How Megaproviders Keep Health Care Costs High

Almost everyone agrees about the urgent need to reform health care in the United States. But authors David Dranove and Wharton health care management professor Lawton R. Burns argue we’re overlooking the most pervasive cause of our costly and underperforming system: megaproviders, the expansive health care organizations they say have become the face of American medicine.

In Big Med: Megaproviders and the High Cost of Health Care in America, Dranove and Burns examine the rise of these megaproviders and their role in the deterioration of health care — as well as its rising costs. They reveal that these megaproviders are ever present: Your local hospital is likely part of one, as are your doctors.

Brett LoGiurato, senior editor at Wharton School Press, sat down with Dranove and Burns to discuss their book.

The conversation has been edited for length and clarity.

Brett LoGiurato: What spurred you to write the book?

David Dranove: I’ve written several research papers on the topic over the years, and I felt the research had finally reached a point where it warranted a book. I started writing down an outline and I realized that, while I know the economics side of this, I don’t know a lot about the management side, but I happen to know somebody who does. I called Rob, and that’s how we ended up doing this together.

LoGiurato: Americans tend to blame drug companies, insurers, even the government, for high costs, but you write that the lion’s share of responsibility belongs with the health care providers. How did it get this way?

Lawton R. Burns: Health care costs have been rising at a fairly steady rate for a long, long time. Earlier on, people usually pointed the finger at technology. And it’s still the case that it plays a role. But attention has shifted at least over the last two to three decades to the providers, particularly the large hospital systems.

Dranove: As one of the surveys that we cite in the introduction shows, in the minds of consumers, the rapacious beasts are the insurers and the drug companies. Perhaps because they’re faceless. While you may pass by your local hospital, you don’t see the insurance company that is processing the claim, making sure the provider is not billing for an unnecessary procedure or perhaps keeping the provider from doing an unnecessary procedure. You don’t see any of that. It’s a black box and, let’s face it, the drug prices have gotten really, really high. When you hear that a new cancer treatment costs $500,000, that’s scary stuff.

“We could get rid of the insurance sector, we could eliminate all profits from the drug industry, and we’d still be vastly more expensive than any other country in the world.”  –David Dranove

And it doesn’t help when a guy like [former hedge fund manager] Martin Shkreli comes along, and he starts buying up cheap drugs and jacking up the prices 10,000%. You start to think that that’s the industry. My next-door neighbor works for a drug company. He’s in a lab every day for 10 hours trying to find a cure for diseases. And he’s joined by hundreds of others at his company alone. It’s an expensive proposition. And people don’t understand how expensive it is, and so the industry gets the blame. And then the other thing is, how could my doctor ever be responsible for everything? We still love our doctors. We don’t put them up on the pedestal as much as we once did, but they are still, along with our nurses, perhaps the highest respected of all professions, and we could never consider that they might be responsible for high costs or poor outcomes.

LoGiurato: What’s an example of something Americans blame on drug companies or insurers that’s actually the fault of the system at large, and these gigantic providers?

Dranove: If you look at the statistics on U.S. health spending, we spend in the commercial sector around three to four times as much per capita as a similarly aged person would spend in any other developed country. And [we] blame that on high drug prices and on insurance companies, on the high salaries of insurance executives, et cetera. As we point out in the book, we could get rid of the insurance sector, we could eliminate all profits from the drug industry, and we’d still be vastly more expensive than any other country in the world. And the reason is that our medical providers deliver far more care than is necessary and charge far higher prices than is necessary for that care. A popular expression is that the most expensive medical technology is the physician’s pen — although nowadays it would be the physician’s tablet computer.

Burns: Fifty-three percent of all health care spending in this country goes to a hospital or a doctor. So, if we’re looking for high costs as well as rising costs, they’re the bullseye on the target.

LoGiurato: You talk in the book about the way the mega providers operate and how there’s a vicious cycle in the health care system. How does that affect physicians and their morale?

Burns: Physicians get shoved further down the organizational hierarchy because as these systems come together, they develop bigger bureaucracies, bigger headquarters, and the people in the front office (executives) are even more removed from the people on the front line (physicians). The latter are a bunch of unhappy campers.

Dranove: You can’t blame the physicians for seeking refuge in larger organizations, but when they do that, as Rob said, they become less satisfied with the day-to-day work that they’re doing. They may have more financial security, they may have more guaranteed hours, but they’re not as happy.

LoGiurato: Let’s talk solutions. Can you give us a picture of what could be done to fix the problem?

Dranove: On the competition policy side, a lot of these are simple remedies. A lot of states still have certificate-of-need laws that block innovative forms of competition. There are quite a few states that have passed certificate-of-public-advantage laws, which allow hospitals to bypass federal antitrust scrutiny. Those are flat-out mistakes. Those are politically motivated. They have nothing to do with serving the public interest.

