In this episode of Relentless Health Value, host Stacey Richter speaks with Shane Cerone and Dr. Sam Flanders of Kada Health about three pervasive myths in the healthcare industry. They discuss the belief in a functioning healthcare market, the necessity of high prices for hospital survival, and the notion that reducing prices means lower quality care.
Highlighting the inefficiencies and lack of competition in the current system, they address the importance of transparency and competition. This episode sets the stage for a follow-up discussion focusing on tangible solutions and improvements for the healthcare system.
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09:28 EP466 with Vivian Ho, PhD.
09:31 EP486 with Stan Schwartz, MD.
09:42 EP488 with Mark Cuban and Cora Opsahl.
10:08 Why we need to focus on prices in healthcare.
11:50 The first myth that holds change back: the healthcare “market.”
15:04 EP286 with John Rodis, MD, MBA.
15:51 The reality behind why there is no functional market in healthcare.
17:11 Why price simplicity is so important.
19:15 EP472 with Eric Bricker, MD.
19:31 How there is pricing failure while hospitals are still facing razor-thin margins.
22:11 The second myth: Can a hospital survive on Medicare rates alone?
25:21 What is the best hospitals can achieve?
26:01 List of hospitals recognized as national leaders for care quality and affordability.
29:23 The third myth: When you lower prices, do you get lower quality?
33:11 Why a decentralized approach at improvement is the way to lower cost and raise quality.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Stacey Richter (00:00):
Episode 490, "The Problem Show
Including 'There is a Healthcare Market'".
Today I speak with ShaneCerone and Dr. Sam Flanders.
Tom Nash (00:21):
American Healthcare Entrepreneurs and Executives
You Want to Know, Talking.
Relentlessly Seeking Value.
Stacey Richter (00:30):
Here's a quote.
"The reality is you can haverazor thin hospital margins if
you are good at just spending allthe money that is given to you."
Shane Cerone says this comingup and throw hot, right?
Razor thin hospital margins, maybedue to high costs or some problematic
market condition or uncompensated care.
(00:51):
Or razor thin operating marginscould also transpire because
you're just really inclined tospend every dollar you're given.
Kind of shines a new lighton the nonprofit word, right?
Anyway, after Shane Cerone raises hiseyebrows at the razor thin hospital margin
cliche, at this point, then he continues,"And I think that's what goes on without
(01:12):
a competitive healthcare marketplace.It's impossible to separate those things".
Meaning is it some problem associated withproviding care in a community or is it
too much money gassing up the private jet?
"It's impossible to separate these thingsand understand what's really possible".
Yep.
That's something that one of my gueststoday, Shane Cerone, will say in
(01:34):
about T minus 19 minutes or something.
So spoiler alert.
Now, let me start from the beginning.
What happens when there is a market, anactual market for any good or service?
Well.
Prices are rationalized.
Supply and demand curves meetat an equilibrium point and
the invisible hand knocks
sellers and buyers in to line.
(01:56):
Abracadabra.
We have fair prices.
If I continue down memory lane toour freshman Econ 101 microeconomics
class, just in case it was that 8:00AM and any of us slept through it.
Those aforementioned supply anddemand curves for them to do their
equilibrium thing, these curvesrequire a series of transactions
(02:17):
that trial and error themselvesinto that aforementioned equilibrium
fair for buyers and sellers price.
Transactions was the key word there.
In other words, a market isthe sum or whatever the average
of its transactions, right?
It's like a group of crows iscalled a murder, a herd of cows.
Well, a group of transactionsis called a market.
(02:39):
Now what is required for a transactionto be an actual transaction?
Let's see.
Oh, here's a start.
Both the buyer and the sellermust be aware of the price at
the time of the transaction asone fundamental rate critical.
And this is not just textbook economicsthat I'm talking about right now.
It's also contract law.
And yeah, anyone who has spent fiveminutes at this rodeo, you listening, you
(03:02):
have immediately cottoned on to the factthat this is already not going well for
anyone planning to argue that there isin fact a healthcare market in the United
States because does anyone even know theprice that they are buying or selling
at for any given healthcare transactionprior to agreeing to buy or sell?
Status quo carriers andTPAs have entered the chat.
(03:25):
But if you don't have transactionswith transparent cost or quality of the
goods purchase, then yeah, real toughto have competition, which is another
market rate critical that is dependenton their being, for reals, transactions.
Real hard to shop for quality whenyou don't know what the quality is.
We often talk about this topicfrom the standpoint of the buyer
(03:47):
here at Relentless Health Value.
Listens to the shows with Kevin Lyons,Jonathan Baron, Dr. Wayne Jenkins.
Today though we're gonna talkabout this from the points
of view of the health system.
How does a non-marketaffect health systems?
I'm thinking now about something Dr.John Rodis talked about in episode 286
(04:09):
that I repeat in the show that follows.
Short version.
Dr. Rodis was CEO of a hospital thatthrew their backs into improving quality
and safety, and they got zero, volumezero demands for their efforts, no
increase in demand, nor were they ableto negotiate higher carrier rates.
So like why bother?
Just put a snazzy billboardon the highway, We are
(04:31):
number one and call it a day.
And yeah, what a loss for the community,for patients, for members, but also for
folks working in any given hospital,trying really hard to get their
organization to do right by patients.
So, wow.
Was I on the edge of my seat todayto get a chance to talk with Dr. Sam
Flanders and Shane Cerone from KadaHealth, who by the way, donated to
(04:54):
the pod to help out with our expenses.
My goodness do I love this tribethat we have created here, and those
of you who step up and help out,it costs a lot of cash actually,
to keep the show in the air.
So thank you so much to Kada Healthand also to everybody who pops
up and drops a couple of bucks inthe tip jar on our website that we
do absolutely nothing to promote.
(05:14):
We get five bucks here and $500 there,and it all adds up and it makes my heart
happy to see how great people are ondays when things look so dark sometimes.
Sorry, we were talkingabout the non-market that
is the healthcare industry.
Okay, I was thrilled to captureShane Cerone and Dr. Sam Flanders,
as I said, and get them on the showtoday because they were responsible
(05:36):
together for running a hospital.
A hospital that ran at 158% of Medicare.
And which had highly rated quality andsafety because I wanted to get my mitts
on someone who had done this successfullybecause I'm trying to figure out why
it seems so hard for others to emulate.
Now the solutions show is gonnabe in two weeks where Shane and
(05:56):
Dr. Sam Flanders get into how theykept prices low and delivered, high
quality and safety to their community.
And if you can't stand waitingtwo weeks, do go back and listen
to the show with Dan Greenleaf.
There's two of them, and he talksabout this from the standpoint
of a multi-specialty group.
Dr. Sam Flanders and Shane Ceroneare talking about this from the
standpoint of a hospital system.
(06:16):
Today, however, we are exploring,deeply and with great insight,
problematic healthcare myths.
Now, these myths are warmly embraced bythose who kind of benefit from them being
embraced, which is probably some prettygood foreshadowing for the solution show.
But these three myths are, first, let'sjust lay out the mother of all myths,
that there is a functioning healthcaremarket or carriers control the prices of
(06:39):
consolidated health systems and et cetera.
Myth two.
Hospitals simply cannot afford to operatewhen prices paid by commercial contracts
are less than 150 or 200% of Medicare.
There has to be wild cost shiftingto local employers, otherwise
they will go out of businessin some kind of clearance sale.
Myth three, when prices go down,so does quality as a general rule.
(07:00):
Now there's gonna be one show inbetween this show, our problematic
myth show and the, okay, now let's helphospitals solve for all of this show.
And the show I'm gonna pop right in themiddle of these two bookends is a show
with Elizabeth Mitchell from PBGH, thePurchaser's Business Group on health,
because toothpaste is out of the tube.
(07:21):
And anyone banking on the non-marketbonanza continuing yeah heads up,
here's what it looks like aroundthe corner in the future coming up.
Because, oh my God I'm terrible atkeeping the suspense under wraps, but
PBGH just took all the transparencydata and a whole bunch of claims data
and quality data, and now they can seeactual prices being charged and actual
(07:43):
quality and safety being delivered byany given health system or organization.
And oh wow is that powerfulbecause it actually creates the
potential for actual transactions,which are the building blocks.
