With so many shifts occurring in healthcare today, what will the industry look like when the dust finally settles?
That was the question Larry Van Horn sought to answer during his keynote address for attendees of the 2017 Crowe Healthcare Summit. Van Horn is an associate professor of economics and management and the executive director of health affairs at Vanderbilt University’s Owen Graduate School of Management, where he oversees various graduate school programs in healthcare. In addition, he is the founder and CEO of Preverity Inc., a founder and partner of Health Systems Innovation LLC, and a senior professional with Competition Economics LLC.
During his address, Van Horn discussed developments in private sector business policy that he believes will drive healthcare markets going forward. Speaking directly to providers, he said, “We’re in a difficult position right now. We’ve got our legacy customers – our third-party insurers and Medicare and Medicaid – and at the same time we’ve got this new emerging group of cash-paying customers.”
Rising Economic Tension
Why are consumers today paying more out of pocket for healthcare? Van Horn looked to the past to contextualize the current state of healthcare. “At a high level, I believe the future of healthcare is going to look much more like the past than the present.” He explained that in the past 30 years, the United States experienced what he described as an “economic unwinding” in which the nation lost the “economic tension” it had developed approximately 45 years ago. In past decades, Van Horn noted, patients were more responsible for the cost of their own care. The major medical insurance many consumers had then was for catastrophic events, or what Van Horn calls “true insurance.”
Van Horn asserted that healthcare consumers have “gone completely in a different direction as a result of who’s paying the bill. Everything we think of as insurance today is prepaid medical consumption, most of which we don’t value anywhere close to the cost. We now have generations of Americans who think that they shouldn’t have to spend more than $5 or $10 on a copay.”
He gave several examples of how the nature of today’s insurance system changed the game economically for healthcare organizations. When people had to spend their own money on hospital care, he said, ward rooms were a normal mode of hospitalization. Today, consumers prefer and sometimes expect private rooms.
Not only have expectations changed, but costs have, too. According to Van Horn, in 1960, the average cost of a vaginal delivery was about $1,800 (in today's dollars), but in 2012, the average cost was $9,775. Van Horn argued that when the median U.S. household income for a family of four is $55,000, paying $9,775 for the delivery of a child is out of range. He asked, “How is that not a colossal failure of the U.S. healthcare industry?” Van Horn said that providers in the United States can’t do the most basic thing – the production of the next generation – at a price point that Americans can afford.
Add into the mix the United States’ mounting debt crisis and the rising unfunded obligations of Medicare and Medicaid, and it should be easy to see why economic tension has returned, Van Horn asserted. In addition, according to Van Horn, the face of the private insurance market soon will be changing even more as individual consumers assume greater shares of their healthcare costs. Thanks to the increase of high-deductible health plans and an overarching change in employer posture on healthcare benefits, Van Horn said, consumers will be seeking out alternatives when it comes to the care they purchase.
These trends have created a market in the healthcare industry that didn’t exist 10 years ago. He shared examples of several of the players in today’s market that have created services aimed at attracting consumers who have to pay a larger share of their healthcare costs. One service is a website where consumers can go to compare cash prices for medical services, pay online for the service they choose, and then use a voucher to pay providers, who are then paid in cash within five days. Another example is a low-risk, all-inclusive birthing center that has locations in several states and offers a $5,000 rate for an uncomplicated birth. And through another website, consumers can pay a flat rate to have a doctor see them at their home or office within two hours.
These are just some of the examples of the new business models designed to meet consumers’ demands to get more value out of healthcare. All these changes are good news for consumers, Van Horn said, but immensely challenging for providers.
Providers: Get Ready
So what can providers do to prepare themselves for these changes and be on the winning side when the dust settles?
First, Van Horn suggested, providers should improve how they communicate with consumers because more revenue will come directly from consumers. More specifically, providers’ posture on pricing and service delivery at a certain price will need to be much different when negotiating with individuals who make $55,000 per year as opposed to negotiating with third-party payers.
In addition, paying diligent attention to cost structure is always a win for providers, Van Horn said. He expressed concerns about providers getting their cost structures in line to be able to address the challenges and price points emerging from new delivery models. “We’ve got to figure out ways to do that,” he said. According to Van Horn, the last thing healthcare providers want to do is to become obsolete.