By JEFF GOLDSMITH

Years ago, the largest living thing in the world was thought to be the blue whale. Then someone discovered that the largest living thing in the world was actually the 106 acre, 47 thousand tree Pando aspen grove in central Utah, which genetic testing revealed to be a single organism. With its enormous network of underground roots and symbiotic relationship with a vast ecosystem of fungi, that aspen grove is a great metaphor for UnitedHealth Group. United, whose revenues amount to more than 8% of the US health system, is the largest healthcare enterprise in the world. The root system of UHG is a vast and poorly understood subsidiary called Optum.

At $226 billion annual revenues, Optum is the largest healthcare business in the US that no-one knows anything about. Optum by itself has revenues that are a little less than 5% of total US healthcare spending. An ill-starred Optum subsidiary, Change Healthcare, which suffered a catastrophic $100 billion cyberattack on February 21, 2024 that put most of the US health system on life support, put its parent company Optum in the headlines.

But Change Healthcare is a tiny (less than 2%) piece of this vast new (less than twenty years old) healthcare enterprise. If it were freestanding, Optum would be the 12^th largest company in the US: identical in size to Costco and slightly larger than Microsoft. Optum’s topline revenues are almost four times larger than HCA, the nation’s largest hospital company, one third larger than the entirety of Elevance, United’s most significant health plan competitor, and more than double the size of Kaiser Permanente.

If there really were economies of scale in healthcare, they would mean that care was of demonstrably better value provided by vast enterprises like Optum/United than in more fragmented, smaller, or less integrated alternatives. It is not clear that it is. If value does not reach patients and physicians in ways that matter to them—in better, less expensive, and more responsive care, in improved health or in a less hassled and more fulfilling practice—ultimately the care system as well as United will suffer.

What is Optum?

Optum is a diversified health services, financing and business intelligence subsidiary of aptly named UnitedHealth Group. It provides health services, purchases drugs on behalf of United’s health plan, and provides consulting, logistical support (e.g. claims management and IT enablement) and business intelligence services to United’s health plan business, as well as to United’s competitors.

Of Optum’s $226 billion topline, $136.4 billion (or 60% of its total revenues) represent clinical and business services provided to United’s Health Insurance business. Corporate UnitedHealth Group, Optum included, generated $29 billion in cashflow in 23, and $118.3 billion since 2019. United channeled almost $52 billion of that cash into buying health-related businesses, nearly all of which end up housed inside Optum.

For most of the past decade, Optum has been driving force of incremental profit growth for United. Optum’s operating profits grew from $6.7 billion in 2017 (34% of UHG total) to $15.9 billion in 2023 (55% of total). However, the two most profitable pieces of Optum by operating margin—Optum Health and Optum Insight—have seen their operating margins fall by one third in just four years. The slowing of Optum’s profitability is a huge challenge for United.

Gaul Had Three Parts, So Does Optum

The largest and least profitable (by percent margin) piece of Optum is its giant Pharmacy Benefit Manager, Optum Rx, the third largest PBM in the US.

Optum Rx is more than half of Optum by revenue ($116.1 billion) but less than a third of its profits. The core of its profit comes from rebates from drug companies for featuring their drugs on OptumRx’s formulary- which governs which drugs United Healthcare subscribers get access to and how much they pay for them. Optum Rx derives almost 62% of its revenues from managing pharmaceutical spending for United’s health plan, but the remainder for servicing both health plan competitors of United and self-funded employers. It is the most “vertical” piece of Optum—in that it has the highest share of its revenues coming from United out of all of Optum’s major segments.

The accounting for these rebates is, to put it gently, less than transparent. Some of these rebates are returned to UHG customers (such as self-funded employers). Some are returned to insurers other than United for which Optum Rx processes pharmaceutical claims. And some are kept as profit inside either Optum Rx or United’s health insurance business. Optum Rx does not disclose the ultimate destination of many billions in rebates.

This lack of transparency is, understandably, a subject of political controversy. Congress is considering tightening PBM disclosures and possibly redirecting the flow of rebates back to health-plan customers and, gasp, potentially to patients themselves. Given the widening political controversy about whether PBMs actually save consumers money, Optum Rx’s business model is a major strategic vulnerability for UHG.

The second major piece of Optum, OptumInsight, has been in the glare of public controversy since its Change Healthcare subsidiary was hacked by the mysterious Russian hacker collective BlackCat in February. Its main business lines are: business intelligence, consulting, IT enablement, and business process outsourcing to non-UHG health enterprises. OptumInsight is the smallest of Optum’s three pieces at $18.9 billion, but the most profitable—22.5% profit margin—$4.3 billion in operating earnings. I have written extensively about OptumInsight, almost 42% of whose revenues derive from servicing United’s other businesses, but will not repeat that analysis here.

Optum Health

The piece we want to focus on here is the largest generator of profits for Optum, Optum Health, a diversified healthcare services enterprise. Optum Health is a $95.3 billion business, which makes it the second largest care enterprise in the US after Kaiser Permanente. It generates nearly $6.6 billion in operating profit for United. However, Optum Health’s profit margin declined from more than 10% in 2018 to about 6.6% in the third quarter of 2023. If not turned around, Optum Health’s declining profitability is a threat to United’s enterprise valuation and reputation. This is why when Optum reported disappointing 3Q23 earnings, United’s Chairman Steven Hemsley cleaned house at Optum Health, installing new leadership.

Since United is not required to disclose acquisitions that are not “material”, there is no way of knowing what United has actually bought and what it presently owns. But Optum Health is home to an enormous collection of physician groups, surgicenters, a large urgent care network, and two of the largest home health agencies in the US. It is a sprawling nationwide roll-up of healthcare assets.

Optum claims 90 thousand physicians in its networks but is cagey on how many are actually employed by Optum and how many are independent physicians in Independent Practice Associations that wrap around the employed groups and are common in the West and Southwest. An educated guess would be that Optum employs from 45 to 60 thousand physicians. If true, this would still be between double and triple the size of Permanente Medical Groups. Optum’s profitability dwarfs that of Kaiser (see below), perhaps a function of Kaiser operating 39 hospitals and Optum not operating a single one.

Optum Health receives $57.7 billion (or 60% of its total revenues) from United’s health plan—the vertical part. But it also claims $21.8 billion in premium income, e.g. capitation, from “non-affiliated” customers, namely health plan competitors of United’s health plans. That capitation represents almost 23% of Optum Health’s total revenues. In addition, Optum Health reports $14.1 billion in services income, almost certainly “fee-for-service” based income from other health plans. What share of Optum Health’s $6.6 billion in profits come from these contracts with United’s competitors is a compelling mystery, since this is not reported in United’s financial disclosures.

Whatever the profit split, Optum Health is very much dependent not merely on the kindness of strangers, but of competitors of United’s core business. An important and unknowable question is whether Optum’s contract renewals with those competitors have enabled it to recover the soaring costs of nursing coverage, temporary physician coverage, turnover and retirements, and other labor factors that have exploded in the wake of the COVID pandemic. Every care delivery enterprise in the US has faced rising people costs, as the largest care delivery enterprise in the US, these forces have not spared Optum.

Optum’s medical group acquisition strategy to date has targeted independent (e.g. non-hospital) medical groups with significant at-risk (e.g. “capitated”) populations, mainly in Medicare Advantage plans. These included the original asset, the Nevada based Sierra Medical Group which United acquired when it purchased the Sierra Health Plan in 2007, but also Healthcare Partners, Monarch and North American Medical Management (based in Los Angeles), WellMed in central Texas, Atrius and Reliant in Massachusetts, Everett and PolyClinic in Seattle and Kelsey Seybold Clinic in Houston Texas. It is a growing presence in Oregon, New York and Connecticut through mainly smaller acquisitions. The map below showed where Optum Health’s assets were as of 2022.

The Vertical Integration Conundrum

Healthcare strategists have touted the idea of vertical integration –pioneered by Kaiser Permanente—which offers a comprehensive healthcare service experience—pretty much soup to nuts—through its health plan. The only way to access Kaiser physicians and hospitals is by enrolling in their health plan. Vertical integration has been viewed as a way of reducing health cost (by eliminating middlemen’s profits) and procuring products and services more efficiently, though actual evidence that it does so is scarce upon the ground.

With United, the health plan preceded the health services. In the first thirty years of its existence, United was a “network” plan, which contracted with independent hospitals and doctors for care. With the Sierra acquisition in 2007, United embarked on an adventure in strategic ambiguity—owning physician clinics which provided care to United customers as well as those of competing health plans. After Sierra and WellMed, a large capitated medical group in central Texas that Optum acquired in 2011, Optum’s medical group acquisitions have been, at best, loosely tied to United’s health plan enrollment. A 2018 analysis showed at best modest overlap between United’s Medicare Advantage market presence and the Optum Health network.

Making United “more vertical” in Optum markets would be complicated. Offering financial incentives to the Optum Health patients presently enrolled in competing plans to switch to United would pose two challenges. One is that this would damage Optum Health’s contracts with competing health plans. And sharing savings (e.g. some of United’s profits) with patients to redirect their care or lowering their rates would reduce health plan profit margins.