Of markets and oh wow, does ithave an impact on health systems
on consultants, on TPAs and ASOs.
I'm controlling myself from going offon a whole tangent about this impact
(08:06):
on consultants and TPAs, but I will notbecause that's what half the show is
about next week, so come back next week.
In the meantime, enjoy this episodewith Dr. Sam Flanders and Shane Cerone.
Then again, as I said, come back nextweek listen to Elizabeth Mitchell.
Then come back for the solutions partof this episode where we talk about,
yeah, solutions where Dr. Sam Flandersand Shane Cerone, just with such
(08:27):
wisdom and experience tick throughhow to slow the raising prices roll.
How to make things work fine, justfine on 150, 200% of Medicare.
How there is zero reason any hospitalshould be thumping its chest and
saying quality will go down or direthis or dire that if they don't get
their double digit rate increases.
So onward here is my problematicmyths conversation with, as
(08:50):
I've said 19 times already.
Shane Cerone and Dr. Sam Flandersfrom Kada Health and the show is
sponsored by Aventria Health Groupwith an assist from Kada Health.
Dr. Sam Flanders, welcometo Relentless Health Value.
Dr Sam Flanders (09:02):
Thank you very much, Stacey.
Great to be here.
Stacey Richter (09:04):
Shane Cerone, welcome to Relentless Health Value.
Shane Cerone (09:06):
Thank you.
It's our pleasure to be here.
Stacey Richter (09:08):
Well, it is a pleasure to have you both on the show today because
we are talking about something that hasfelt like a black box to me frankly.
We've done a lot of shows talkingabout just the amount rising hospital
prices have to do with rising renewals.
(09:28):
There was that show withVivian Ho, which dug into that.
We've also had quotes like Dr.Stan Schwartz from Zero Health.
He was talking about how a lot ofwhat is wrong with medical expense
has to do with pricing failures.
We had Mark Cuban and others on thepod talking sort of about that same
(09:48):
thing and how a lot of the risk isshifting over to hospitals, but what
is going on within the hospitals andwhether this is a totally intractable,
like this is just gonna happen andthere's nothing we can do about it,
flywheel, that we haven't talked about.
So I am fascinated to have you two today.
Shane Cerone (10:07):
Stacey, for my entire career and, and since before then,
for decades, we've been concernedabout the rising cost of healthcare.
It's my view that we have for many,many years created new programs
that are sometimes just renewedinitiatives of things we've tried
in the past, but they're veryheavily focused on controlling
the volume of use in the industry.
(10:30):
And of course those initiatives are reallyimportant and they're essential, but we've
never really done anything about price.
I really follow the old UweReinhardt story from years gone by.
It's about prices.
And in my view, if we don't do anythingabout prices, no matter what else we do,
the cost of care will continue to rise.
(10:50):
And if there's a message at thebeginning for the end, is that we
have to fix the lack of any marketstructure on pricing in healthcare if
we're gonna get to a better solution.
Stacey Richter (10:59):
You mentioned the Uwe Reinhardt quote, "It's the prices
stupid", which is pretty much justa different way to say what Dr.
Stan Schwartz was saying, which isthat we have pricing failure here.
What do you wanna addhere, Dr. Sam Flanders?
Dr Sam Flanders (11:09):
I would just add that the prices are so different.
Between hospitals in the same marketfor the same services, and we can
talk more about this later, butthere's not differences in quality.
But explain this, no one's reallydealing with those differences.
That data's been publicly availablefor a long time, but we haven't
been able to put it to use yet.
Stacey Richter (11:28):
And that for sure, right?
Like you can look at, there's enoughtransparency that is available now.
There's just, there's a number ofentities that are popping up in the
market, which just show these wilddeltas and how much things cost.
And to your exact point, thereis very little that would support
some kind of quality as thedifference, the differentiator there.
(11:50):
Which kind of leads us to thefirst excellent segue there.
Into the first myth that mayhold us back if we believe it.
And that myth is that there is marketcontrol here that carriers are somehow
controlling not only UM, but also pricing.
Who wants to dig into what the mythis first and then why it's a myth.
Shane Cerone (12:16):
I'd be happy to take a first run with it.
The myth is that we have afunctioning marketplace and we don't.
I would say, we don'thave a broken market.
It's closer to a non-existent market.
And what I mean by that is, assomebody who's been the CEO of multiple
hospitals and health systems, hospitalsdon't compete on price for patients.
It just doesn't work that way.
(12:36):
And so we don't really have a normalmarket incentive to reduce the cost,
or in this case, the price for servicesin order to remain competitive.
In fact, I would say it's youcan run the most efficient, high
quality hospital in the country.
And it really will have very little tono effect on your business in terms of
steering volume to the organization.
And that's what's required for, youknow, for a functioning marketplace,
(12:59):
we need a system where buyers andsellers can make informed decisions.
Which then lead to the efficientallocation of market resources.
Functioning markets have to have freeand fair competition, and there's no
competition in healthcare and pricebecause nobody understands the pricing.
Even with the latest efforts for pricetransparency, which are, you know,
it's a great step, we're still nowherenear a place where people can use price
(13:22):
to factor into their decision making.
I sometimes like to say, and this mayseem ridiculous, but in healthcare, to
use a different example, you can imagineif Visa and MasterCard said, you know
what, we have a lot of purchasing power.
How about we negotiate the price ofmilk with your local grocery store?
We'll get a better price for you.
But here's the catch.
(13:44):
We're not gonna print or publishwhat the price of milk is.
We're just gonna get thebest possible price for you.
And you won't see what the line itemsare, but at the end of the month, we'll
send you a bill and tell you how muchyou spend on all of your groceries,
including the milk and everything forwhich we've negotiated these great prices.
Then down the road when your grocerybills get high or when you, when they're
too high and you complain, instead oftrying to achieve better pricing on
(14:07):
milk, Visa comes back and says, howabout I put a program to try and help
you reduce your consumption of milk,but that's gonna add administrative
expense to my processing fees.
That's how I view healthcare.
Something we would neverdo in another industry.
We would never let a thirdparty like this set prices.
And so unfortunately, part of thechallenge in the industry is, I
(14:28):
don't think insurance companieshave, at least to this point, been
able to create competition on pricein the industry, and that's what
we have to have to drive change.
Stacey Richter (14:38):
I'm gonna reiterate a couple of the points that you made and
then see if Dr. Sam Flanders has anythingabout the problem or the myth to add
before we move into what the reality is.
Which we sort of have alreadydipped into a little bit here.
You said the market's notbroken, it's non-existent.
And the reason or one supportingelement that you said there is that
(15:00):
hospitals do not compete on priceand they do not compete on quality.
And kind of backing up that we hadDr. John Rodis on the pod a while ago
who was the CEO of hospitals in NewEngland, and he kind of said the same
thing that when he first became theCEO, he did this huge effort to improve.
They had really low safetyscores, like their leapfrog safety
rating was a D or something.
(15:20):
And he busted everybody's behindsto lift it up to an A and got
absolutely no volume for it.
Like no one cared, which to him wasa absolutely shocking revelation.
Which I think emphasizes the pointthat you're making is do we actually
have a market where you could lowerprices, which I've also heard people
try to do and get nothing for it, or youcould raise quality, raise safety, and
(15:45):
literally there is no market benefit.
Let's get into the reality now here.
Shane Cerone (15:51):
You know, in terms of the reality, if you're the CEO of
a hospital or a health system andyou work to reduce your cost so that
you can reduce your prices, but themarket doesn't move to you, when you
get that work done, all you've doneis really lowered your top line, and
most boards are gonna frown on that.
And so you know you, again, even withthe right effort, a CEO's just not
(16:13):
working in a marketplace that allowsher or him to do what's best for the
market, for the employers who pay forcare for the patients who receive care.
Stacey Richter (16:21):
Lemme ask you something though.
You had mentioned so, so there is manytimes when this topic comes up, there
are definitely those who say, becauseof pricing transparency, and by the way,
just to be super clear here, no one issaying, let's not have transparent prices.
That is not the pointthat we're making here.
Elizabeth Mitchell fromPBGH, so come back next week.
(16:45):
But you had mentioned even with theexisting price transparency that we
still have a ways to go because peoplestill don't understand the prices.
What do you mean by that?
