What Atul Gawande Got Wrong about U.S. Health Care Spending

Hospital consolidation has been increasing the last few decades. Many hospitals are regional monopolies and have a ton of leverage in negotiations with insurers. Insurance companies put the squeeze on smaller providers, increasing pressure on them to sell to big hospitals. After buying a smaller hospital or clinic, the hospital system can bill insurance companies at the hospital systems' much higher negotiated rate -- for the exact same care (at least this is what i heard from several execs at big hospital systems).

My first job out of college was an investment banking analyst and our most profitable clients were hospital systems (HCA, Community Health, Tenet Healthcare, etc). They were so profitable that their profit margins were 20-30% even after writing off 30% of their revenues as uncollectible (this was before the Affordable Care Act).

These hospital systems were major targets of private equity buyouts. A buyout fund would buy a big hospital system, finance the deal with a ton of debt, then buy more hospitals and clinics and roll them up into the bigger system. They made so much cash that they could pay down huge amounts of debt quickly so the private equity groups made tons of money. Many non-profit hospital systems engage in similar aggressive behavior

This reminds me of the infuriating pattern in some health care conversations when discussing consumer discounts and rebates for prescription drugs. The pharma company will say, "we give pricing relief to our customers, and ensure that no patient will pay more than $20 for a monthly supply!" That's all well and good, but it elides over the fact that the insurance company is still paying $1000+/month for their share of the prescription, and that money eventually comes out of the patient or the employers pocket, which means it eventually comes out of our pockets as their consumers.

> However, when economists refer to “health care prices,” they mean the overall payments for a service—not just what the patient pays to the provider in the form of a copay or deductible, but what the insurer pays to the provider on behalf of the patient...But the distinction between these two ways of thinking about prices leads me to the second problem with the emerging price consensus: the failure to consider what is baked into the payments that payers (whether public or private) make to providers.

Fundamentally, if we were able to reduce our spend as a percentage of GDP to that of the average OECD country, it would remove $1 Trillion in annual revenue from our health care system. The existing health care industry is going to fight that tooth and nail. That doesn't mean we shouldn't do it.

Hospitals aren't able to refuse treatment to those that can't afford to pay for their services, insurance companies are forced to insure unprofitable people and the net effect is to try and coerce people into a redistribution of money from people that require more care from those that require less care to cover these expenditures.

Because there is no mechanism to coerce people to do this willingly both industries to give the invoices to the government (who created the problem) thereby getting rid of the requirement to think about how they will fund their expenditures - making it the governments problem to figure out.

This thereby allows them to continue uncontrolled expenditure in an ever increasing downward spiral to catastrophe as in effect they are spending 'other peoples money' in the hopes that "eventually these invoices will be paid" through some sort of government sponsored coercion mechanism forcing socialized heath care or some other such method with the same result.

Its really quite simple and clever.

-5% of the population accounts for more than half of all health spending. -50% of the population with the lowest spending accounts for only 3% of all total health spending.

That seems obvious in general, but should be extra obvious to anyone who has ever received a bill from anything in the US health system.

b) One extraordinarily simple thing we could do to deflate medical costs in this country that would have essentially zero negative effects would be to create a market in kidneys. Medicare currently spends 90k per patient per year on dialysis. Allowing people to sell a spare kidney would completely and totally solve this problem, essentially overnight. Everyone currently on dialysis would get a transplant, and the costs would go to zero. 7% of Medicare's budget would evaporate instantly, and the numbers would probably be similar for private insurers.