Health Care Reform – The Unspoken Debate

by Victor Cheng

Over the past several weeks, I’ve been fuming and irritated about the whole health care reform debate.

Now, I’ll leave politics aside (really) in terms of what I personally feel about the whole thing, but my gripe is in regards to HOW President Obama has been describing the problem… and even more irritating is how many people seem to be accepting his perspective without critical challenge.

You see the skill that the average person seems to lack and I’m coming to discover that many business owners either lacks or doesn’t use is what I call the 2nd most useful, but boring, skill in business.

What is this skill?

It’s what I call “root cause analysis”.

Well… I did say the skill was B-O-R-I-N-G didn’t I?

(There is truth in advertising).

The basic idea behind root cause analysis is simple. Everything you don’t like in your business, in your life, or in your economy isn’t really a problem at all.  It’s more commonly a highly visible symptom of an underlying (often hard to see) problem.

In business as in life, this is very important.

If you don’t focus on the right problem, it is impossible to come up with the right solution.

For example, Obama has been characterizing the health care problem as health insurance companies are just too greedy. And we need to force them to be less greedy (but setting max price increases, etc…), creating a more competitive marketplace, etc…

And as an example, he points to Anthem Blue Cross’s recent price increases of up to 40% for some customers as an example of how “evil” these insurance companies are.

But, using “root cause analysis” one has to ask WHY the health insurance companies consistently raises rates 10%+ each year and why a select few Anthem Blue Cross customers had their rates raised 40%?

If you factually verify the “they’re a bunch of greedy bastards” theory, you find that the average net profit margin of the top 10 health insurance companies was about 3% – 4%. If you look at the top 3 – 4 carriers, they are at about a 7% net margin.

By point of comparison, the net profit margin (based on EBITDA) for Costco in 2009 was 3.5%. The net profit margin for Nordstroms was 13%.

So if a carrier raises prices by up to 40%, but whose net profits say increase from say 5% to 7%, where is the remaining 38% of the price increase going?

In a word… COSTS.

The REAL root-cause reason health care insurance prices are skyrocketing is because factually health care COSTS are sky rocketing.

Sure some of that price increase is going to the bottom line for carriers, but the increase in profits is a small percentage of the overall increase in rates to customers.

The big problem is costs.

This is being driven by a three factors.

First, the US population is getting older. Older people have more health problems. The more health problems you have, the more health care costs you incur.

Second, a lot of health people are opting to go without health care insurance either to save money or because they lost their jobs and benefits.

Health insurance companies make their profits on health people and lose money on sick people. When a lot of the younger, healthier people are going without insurance, the average cost per member that remains insured goes up.

Suddenly older, sicker people have to pay more to cover their costs because there are fewer younger, healthier people to do it.

Third, as a country we believe everyone deserves the best possible health care. While this is a nice sentiment, the problem is the best possible care cost a lot of money.

So as Americans we want the best, but you know what we don’t actually want to pay for it. For example, at what price tag is a human life no longer worth saving?

When is a life saving treatment too expensive and as a country we’re better off letting someone die instead? $1 million? $10 million?

I don’t have the answer, but if you look at countries with Universal health care (like Canada)… there IS a cut-off price.

This is the brutal, honest reality of the situation… and you can see why no politician wants to touch it with a 10 foot pole. You would get absolutely demonized by the media.

(And it is for this reason, I would be a lousy politician 🙂

So why am I explaining all of this to you?

Because in difficult times, the resources in your business are very limited. You can’t afford to fight every battle and solve every problem (especially the wrong ones!).

In the health care example above, the Obama administration is focusing on trimming insurance company profits. There isn’t that much to trim!

Even if they made every for-profit insurance company a non-profit, the problem would still exist.

There’s a lot of energy being wasted on NOT actually fixing the problem.

In your business, you can’t afford to do this.

If sales are down, WHY is it down?

Do your products stink? Are your prospects unable to grasp why they should do business with you instead of your competitors?

It’s a cop out to say it’s because there is a recession and there are fewer customers spending less money… because even in shrinking industries there are ALWAYS companies who are growing.

To be one of those companies, you have to be brutally honest with yourself and examine your own business with a critical eye.

You need to find the “root causes” of those “problems” in your business and fix them.

As you can see from my health care example above, dealing with the root cause of a problem is rarely a comfortable activity–but it is most definitely an effective one.

(And if you’re curious as to what I think the single most useful, but boring, skill in business is… it’s accounting.  It is incredibly useful, but regrettable pretty boring. I’ll save that topic for another day.)

Comments

{ 12 comments… read them below or add one }

Steve March 4, 2010 at 5:25 AM

GREAT article Victor!

