Investigating Claims of Provider Industry Success

I have had many conversations with representatives from provider institutions over the last 12 months, and there is a clear distinction between those who see our current industry structure as bad for their patients and those who see it as the best possible solution. Many of the conversations with the latter group have focused on a couple key points that I wanted to put some some data and thought behind. As with everything in healthcare, nuance is of the highest importance:

US Clinical Quality Improvements Highlight Industry Success

Patients are better off because physicians in the US have become more skilled in their healing practices, and this has resulted in dramatically reduced mortality rates for common procedures. However, this does not demonstrate that improved clinical quality in the US healthcare system is representative of the successes of our current industry structure.


While raw mortality rates for common procedures have certainly declined in the US, these figures tell us nothing about how our business of healthcare is actually functioning. Instead, we need to be looking at relative figures comparing mortality rates to other developed nations. For example, results for US cancer patients have been improving at rates faster than other countries, primarily due to the immense amount of research dollars that have been dedicated to develop innovative treatments in this space. However, for mortality related to all cases considered amenable to healthcare, the US rate of improvement has lagged comparable countries. (source) This second statistic indicates to me that we should not be patting ourselves on the back just yet - there is something in our system that results in slower rates of improvement. Admittedly, there are many other potential causes for this beyond just our business model, but saying our improvements in clinical quality are due to our superior industry structure is misleading if not outright fraudulent.

Provider Consolidation is Good for Patients

It is often said that provider consolidation is good for patients because it allows health systems to both better coordinate care and take advantage of cost efficiencies. It is absolutely right to say that coordination of care improves substantially as a result of M&A activity, particularly since all patients eventually reside within the same EHR system.

However, the second point regarding cost efficiencies has not been true thus far. These cost efficiencies may be good for the system, but they are not being passed on to the patient in the form of lower prices. Instead, prices rise up to 18% following provider mergers. (source) Consolidation results in greater market power for providers, who can then raise prices across the commercial market. The revenues from these price increases are being filtered in to research, facility upgrades, and more (often unnecessary) advanced technology. While it can be argued that more research is a net good for patients, I believe it is more important that we address these unsustainable price increases so that access becomes more realistic for a majority of our population

There are certainly cases where a point could be made that Provider M&A practices are good for the end consumer. However, the majority of those cases has occurred within a provider system that has embraced value-based care. This is why I am much more supportive of companies like Optum buying practices than the local monopolist health system.

Medicare Reimbursement is Not Adequate

It is often indicated that Medicare reimburses below cost and hospitals lose money on these patients. For three quarters of health systems, this is largely accurate and the average profit margin for Medicare patients has been steady at around -10%. However, the reason for this negative profit margin may be an accounting trick used by health systems to advocate for greater reimbursement. In full-absorption accounting, the fixed overhead for the business is allocated to service costs. As we know, health systems are insanely high fixed cost businesses, so the profitability of their services may appear negative as a result.

Medicare reimbursement, conversely, more than covers the variable costs of caring for a patient in this population. Given that 25% of providers are profitable within this segment, it is clear that there is a way for these organizations to make money on Medicare. Doing so primarily requires very close management of the aforementioned fixed costs, and a shift in the business model of providing care. This HBR article outlines some great advice for systems looking to earn a profit in Medicare. (source).

We Should Pay Higher Prices Based on Location of Service

Finally, it is often stated Academic Medical Centers should be reimbursed more for services than other institutions. The justification for this claim is that AMCs dedicate larger portions of their budgets to research and teaching than other institutions which have a net benefit on the system. I am not sold.

Yes, research funding is primarily driven through profits on commercial reimbursement. We do not have other great mechanisms for funding medical research in the US. However, I believe that the negative impacts of high prices on consumers far outweigh the benefits from increased research in today’s market. If we continue to use commercial profits to fund research, the only way to lower prices to patients is to do less research. Innovation in therapy development and procedure practices will slow, but this feels like the appropriate trade off for access and affordability. Note that this only applies to today’s market, as there is certainly a price point for which I would not advocate for less (or differently funded) research; but, right now, we are not even in the same universe.

While I know I am being hard on current provider business models, I do so because I believe they are the largest barrier we have to increased access and affordability in healthcare. Academic Medical Centers have been the heart of massive amount of innovation over the past decades, and many people are now alive because of the tireless work of the physicians and the researchers employed by these institutions. I just can’t help but wonder, how many people would be better off if they changed how they operate? How many fewer people would be bankrupt because of their medical bills?

Luckily, a good portion of our industry is constituted by inspirational, brave leaders doing their best to upend this delivery model. We need incumbents to consider alternative methods to maintaining profitability beyond raising prices, or the graph we see below will only get worse.