Shane Cerone (16:56):
It's nearly impossible for a patient to, or a physician
who's referring a patient for care toreally know the prices that that will
be paid for those services, let alonewhat the patient will have to bear.
And, and that's where, again, it's just,you know, part of it is we have to get
to a simpler model in our industry too.
We need transparency, but we alsoneed price simplicity so that doctors
(17:19):
and patients can make decisionsabout what to do and where to go for
the care that the patient requires.
Stacey Richter (17:26):
OK, I guess this is my new thing now, sticking
in these little sidebars.
Did what Shane Cerone said just nowremind you of the conversation with
Mark Cuban and Cora Opsahl entitledTrust, simplicity, and a Chicken.
Yeah, me too.
But this point really matters in thisconversation without simply knowing
the price to be paid or received, notransactions and no market for you.
(17:48):
But for the longer version, definitely goback and listen to that earlier episode.
Dr Sam Flanders (17:53):
I would add that it's also almost impossible for
employers or plan sponsors to knowthe answer to the same question.
How much is it costing to go tothis hospital versus that hospital
for the same line of service?
And until they know that and have somecontrol over it, it's gonna be really
difficult to deal with this problem.
Stacey Richter (18:10):
Got it.
So it's not, so basically the point thatyou're making is like double down on the
existing transparency, make sure thatit trickles down through the system.
Dr Sam Flanders (18:17):
We need to do more of it and just make it transparent.
There needs to be a mechanismto bring that to the market.
Shane Cerone (18:22):
I think what you find, Stacey, is that when organizations
negotiate with payers, they negotiateand so if they're trying to reduce
prices or they're negotiating a certainarea like the cost of cancer care, the
payer may want to decrease the amountthat is being spent on infusion care.
The health system may say, well, I can dothat, but I, you know, they may try and
(18:43):
negotiate some different pricing models ordifferent payment models in other areas.
And so what you end up with in, I'm surealmost every market is just a really
confusing mess of negotiated rates.
It's not simple.
And then to translate that intosomething that a referring doctor
or patient could understand.
I think it's nearly impossible.
(19:04):
I don't really see a way out ofit other than pricing as a percent
of Medicare reference base myself.
Stacey Richter (19:09):
It's interesting, and anyone who has any doubts about what
Shane just said, go back and listento the recent pod about stop loss
contracting between hospitals and carriersin the show with Dr. Eric Bricker.
But yet so, so let's just thinkabout the hospital now, or at
least what I have heard many say.
(19:30):
They point to their operating marginand they say, we have to charge these
prices because look at our operatingmargin, even with these increased prices.
We are still losing money orare we still razor thin margin?
That's the, like we should play a drinkinggame where every time you hear razor
thin margin, we'd all be extremely,probably in the ER with alcohol poisoning.
(19:53):
But you know, like how can thesetwo things be true at the same time
that there is pricing failure whileat the same time hospitals are still
struggling with, you know, to pay therent if you read the press releases.
And by the way, right now I am talkingabout large, consolidated health
systems, mostly, not rural or veryurban hospital systems that for real
(20:14):
have tons of uncompensated care andMedicaid and all kinds of other issues.
Dr Sam Flanders (20:19):
Well, I think that what you just said is true, and these
hospitals do have these economic issues,but you can find lots of examples of
really high quality hospitals out therethat get by with much lower pricing.
If you look at the RAND data we put on ourwebsite last year, over 20 hospitals that
are top quality, nationally rated, andcan get by on less than 200% of Medicare.
(20:42):
So it's possible to do it if youknow how to improve quality and
lower costs in the correct way.
Shane Cerone (20:47):
And I think you know, Stacey, that Sam and I, when we
started our work together many yearsago at Beaumont, this was before
a lot of this price data was madetransparent and publicly available.
But you know, in the years when we workedtogether there, it was an organization
that was paid around 150% of Medicareamong the lowest, not just in the
country, but really among the lowestrates, even in the state of Michigan.
(21:11):
And what was an organization that Iwas really proud to work with then
and was, I'm still proud to havebeen associated with it, a really
high quality specialty center withnational rankings and national awards.
So, so Sam and I, to his point, we knowfrom both the data that's published
and from personal experience, thatthe care can be delivered much more
efficiently and at much lower prices.
(21:31):
And this will sound, you know,I hate the way this sounds, but
you know, there's a lot of healthsystems that have small margins.
It doesn't mean that they're efficient.
Some are, maybe, and trulystruggle and some probably aren't.
I mean, the reality is, um, youknow, you can have low margins if
you're good at just spending allthe money that is given to you.
And I think that's what goes withouta competitive marketplace it's
(21:52):
impossible to separate those thingsand understand what's really possible.
Stacey Richter (21:56):
I'm definitely gonna circle around to the, you will have
a low operating margin if you spendall the money that's given to you.
But I do wanna segue into the second myththat we have, obviously we organized this
show in a very thoughtful way because,because we, uh, have gotten out to the,
the second thing that we did wanna talkabout, which is that hospitals cannot
(22:20):
survive on Medicare slash Medicaidpayments, which is why they have to
cost shift to commercial employers.
So before I dig in on that and I askyou a follow up question about the
spend, all the money they are, given,do either one of you want to expound on
the myth and how it may have happenedthat a hospital just simply cannot
(22:45):
bear to be on Medicare rates alone?
Dr Sam Flanders (22:49):
I think that that can certainly be true and
Medicare rates are are very low.
But can a hospital be on 150% or200% of Medicare rates instead of
300 or north of 300 Medicare rates?
I think that's the questionis could they survive on that?
And um, Shane just explained that welived in a hospital that did not just
survive, but do very, very well on that.
(23:10):
So it really depends on whether thehospital can do the correct kind
of improvements that are neededto work on both quality and cost.
And by the way, my specialty is quality,and those two go together very, very well.
If you do things well, it almostalways costs less so it can be done.
Stacey Richter (23:26):
One of the things that I often hear is that if you are in
a market where there's one hospitalthat's charging whatever wildly over
Medicare rate, you know, four or five,whatever percentage over Medicare,
then they can afford to pay way more.
Therefore, all of the cliniciansand staffing go over to the
(23:48):
hospital that can pay them more.
And then the one that is trying torationalize prices, winds up paying less.
Therefore, they have a competitivedifferentiation because
people follow their doctor.
So is what you're saying true acrossthe board or is it only true in
areas where you sort of have a, amarket where that's not in play?
Shane Cerone (24:06):
I think it could be true.
I mean, if you have a market where oneorganization is paid on the high side
of the market and the other is not, itis an advantage to that organization in
terms of the resources they have availableto invest in clinical programs and to
recruit personnel and to compensatephysicians and executives and nurses.
So I, I mean, I think just at, atsome level I that it makes sense and
is logical, but kind of back to thebaseline question, I don't know if we
(24:30):
know how efficient we can become as acountry in terms of percent of Medicare.
And what I would say is, you know,on one hand there aren't many
places that don't accept Medicare
so, you know, what you reallyfind is that you can make some
margin on Medicare patients.
It may not total up to cover all ofthe overhead and, and the allocated
costs in an organization, but in thatenvironment, what you want are really
(24:53):
big, large, busy medical centers thatcan achieve greater economies of scale.
And in large part, I think that'swhat Sam and I experienced in
our time together at Beaumont.
It was a really large, one of the 20busiest hospitals in the country and
we were able in that environment,you can get a lot closer to Medicare
payments and be viable and sustainable.
My view, and this will not makepeople in the industry happy that do
(25:16):
what I, what I do for a living, butis that we've got it all backwards.
We should think of, we havehospitals in the country today,
as Dr. Flanders mentioned.
That are doing very well at 160,70, 80% of Medicare in terms of
the quality of care they provide.
I think that's not thebest we can achieve.
I think it's the floor and thatif we really had a competitive
(25:37):
marketplace, we would see greatcare being delivered at far lower
multiples of Medicare than even that.
But again, in today's marketplace,those organizations are most likely not
rewarded by the market for that level ofperformance, and we have to change that.
Stacey Richter (25:52):
Yeah, and you did send over a list, which we will
put in the show notes of hospitalsthat are fine hospitals, great
quality, that have rational pricing.
Anything to add?
Dr. Flanders?
