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The Keckley Report

Profit in health care can be a problem

By January 6, 2014March 1st, 2023No Comments

To the surprise of few, Pope Francis was named Time Magazine’s Person of the Year for 2013. It is significant beyond the obvious.

The obvious: The former Archbishop of Buenos Aires chose Francis as his papal name to focus the attention of the world’s 1.2 billion Catholics on the ministry of St. Francis of Assisi to the poor. In his 9 months as Pope Francis, he has used powerful symbols to drive home his message—use of a Ford Taurus instead of the papal Mercedes, pedestrian shoes in lieu of the Red papal sandals, kissing a disfigured parishioner in St. Peter’s Square that garnered world media attention and others. But beyond the symbolism, his quest to refocus the world’s biggest church is supported in word and deed.

Words…The Pope’s choice of words is deliberate and impactful. He calls the church a “field hospital” routinely to draw attention to its mission. In his 288 page “Evangeli Gaudium” (“Joy of the Gospel”), he cautioned that “how can it be that it is not a news item when an elderly homeless person dies of exposure, but it news when the stock market loses two points?” And at every venue, he is quick to point out the gaps between have’s and have not’s in society, calling on world leaders and lay parishioners to extend mercy and understanding to the plight of the poor.

Deeds…The Pope is changing the church. He assembled a team of 8 advisors in the Curia, replacing traditionalists with reformers including many with whom he disagreed. He stripped away the use of ‘Monsignor’ so that Bishops would reflect on their service rather than position. And he has chosen to visit cities where the young and poor are desperate for hope.

The U.S. healthcare industry needs a pope. It needs to rethink the balance of money and mission. It needs to use the Pope’s powerful combination of symbolism, words and deeds as we enter Health Reform 2.0 in 2014. 

Last year, the ranks of those lacking insurance coverage increased to 50 million—16% of our population. Almost a fourth of our population lives in poverty including 4 in 10 of our African American and 3 in 10 of our Hispanic children. Among our poorest, health issues are a predominant concern and chronic illnesses more prevalent.  Compounding the challenge, access to the health system is a catch-as catch can proposition: public clinics, school nurses, and hospital emergency rooms provide episodic primary care, and bigger medical problems are typically treated too late or not at all.

Last year, health spending increased 4% to $2.9 trillion in the U.S. Our stock market provided investors a 33% increase and profits in publicly traded health care companies increased 48% (Morningstar) led by drug companies (+31%), medical devices (+37%), health plans (+40%) and biotech (+58%). There’s nothing wrong with profit: it’s necessary to an organization’s sustainability whether operated as a for-profit or not for profit. Some in health care generate profit by raising money through gifts and grants; others through operations and growth. And all in health care have benefitted from the system’s perverted incentives that reward doing more rather than doing only the right things in the right setting the first time every time. 

Let’s face it: health care can be very profitable. There are three reasons:

The industry knows how to cut costs. Last year, $1.068 trillion of the $2.9 trillion spent in U.S. health care came from Medicare or Medicaid. Historically, payments from the government via these programs has set the bar for the rest of the system’s fee schedules with private insurers and individuals. As a result of its buying power, the government has forced the industry to go lean or get out. We do it well.

The industry knows how to do deals. Health care is capital intense, labor intense, and highly regulated at the state and federal levels. And it is highly fragmented but not for long. But in recent years, the industry’s profitability has been driven by its consolidation within sectors: hospital system affiliations, the integration of physicians and hospitals into risk bearing regional care management organizations, acquisitions of smaller Medicaid managed care plans by traditional private insurers among the most frequent recently. In each sector, and across sectors, the bigger players are buying up competencies, distribution and scale they need and weaker rivals are hiring consultants to design optimal exit strategies. Go big or get out is the rule of the realm. Scale is profitable because it rewards leverage over competitors and protects prices and margins. And achieving scale in health care is about doing deals.

Demand for the industry’s goods and services is strong and will continue. And simply put, as we age, and as the world’s diagnosis and treatment of illnesses progresses, demand for our products and services will continue to increase.

Profit is not bad; but profits in health care can be problematic. Most of the U.S.  population, especially Millennials and those in lower socio-economic classes, believe health care is a right, not a privilege. They believe it should be provided unilaterally to all, without respect to a person’s ability to pay. Almost 2 in 5 Americans under 65 with insurance coverage will face at least $1000 out of pocket this year, and 75% of health costs increases will be passed through directly to individuals through higher co-payments, deductibles, limits or coverage and so on.

So in our organizations, boards and management teams must take seriously an urgent need to educate our employees, communities and the general public about profit in health care. Delicate questions must be answered so the public understands… How can investors garner such handsome returns while local hospitals announce layoffs and doctors complain they’re no longer able to practice? How can insurance carriers produce profits while denying coverage? How can hospitals, doctors, drug and device makers justify prices that vary so widely and are rarely accessible or understandable? How can the U.S. system justify that 2 million of its citizens face bankruptcy annually as a result of medical debt? And others.

The profitability of the health care industry will be a major story in 2014. Each organization must be prepared to communicate openly about its profitability—how much from increased volume, how much from increased prices, how much from cost cutting and so on. And each must have a message about how profits are used– both short and long-term.

The popularity of Pope Francis is due, in large measure, to the resonance of his message to care for the poor. He combines powerful symbolism with word and deed to drive home his call to action to his congregants and world leaders.

We need the voice of the Pope in the health care industry—perhaps to remind us that healthcare is about people who sometimes face medical problems not of their own doing…about children born in poverty whose health status is predicted by their circumstance at birth…about the health status of 6 billion in 150 countries not fortunate to be born into a developed system of care.

Symbols, words and deeds about the mission of a health care organization and its greater responsibility to society are needed urgently in our industry. It’s about the balance of money and mission. It’s about profit with a purpose that’s understood by our congregants, not just our investors.

Footnote: The study published Thursday, January 2 in Science got lots of attention last week. Researchers followed 10,000 newly enrolled Oregon Medicaid enrollees for 18 months to see how they used the health system. The results showed a 40% increase in emergency department visits– 1.43/enrollee vs. 1.02 for those without coverage. The study is credible and important, but not conclusive. It’s clear expansion of coverage results in higher use of health services: in Massachusetts and other venues, the same was observed as a result of its reforms in 2006. But what’s not clear are how different incentives for either primary care providers or enrollees or both in Oregon might have changed the result. And if 18 months was an appropriate timeframe for measuring long-term impact. A good study and an important discussion, but not to be over-interpreted.