Thanks

Steve

Gustavo Pinheiro March 4, 2010 at 6:17 AM

Can’t wait to hear your thoughts on Accounting, Victor!

Great article, btw!

cheers

Mladin Dorian March 4, 2010 at 7:35 AM

1.The root cause is not the COST, IS THE ECONOMY BASE:FINANCIAL AND NOT BASED ON RESOURCES
2.Try to solve the PROBLEM eliminating the MONEY-PROFIT notion from it .
3.It remains the Q: If it is no profit / money , why the trouble?
4.I let you find the answer!

Gerald Guard March 4, 2010 at 10:34 AM

Thanks Victor,
I did not see it that way. Costs.

Great research job.

But, for costs to drop, then across the board costs of merchandise & service costs would have to drop.

How about the Government subsidizing health care costs, no cap, but creating a competition amongst healthcare carriers, & subsidizing them even up to 25%. taxes would definiteley have to go-up.

What a financial circle mankind has created.

Joshua Long March 4, 2010 at 12:32 PM

Victor,

You definitely wouldn’t go far in politics bringing up the harsh reality that at some point the investment in extending life ceases to make sense.

Great content, too! It seems to me that much of the steps needed to create business success is viewed as ‘boring’. That’s why the vast majority of business owners get nowhere because they chase every ‘new shiny’ idea or tactic that pops in front of them.

You’re going to really get people lining up at the door to work with you saying accounting is the most important skill. Don’t think I’ve ever seen a guru come from that angle:) Looking forward to it though as I’m sure I’ll learn quite a few things.

-Josh

David March 4, 2010 at 1:24 PM

Thanks for the analysis, Victor. You have certainly narrowed down the problem but, of course, there is still a ways to go.

In particular, I would like to see an analysis detailing the relationship to costs and quality of health care. It does not suffice for one to say that health care costs have gone up over x time period. What about the scope and, more importantly, quality of services over the same period? The healthcare provider industry is certainly capable of better servicing many more health problems today than 50, 30 and even only a few years ago. These advances have been gained through years of expensive research and development. My hypothesis is that the increase in costs are a function of a number of simultaneous issues – including the advances in medical technologies. The same exact treatment from 20 years ago would certainly be much cheaper if administered today. If society wants the best and most up to date available treatment, they have to pay for it.

A proper analysis of the relationship beteween realized cost – quality adjusted services can help us determine the specific root cause of the current health care issue.

Victor Cheng March 4, 2010 at 1:53 PM

I love everyone’s comments and ideas — these are the exact issues we should be discussing in Washington.

There are many ways to cut costs. As David mentions spending and health do not necessarily go hand in hand.

One of the interesting health care areas I’ve been following is in the area of concierge medicine. These are programs geared towards affluent patients who pay $3k – $12k flat fee per year to their general practitioner to have unlimited GP care and to have your own Chief Medical Officer (your GP) coordinate all your specialists and go on specialists visits with you.

While originally criticized as health care for the rich, some interesting things have emerged out of it.

Because the patient to doctor ratio shifts from 3,000 patients per doctor to 600 patients per doctor, doctor’s spend more time with patients and have been much more effective at preventative care.

In Florida, emergency room visits and hospitalizations per patient per year have fallen by 60% for patients in these programs. Even at those very high prices, it’s possible that overall health care costs might actually be lower.

New companies are trying to adapt that approach to medicine for middle-income and low-income individuals ($600/year instead of $12k/year).

If you like at Kaiser Northern California they are one of the most successful health care HMO’s in the United States. They routinely get health care leaders from around the world to study what they do.

There per patient spending is amongst the lowest in the country AND their health levels are very high. My mother is a member and now I know why they can pull this off. They are RELENTLESS at prodding you to participate in preventative health care.

It’s kind like you get a your primary care physician and a rent-a-mom to gently prod you into following the doctor’s advice. They offer cooking classes, nutrition programs, support groups, and pretty much anything you can think of for every ailment.

If you miss key preventative appointments, they are all over you to reschedule, etc… it’s a very interesting model.

It seems clear to me that prevention costs are much, much cheaper that major illness / trauma / hospitalization costs.

So this seems to me to be one promising approach to managing costs. It’s not the only one.

If you look at the leading cardiac hospital in the world for the past 15 years in a row, it’s the Cleveland Clinic. They have their own Saudi Arabia wing for the sheiks to fly in with their 50 person entourages.

They get the sickest cardiac patients in the US, and they have the highest success rates.