Dr Sam Flanders (26:04):
I think the only thing I would add is that in order to get
this ball rolling, there has to be amechanism to get the prices so that
they are competitive and so that there'ssome incentive for the hospitals to
wanna offer those competitive pricing.
And once they do that, then theimpetus for quality improvement
and cost improvement will be therein a very transparent sort of way.
(26:24):
Today we don't really have thatcompetition on either price and or
quality, and so it's hard to get peoplemotivated to really make those changes.
Stacey Richter (26:32):
And from what I'm understanding, the carriers
themselves and just the way that theynegotiate and the various potentially
conflicts of interest, if I wannajust put it in the baldest terms.
The more money healthcare costs, ifyou're taking a percentage of the total,
the bigger the healthcare pie, the moremoney there is which, is very, very basic
(26:53):
and also very, very pernicious, frankly.
I mean, it's just, it,it just, it just is.
Back to kind of the first myth thatwe have a functioning market here that
rationalizes prices because we don't,the downstream effect of that hospital
organizations aren't rewarded fordoing things that a market would reward
them to do because we have no marketi.e. better quality rational prices.
Dr Sam Flanders (27:17):
I think that's absolutely true, and in any given market, if a
carrier negotiates rates, let's saywith six hospitals, and it ranges from
150% of Medicare up to north of 300of Medicare for the same services.
The plan sponsors or employers don't knowwhat they're paying at each hospital.
The members don't know, and there'sno incentive for the members to
(27:37):
choose one of a lower cost hospitals.
Stacey Richter (27:40):
And that actually has even shades of gray in it.
For example, I was talking with ahead of primary care actually had a
large consolidated health system thatfrankly had done a, and they admitted
this fully, not a great job 20 yearsago, negotiating their primary care
rates versus other local hospitals.
(28:01):
Kind of like back to the pointthat I was making earlier.
So this one particular hospital wastrying to negotiate higher, like their
primary care rates were shockingly low.
They couldn't keep anyprimary care physicians.
And the carrier was like, Nope.
You know, sorry, you screwed yourself.
Meanwhile, you hear people likeElizabeth Mitchell talking about
how the businesses in the area arethey're frankly, okay, paying more for
(28:25):
primary care, just given everythingthat we now know about primary care.
But you've got a carrier who'sthumping, so it's almost like
the opposite problem also.
It's not only how much you'repaying, but what are you paying for
that could also not have a market.
Dr Sam Flanders (28:43):
There's so many different levers and so many different things that
could be done, and they're all good.
I guess our main point is startwith hospital pricing and quality.
And if we could deal with that, thatwould give us a huge leg up to be able
to then do some of the other things thatwe also need me to do, like primary care
and lots of other things, but it's lowhanging fruit that hasn't been harvested.
Stacey Richter (29:04):
And how do you harvest this low hanging fruit?
See you in two weeksduring the solutions show.
We've gone through a lot of theissues that these myths create, and
I just wanna throw a third myth intothe bucket here as well, which is that
you lower prices and you get lowerquality, which Dr. Sam Flanders, you
(29:24):
just directly countermanded when yousaid that sometimes when you lower
prices you get higher quality becausenow people are actually thinking really
hard about what their processes are andwhat their protocols are, it's et cetera.
So we've got three myths here.
That all definitelyflywheel around each other.
The first one being that we've got afunctioning market that controls prices.
(29:44):
The second one being that hospitalscannot survive on Medicare, 150%
of Medicare, 200% of Medicare.
That the prices have to be more than thatwith cost, is that we gotta cost shift.
And then the third one that we justadded into our mix here is that you
lower the price, you lower the quality.
Intractable question mark.
Dr Sam Flanders (30:03):
Well, I'll address the quality question and then I'd
like to ask Shane to address thequestion of what do we do about this?
But it's been known since right afterWorld War ii, thanks to the work of Dr.
W Edwards Deming in Japan and later inthe US, that improving quality lowers
costs, those two go hand in hand, and thatlowering costs often is less expensive.
(30:23):
Than doing things at higher costbecause again, quality and cost are
related in, in a positive sort of way.
So there's no question that you can dothings well at a lower cost than that
list that you're going to put out onyour website will show all the listeners
that that's completely possible.
So there's, there's no quality barriersfrom doing what we're talking about here.
Stacey Richter (30:42):
Which is fascinating.
I just can't help but jump in.
Sorry, Shane, over to you in a sec. Itis just fascinating because it is so
often put on a counterpoint where thesecond anybody talks about lowering
cost, there's just kind of this, andmaybe it's just intuitive, right?
You just think, oh, the lowerthe price, the lower the quality.
Like that's normally how things work, butthe point that you're making, and there's
(31:05):
Edward Deming, there's the Toyota model,there's just any number of different,
very well validated assessments whichshow that if you really start thinking
about what you're doing and organizingwhat you're doing, that you can't, and
I'm sure there's a threshold here, right?
Like you can't go below some number, andI think you said 150, 200% of Medicare
(31:26):
might be that threshold, but if you'reworking in that sweet spot and you really
start thinking about what's efficient,then you actually may raise quality
because now you're thinking about it hard.
Dr Sam Flanders (31:38):
You absolutely can.
And we're big proponents of the Toyotamodel, which we've successfully adapted to
healthcare and organizations where we'veworked, and it really changes the way you
approach performance improvement for bothcost and quality in a way that empowers
frontline workers to be able to be muchbigger participants in that effort than
they typically are in most health systems.
Stacey Richter (32:00):
One of the things that we often forget about hospitals
also is we think hospital and wethink care delivery, but these
are huge sprawling bureaucracies.
For example, I was listening to DanO'Neill talk on Lisa Barry's podcast.
And he was talking about physiciancredentialing and this one healthcare
organization had this form where adoctor had to fill in stuff that was
(32:23):
easily available on the internet,like so then you had to go offline.
It was this hard copy thing.
You had to fill it in and then sendin a physical check, and they had a
whole department that just managedall of that, and you're thinking to
yourself, how much did that cost?
But you get these little fiefdoms, right?
That again, have nothing to do.
Well, I mean, I guess indirectly, butthey're really far away from direct
(32:46):
care and incrementally, you add thatplus another different day, different
department, and you can get reallycostly, really fast, and you standardize
and make that really efficient.
It's got nothing to do with patient care.
Right?
Dr Sam Flanders (32:58):
Yeah.
Well, if I could just addone more thing to that.
I think the point you make is really good.
And in addition to creating perhapsbureaucracy that doesn't need to be there.
There are hundreds or even thousandsof problems in health systems
everywhere, even really good healthsystems that need to be dealt with.
And there's no way you can dothat from a central location.
You can't have a central quality team ora department, or a czar or anyone that can
(33:22):
be aware of all of those sorts of things.
If you look at how Toyotastructures theirs, their model
is conceptually very simple.
Every employee needs to dotheir job and do their job
and perform it well every day.
But also be thinking and makingchanges constantly to try to
improve the way their job is done.
And that's the model that can get outinto the front lines, into all of the
(33:45):
different recesses that are out therethat are impossible to manage centrally
because there's too much complexity.
The people that are doing thework know how to improve it.
If you'll let them.
If you'll encourage them,if you'll coach them.
And letting that happenmakes an enormous difference.
And really gets you tocontinuous improvement.
You've talked a lot about theflywheel model in this podcast.
I've heard it numerous timesand it's the same sort of thing.
(34:08):
It's a giant flywheel, and if youget everyone in the organization
pushing on it, the flywheelbegins to turn faster and faster.
If you only try to do it centrally,you can't even get the first
turn of the flywheel to go.
Stacey Richter (34:19):
And just to be clear, oftentimes on this podcast we talk about
kind of the death spiral direction ofthe flywheel where quality goes down
or, or at a minimum remains neutral, Iguess best case, but prices go way up.
What you're talking about is the virtuousspin, so turning that flywheel around,
how do you make it go the opposite way?
I am on the edge of my seat chainto hear how, how we do this.
(34:42):
Wow, with that cliffhanger do comeback, as I said next week, listen to
Elizabeth Mitchell of PBGH talkingabout the demonstration project.
That is a first step.
It is a foray intomaking an actual market.