Conversely, telling Optum patients that they could only get care if they enrolled in United’s health plan would trigger a firestorm of negative publicity not to mention retaliation and cancelled contracts by United’s health plan competitors. Telling United subscribers they could only get care from Optum physicians and facilities would overwhelm them in volume and trigger longer waiting times and provider burnout. In sum, it does not appear to make business sense for United to make Optum more “vertically aligned” with its health plans. So straddling competitors in local markets seems to be an ambiguity with which United will have to cope going forward.

How much unregulated and invisible profit United’s health plans can generate  “inside” United’s visible and highly regulated medical loss ratio (MLR) by selectively and generously compensating Optum’s physicians, surgical facilities, etc. is the most compelling mystery of this business model. Matthew Holt, a veteran industry observer, has termed this strategy of maximizing enterprise profit through contracting favorably with yourself “provider fracking.” Companies that control both insurance and care delivery have a great deal of flexibility in what the accountants term “transfer pricing”.  This flexibility is valuable and would be lost were Optum to be spun off in a future United restructuring.

Two Big Risks for the Partially Integrated Optum Health

There are two other major clouds on the horizon for Optum Health. One is the Federal Trade Commission’s proposal to ban of non-compete clauses for corporate employees, including physicians. Non-compete clauses effectively make the patient populations of acquired physician groups the property of Optum. If physicians leave Optum, they are required to move out of the community to practice, surrendering their patients to the company.

Many of the senior physicians who were equity holders in the large practices acquired by Optum departed millionaires with United’s cash, leaving behind junior colleagues to suffer through both Optum system conversions and leadership changes that affected their daily lives as practitioners. Outlawing non-competes would enable disgruntled Optum physicians to remain in their home communities and take their patients with them.

If FTC precedents hold, the non-compete clause prohibition might not apply to non-profit hospitals (80% of all hospitals are non-profit), putting Optum and other corporate employers of physicians at a competitive disadvantage. In my opinion, entities that rely on coercive measures like non-competes to assure physician loyalty need to take a long hard look at their corporate culture.

The FTC’s proposed ban on non-competes is a major enterprise risk for Optum Health’s vast agglomeration of medical groups. If enacted, it would force Optum management directly to address physician working conditions, values, and priorities. United does have the potential for markedly reducing the documentation burden for Optum physicians that take care of United patients by selectively altering its claims review strategies. It will be interesting to see if they do so.

E Pluribus Unum

The other major cloud on the horizon is the unionization of physicians. According to AMA, some 67 thousand practicing physicians (e.g. not interns, residents or fellowship trainees) are members of labor unions. There are been several recent high profile instances where disillusioned hospital-employed physicians elected union representation (Allina in Minneapolis/St Paul, Providence St. Vincent and Legacy Health in Portland OR, are recent examples).

Unionization is often not motivated directly by compensation issues but rather by a sense of powerlessness and a feeling that core issues that affect the employee are not being addressed. Unionization would both increase Optum’s operating costs and reduce its management’s flexibility. Optum Health’s groups are by far the largest and most lucrative target of physician unionization in the United States.

Down in the Valley

The emerging market risks for Optum can be seen in two medium sized cities in Oregon’s Willamette Valley. During the early pandemic, Eugene-based Oregon Clinic encountered terminal operating difficulties and sold to Optum in late 2020. In March of this year, Optum sent letters to patients of departing Oregon Clinic physicians that they would have to find care elsewhere because they were unable to recruit replacements for their physicians. These 32 physicians resigned, apparently, because they were unhappy with working conditions at Oregon Clinic after the Optum takeover. Reading between the lines, due to non-competes, the departing physicians were unable to remain the Eugene area and thus unable to continue seeing long-standing patients.

Meanwhile, up the road forty miles in Corvallis, Optum requested that the State of Oregon expedite review of its proposed acquisition of the Corvallis Clinic due to accelerating cash flow difficulties that made it impossible for the Clinic to meet its payroll. The State ultimately acceded to Optum’s request.   The apparent cause of the cash flow problem: the Change Healthcare cyberattack, which made it impossible for Change, an Optum subsidiary to accept or pay claims from its provider networks, including, most likely Corvallis Clinic. In other words, the catastrophic system failure of one piece of Optum likely accelerated another piece of Optum’s acquisition of the largest physician group in town.

Taken together, these simultaneous problems have not served to enhance Optum’s image as a care provider in the southern Willamette Valley. They make the company appear as a cold and exploitative outsider capitalizing on problems it helped create. These events will not enhance the likelihood of United growing its core insurance business in the area or endear the company to Oregon’s health system regulators, or its state managed Medicaid program, the Oregon Health Plan.

Outgrowing Its Nervous System?

Optum Health has almost quadrupled in size in the past six years, but its profit margin has fallen by a third. Given the explosive pace of acquisitions and the cost pressures on physician practices during and after the COVID pandemic, this margin deterioration is not surprising. However, if Optum Health’s new management does not stabilize its operating performance, margins could deteriorate further, putting pressure on United’s earnings.

There are no evident economies of scale or co-ordination in physician services. How Optum can recruit and retain high quality motivated physicians and advanced practice nurses to its vast care system is a major challenge to the enterprise. They will need a compelling answer to the question: “Why work for Optum?” The answer cannot be: we are huge and you don’t have a choice. How the company creates value for its tens of thousands of physicians and nurses will be the central management facing United, or indeed any large-scale employer of these complex professionals.

There is growing evidence that there are diseconomies both of scale and co-ordination in health services generally. Those diseconomies manifest themselves in the vast empty space between the giant enterprise and the physicians and patients who rely on them. Every denial of care by United’s AI-driven claims management system makes a tiny dent in the company’s consumer image. Patient anger over arbitrary and self-interested health plan meddling in care decisions resulted in first managed care backlash in the late 1990’s. United’s recent Net Promoter Score of -5 suggests that it has a long way to travel to regain customer confidence and loyalty.

The physician-patient relationship remains the bedrock of the health system. If the nerve endings of an enterprise do not reach out and sense the effect it is having on that relationship, it isn’t going to be very long before it either ceases to grow or ceases to be profitable or, likely, both. United and Optum have reached that tipping point right now. Follow Optum’s physicians and their patients and see the future.

Acknowledgements: Trevor Goldsmith provided research and technical support for this piece. The author appreciates Ian Morrison, Andrew Mueller  and Jamie Robinson for reading and commenting on this piece.

Jeff Goldsmith is a veteran health care futurist, President of Health Futures Inc and regular THCB Contributor. This comes from his personal substack

By MATTHEW HOLT

Last week Jeff Goldsmith wrote a great article in part explaining why health care costs in the US went up so much between 1965 and 2010. He also pointed out that health care has been the same portion of GDP for more than a decade (although we haven’t had a major recession in that time other than the Covid 2020 blip when it went up to 19%). However, it’s worth remembering that we are spending 17.3% of GDP while the other main OECD countries are spending 11-12%. Now it’s true that the US has lots of social problems that show up in heath spending and also that those other countries probably spend more on social services, but it’s also clear that we don’t actually deliver a lot more in services. In fact probably the most famous health economics paper of the last 50 years was Anderson & Rienhardt’s “It’s the Prices, Stupid”, which shows we just pay more for the same things. Anyone who’s looked at the price of Ozempic in the US versus in Denmark knows that’s true.

But suspend disbelief and say we actually wanted to do something about health care costs, what would we do?

There are 4 ways to cut health care costs

1. Cut prices
2. Cut overall use of services
3. Reduce only unnecessary services
4. Replace higher priced services with lower priced ones

Number 3 or reducing only unnecessary services is the health policy wonks dream.

The Dartmouth school, originating with Jack Wennberg, has done a pretty good job convincing the health policy establishment that there is massive practice variation across the nation (and even within cities and individual hospitals), and that while this leads to higher costs, it doesn’t result in better outcomes. In fact outcomes where there are more services and spending tend to be worse. Dartmouth does have its critics like Buzz Cooper, and maybe all the explanation of variables in health care spending is caused by well meaning doctors ministering to the inner city poor, but it’s not hard to find overuse bordering on fraud. There have been a ton of well meaning attempts to both educate patients to choose wisely and to get doctors to behave better (or at least report their data), but there’s a new report out showing that Dartmouth had it roughly right every day. (This recent NYTimes one is about cutting babies’ tongues to make them breastfeed more easily).

Overall there have been some reductions in some measures, like hospital admissions but many of those have been replaced with other services, and in general practice variation has not gone away. Could it happen? Maybe, but 50 years of evidence makes it look unlikely. Don’t forget that the Obamacare authors were faithful disciples of Dartmouth but not much of that philosophy ended up in CMS policy.

Number 4 or replacing higher priced services with lower priced ones is the Silicon Valley health tech dream cross-bred with the Dartmouth school’s love of primary care. I will admit to being a fan of this movement. If we can replace higher priced people (doctors) with lower priced people or non-people (AI) we should be able to deliver the same things we are doing today at a lower cost. For example, in the field of psychotherapy there’s currently a great shortage of therapists. One thing that’s being done is replacing therapists with lower qualified coaches. But the end game is to use AI-powered chatbots and avatars to do the same thing. 