They do things totally differently than a typical hospital. Surgeons are paid on salary, not on commission (e.g., per-procedure). They run their cardiac unit like Honda runs their assembly lines – total quality management, on-going process improvement, etc.. they run statistical analysis on pre-op, surgical, and post-op treatment protocols to see which ones improve survival, etc…

They are part Fortune 500 disciplined manufacturing facility, part MIT statistical lab, part hospital. A very interesting and very effective approach.

Real reform on costs I think comes from studying and modeling those in the industry that have above average care for below average costs — seeing what they do right, and trying to make that approach the standard.

It is not easy to do this, but this I think is what “real” reform is about… fixing a structural problem with a structural solution.

As for Gustavo and Joshua’s comment, given your interest in the accounting piece, I might actually speed up writing about it… and it’s actually even MORE boring than root cause analysis, but just as useful – serious!

Engin Guven March 4, 2010 at 3:54 PM

I am not American, but I am trying to follow the discussions about the health care reform in America. Your analysis is very neat, Mr. Victor.

Looking forward to your article about accounting.

Larry Cheng March 6, 2010 at 10:31 AM

With 4% net margins, the question is does healthcare reform tweak with the economics of insurers sufficiently that those margins collapse, they go out of business, and we’re in a government run system.

Victor Cheng March 9, 2010 at 12:45 PM

I did get a private reply mentioning that I forgot a few other costs. One is the cost of malpractice insurance. Doctor’s get sued a lot. They need to buy insurance to protect themselves from getting totally wiped out by a lawsuit. The price they need to charge includes the insurance premium.

Is there a different way to keep doctor’s accountable without the litigation? That’s a pretty key question. If we can figure out a different way, we can take out a sizeable chunk of health care cost.

Another one is paperwork. For every $1 spent on health care, about $0.25 goes to paperwork.

You go visit the doctor. The doctor has to hire someone to submit the bill to your insurance company. But since insurance companies only accept bills with specific diagnostic codes, your doctor has to hire someone to “code” the bill. To do this, the medical coder needs to read your doctor’s notes to see why you needed to see her.

But since your doctor’s handwriting pretty much stinks, she hires a medical transcriptionist who will take verbally dictated notes and type them up so the medical coder can figure out how to bill the insurance company.

When the insurance company gets the bill, they need to decided if the claim is legit. And if so, they need to figure out how much to pay the doctor. Then they send your doctor a check.

Now your doctor needs someone to take a look at the check to see if your insurance paid for everything correctly. If not, it needs to re-submitted (and the insurance company needs to re-check it, re-decide, re-pay the doctor).

Then you doctor has to have someone on staff who is now going to bill you… but only the amount you’re supposed to be billed.

Then you pay that bill (but sometimes there are mistakes on those bills), and now the doctor needs someone to figure out if the amount you paid is the correct amount and figure out which visit it is related to.

This whole process is EXPENSIVE. It is what consultants like me call “non-value added costs” as in the money spent on paperwork doesn’t actually make anyone healthier or save lives.

The CEO of the Cleveland Clinic had a really interesting idea to solve this problem (Fortune Magazine had a great interview of him).

Why not just take the average cost for a procedure (say heart surgery which is what the Cleveland Clinic is so well known for) and have the insurance company pay us the average amount… and have both sides get rid of all the paper pushers. Sure the insurance companies will under pay sometimes, over pay us other times, but if we’re eliminating 25% of our costs from not having so much paperwork, (and they are too), we’re all going to be better off even if the accounting isn’t 100% precise on a per case basis (but will be pretty accurate across all the cases for the year).

It’s the kind of thinking that really gets at the “root cause” of health care costs. We should be having debates about this kind of stuff (the real problem), instead of just ignoring the cost side of the problem.

gerald Guard March 9, 2010 at 5:08 PM

Good post.
I realize you’re already introducing the accounting into the mix.
Yes. the payment on a percentage average basis really would work.
I, as an insurance payee, have gotten misdirected bills from my
health providers & it is a hassle straightening this out for patient, doctor and Health insurers. Then it does get expensive. I’ve always wondered how Doctors survive with all this unnecessary overhead.

Thank You Victor.

Bob Regnerus March 18, 2010 at 2:08 PM

Great insight, as always, Victor. Certainly in regards to the debate on health care, but more about the lesson for us business owners. I’ve caught myself blaming a lot of last years revenue issues on the economy, when in reality, it was many other things that I needed to tighten up in reaction to the economy. You can afford to be sloppy in good times, but get your a$$ kicked in bad times when you don’t have things in order – like service, lead flow, lead sources, etc. I think Dan Kennedy calls this “accurate thinking”. This was a good reminder about getting to the root cause of the matter. Thank you!

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