Then come back week after that forpart two, the solution show of this
conversation where Shane Cerone actuallygets a chance to answer the question,
(35:06):
What do we do to countermand theseproblematic myths that we have spent the
last 30 minutes discussing in this show?
So see you on the other side.
Shane Cerone (35:15):
Hi, this is Shane Cerrone with Kada Health.
I like to think of RelentlessHealth Value as a solution center.
A unique place where industry insidersand experts gather to break down the
failures of our nation's health systemand talk honestly about the problems
we confront and the solutions we need.
It's a rare place where you hearstrategies that are actually being
(35:35):
used to drive the changes we allwant and need to see in the industry.
If you're interested in makingan impact, I'd encourage you to
follow Relentless Health Value onLinkedIn and share your perspective.
Thanks for listening.
Episode 490, "The Problem Show
Including 'There is a Healthcare Market'".
Today I speak with ShaneCerone and Dr. Sam Flanders.
Tom Nash (00:21):
American Healthcare Entrepreneurs and Executives
You Want to Know, Talking.
Relentlessly Seeking Value.
Stacey Richter (00:30):
Here's a quote.
"The reality is you can haverazor thin hospital margins if
you are good at just spending allthe money that is given to you."
Shane Cerone says this comingup and throw hot, right?
Razor thin hospital margins, maybedue to high costs or some problematic
market condition or uncompensated care.
(00:51):
Or razor thin operating marginscould also transpire because
you're just really inclined tospend every dollar you're given.
Kind of shines a new lighton the nonprofit word, right?
Anyway, after Shane Cerone raises hiseyebrows at the razor thin hospital margin
cliche, at this point, then he continues,"And I think that's what goes on without
(01:12):
a competitive healthcare marketplace.It's impossible to separate those things".
Meaning is it some problem associated withproviding care in a community or is it
too much money gassing up the private jet?
"It's impossible to separate these thingsand understand what's really possible".
Yep.
That's something that one of my gueststoday, Shane Cerone, will say in
(01:34):
about T minus 19 minutes or something.
So spoiler alert.
Now, let me start from the beginning.
What happens when there is a market, anactual market for any good or service?
Well.
Prices are rationalized.
Supply and demand curves meetat an equilibrium point and
the invisible hand knocks
sellers and buyers in to line.
(01:56):
Abracadabra.
We have fair prices.
If I continue down memory lane toour freshman Econ 101 microeconomics
class, just in case it was that 8:00AM and any of us slept through it.
Those aforementioned supply anddemand curves for them to do their
equilibrium thing, these curvesrequire a series of transactions
(02:17):
that trial and error themselvesinto that aforementioned equilibrium
fair for buyers and sellers price.
Transactions was the key word there.
In other words, a market isthe sum or whatever the average
of its transactions, right?
It's like a group of crows iscalled a murder, a herd of cows.
Well, a group of transactionsis called a market.
(02:39):
Now what is required for a transactionto be an actual transaction?
Let's see.
Oh, here's a start.
Both the buyer and the sellermust be aware of the price at
the time of the transaction asone fundamental rate critical.
And this is not just textbook economicsthat I'm talking about right now.
It's also contract law.
And yeah, anyone who has spent fiveminutes at this rodeo, you listening, you
(03:02):
have immediately cottoned on to the factthat this is already not going well for
anyone planning to argue that there isin fact a healthcare market in the United
States because does anyone even know theprice that they are buying or selling
at for any given healthcare transactionprior to agreeing to buy or sell?
Status quo carriers andTPAs have entered the chat.
(03:25):
But if you don't have transactionswith transparent cost or quality of the
goods purchase, then yeah, real toughto have competition, which is another
market rate critical that is dependenton their being, for reals, transactions.
Real hard to shop for quality whenyou don't know what the quality is.
We often talk about this topicfrom the standpoint of the buyer
(03:47):
here at Relentless Health Value.
Listens to the shows with Kevin Lyons,Jonathan Baron, Dr. Wayne Jenkins.
Today though we're gonna talkabout this from the points
of view of the health system.
How does a non-marketaffect health systems?
I'm thinking now about something Dr.John Rodis talked about in episode 286
(04:09):
that I repeat in the show that follows.
Short version.
Dr. Rodis was CEO of a hospital thatthrew their backs into improving quality
and safety, and they got zero, volumezero demands for their efforts, no
increase in demand, nor were they ableto negotiate higher carrier rates.
So like why bother?
Just put a snazzy billboardon the highway, We are
(04:31):
number one and call it a day.
And yeah, what a loss for the community,for patients, for members, but also for
folks working in any given hospital,trying really hard to get their
organization to do right by patients.
So, wow.
Was I on the edge of my seat todayto get a chance to talk with Dr. Sam
Flanders and Shane Cerone from KadaHealth, who by the way, donated to
(04:54):
the pod to help out with our expenses.
My goodness do I love this tribethat we have created here, and those
of you who step up and help out,it costs a lot of cash actually,
to keep the show in the air.
So thank you so much to Kada Healthand also to everybody who pops
up and drops a couple of bucks inthe tip jar on our website that we
do absolutely nothing to promote.
(05:14):
We get five bucks here and $500 there,and it all adds up and it makes my heart
happy to see how great people are ondays when things look so dark sometimes.
Sorry, we were talkingabout the non-market that
is the healthcare industry.
Okay, I was thrilled to captureShane Cerone and Dr. Sam Flanders,
as I said, and get them on the showtoday because they were responsible
(05:36):
together for running a hospital.
A hospital that ran at 158% of Medicare.
And which had highly rated quality andsafety because I wanted to get my mitts
on someone who had done this successfullybecause I'm trying to figure out why
it seems so hard for others to emulate.
Now the solutions show is gonnabe in two weeks where Shane and
(05:56):
Dr. Sam Flanders get into how theykept prices low and delivered, high
quality and safety to their community.
And if you can't stand waitingtwo weeks, do go back and listen
to the show with Dan Greenleaf.
There's two of them, and he talksabout this from the standpoint
of a multi-specialty group.
Dr. Sam Flanders and Shane Ceroneare talking about this from the
standpoint of a hospital system.
(06:16):
Today, however, we are exploring,deeply and with great insight,
problematic healthcare myths.
Now, these myths are warmly embraced bythose who kind of benefit from them being
embraced, which is probably some prettygood foreshadowing for the solution show.
But these three myths are, first, let'sjust lay out the mother of all myths,
that there is a functioning healthcaremarket or carriers control the prices of
(06:39):
consolidated health systems and et cetera.
Myth two.
Hospitals simply cannot afford to operatewhen prices paid by commercial contracts
are less than 150 or 200% of Medicare.
There has to be wild cost shiftingto local employers, otherwise
they will go out of businessin some kind of clearance sale.
Myth three, when prices go down,so does quality as a general rule.
(07:00):
Now there's gonna be one show inbetween this show, our problematic
myth show and the, okay, now let's helphospitals solve for all of this show.
And the show I'm gonna pop right in themiddle of these two bookends is a show
with Elizabeth Mitchell from PBGH, thePurchaser's Business Group on health,
because toothpaste is out of the tube.
(07:21):
And anyone banking on the non-marketbonanza continuing yeah heads up,
here's what it looks like aroundthe corner in the future coming up.
Because, oh my God I'm terrible atkeeping the suspense under wraps, but
PBGH just took all the transparencydata and a whole bunch of claims data
and quality data, and now they can seeactual prices being charged and actual
(07:43):
quality and safety being delivered byany given health system or organization.
And oh wow is that powerfulbecause it actually creates the
potential for actual transactions,which are the building blocks.
Of markets and oh wow, does ithave an impact on health systems
on consultants, on TPAs and ASOs.
I'm controlling myself from going offon a whole tangent about this impact
(08:06):
on consultants and TPAs, but I will notbecause that's what half the show is
about next week, so come back next week.
In the meantime, enjoy this episodewith Dr. Sam Flanders and Shane Cerone.
Then again, as I said, come back nextweek listen to Elizabeth Mitchell.
Then come back for the solutions partof this episode where we talk about,
yeah, solutions where Dr. Sam Flandersand Shane Cerone, just with such
(08:27):
wisdom and experience tick throughhow to slow the raising prices roll.
How to make things work fine, justfine on 150, 200% of Medicare.