A related attempt is to deliver preventative services using technology. This is now paid for by Medicare – it’s called remote physiological monitoring (RPM). While its introduction has been a tad bumpy, it intuitively makes sense. If you can start tracking the care of relatively sick people while they are at home and relatively healthy, surely you can pick up issues before they get worse, intervene with medication changes and other services in their homes, and therefore prevent hospital admissions and improve outcomes. In fact, given how cheap tracking technology is, and the advances in AI, can’t you monitor everyone (based on their level of acuity) and give them a personal AI health coach? I call this the “continuous clinic” and it’s a great idea if I say so myself. The problem is that it’s not going to happen easily in a medical world that manages its process in terms of office visits and hospital admissions and gets paid on those metrics. We simply don’t have the right type of new organizations to put this together. And if you believe John Glaser and Sara Vaezy’s recent piece in the HBR called Why the Tech Industry Won’t Disrupt Health Care, we’re unlikely to get them. (I think John & Sara hope that the incumbents will reform themselves, but they would say that, wouldn’t they!)

Which leaves us with 1, cutting prices, and 2, reducing overall use of services. 1 & 2 are what the rest of the OECD does. 

Virtually every country in the OECD has some form of central price controls. Even if they have multiple paying entities, like Germany, there’s one agreed price schedule. Or, as in the UK and Scandinavia, there’s a regional or national budget. The US also has such a national price control, but only for some people over 65, given that Medicare Advantage now covers half of that population, and only for some services. Notably it doesn’t cover drugs, although that will slightly change in the near future given CMS’ new ability to negotiate the prices of some drugs. 

To this point in the US, any attempt to squeeze down on Medicare prices produces two effects. One is violent disagreement on behalf of provider organizations, which spend more money lobbying than basically any other industry in America. Almost always this means that Congress balks at imposing any real cuts. The other is that providers find ways to transfer those costs onto patients unable to negotiate. You’d think that the patients’ representatives (insurers and employers) would resist that but RAND has shown that they are basically price takers, paying more than double what Medicare pays for the same thing. Again this could change, and there’s some recent legislative activity that has a few people very excited, and has spurred some lawsuits about fiduciary responsibility – ironically one from an employee of a drug company. But we remain a long long way from a German/Japanese/French style price schedule.

Which leave us with 2, reducing overall use of services. The name for this in US health political  (if not policy) circles begins with another R, rationing. The stories of Canadians flooding across the border to access American health care were always basically bullshit, but like today’s stories of critical race theory, transgender drag queens corrupting our youth, and millions of migrants invading the southern border, it doesn’t take much to wind up the Fox News crowd as the Democrats found out. In 2009 the very wonky issue of when women should get mammograms became death panels very quickly. (BTW if you want to read a lot more about Canada, here’s a classic THCB piece I wrote in 2003. Not that much has changed)

This all means that obviously and transparently reducing services, presumably by creating a UK style cost-benefit analysis commission, is unlikely to happen. We have tried outsourcing that to the private sector, particularly in Medicare Advantage. But the combination of naked greed and stupidity from the MA plans and the use of scary AI, will probably put paid to that soon enough now the trial attorneys have got hold of it.

So to summarize, we pay about double what most other countries pay in $$ terms and about 50% more as a share of our (much bigger) GDP. And of course we lead the league (still) in the number of uninsured people and those who are practically uninsured, or facing bankruptcy from medical bills. There are four ways we could fix it, but none of them seem that promising.

And I don’t see a way this changes any time soon.

Matthew Holt is the publisher of The Health Care Blog

How the Search for Perfect Markets has Damaged Health Policy

Sometimes ideas in healthcare are so powerful that they haunt us for generations even though their link to the real world we all live in is tenuous. The idea of “moral hazard” is one of these ideas. In 1963, future Nobel Laureate economist Kenneth Arrow wrote an influential essay about the applicability of market principles to medicine entitled “Uncertainty and the Welfare Economics of Medical Care”.    

One problem Arrow mentioned in this essay was “moral hazard”- the enhancement of demand for something people use to buy for themselves that is financed through third party insurance. Arrow described two varieties of moral hazard: the patient version, where insurance lowers the final cost and inhibitions, raising the demand for a product, and the physician version–what happens when insurance pays for something the physician controls by virtue of a steep asymmetry of knowledge between them and the patient and more care is provided than actually needed. The physician-patient relationship is “ground zero” in the health system.

Moral hazard was only one of several factors Arrow felt would made it difficult to apply rational economic principles to medicine. The highly variable and uniquely threatening character of illness was a more important factor, as was the limited scope of market forces, because government provision of care for large numbers of poor folk was required.  

One key to the durability of Arrow’s thesis was timing: it was published just two years before the enactment of Medicare and Medicaid in 1965, which dramatically expanded the government’s role in financing healthcare for the elderly and the categorically needy. In 1960, US health spending was just 5% of GDP, and a remarkable 48% of health spending was out of pocket by individual patients. 

After 1966, when the laws were enacted, health spending took off like the proverbial scalded dog. For the next seven years, Medicare spending rose nearly 29% per year and explosive growth in health spending rose to the top of the federal policy stack. By 2003, health spending had reached 15% of GDP! Arrow’s  moral hazard thesis quickly morphed into a “blame the patient” narrative that became a central tenet of an emerging field of health economics, as well as in the conservative critique of the US health cost problem.  

Fuel was added to the fire by Joseph Newhouse’s RAND Health Insurance Experiment in the 1980s,  which found that patients that bore a significant portion of the cost of care used less care and were apparently no sicker at the end of the eight-year study period. An important and widely ignored coda to the RAND study was that patients with higher cost shares were incapable of distinguishing between useful and useless medical care, and thus stinted on life-saving medications that diminished their longer term health prospects. A substantial body of consumer research has since demonstrated that patients are in fact terrible at making “rational” economic choices regarding their health benefits. 

The RAND study provided justification for ending so-called first dollar health  coverage and, later, high-deductible health plans. Today more than half of all Americans have high deductible health coverage. Not surprisingly, half of all Americans also report foregoing care because they do not have the money to pay their share of the cost!   

However, a different moral hazard narrative took hold in liberal/progressive circles, which blamed the physician, rather than the patient, for the health cost crisis.  

The Somers (Anne and Herman) argued that physicians had target incomes, and would exploit their power over patients to increase clinical volume regardless of actual patient needs to meet their target income. John Wennberg and colleagues at Dartmouth later indicted  excessive supply of specialty physicians for high health costs. Wennberg’s classic analysis of New Haven vs. Boston’s healthcare use was later shredded by Buz Cooper for ignoring the role of poverty in Boston’s much higher use rates.

The durable “blame the physician” moral hazard thesis has led American health policy on a  futile five-decade long quest for the perfect payment framework that would damp down health cost growth–first capitation and HMOs, then, during the Obama years, “value-based care”–a muddy term for incentives to providers that will eliminate waste and unnecessary care. Value-based care advocates assume that  physicians are helpless pawns of whatever schedule of financial rewards is offered them, like rats in a Skinner box. If policymakers can just get the “operant condition schedule” right, waste will come tumbling out of the system. 

The end result of this narrative: thanks in no small part to the festival of technocratic enthusiasm that accompanied ObamaCare, (HiTECH, MACRA, etc), physicians and nurses now spend as much time typing and fiddling with their electronic health records to justify their decisions as they do caring for us. Controlling physician moral hazard thru AI driven claims management algorithms has become a multi-billion business. The biggest “moral hazard mitigation” company, UnitedHealth Group, has a $500 billion market cap.

Thus the poisonous legacy of Arrow’s “moral hazard” thesis has been two warring policy narratives that blame one side or the other of the doctor-patient relationship for rising health costs. It has given us a policy conversation steeped in mistrust and cynicism. You can tell if someone is a progressive or conservative merely by asking who they blame for rising health costs! 

There were credible alternative explanations for the post-Medicare cost explosion. Recall that the point of expanding health coverage in the first place was that better access to care DOES in fact improve health.  Medicare lifted tens of millions of seniors out of poverty, improving both their nutrition and living conditions. Medicaid dramatically broadened access to care for tens of millions in poverty. This expansion of coverage, and the added costs, deserve much credit for the almost nine year improvement in Americans’ life expectancy from 1965 to 2015. 

It is also worth recalling that the two most explosive periods of inflation in the post-WWII US economy were the late 1960’s, the so-called Guns and Butter economy that financed the Vietnam War, and the mid 1970’s to 1981, fueled by the Arab oil embargo. These periods of hyperinflation coincided with the coverage expansion, amplifying their cost impact.

And of course, the 1980’s also saw a flood of optimistic, high energy baby boomer physicians, the result of a dramatic federally funded expansion of physician supply begun by Congress during the 1970’s. The reason for this surge: we did not have enough physicians to meet the demands of the newly enfranchised Medicare and Medicaid populations. 

This surge in aggressive young physicians coincided with dramatic expansion in the capabilities of our care system. Non-invasive imaging technologies such as MR, CT and ultrasound, ambulatory surgery dramatically lowered both the risks and costs of surgical care. The advent of effective cancer treatments, cut the cancer death rate by one-third from its 1991 peak. The advent of statins, and less invasive heart treatment has reduced mortality from heart disease by 4% per year since 1990, despite the rise in obesity!

