training in primary care specialties _ including pediatrics, family medicine and internal medicine _ in 2007 compared with 2002. In the same span, the number of foreign graduates pursuing those careers rose by nearly 3,300.

“Primary care is holding steady but only because of international medical school graduates,” said Edward Salsberg of the Association of American Medical Colleges, a co-author of the study. “And holding steady in numbers is probably not sufficient when the population is growing and aging.”

The reality is that US healthcare is already globalized. This should make it easy to demystify the idea of traveling abroad for surgery. When you walk into an American hospital as a patient, chances are your X-Rays and other lab results are being interpreted by technicians in places like India, at least one or your doctors received their degree from a foreign medical school and a large percentage of the nurses and other medical professionals attending you were born and trained abroad.

Importing Competition

Lots of interesting stuff at The Economist article mentioned in the previous post. What stood out the most for me having already been immersed in medical tourism trends these past couple of years was this idea of “importing competition”:

He is right that health care abroad is not a substitute for difficult reforms at home. But medical travel could serve as a catalyst for those reforms. Rajesh Rao of IndUSHealth, a middleman that helps insurers and employers co-ordinate medical care in India, reckons medical travel “is not really about exporting patients, it is importing competition.”

A bit of rivalry from top foreign facilities may introduce transparency and price competition into an inefficient system riddled with oligopolies and perverse incentives. For example, American and European hospitals may cut prices once they realise how much potential business they stand to lose. By Deloitte’s reckoning, medical travel will represent $162 billion in lost spending on health care in America by 2012.

I’m a big believer in the potential benefits of medical tourism. At it’s best, it gives uninsured patients facing a major illness requiring surgery expanded options. If they do their homework they can find world class doctors and hospitals who can do the surgery at a fraction of the cost. Without these options the uninsure patient faces two devastating scenarios: financial ruin or deteriorating health.

And if enough patients go abroad for medical care the ones who stay behind will benefit too. Healtchare spending in the United States accounts for roughly 1/7 of the economy. And it’s grossly inefficient. If ten people walk into an ER for medical care they will walk out paying 10 different prices. There’s no transparency and very little competition.

It’s Econ 101: the more competitors there are, the more prices will fall and consumers stand to gain. And I bet that as patients and employers pressure insurance companies and lobby politicans to make it easier to travel abroad for medical care it will also open up greater medical travel inside the US as well. The patient in Chicago looking for hip replacement will one day not only consider traveling to Bangkok for the procedure but also Phoenix, AZ.

10 Million Medical Tourists by 2012

The Economist has an excellent overview of the coming boom in medical travel:

Tens of millions of middle-class Americans are uninsured or underinsured and soaring health costs are pushing them and cost-conscious employers and insurers to look abroad for savings (see article). At the same time the best hospitals in Asia and Latin America now rival or surpass many hospitals in the rich world for safety and quality. On one estimate, Americans can save 85% by shopping around and the number who will travel for care is due to rocket from under 1m last year to 10m by 2012—by which time it will deprive American hospitals of some $160 billion of annual business.

That’s a pretty aggressive growth projection for the next four years but definitely in the realm of the possible. By our calculations there are about 100 million elective and cosmetic surgeries performed every year in the US. This is basically any non-emergency surgery that the patient has time to schedule. So currently less than 1% of elective surgeries are being performed abroad. That’s a lot of room to grow.

And these number don’t include dental work, which is another important market. Already thousands of Americans drive across the Mexican border where they can get dental work done for as little as 10% of the cost in the US. This market will also take off in the next few years.

The Economist goes on to review some of the major factors keeping Americans from traveling abroad for medical care:

If medical tourism is to live up to this promise, several barriers must first be swept away. In parts of America arcane restrictions still forbid out-of-state doctors from consulting with patients on the internet or by phone, which inhibits follow-up care for medical tourists. Legal and insurance barriers make it hard for employers to give employees a financial incentive to choose medical tourism over local options—even though insurers are allowed to offer such incentives to prompt patients to pick cheaper doctors inside America.

Of course the insurance barriers only apply to those Americans who have insurance in the first place. That leaves over 47 million Americans for whom medical travel is an attractive option. And an increasing number of large companies are pressuring insurance companies to cover medical procedures done abroad. Think about it: if it’s done right it’s a win/win: companies pay smaller premiums and employees get quality healthcare.

Welcome to our blog!

This blog offers news and commentary on the growing market for medical travel also sometimes referred to as medical tourism. We will cover the major trends pushing growth in this market including: rising healthcare costs in the United States, a growing number of Americans without health insurance, a shortage of doctors and trained medical professionals and the emergence of world class hospitals and surgical clinics around the world offering medical travel packages to international patients.

Stay tuned.