How there is zero reason any hospitalshould be thumping its chest and
saying quality will go down or direthis or dire that if they don't get
their double digit rate increases.
So onward here is my problematicmyths conversation with, as
(08:50):
I've said 19 times already.
Shane Cerone and Dr. Sam Flandersfrom Kada Health and the show is
sponsored by Aventria Health Groupwith an assist from Kada Health.
Dr. Sam Flanders, welcometo Relentless Health Value.
Dr Sam Flanders (09:02):
Thank you very much, Stacey.
Great to be here.
Stacey Richter (09:04):
Shane Cerone, welcome to Relentless Health Value.
Shane Cerone (09:06):
Thank you.
It's our pleasure to be here.
Stacey Richter (09:08):
Well, it is a pleasure to have you both on the show today because
we are talking about something that hasfelt like a black box to me frankly.
We've done a lot of shows talkingabout just the amount rising hospital
prices have to do with rising renewals.
(09:28):
There was that show withVivian Ho, which dug into that.
We've also had quotes like Dr.Stan Schwartz from Zero Health.
He was talking about how a lot ofwhat is wrong with medical expense
has to do with pricing failures.
We had Mark Cuban and others on thepod talking sort of about that same
(09:48):
thing and how a lot of the risk isshifting over to hospitals, but what
is going on within the hospitals andwhether this is a totally intractable,
like this is just gonna happen andthere's nothing we can do about it,
flywheel, that we haven't talked about.
So I am fascinated to have you two today.
Shane Cerone (10:07):
Stacey, for my entire career and, and since before then,
for decades, we've been concernedabout the rising cost of healthcare.
It's my view that we have for many,many years created new programs
that are sometimes just renewedinitiatives of things we've tried
in the past, but they're veryheavily focused on controlling
the volume of use in the industry.
(10:30):
And of course those initiatives are reallyimportant and they're essential, but we've
never really done anything about price.
I really follow the old UweReinhardt story from years gone by.
It's about prices.
And in my view, if we don't do anythingabout prices, no matter what else we do,
the cost of care will continue to rise.
(10:50):
And if there's a message at thebeginning for the end, is that we
have to fix the lack of any marketstructure on pricing in healthcare if
we're gonna get to a better solution.
Stacey Richter (10:59):
You mentioned the Uwe Reinhardt quote, "It's the prices
stupid", which is pretty much justa different way to say what Dr.
Stan Schwartz was saying, which isthat we have pricing failure here.
What do you wanna addhere, Dr. Sam Flanders?
Dr Sam Flanders (11:09):
I would just add that the prices are so different.
Between hospitals in the same marketfor the same services, and we can
talk more about this later, butthere's not differences in quality.
But explain this, no one's reallydealing with those differences.
That data's been publicly availablefor a long time, but we haven't
been able to put it to use yet.
Stacey Richter (11:28):
And that for sure, right?
Like you can look at, there's enoughtransparency that is available now.
There's just, there's a number ofentities that are popping up in the
market, which just show these wilddeltas and how much things cost.
And to your exact point, thereis very little that would support
some kind of quality as thedifference, the differentiator there.
(11:50):
Which kind of leads us to thefirst excellent segue there.
Into the first myth that mayhold us back if we believe it.
And that myth is that there is marketcontrol here that carriers are somehow
controlling not only UM, but also pricing.
Who wants to dig into what the mythis first and then why it's a myth.
Shane Cerone (12:16):
I'd be happy to take a first run with it.
The myth is that we have afunctioning marketplace and we don't.
I would say, we don'thave a broken market.
It's closer to a non-existent market.
And what I mean by that is, assomebody who's been the CEO of multiple
hospitals and health systems, hospitalsdon't compete on price for patients.
It just doesn't work that way.
(12:36):
And so we don't really have a normalmarket incentive to reduce the cost,
or in this case, the price for servicesin order to remain competitive.
In fact, I would say it's youcan run the most efficient, high
quality hospital in the country.
And it really will have very little tono effect on your business in terms of
steering volume to the organization.
And that's what's required for, youknow, for a functioning marketplace,
(12:59):
we need a system where buyers andsellers can make informed decisions.
Which then lead to the efficientallocation of market resources.
Functioning markets have to have freeand fair competition, and there's no
competition in healthcare and pricebecause nobody understands the pricing.
Even with the latest efforts for pricetransparency, which are, you know,
it's a great step, we're still nowherenear a place where people can use price
(13:22):
to factor into their decision making.
I sometimes like to say, and this mayseem ridiculous, but in healthcare, to
use a different example, you can imagineif Visa and MasterCard said, you know
what, we have a lot of purchasing power.
How about we negotiate the price ofmilk with your local grocery store?
We'll get a better price for you.
But here's the catch.
(13:44):
We're not gonna print or publishwhat the price of milk is.
We're just gonna get thebest possible price for you.
And you won't see what the line itemsare, but at the end of the month, we'll
send you a bill and tell you how muchyou spend on all of your groceries,
including the milk and everything forwhich we've negotiated these great prices.
Then down the road when your grocerybills get high or when you, when they're
too high and you complain, instead oftrying to achieve better pricing on
(14:07):
milk, Visa comes back and says, howabout I put a program to try and help
you reduce your consumption of milk,but that's gonna add administrative
expense to my processing fees.
That's how I view healthcare.
Something we would neverdo in another industry.
We would never let a thirdparty like this set prices.
And so unfortunately, part of thechallenge in the industry is, I
(14:28):
don't think insurance companieshave, at least to this point, been
able to create competition on pricein the industry, and that's what
we have to have to drive change.
Stacey Richter (14:38):
I'm gonna reiterate a couple of the points that you made and
then see if Dr. Sam Flanders has anythingabout the problem or the myth to add
before we move into what the reality is.
Which we sort of have alreadydipped into a little bit here.
You said the market's notbroken, it's non-existent.
And the reason or one supportingelement that you said there is that
(15:00):
hospitals do not compete on priceand they do not compete on quality.
And kind of backing up that we hadDr. John Rodis on the pod a while ago
who was the CEO of hospitals in NewEngland, and he kind of said the same
thing that when he first became theCEO, he did this huge effort to improve.
They had really low safetyscores, like their leapfrog safety
rating was a D or something.
(15:20):
And he busted everybody's behindsto lift it up to an A and got
absolutely no volume for it.
Like no one cared, which to him wasa absolutely shocking revelation.
Which I think emphasizes the pointthat you're making is do we actually
have a market where you could lowerprices, which I've also heard people
try to do and get nothing for it, or youcould raise quality, raise safety, and
(15:45):
literally there is no market benefit.
Let's get into the reality now here.
Shane Cerone (15:51):
You know, in terms of the reality, if you're the CEO of
a hospital or a health system andyou work to reduce your cost so that
you can reduce your prices, but themarket doesn't move to you, when you
get that work done, all you've doneis really lowered your top line, and
most boards are gonna frown on that.
And so you know you, again, even withthe right effort, a CEO's just not
(16:13):
working in a marketplace that allowsher or him to do what's best for the
market, for the employers who pay forcare for the patients who receive care.
Stacey Richter (16:21):
Lemme ask you something though.
You had mentioned so, so there is manytimes when this topic comes up, there
are definitely those who say, becauseof pricing transparency, and by the way,
just to be super clear here, no one issaying, let's not have transparent prices.
That is not the pointthat we're making here.
Elizabeth Mitchell fromPBGH, so come back next week.
(16:45):
But you had mentioned even with theexisting price transparency that we
still have a ways to go because peoplestill don't understand the prices.
What do you mean by that?
Shane Cerone (16:56):
It's nearly impossible for a patient to, or a physician
who's referring a patient for care toreally know the prices that that will
be paid for those services, let alonewhat the patient will have to bear.
And, and that's where, again, it's just,you know, part of it is we have to get
to a simpler model in our industry too.
We need transparency, but we alsoneed price simplicity so that doctors
(17:19):
and patients can make decisionsabout what to do and where to go for
the care that the patient requires.
Stacey Richter (17:26):
OK, I guess this is my new thing now, sticking
in these little sidebars.
Did what Shane Cerone said just nowremind you of the conversation with
Mark Cuban and Cora Opsahl entitledTrust, simplicity, and a Chicken.
Yeah, me too.