Medicine today is of an different order of magnitude of clinical effectiveness, technical complexity and, yes, cost, than that on offer in 1965. No one would trade that health system for the one we have today.    

However, the biggest problem with the moral hazard theses–both of them–was the assumption that the physician and the patient are primarily motivated by “maximizing their utility” in the healthcare transaction. Arrow knew better. He emphasized the role that fear and existential risk played in their interaction, given that illness, particularly serious illness, is, as he put it, “an assault on personal integrity”. Given the level of personal risk, it is easy to understand why both patients and physicians will not be obsessing about the risk/benefit relationship of every single medical decision.

By reducing the physician-patient interaction to a morally fraught mutual quest of the proverbial free lunch, economists have not only insulted both parties, but grossly oversimplified this complex interaction. Is a sick person really “consuming” medical care, like an ice cream bar or a movie? Is the physician really “selling” solutions regardless of their effectiveness, unconstrained by pesky professional ethics, or rather groping through fraught uncertainty to apply their knowledge to helping their patient recover? 

In contrast to virtually every other Western country, American health policy has been obsessed for nearly sixty years with fighting moral hazard and, in the process, saddling almost 100 million Americans with $195 billion in medical debts (the vast majority of which are uncollectible). Isn’t it ironic that those other wealthy countries that provide their citizens care free at the point of service spend between 30-50% less per capita on healthcare than we do?  And that both physician visits and hospitalization rates are far lower in the US than most of these countries.   

There is no question that healthcare in the US today is very expensive. But health costs have been dead flat as a percentage of US GDP for the past thirteen years. The explosive growth in health costs is over. Increasingly, attention is turning to the real culprit–socially determined causes of illness, and the inadequacy of our policies toward nutrition, shelter, mental health, gun violence and investment in public health. It’s time for the economists to eat some humble pie, and acknowledge that medicine will probably never fit in their cartoon universe of “Pareto optimality in perfect markets”.

Jeff Goldsmith is a veteran health care futurist, President of Health Futures Inc and regular THCB Contributor. This comes from his personal substack

By JEFF GOLDSMITH

On Christmas Eve 2014, I received a present of some profoundly unwelcome news: a 64 slice CT scan confirming not only the presence of a malignant tumor in my neck, but also a fluid filled mass the size of a man’s finger in my chest cavity outside the lungs. Two days earlier, my ENT surgeon in Charlottesville, Paige Powers, had performed a fine needle aspiration of a suspicious almond-shaped enlarged lymph node, and the lab returned a verdict of “metastatic squamous cell carcinoma of the head and neck with an occult primary tumor”. 

I had worked in healthcare for nearly forty years when cancer struck, and considered myself an “expert” in how the health system worked. My experience fundamentally changed my view of how health care is delivered, from the patient’s point of view. Many have compared their fight against cancer as a “battle”. Mine didn’t feel like a battle so much as a chess match where the deadly opponent had begun playing many months before I was aware that he was my adversary. The remarkable image from Ingmar Bergman’s Seventh Seal sums up how this felt to me.

The CT scan was the second step in determining how many moves he had made, and in narrowing the uncertainty about my possible counter moves. The scan’s results were the darkest moment: if the mysterious fluid filled mass was the primary tumor, my options had already dangerously narrowed. Owing to holiday imaging schedules, it was not until New Years’ Eve, seven interminable days later, that a PET/CT scan dismissed the chest mass as a benign fluid-filled cyst. I would require an endoscopy to locate the still hidden primary tumor somewhere in my throat.  

I decided to seek a second opinion at my alma mater, the University of Chicago, where I did my doctoral work and subsequently worked in medical center administration.

The University of Chicago had a superb head and neck cancer team headed by Dr. Everett Vokes, Chair of Medicine, whose aggressive chemotherapy saved the life and career of Chicago’s brilliant young chef, Grant Achatz of Alinea, in 2007.

If surgery was not possible, Chicago’s cancer team had a rich and powerful repertoire of non-surgical therapies. I was very impressed both with their young team, and how collaborative their approach was to my problem. Vokes’ initial instinct that mine was a surgical case proved accurate.

The young ENT surgeon I saw there in an initial consultation, Dr. Alex Langerman performed a quick endoscopy and thought he spotted a potential primary tumor nestled up against my larynx. Alex asked me to come back for a full-blown exploration under general anaesthesia, which I did a week later. The possible threat to my voice, which could have ended my career, convinced me to return to Chicago for therapy. Alex’s endoscopy found a tumor the size of a chickpea at the base of my tongue. Surgery was scheduled a week later in the U of Chicago’s beautiful new hospital, the Center for Care and Discovery.

This surgery was performed on Feb 2, 2015, by a team of clinicians none of whom was over the age of forty. It was not minor surgery, requiring nearly six hours:  resections of both sides of my neck, including the dark almond and a host of neighboring lymph nodes. And then, there was robotic surgery that removed a nearly golf ball-sized piece of the base of my tongue and throat. The closure of this wound remodeled my throat.

I arrived in my hospital room late that day with the remarkable ability to converse in my normal voice.

Thoughtfully, I was put in a quasi-isolation unit with two doors and negative air pressure. There was a consistent, very high level of focus on infection control throughout my stay. The next day, flushed with the news that no cancer had been found in any other lymph nodes, that there were clean, ample cuts around the tumors we knew about, and, best of all, that no follow-on chemo- or radiotherapy would be needed, I chatted away happily with two visitors for almost ninety minutes. I was repaid for this premature end-zone celebration with a siege of intense throat pain that lasted over a week. I was also repaid in a different way for the optimistic removal the next morning of the nasogastric tube installed during my surgery to feed and medicate me post-op. 

My surgeon, Alex Langerman, was generous with his time. We had four visits in the hospital that I could remember and one which I couldn’t. He responded thoughtfully and substantively to my questions and concerns but delegated the day-to-day management of my care to his senior and junior residents. The senior residents, who were present in the OR,  were as impressive as Alex was.

Some of the junior residents, however, literally phoned it in. On the second night, I woke up strangling on a large blood clot that had dislodged from the wound and blocked my airway. The anxious nurse in charge of my care paged the on-call resident who . . . didn’t answer the page in 90 minutes. Paged again, the resident scolded the nurse for bothering her and instructed the nurse to inform me that “breathing and swallowing problems were normal for this type of surgery” and refused to come in to the hospital to examine me.

At this point, I asked to speak to the resident on the phone, which prompted her to appear in my room thirty minutes later. She performed a perfunctory, fifteen-second examination, pressing down on my tongue with a depressor, but failing to examine my airway where a large piece of the clot was still lodged. Then she delivered a sour little lecture on how “breathing and swallowing problems were normal. etc.” and after documenting that she had showed up, ordered a swallowing study for the next day and vanished without taking any other action, not to be seen again. I eventually coughed up the rest of the clot myself and prayed it wouldn’t happen again. 

The failure of on-call residents to respond to pages from the nurses caring for me was repeated later in my stay. Despite this inconstant clinical back up, I received thoughtful and attentive nursing care throughout my stay. Sadly, the nurses seemed to spend twice as long typing into the numerous computers in the rooms and at the nursing station as they did actually caring for us.  

However, the inadequate pain control regimen vital to my regaining my ability to swallow exacted a huge price. Originally, my pain meds were to be delivered through the nasogastric tube that bypassed my new throat. When the tube was removed the day after surgery, no thought was given to rethinking my pain control. Though I had a mild patient-controlled anaesthesia through IV, I was expected to swallow my primary pain medication delivered in liquid form roughly every four hours. 

As you might expect given the large wound in my throat, swallowing was a nightmare, particularly since the liquid pain medications seemed to be suspended in alcohol. I could not swallow them sitting up in bed, so I made a medication station out of my window sill. Even if I diluted them with water or a suspension of edible fiber, it took almost twenty minutes to down each dose of pain meds. Every tiny swallow brought a sharp stab, a hop and a yelp, followed by a spasm of painful coughing. Several days of protest brought a new idea:  bitter ground up pain pills mixed with apple sauce! Chunks of pain medication and apple hung up in my throat, lodging on the wound. 

Then the hospital entered the fugue state otherwise known as the weekend. A hospital stay expected to be seventy-two hours had stretched to six days, during which I was unable to eat and barely able to swallow even water, let alone therapeutic food. I made an angry circuit of the massive, aircraft carrier sized hospital floor every few hours, pushing my IV stand alongside of me, weakening each day from the cumulative deficit of protein. 

 I lost more than seventeen pounds during my stay in the hospital, mostly muscle, from my inability to eat. This muscle loss contributed directly to the collapse of my left hip joint later in the spring by depriving a badly eroded arthritic joint of its supporting musculature. Escalating pain in both hips required two joint replacements in the ensuing eighteen months.   

Finally, on Sunday evening, Alex called for a pain consult, which came on Monday morning, from a brilliant young anesthesiologist named David Dickerson. The result was a nearly complete victory: a combination of an anesthetic patch, local anesthetic mouthwash for the throat, a medication intended to numb the small nerves, and a strong liquid systemic painkiller to be used as needed. I was discharged within 36 hrs. able to swallow protein drinks for sustenance. 