On the antitrust side, it’s important to think about the need to preserve alternative forms of delivery in health care markets. I’ll give you an example. United Health Group’s Optum division is buying up physician practices in many parts of the country. I don’t know if that’s going to prove successful or not. I’m not sure if they know if it’s going to prove successful or not. It’s a bet that they’re making. A lot of people feel we shouldn’t allow that. That’s a big powerful insurer buying up physician practices, and I’m thinking, that’s an experiment. That’s a new way of trying to do things. Let’s see if it works.

Burns: We also need some more energized state attorney generals to step in and monitor some of these deals.

LoGiurato: What about on the management side? What can these organizations do better?

Burns: The basic strategy that everybody is following is “just get big.” That’s it. You ask CEOs what’s your strategy, it’s “get big.” The surprising thing is they’re now not afraid to say that. Everybody’s saying it, so they’ve got political cover. Do you remember Al Davis, the former owner of the Oakland Raiders? He’d say, “just win, baby.” Well, that’s what the boards and the CEOs are telling their staff. Just grow, baby. And so that’s the strategy. But to what end? It’s not to benefit society. It’s basically to pursue some self-interested aims of these systems — to survive, to grow, to dominate markets, make more money, to spend it on themselves.

“The basic strategy that everybody is following is ‘just get big.’” –Lawton R. Burns

Dranove: Many of these organizations have drunk the Kool-Aid that big actually will translate into value. And they need to take a step backward and ask, how exactly are we delivering this value? Because size becomes its own end if you don’t question the theory that size by itself generates value.

LoGiurato: Is there anything that the past year has done to change the system itself? We’ve seen a world in which vaccines are free for everyone and the U.S. is waiving patent protections. We’ve also seen some political solutions being discussed that include Medicare for All and a public option.

Burns: Good question. There are two definite benefactors of this past year. One is the drug companies who all of a sudden have gone from the doghouse to the White House by virtue of coming up with these vaccines in a very short period of time. The public’s perception of drug companies has changed pretty quickly. The other benefactors were the insurance companies because nobody went to a doctor or a hospital [for routine care], and so the insurers collected all the premiums and then amassed all of this money. Maybe they are using it to accumulate and employ doctors inside their bureaucracies as hospitals have done. God knows what they’re going to use it for.

Dranove: In a way, the big megaproviders we’re talking about also win. They suffered losses like anyone else, because people postponed all the elective procedures that are so profitable. But they had war chests to survive. The number of independent players who have gone bankrupt or nearly bankrupt last year was astonishing, and there are more smaller providers than ever before that are seeking the shelter of big organizations.

LoGiurato: Has the past year just made the problem even worse?

Dranove: Yes. Once we get through this and we return back to a world where everybody seeks out health care the way they normally did, we’re going to be shocked once again at how expensive health care is. Medicare for All has been on the back burner. Once people see how expensive health care is, that’s going to come up to the fore again. And even if we have Medicare for All, nobody’s talking about a government takeover of hospitals and doctors, which means that you’re basically going to have a totally politicized system where the government is trying to regulate a handful of powerful providers.

So the problem of the megaprovider is going to be larger than ever, once the dust has settled.

LoGiurato: You mention private corporations like Amazon and Walmart moving more into health care and related business. What is your take on whether that will help move us toward a solution?

“The problem of the megaprovider is going to be larger than ever, once the dust has settled.” –David Dranove

Dranove: Let’s start with Haven, or what was once called Haven, which was Jeff Bezos, Warren Buffett, and Jamie Dimon. If you Google that venture from two or three years ago, whenever it started, they were going to change health care. “The three biggest business geniuses of all time, and now they’re going to turn their attention to health care. Watch out everyone.” And they ran with their tails between their legs.

Burns: The general answer to your question is that in the long term, these tech companies may have a big impact. In the short term, they probably won’t. Partly because of the overhype of these companies, but also because they have either no track record or a lousy track record previously in health care. Many of them have very specific capabilities: Amazon’s capabilities are in logistics; none have real abilities in health care delivery. So, it’s not clear that that’s going to solve a lot of our problems in the short term.

Dranove: What may be more interesting is what some of the insurance companies are doing, because they’re huge and they have huge amounts of data. United has been most upfront about that, but Cigna and Aetna have been making waves about transforming their relationships with providers. And they have huge experience with data. We’ve seen Aetna get involved with CVS, and now CVS is starting to integrate with care providers. There are potential disruptors out there. We don’t think they’re people who are going to come in from the outside wearing the white hat and saving the day.

LoGiurato: Last question: What’s the big lesson that you want people to take away from the book?

Dranove: Be better shoppers for health care. Insist on value. Make legislators feel comfortable going after big health care provider organizations.

Burns: Another message is “bigger is not better.”

Dranove: And we want the systems themselves to do a little bit of introspection and understand this. Have we set up an organization that’s designed to deliver value, or have we simply set up a big organization?

Burns: One last comment I would have is that structure is not the solution. These big mega providers are structures. That’s not the solution to our health care industry’s problems.

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