But this point really matters in thisconversation without simply knowing
the price to be paid or received, notransactions and no market for you.
(17:48):
But for the longer version, definitely goback and listen to that earlier episode.
Dr Sam Flanders (17:53):
I would add that it's also almost impossible for
employers or plan sponsors to knowthe answer to the same question.
How much is it costing to go tothis hospital versus that hospital
for the same line of service?
And until they know that and have somecontrol over it, it's gonna be really
difficult to deal with this problem.
Stacey Richter (18:10):
Got it.
So it's not, so basically the point thatyou're making is like double down on the
existing transparency, make sure thatit trickles down through the system.
Dr Sam Flanders (18:17):
We need to do more of it and just make it transparent.
There needs to be a mechanismto bring that to the market.
Shane Cerone (18:22):
I think what you find, Stacey, is that when organizations
negotiate with payers, they negotiateand so if they're trying to reduce
prices or they're negotiating a certainarea like the cost of cancer care, the
payer may want to decrease the amountthat is being spent on infusion care.
The health system may say, well, I can dothat, but I, you know, they may try and
(18:43):
negotiate some different pricing models ordifferent payment models in other areas.
And so what you end up with in, I'm surealmost every market is just a really
confusing mess of negotiated rates.
It's not simple.
And then to translate that intosomething that a referring doctor
or patient could understand.
I think it's nearly impossible.
(19:04):
I don't really see a way out ofit other than pricing as a percent
of Medicare reference base myself.
Stacey Richter (19:09):
It's interesting, and anyone who has any doubts about what
Shane just said, go back and listento the recent pod about stop loss
contracting between hospitals and carriersin the show with Dr. Eric Bricker.
But yet so, so let's just thinkabout the hospital now, or at
least what I have heard many say.
(19:30):
They point to their operating marginand they say, we have to charge these
prices because look at our operatingmargin, even with these increased prices.
We are still losing money orare we still razor thin margin?
That's the, like we should play a drinkinggame where every time you hear razor
thin margin, we'd all be extremely,probably in the ER with alcohol poisoning.
(19:53):
But you know, like how can thesetwo things be true at the same time
that there is pricing failure whileat the same time hospitals are still
struggling with, you know, to pay therent if you read the press releases.
And by the way, right now I am talkingabout large, consolidated health
systems, mostly, not rural or veryurban hospital systems that for real
(20:14):
have tons of uncompensated care andMedicaid and all kinds of other issues.
Dr Sam Flanders (20:19):
Well, I think that what you just said is true, and these
hospitals do have these economic issues,but you can find lots of examples of
really high quality hospitals out therethat get by with much lower pricing.
If you look at the RAND data we put on ourwebsite last year, over 20 hospitals that
are top quality, nationally rated, andcan get by on less than 200% of Medicare.
(20:42):
So it's possible to do it if youknow how to improve quality and
lower costs in the correct way.
Shane Cerone (20:47):
And I think you know, Stacey, that Sam and I, when we
started our work together many yearsago at Beaumont, this was before
a lot of this price data was madetransparent and publicly available.
But you know, in the years when we workedtogether there, it was an organization
that was paid around 150% of Medicareamong the lowest, not just in the
country, but really among the lowestrates, even in the state of Michigan.
(21:11):
And what was an organization that Iwas really proud to work with then
and was, I'm still proud to havebeen associated with it, a really
high quality specialty center withnational rankings and national awards.
So, so Sam and I, to his point, we knowfrom both the data that's published
and from personal experience, thatthe care can be delivered much more
efficiently and at much lower prices.
(21:31):
And this will sound, you know,I hate the way this sounds, but
you know, there's a lot of healthsystems that have small margins.
It doesn't mean that they're efficient.
Some are, maybe, and trulystruggle and some probably aren't.
I mean, the reality is, um, youknow, you can have low margins if
you're good at just spending allthe money that is given to you.
And I think that's what goes withouta competitive marketplace it's
(21:52):
impossible to separate those thingsand understand what's really possible.
Stacey Richter (21:56):
I'm definitely gonna circle around to the, you will have
a low operating margin if you spendall the money that's given to you.
But I do wanna segue into the second myththat we have, obviously we organized this
show in a very thoughtful way because,because we, uh, have gotten out to the,
the second thing that we did wanna talkabout, which is that hospitals cannot
(22:20):
survive on Medicare slash Medicaidpayments, which is why they have to
cost shift to commercial employers.
So before I dig in on that and I askyou a follow up question about the
spend, all the money they are, given,do either one of you want to expound on
the myth and how it may have happenedthat a hospital just simply cannot
(22:45):
bear to be on Medicare rates alone?
Dr Sam Flanders (22:49):
I think that that can certainly be true and
Medicare rates are are very low.
But can a hospital be on 150% or200% of Medicare rates instead of
300 or north of 300 Medicare rates?
I think that's the questionis could they survive on that?
And um, Shane just explained that welived in a hospital that did not just
survive, but do very, very well on that.
(23:10):
So it really depends on whether thehospital can do the correct kind
of improvements that are neededto work on both quality and cost.
And by the way, my specialty is quality,and those two go together very, very well.
If you do things well, it almostalways costs less so it can be done.
Stacey Richter (23:26):
One of the things that I often hear is that if you are in
a market where there's one hospitalthat's charging whatever wildly over
Medicare rate, you know, four or five,whatever percentage over Medicare,
then they can afford to pay way more.
Therefore, all of the cliniciansand staffing go over to the
(23:48):
hospital that can pay them more.
And then the one that is trying torationalize prices, winds up paying less.
Therefore, they have a competitivedifferentiation because
people follow their doctor.
So is what you're saying true acrossthe board or is it only true in
areas where you sort of have a, amarket where that's not in play?
Shane Cerone (24:06):
I think it could be true.
I mean, if you have a market where oneorganization is paid on the high side
of the market and the other is not, itis an advantage to that organization in
terms of the resources they have availableto invest in clinical programs and to
recruit personnel and to compensatephysicians and executives and nurses.
So I, I mean, I think just at, atsome level I that it makes sense and
is logical, but kind of back to thebaseline question, I don't know if we
(24:30):
know how efficient we can become as acountry in terms of percent of Medicare.
And what I would say is, you know,on one hand there aren't many
places that don't accept Medicare
so, you know, what you reallyfind is that you can make some
margin on Medicare patients.
It may not total up to cover all ofthe overhead and, and the allocated
costs in an organization, but in thatenvironment, what you want are really
(24:53):
big, large, busy medical centers thatcan achieve greater economies of scale.
And in large part, I think that'swhat Sam and I experienced in
our time together at Beaumont.
It was a really large, one of the 20busiest hospitals in the country and
we were able in that environment,you can get a lot closer to Medicare
payments and be viable and sustainable.
My view, and this will not makepeople in the industry happy that do
(25:16):
what I, what I do for a living, butis that we've got it all backwards.
We should think of, we havehospitals in the country today,
as Dr. Flanders mentioned.
That are doing very well at 160,70, 80% of Medicare in terms of
the quality of care they provide.
I think that's not thebest we can achieve.
I think it's the floor and thatif we really had a competitive
(25:37):
marketplace, we would see greatcare being delivered at far lower
multiples of Medicare than even that.
But again, in today's marketplace,those organizations are most likely not
rewarded by the market for that level ofperformance, and we have to change that.
Stacey Richter (25:52):
Yeah, and you did send over a list, which we will
put in the show notes of hospitalsthat are fine hospitals, great
quality, that have rational pricing.
Anything to add?
Dr. Flanders?
Dr Sam Flanders (26:04):
I think the only thing I would add is that in order to get
this ball rolling, there has to be amechanism to get the prices so that
they are competitive and so that there'ssome incentive for the hospitals to
wanna offer those competitive pricing.
And once they do that, then theimpetus for quality improvement
and cost improvement will be therein a very transparent sort of way.
(26:24):
Today we don't really have thatcompetition on either price and or
quality, and so it's hard to get peoplemotivated to really make those changes.
Stacey Richter (26:32):
And from what I'm understanding, the carriers
themselves and just the way that theynegotiate and the various potentially
conflicts of interest, if I wannajust put it in the baldest terms.