Unfortunately, within twenty-four hours, I was back in the University of Chicago ER for bleeding. I was readmitted for minor surgery to cauterize the wound in my throat, and also to remove fluid from one side of the neck. Finally, after recovering from the anesthesia, I was sent back to my physician’s house, which was my base camp during my Chicago stay. I flew home to Virginia two days later, on February 13. 

The saga wasn’t over. Karen, my wife, stayed with me the first four days. Despite her constant presence, neither my wife nor my guardian angel hosts in Hyde Park were given discharge instructions. Karen was barely acknowledged by any member of the care team during her four days in the hospital, despite her impending role as my caregiver. I received my discharge instructions in a haze of elation and pain meds,  and immediately tucked them away in my bag. When I arrived home in Charlottesville, exhausted from my eleven-day visit to Chicago, I showered and collapsed into my welcoming bed.

I awakened fifteen hours later with no feeling in the fingers of both hands. I also found nearly two-inch blisters on my heels from lying on my back for fifteen hours. Karen, a florist, was preoccupied by Valentine’s Day, her busiest day of the year, and my son, Trevor, who came to stay, was reluctant to disturb me. Six months later, I still had no feeling in the two outer fingers of my right hand, needless collateral damage from my treatment. I basically lost my ability to type. This avoidable complication was eventually addressed with a six-hour nerve grafting surgery at Washington University in St. Louis in October, 2015.

I’d been warned by several of my policy colleagues about selecting Medicare Advantage when I turned sixty-five. “Wait ‘till you get sick”, they sagely warned me.

In fact, my carrier, Humana, did not delay my course of therapy by five minutes, and rapidly approved my personal decision based on medical advice to seek cancer care from an NCI designated Comprehensive Cancer Center five hundred miles from home and “out of network” for my Virginia-based plan. 

Unfortunately, the MA approval process placed a huge clerical/administrative burden on my Charlottesville-based primary care physician Jeff Davis, whose long-suffering office staff was required to initiate requests for authorization for every single stage of the diagnosis and treatment, a process which consumed nearly two person days of administrative time. I did get regular check-ins from a Humana nurse for several weeks after the procedure and a big shipment of frozen meals.  

But otherwise, my Medicare Advantage plan added no value to my cancer care, and grossly underpaid the University of Chicago for my surgery. The hospital was paid $15 thousand under their Humana MA contract for my total care, not counting Alex’s surgical fee, for a complex surgery, an eight day hospital stay and an emergency readmission.

The surgical care I received at the U of C was a triumph, both thorough and definitive. It saved my life.  However, the follow up pain management and the discharge process and post-surgical recovery were disasters, both from a patient experience standpoint (fed back with verve on my HCAHPS survey!) and a cost standpoint.  

The diffusion of responsibility throughout the complex care episode, and consequent lack of ownership of my recovery, was the root cause of much of this gap. An additional learning for me:  much of the risk of any clinical intervention is borne by the family after the intervention is over. The failure to prepare my family for its role had direct consequences for me in future surgical episodes that would have been unnecessary a better scripted episode. 

A recent commenter on LinkedIn compared the “consumer” of healthcare to a person gorging on Baked Alaska in a restaurant where someone else picked up the bill. Given my own frightening experience with cancer, I found this characterization insulting and demeaning. I wasn’t “consuming” anything; I was drowning! My central challenge was finding someone I could trust to save my life. Would I have chosen someone I did not know or trust, but whose services were less costly, to rid me of my cancer? Not on your life. 

Economist Kenneth Arrow wrote sixty years ago that one thing that distinguishes medicine from other things our economy does is that illness is not only unpredictable, but also an “assault on one’s personal integrity”. Responding to that lethal uncertainty is the toughest job in our economy. I was and remain deeply grateful to my clinical team for saving my life.  

I am now nine years cancer free, and sobered by how fraught and complicated my care experience was. It is hard to describe how much fear and uncertainty I felt, even in my home institution, despite forty years of working experience in and around hospitals. When I hear marketing experts prattle on about the “consumer’s care journey”, it just makes me want to throw up.

Jeff Goldsmith is a veteran health care futurist, President of Health Futures Inc and regular THCB Contributor. This post comes from his personal substack

Like birds of a feather, talent in healthcare management often gathers in flocks. The University of Minnesota, University of Michigan and University of Iowa healthcare management programs are all justly famous for graduating, over many decades, an exceptional number of future transformative healthcare leaders. But sometimes, talent comes from the “street”- challenging healthcare turnarounds that attract risk-taking leaders who, in turn, gather young talent around them. The University of Chicago’s urban academic health center has been one of these places.

The U of C was (and remains) the largest care provider on Chicago’s troubled South Side, a vast urban landscape that struggled economically and socially for more than seventy years with intractable poverty and violence. Like other major teaching hospitals in challenging neighborhoods–the Bronx’s Montefiore and Harlem’s Columbia-Presbyterian come to mind–all the management challenges of running complex academic health center are magnified by coping with huge flows of Medicaid and uninsured urban poor. 

In 1973, President Edward Levi appointed Daniel Tosteson, who was then Chair of Pharmacology and Physiological Sciences at Duke University, to be Dean of the Pritzker School of Medicine and Vice President for the University of Chicago’s troubled Medical Center. Tosteson was a charismatic basic scientist with no prior experience running a 700-bed urban teaching hospital.  He arrived in the middle of a severe Illinois’ fiscal crisis, and a horrendous Medicaid funding challenge (31% of the Chicago’s patients were Medicaid recipients). Chicago’s clinical chairs who led the recruitment of Tosteson also played a crucial role in the subsequent turnaround–notably Dr David Skinner, Chair of Surgery and Dr. Al Tarlov, Chair of Medicine, and Dr. Daniel X Freedman, Chair of Psychiatry. 

To renew the Medical Center, Tosteson recruited an experienced clinical manager, Dr. Henry Russe from competitor Rush Presbyterian St-Lukes, as his Chief Clinician. But Tosteson went off the reservation and hired a 34 year old economist named David Bray, who was Executive Associate Director of the White House Office of Management and Budget (responsible for the national security and intelligence agencies) as his Chief Financial Officer. He also named John Piva, formerly of Johns Hopkins,  his Chief Development Officer. To revitalize Chicago’s principal affiliate, Michael Reese Hospital, he recruited as its President, Dr. J. Robert Buchanan, then Dean of Cornell Medical College.  And he recruited me, at age 27, from the Illinois Governor’s Office, as his government affairs lead and special assistant.   

Tosteson’s stay at Chicago was brief. He fell out with Levi’s successor, President John Wilson and left in 1975 after only two years to become Dean at the Harvard Medical School. But something remarkable happened in the following seven years: the team assembled by Tosteson rallied to continue the turnaround. A veteran Chicago basic scientist Robert Uretz succeeded Tosteson and he appointed Bray as CEO of the Medical Center. Bray in turn recruited a brace of ambitious young people to help revitalize the medical center. Bray recruited Anthony Speranzo as his Chief Financial Officer and Richard Henault as his Chief Operating Officer,  both in their early 30s.

However, Illinois’ economy continued to deteriorate, taking down the steel industry which anchored the South Side’s manufacturing economy. With two more serious recessions in 1979 and 1981-82, there came a succession of Medicaid funding crises. The Medical Center also struggled with a difficult IT system conversion which damaged its financial position. In 1985, financial pressures forced University President Hannah Gray to change managements–appointing her Budget Director Ralph Muller, who had no previous healthcare management experience, as President of the Medical Center.

Bray had followed Tosteson to Harvard in 1982 and became Dean for Management at Harvard Medical School. He was the architect not only of Harvard’s successful partnerships with major pharmaceutical manufacturers but also a major expansion of HMS research facilities. Bob Buchanan became President of the Massachusetts General Hospital, Harvard’s principal teaching hospital affiliate, in 1983. Buchanan’s CFO at Michael Reese, John Gunn, went on to run Memorial Sloan Kettering Medical Center in New York for more than two decades. In 1983, Piva left Chicago to become Exec VP for Development at Duke and went on to raise over $3 billion in successive and oversubscribed fundraising campaigns. 

The Chicago clinical chiefs went on to stardom. Skinner went on to become President of the New York Hospital and architect of the merger with Columbia Presbyterian in 1998. Al Tarlov became President of the Henry J Kaiser Family Foundation in 1984.  Daniel Freedman elected President of the American Psychiatric Association in 1981. Russe became Dean of the Rush Medical College.   

Bray’s team also found leadership opportunities after Chicago. After a brief career in banking, Speranzo went on to St Josephs of Orange in California as CFO, and eventually became Executive VP/Finance for Ascension Health, where he oversaw a dramatic expansion in Ascension’s capital base. He is today head of Ascension Capital. Henault returned to New Orleans as COO of Methodist Health System, and became chair of the American College of Healthcare Executives in 2003. Henault’s Chief of Staff, Janet Guptill, became President of the Scottsdale Institute. 

Ralph Muller was President of the University of Chicago’s Medical Center for an eventful sixteen years, during which the Medical Center separated itself corporately from the University and embarked on a huge capital replacement program. He also recruited a succession of talented young leaders to his management team- Ken Bloem, Steve Lipstein, Lawrence Furnstahl, Michael Riordan, Ken Kates–who all went on to run major medical centers or health systems. Bloem at Stanford and Georgetown, Lipstein at BJC/Washington University, Kates at Iowa, Furnstahl at Oregon, and Riordan at Greenville/Prisma in South Carolina. Muller’s strategy lead Christine Malcolm went on to consulting/thought leadership roles at APM and University Hospital Consortium before running Kaiser’s $20 billion capital replacement program. 

Muller left the University of Chicago after sixteen years, and after a brief sabbatical with the Kings Fund in London, became Chief Executive of Penn Medicine in Philadelphia and led perhaps the most successful turnaround of a major academic medical center in the past twenty five years.  Riordan succeeded Muller in 2003. Riordan’s VP for community affairs and external relations, Michelle Obama, became First Lady of the United States.

The Medical School side of University of Chicago Medical Center produced two Deans who also became successful turnaround leaders:  Dr. Glenn Steele, who led Geisinger from 2003 to 2015 and Dr. James Madara, who became Executive VP of the American Medical Association in 2011.   The Social Sciences Division of the University contributed significant academic health education leaders:  Stephen Shortell, who became Dean of Public Health at the University of California at Berkeley and Lawton Burns, who chaired the Health Management Department at Wharton School of Finance at Penn. (A classmate of theirs and ours in the Sociology Department, Theresa Sullivan, became President of the University of Virginia). 

Most of the Medical Center turnaround took place under Stanford Goldblatt’s Board Chairmanship.  He was materially aided by his North Shore trustee colleagues John Mabie and Mike Koldyke. Goldblatt was succeeded in his Chairmanship role by Paula Wolff, who worked for Governor Jim Thompson and became President of Governors State University.

The unique challenges of turning around and strengthening this large urban academic health center attracted a remarkable array of talented young managers. Bray, Muller, Speranzo, Steele, Gunn and Piva generated either through earnings, investments or philanthropy multiple billions of dollars for their respective institutions. The fact that this twenty-year span produced so many young leaders who went on to greatness in other institutions should tell you that adverse circumstances often attract risk takers who grow through challenge.  

Jeff Goldsmith is a veteran health care futurist, President of Health Futures Inc and regular THCB Contributor. This comes from his personal substack

Flawed Accounting for the US Health Spending Problem

By Jeff Goldsmith

Source: OECD, Our World in Data

Late last year, I saw this chart which made my heart sink. It compared US life expectancy to its health spending since 1970 vs. other countries. As you can see,  the US began peeling off from the rest of the civilized world in the mid-1980’s. Then US life expectancy began falling around 2015, even as health spending continued to rise. We lost two more full years of life expectancy to COVID. By  the end of 2022, the US had given up 26 years-worth of progress in life expectancy gains. Adding four more years to the chart below will make us look even worse.  

Of course, this chart had a political/policy agenda: look what a terrible social investment US health spending has been! Look how much more we are spending than other countries vs. how long we live and you can almost taste the ashes of diminishing returns. This chart posits a model where you input health spending into the large black box that is the US economy and you get health out the other side. 

The problem is that is not how things work. Consider another possible interpretation of this chart:  look how much it costs to clean up the wreckage from a society that is killing off its citizens earlier and more aggressively than any other developed society. It is true that we lead the world in health spending.  However, we also lead the world in a lot of other things health-related.

Exceptional Levels of Gun Violence

Americans are ten times more likely than citizens of most other comparable countries to die of gun violence. This is hardly surprising, since the US has the highest rate of gun ownership per capita in the world, far exceeding the ownership rates in failed states such as Yemen, Iraq and Afghanistan. The US has over 400 million guns in circulation, including 20 million military style semi-automatic weapons. Firearms are the leading cause of deaths of American young people under the age of 24. According to the Economist, in 2021, 38,307 Americans aged between 15 and 24 died vs. just 2185 in Britain and Wales. Of course, lots of young lives lost tilt societal life expectancies sharply downward.

A Worsening Mental Health Crisis

Of the 48 thousand deaths from firearms every year in the US, over 60% are suicides (overwhelmingly by handguns), a second area of dubious US leadership. The US has the highest suicide rate among major western nations. There is no question that the easy access to handguns has facilitated this high suicide rate.

About a quarter of US citizens self-report signs of mental distress, a rate second only to Sweden. We shut down most of our public mental hospitals a generation ago in a spasm of “de-institutionalization” driven by the arrival of new psychoactive drugs which have grossly disappointed patients and their families. As a result,  the US  has defaulted to its prison system and its acute care hospitals as “treatment sites”; costs to US society of managing mental health problems are, not surprisingly, much higher than other countries. Mental health status dramatically worsened during the COVID pandemic and has only partially recovered. 

Drug Overdoses: The Parallel Pandemic

On top of these problems, the US has also experienced an explosive increase in drug overdoses, 110 thousand dead in 2022, attributable to a flood of deadly synthetic opiates like fentanyl. This casualty count is double that of the next highest group of countries, the Nordic countries, and is again the highest among the wealthy nations. If you add the number of suicides, drug overdoses and homicides together, we lost 178 thousand fellow Americans in 2021, in addition to the 500 thousand person COVID death toll. The hospital emergency department is the departure portal for most of these deaths. 

Maternal Mortality Risks

The US also has the highest maternal mortality rate of any comparable nation, almost 33 maternal deaths per hundred thousand live births in 2021. This death rate is more than triple that of Britain, eight times that of Germany and almost ten times that of Japan. Black American women have a maternal mortality rate almost triple that of white American women, and 15X the rate of German women. Sketchy health insurance coverage certainly plays a role here, as does inconsistent prenatal care, systemic racial inequities, and a baseline level of poor health for many soon-to-be moms.     

Obesity Accelerates

Then you have the obesity epidemic. Obesity rates began rising in the US in the late 1980’s right around when the US peeled away from the rest of the countries on the chart above. Some 42% of US adults are obese, a number that seemed to be levelling off in the late 2010’s, but then took another upward lurch in the past couple of years. Only the Pacific Island nations have higher obesity rates than the US does. And with obesity, conditions like diabetes flourish. Nearly 11% of US citizens suffer from diabetes, a sizable fraction of whom are undiagnosed (and therefore untreated). US diabetes prevalence is nearly double that of France, with its famously rich diets. 

Causes of obesity include: poverty and racial inequity, poor diet, lack of physical activity, prepared foods laden with processed sugar and salt, food desserts, etc. There has been an eerie correlation between the decline in adult smoking and  the rise in obesity; one lethal anxiety reducer replacing another beginning  in the late 1980’s, right around the time our health costs peeled away from the rest of the world vs. life expectancy. Our high rate of obesity undoubtedly contributed to the US  death toll from COVID. More than 70% of COVID casualties among the US population were obese or overweight. Obesity rendered the infected vulnerable to breathing and circulatory problems aggravated by COVID.

Our Appalling COVID Performance

And of course, per capita deaths from COVID in the US, though not the highest in the world, significantly exceeded the death tolls in most wealthy nations. According to the Economist, we lost  between 1.3 and 1.4 million people to COVID., the third most “excess deaths” of any country (after India and Russia).* Our peer group in the rate of excess deaths per thousand during the pandemic included:  Kazakhstan, Greece, Brazil and Estonia.  

Countries that excelled in combatting this pandemic, which had death rates less than one-fifth of ours- New Zealand, Taiwan, Japan, South Korea- seem to share two traits in common: competent governments capable of acting quickly and decisively to manage public health risks and populations that respected both scientific authority and public health mandates. In the US, we lacked both of these things.

* Excess deaths- deviation above the normal predicted level of deaths in a year- may be a better measure of the pandemic’s effects than “official” COVID deaths, due to complexities in attribution of deaths to specific causes and political interference by government

Toxic Libertarianism

During the pandemic, an ethos of F#@ck You Libertarianism took firm hold in much of the US: “My right to go bowling is more important than your right to be disease free! You are NOT the boss of me!” A gross imbalance between individual rights and responsibilities to the society manifest itself in resistance to masking, social distancing and vaccination. The same objections “libertarians” had to COVID precautions apply equally to traffic signals or drunk driving restrictions, which are also abridgements of individual rights in service of a common good. Basic and sensible public health measures became politicized in a tidal wave of social media-fired nonsense; any doofus with an Internet connection became his or her own epidemiologist or virologist. Public health is now, to many Americans, an elitist conspiracy to deprive them of their freedom. 

And the resistance was well armed.  A not-so-well-regulated militia of local citizens armed with semi-automatic weapons and walkie-talkies turned up to reopen the Crash and Burn Tattoo Parlor in Shepherd, Texas in April, 2020. Radical libertarian militiamen were convicted of a plot to kidnap and murder the Governor of Michigan based on her enforcement of pandemic closures! 

Not a Failed Economy but a Struggling Society

The US has certainly not failed as an economy. A recent Economist analysis show us pulling away from our European peers in wealth generation. It had a similar record in productivity growth. So it isn’t a resource shortage that is holding us back. The US is also  not a failed  state; it fought off a coup attempt after the 2020 federal election, and successfully defended the integrity of its election system in the 2022 mid -terms. 