The more money healthcare costs, ifyou're taking a percentage of the total,
the bigger the healthcare pie, the moremoney there is which, is very, very basic
(26:53):
and also very, very pernicious, frankly.
I mean, it's just, it,it just, it just is.
Back to kind of the first myth thatwe have a functioning market here that
rationalizes prices because we don't,the downstream effect of that hospital
organizations aren't rewarded fordoing things that a market would reward
them to do because we have no marketi.e. better quality rational prices.
Dr Sam Flanders (27:17):
I think that's absolutely true, and in any given market, if a
carrier negotiates rates, let's saywith six hospitals, and it ranges from
150% of Medicare up to north of 300of Medicare for the same services.
The plan sponsors or employers don't knowwhat they're paying at each hospital.
The members don't know, and there'sno incentive for the members to
(27:37):
choose one of a lower cost hospitals.
Stacey Richter (27:40):
And that actually has even shades of gray in it.
For example, I was talking with ahead of primary care actually had a
large consolidated health system thatfrankly had done a, and they admitted
this fully, not a great job 20 yearsago, negotiating their primary care
rates versus other local hospitals.
(28:01):
Kind of like back to the pointthat I was making earlier.
So this one particular hospital wastrying to negotiate higher, like their
primary care rates were shockingly low.
They couldn't keep anyprimary care physicians.
And the carrier was like, Nope.
You know, sorry, you screwed yourself.
Meanwhile, you hear people likeElizabeth Mitchell talking about
how the businesses in the area arethey're frankly, okay, paying more for
(28:25):
primary care, just given everythingthat we now know about primary care.
But you've got a carrier who'sthumping, so it's almost like
the opposite problem also.
It's not only how much you'repaying, but what are you paying for
that could also not have a market.
Dr Sam Flanders (28:43):
There's so many different levers and so many different things that
could be done, and they're all good.
I guess our main point is startwith hospital pricing and quality.
And if we could deal with that, thatwould give us a huge leg up to be able
to then do some of the other things thatwe also need me to do, like primary care
and lots of other things, but it's lowhanging fruit that hasn't been harvested.
Stacey Richter (29:04):
And how do you harvest this low hanging fruit?
See you in two weeksduring the solutions show.
We've gone through a lot of theissues that these myths create, and
I just wanna throw a third myth intothe bucket here as well, which is that
you lower prices and you get lowerquality, which Dr. Sam Flanders, you
(29:24):
just directly countermanded when yousaid that sometimes when you lower
prices you get higher quality becausenow people are actually thinking really
hard about what their processes are andwhat their protocols are, it's et cetera.
So we've got three myths here.
That all definitelyflywheel around each other.
The first one being that we've got afunctioning market that controls prices.
(29:44):
The second one being that hospitalscannot survive on Medicare, 150%
of Medicare, 200% of Medicare.
That the prices have to be more than thatwith cost, is that we gotta cost shift.
And then the third one that we justadded into our mix here is that you
lower the price, you lower the quality.
Intractable question mark.
Dr Sam Flanders (30:03):
Well, I'll address the quality question and then I'd
like to ask Shane to address thequestion of what do we do about this?
But it's been known since right afterWorld War ii, thanks to the work of Dr.
W Edwards Deming in Japan and later inthe US, that improving quality lowers
costs, those two go hand in hand, and thatlowering costs often is less expensive.
(30:23):
Than doing things at higher costbecause again, quality and cost are
related in, in a positive sort of way.
So there's no question that you can dothings well at a lower cost than that
list that you're going to put out onyour website will show all the listeners
that that's completely possible.
So there's, there's no quality barriersfrom doing what we're talking about here.
Stacey Richter (30:42):
Which is fascinating.
I just can't help but jump in.
Sorry, Shane, over to you in a sec. Itis just fascinating because it is so
often put on a counterpoint where thesecond anybody talks about lowering
cost, there's just kind of this, andmaybe it's just intuitive, right?
You just think, oh, the lowerthe price, the lower the quality.
Like that's normally how things work, butthe point that you're making, and there's
(31:05):
Edward Deming, there's the Toyota model,there's just any number of different,
very well validated assessments whichshow that if you really start thinking
about what you're doing and organizingwhat you're doing, that you can't, and
I'm sure there's a threshold here, right?
Like you can't go below some number, andI think you said 150, 200% of Medicare
(31:26):
might be that threshold, but if you'reworking in that sweet spot and you really
start thinking about what's efficient,then you actually may raise quality
because now you're thinking about it hard.
Dr Sam Flanders (31:38):
You absolutely can.
And we're big proponents of the Toyotamodel, which we've successfully adapted to
healthcare and organizations where we'veworked, and it really changes the way you
approach performance improvement for bothcost and quality in a way that empowers
frontline workers to be able to be muchbigger participants in that effort than
they typically are in most health systems.
Stacey Richter (32:00):
One of the things that we often forget about hospitals
also is we think hospital and wethink care delivery, but these
are huge sprawling bureaucracies.
For example, I was listening to DanO'Neill talk on Lisa Barry's podcast.
And he was talking about physiciancredentialing and this one healthcare
organization had this form where adoctor had to fill in stuff that was
(32:23):
easily available on the internet,like so then you had to go offline.
It was this hard copy thing.
You had to fill it in and then sendin a physical check, and they had a
whole department that just managedall of that, and you're thinking to
yourself, how much did that cost?
But you get these little fiefdoms, right?
That again, have nothing to do.
Well, I mean, I guess indirectly, butthey're really far away from direct
(32:46):
care and incrementally, you add thatplus another different day, different
department, and you can get reallycostly, really fast, and you standardize
and make that really efficient.
It's got nothing to do with patient care.
Right?
Dr Sam Flanders (32:58):
Yeah.
Well, if I could just addone more thing to that.
I think the point you make is really good.
And in addition to creating perhapsbureaucracy that doesn't need to be there.
There are hundreds or even thousandsof problems in health systems
everywhere, even really good healthsystems that need to be dealt with.
And there's no way you can dothat from a central location.
You can't have a central quality team ora department, or a czar or anyone that can
(33:22):
be aware of all of those sorts of things.
If you look at how Toyotastructures theirs, their model
is conceptually very simple.
Every employee needs to dotheir job and do their job
and perform it well every day.
But also be thinking and makingchanges constantly to try to
improve the way their job is done.
And that's the model that can get outinto the front lines, into all of the
(33:45):
different recesses that are out therethat are impossible to manage centrally
because there's too much complexity.
The people that are doing thework know how to improve it.
If you'll let them.
If you'll encourage them,if you'll coach them.
And letting that happenmakes an enormous difference.
And really gets you tocontinuous improvement.
You've talked a lot about theflywheel model in this podcast.
I've heard it numerous timesand it's the same sort of thing.
(34:08):
It's a giant flywheel, and if youget everyone in the organization
pushing on it, the flywheelbegins to turn faster and faster.
If you only try to do it centrally,you can't even get the first
turn of the flywheel to go.
Stacey Richter (34:19):
And just to be clear, oftentimes on this podcast we talk about
kind of the death spiral direction ofthe flywheel where quality goes down
or, or at a minimum remains neutral, Iguess best case, but prices go way up.
What you're talking about is the virtuousspin, so turning that flywheel around,
how do you make it go the opposite way?
I am on the edge of my seat chainto hear how, how we do this.
(34:42):
Wow, with that cliffhanger do comeback, as I said next week, listen to
Elizabeth Mitchell of PBGH talkingabout the demonstration project.
That is a first step.
It is a foray intomaking an actual market.
Then come back week after that forpart two, the solution show of this
conversation where Shane Cerone actuallygets a chance to answer the question,
(35:06):
What do we do to countermand theseproblematic myths that we have spent the
last 30 minutes discussing in this show?
So see you on the other side.
Shane Cerone (35:15):
Hi, this is Shane Cerrone with Kada Health.
I like to think of RelentlessHealth Value as a solution center.
A unique place where industry insidersand experts gather to break down the
failures of our nation's health systemand talk honestly about the problems
we confront and the solutions we need.
It's a rare place where you hearstrategies that are actually being
(35:35):
used to drive the changes we allwant and need to see in the industry.
If you're interested in makingan impact, I'd encourage you to
follow Relentless Health Value onLinkedIn and share your perspective.
Thanks for listening.
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