But US society’s performance has been truly cringe-worthy. Start with a base layer of income inequality and the resultant unresolved racial and social class antagonisms, stir in pervasive obesity, widespread depression,  anxiety, and a high ambient level of anger, add over 400 million lethal weapons, flood with fentanyl and then a lethal virus and you are left with the chart which we began this essay. In the inimitable words of  Walt Kelly’s Pogo: “We have met the enemy and he is us”.

Health System Not Blameless

We cannot and should not absolve our health care system of blame; it is 17.3% of our economy. Our pharmaceutical industry, including wholesalers and retailers, lit the match that exploded into the epidemic of opioid addiction and deaths. But other corporate interests have contributed materially to the broader decline in Americans’ health. Our food industry -fast and otherwise-bears a lot of responsibility for the flood of cheap calories and oversalted prepared foods. Gun manufacturers and Second Amendment absolutists have facilitated not only the explosion of gun ownership, but the inability sensibly to restrict their use.   

And we can thank two generations of distracted state and national political leadership of both parties, and an ethos of “don’t worry, the market will fix it”, for abandoning our inner cities and much of rural America  notably the Deep South and “greater Appalachia”. This malign neglect created economic conditions that narrowed life choices, and a marked disparity in life expectancy depending on where you live (see map below). It also helped foster a deep and festering resentment among those who were left behind which found its expression in the election of Donald Trump and in the rioting that followed the George Floyd murder.   

What Isn’t Going to Matter Much

Is our health system too costly both to individuals and to US society? Absolutely. But the forces that push up the demand for care and generate those health costs are deeply imbedded in a poorly functioning society. The current roster of health policy nostrums favored by academia, the policy commentariat and the consulting community – “price transparency”, further shifting of health costs onto strained household budgets, converting Medicare to a voucher program instead of a “service benefit,” state administered hospital price controls and yet another wave of futile technocratic payment system tinkering for hospital and physician care such as that launched by ObamaCare – do not even graze the underlying problem.

What Might Actually Help

There are things we can do that might make a difference. We can create a safe “third place” besides prison and the acute care hospital for schizophrenics and others of danger to themselves or others (and dramatically reduce incarceration rates while at it). We can do a much better job of keeping the mentally disturbed away from firearms. We can break the cycle of revenge-driven shootings by intervening sensibly at the neighborhood level. We can also do a much better job of managing addiction in a humane and thoughtful fashion, by dramatically expanding both the quality and availability of addiction treatment.   

We can raise taxes on salt and processed sugar added to food, and use the money to fund research into food addiction. We can also reduce taxes on fresh fruit and vegetables to make them more affordable to the poor and near poor.

Most importantly, we can dramatically improve our system of social care, particularly support for family care-giving, as Elizabeth Bradley and Lauren Taylor suggested in their outstanding The American Healthcare Paradox. Anything we can do to strengthen American families’ ability to remain together will make a material difference in Americans’ health and reduce pressure on health spending. And even with all the pandemic related extensions of health coverage, 28.5 million Americans still lacked health coverage in 2022, whose costs of care were shifted onto the rest of us.

Fixing Broken Regional Economies

But none of this will matter much unless we can reverse the outflow of public and investor capital from the abandoned localities in our country, both urban and rural, and create dignified and lasting employment for those that live there. Life expectancy differences closely mirror the health of local economies. If the hospital is the largest employer in many of these communities, as it is, that is not an economically sustainable state of affairs. 

It is not random that the lowest life expectancies in the US (fifteen years or twenty years lower than the national averages in some counties) can be founded in regions of the US such as Appalachia and the Deep South that have struggled economically for more than fifty years. Buz Cooper convincingly argued in his brilliant Poverty and the Myths of Health Reform, that poverty and all its sickness-inducing correlates is the most important driving force in the variation in health spending, not flawed payment schemes or oversupply of care system resources.  

Source: US Census Bureau

The country is so big, both in geography and population, that it is difficult to understand or appreciate how things are for others that are geographically remote from us. But travel writer Paul Theroux, in his Deep South, said he found poverty in the American South that was worse than what he has seen in rural Africa.  There are significant health (and political) consequences for this poverty.  

Given the fragmentation, how we can get Americans to actually focus on helping each other may be the most difficult problem of all. It is galling to see totalitarian societies like China use our current troubles to justify stripping their own citizens of their freedom and dignity and abusing their human rights in the name of “social order”.

By the time those who have been damaged by neglect reach the Emergency Department, it is too late to help most of them.  Our present flawed social accounting system blames the health care system for the cost of patching up the damage from all the problems enumerated above. . You do not need a doctorate in sociology to realize that the problems that generate all those health costs lie much deeper. They are soluble problems.  We must use our wealth, ingenuity and boundless American energy to foster a sense of mutual responsibility that transcends racial, ethnic and social class boundaries to fix these problems.   

An excellent NPR report in March, 2023 entitled “Live Free and Die” explored these issues, as did a similarly excellent April, 2023 piece in the Economist. 

Jeff Goldsmith is the President of Health Futures Inc. This first appeared on his substack

Joining Matthew Holt (@boltyboy) on #THCBGang on Thursday September 28 at 1pm PST 4pm EST are futurist Jeff Goldsmith: author & ponderer of odd juxtapositions Kim Bellard (@kimbbellard); and patient safety expert and all around wit Michael Millenson (@mlmillenson).

You can see the video below & if you’d rather listen than watch, the audio is preserved as a weekly podcast available on our iTunes & Spotify channels.

Joining Matthew Holt (@boltyboy) on #THCBGang on Thursday August 17 at 1pm PST 4pm EST are futurist Jeff Goldsmith: medical historian Mike Magee (@drmikemagee); policy expert consultant/author Rosemarie Day (@Rosemarie_Day1); and patient safety expert and all around wit Michael Millenson (@mlmillenson);

You can see the video below & if you’d rather listen than watch, the audio is preserved as a weekly podcast available on our iTunes & Spotify channels.

By JEFF GOLDSMITH

The concept of vertical integration has recently resurfaced in healthcare both as a solution to maturing demand for healthcare organizations’ traditional products and as a vehicle for ambitious outsiders to “disrupt” care delivery.    Vertical integration is a strategy which emerged in US in the 19th Century industrial economy.  It relied upon achieving economies of scale and co-ordination through managing the industrial value chain.    We are now in a post-industrial age, where economies of scale are in scarce supply.  Health enterprises that are pursuing vertical integration need to change course. If you look and feel like Sears or General Motors, you may well end up like them.  This essay outlines reasons for believing that vertical integration is a strategic dead end and what actions healthcare leaders need to take.

Where Did Vertical Integration Come From?

The strategy of vertical integration was a creature of the US industrial Revolution. The concept was elucidated by the late Alfred DuPont Chandler, Jr. of the Harvard Business School. Chandler found a common pattern of growth and adaptation of 70 large US industrial firms. He looked in detail at four firms that came to dominate markedly different sectors of the US economy:  DuPont, General Motors, Sears Roebuck and Standard Oil of New Jersey. They all followed a common pattern: after growing horizontally through merging with like firms, they vertically integrated by acquiring firms that supplied them raw materials or intermediate products or who distributed the finished products to final customers. Vertical integration enabled firms to own and co-ordinate the entire value chain, squeezing out middlemens’ profits.

The most famous example of vertical integration was the famed 1200 acre River Rouge complex at Ford in Detroit, where literally iron ore to make steel, copper to make wiring and sand to make windshields went in one end of the plant and finished automobiles rolled out the other end. Only the tires, made in nearby Akron Ohio, were manufactured elsewhere. Ford owned 700 thousand acres of forest, iron and limestone mines in the Mesabi range, and built a fleet of ore boats to bring the ore and other raw materials down to Detroit to be made into cars. 

Subsequent stages of industrial evolution required two cycles of re-organization to achieve greater cost discipline and control, as well as diversification into related products and geographical markets. Industrial firms that did not follow this pattern either failed or were acquired. But Chandler also showed that the benefits of each stage of evolution were fleeting; specifically, the benefits conferred by controlling the entire value chain did not last unless companies took other actions. Those interested in this process should read Chandler’s pathbreaking book: Strategy and Structure: Chapters in the History of the US Industrial Enterprise (1962).   

By the late 1960’s, the sun was setting on the firms Chandler wrote about. Chandler’s writing coincided with an historic transition in the US economy from a manufacturing dominated industrial economy to a post-industrial economy dominated by technology and services. Supply chains re-oriented around relocating and coordinating the value-added process where it could be most efficient and profitable.  Owning the entire value chain no longer made economic sense. River Rouge was designated a SuperFund site and part of it has been repurposed as a factory for Ford’s new electric F-150 Lightning truck. 

Why Vertical Integration Arose in Healthcare

I met Alfred Chandler in 1976 when I was being recruited to the Harvard Business School faculty. As a result of this meeting and reading Chandler’s writing, I wrote about the relevance to healthcare of Chandler’s framework in the Harvard Business Review in 1980 and then in a 1981 book Can Hospitals Survive: The New Competitive Healthcare Market, which was, to my knowledge, the first serious discussion of vertical integration in health services.

Can Hospitals Survive correctly predicted a significant decline in inpatient hospital use (inpatient days fell 20% in the next decade!). It also argued that Chandler’s pattern of market evolution would prevail in hospital care as the market for its core product matured. However, some of the strategic advice in this book did not age well, because it focused on defending the hospital’s inpatient franchise rather than evolving toward a more agile and less costly business model. Ambulatory services, which are today almost half of hospital revenues, were viewed as precursors to hospitalization rather than the emerging care template.

Policymakers Fell in Love with Vertical Integration:  Cost Containment by HMOs

At the time of my writing, vertical integration was a hot topic in health policy.  Federal policymakers’ attention was fixated on Kaiser Permanente, the largest vertically integrated actor in healthcare (then and now). Dr Paul Ellwood, a health reform advocate, persuaded the Nixon Administration to sponsor the HMO Act of 1973, designed to foster health plans modelled on Kaiser as a “pro-competitive” alternative to a government run national health insurance plan. 

Nixon’s 1973 HMO Act provided federal grants to foster HMOs as a vehicle for containing soaring health spending through market mechanisms. Many multi-hospital systems-Intermountain in Utah, Henry Ford in Detroit, Sentara in Virginia,  Geisinger in Pennsylvania, Humana, Lutheran Hospital Society of Southern California, Michael Reese and Rush Presbyterian Hospitals in Chicago-created their own HMOs during the 1970’s and early 80’s. As a result of these federal investments, HMOs covered 31% of the privately insured population by 1990.  

However, Kaiser-style health plans did not prosper in communities with strong traditions of independent (e.g. solo and partnership) medical practice. HMOs contracting with private physicians individually or through physician sponsored Independent Practice Associations (IPAs) dominated the space. IPAs enabled physicians to participate in HMOs without being employed by them or by hospitals, and to earn extra income through shared profits. 

The abortive Clinton health reforms during 1993-1995 provided a further push toward vertical integration. The almost inexplicably complex Clinton plan would have required the entire care system to be re-organized into competing Kaiser-like regional health enterprises that would receive a global payment for caring for all citizens in its region. The Clinton reforms foundered over concerns about restricting consumer choice of physicians and hospitals (and because no-one could understand exactly what they were trying to do). Nonetheless, hospitals launched a frenzy of physician practice acquisition and regional mergers to prepare for a ClintonCare which never came. 

Shortly thereafter, HMOs suffered an angry consumer and employer backlash (fanned by organized medicine and hospitals). Commercial insurers including Blue Cross plans, United Healthcare, Aetna, Humana and CIGNA displaced HMOs in the commercial market using broad network Preferred Provider Organizations (PPOs) that contracted with hospitals and doctors through, mainly, discounted fee-for-service payment. Today, HMOs represent only about 12% of private insurance enrollment, of which Kaiser’s members represent well more than half.  

The Obama Administration’s 2010 health reforms attempted to revive enthusiasm for vertically integrated healthcare by fostering “value based care”, a fluffy term intended to describe a raft new payment models that shifted risk onto provider organizations-hospitals, physician groups and others. The policy intent was that “value-based care” would serve as  a bridge to full risk/delegated risk capitation. Thirteen years on, “value-based” care remains largely unproven as a cost containment strategy, and the evolution to full-risk capitation has not occurred. 

Why Vertical Integration Hasn’t Worked in Healthcare:  What the Literature Shows

We now have had five full decades of broad experimentation with vertical integration strategies in healthcare. With the benefit of hindsight, Chandler’s pattern has not worked well in this field. There has been a lot of “consolidation” but no measurable efficiency gains. Costs have soared. Something about healthcare has fiercely resisted “industrialization”.

Healthcare mergers-horizontal or vertical- have not only not reduced cost, but may actually have added cost through high transaction costs and new and expensive layers of supervision. Vertical integration of physician practice into hospitals has increased costs, not reduced them. And  vertically “integrated delivery systems” that combined hospital, physicians and health plans in a single organization are neither cheaper nor of demonstrably higher quality than less integrated competitors in the same markets. As health systems diversified into non-hospital businesses, their returns on capital declined. The greater the investment, the greater the decline.  (For a comprehensive review of this literature, see my 2015 piece in integrated delivery networks).

Kaiser and Geisinger

The vertical exemplar, Kaiser, has grown to $95 billion in revenues in 2022.  However, it has remained largely a creature of the markets in which it originated (e.g the Pacific Coast) where over 80% of its members live.  It has taken nearly eighty years to grow to 12.7 million members (and about 2% of total US health spending), despite the bursts of federal enthusiasm. Kaiser suffered several years of major financial losses by attempting to become a “national brand” in the late 1990’s. Kaiser’s success was likely attributable to the market conditions in their original markets rather than its vertical strategy.

An ominous development for the vertical strategy was the recent failure of Geisinger, a 110 year old exceptionally high quality multi-specialty physician group-based health system with a significant health plan and ten hospitals in central Pennsylvania. Geisinger lost $842 million in 2022, and was losing $20 million a month on operations when it announced a complex, non-merger style affiliation with Kaiser through a new enterprise unpromisingly named Risant. At almost $7 billion revenues, it is difficult to argue that Geisinger had insufficient scale to prosper. Rather, Geisinger’s demise as a freestanding enterprise raises serious questions about the viability of the vertically integrated model.

The Heart of the Matter: The Structure of the Value Chain in Healthcare

The main problem with the vertical integration strategy in healthcare: professional judgment and the personalized care guided by it does not scale very well. People, not raw materials, energy or capital, are the vast majority of health costs. Healthcare’s value chain is fundamentally different and more complex than that in manufacturing or retailing. There is also greater variability and uncertainty at the point of service, as well as greater personal risk to the “consumer” than just about anywhere else in the economy.  Chandler’s pattern has also not held for the other professional services that dominate the American economy: education, law, accounting, consulting, etc.

Action is Needed

Vertical integration is a relic of the industrial age. It neither guarantees market dominance nor profitability in healthcare. Actors in the health system should adjust their strategies accordingly.

Keep What You Do Well or Which Would Be Missed If you Did Not Do It.  Lose the Rest.

Health care enterprises’ earnings and financial positions have been damaged by the pandemic, and restoring a positive return on the organization’s assets and people is essential. Health systems that have been adjusting to this new environment with layoffs rather than examining their portfolio of businesses. It is time to ask Peter Drucker’s famous question:  if we were starting fresh today, would we own all the assets and programs we have now? Do we do a good job of running them (e.g. generate both happy customers and black ink), and would anyone miss them if someone else did?  

Don’t just guess what you do best. Rely on empirical sources if available, whether federal HCAHPS patient survey results or Medicare STAR ratings, Leapfrog ratings, independently gathered Net Promoter Scores or internal surveys of clinicians and managers working in each service area, as well as a searching and fearless analysis of where positive cash flow is being generated.

Community needs are an important consideration. If your community would suffer if you stopped doing something, you can count the losses you incur by continuing to do it as part of your community benefit.   An important exception might be for teaching institutions, for whom the breadth of clinical experience required to train new physicians might dictate a breadth of service that does not make sense otherwise.  Those losses are covered in part by Medicare’s direct and indirect medical education supplemental payments.

Services that do not sustainably return your capital or generate a positive work experience for clinicians should be flagged for divestiture, unless you need to continue doing them for teaching purposes or are meeting a significant and demonstrable unmet community need. It makes no sense to own the tenth home care agency or the sixth chain of convenience clinics just to “feed” your clinicians referrals or to field a complete “continuum of care”.

Health Plans in Hospital Systems:  A Bridge to Nowhere?

The future of population-level risk in healthcare delivery enterprises is cloudy. It is true that some health systems saw windfall profits in their captive health plans from declining healthcare use during COVID provide a significant offset to their care delivery losses. But this was a once-in-a-century health emergency, not a “use case” for continuing to invest scarce capital (in a capital intensive business) in a business most care enterprises have struggled with.

Being a “payvider” is not vertical integration, nor is it an efficient vehicle for growing healthcare volumes. Health insurance and healthcare delivery are very different businesses, with dramatically different critical success factors. For care delivery entities, health insurance is unrelated and risky diversification with a high probability of negative investment returns. Unlike inside Kaiser, where the sole access point is enrollment in their health plan, there is “dysergy”, not synergy, between care delivery and health insurance. Success in the health plan business requires reducing both unit cost and utilization in care systems, as well as angering physicians, as Humana realized on its way to divesting its hospitals in the early 1990s.    

Overall, health plan revenues in a few health systems (UPMC, Sentara, Spectrum/CoreWell, Geisinger, InterMountain, Aultman, Providence/Oregon) are such a significant piece of overall revenues and so significant in key local markets that the plans are integral to the future of the enterprise. How many of these systems prop up their health plans’ profitability with “below market” payment rates and pay their physician groups on an RVU basis that incents them to do “more” not “less”  are interesting research questions.  

For organizations with a smaller footprint in health insurance or sputtering “risk models”, it is time for an agonizing re-appraisal of these investments. Those with successful managed care infrastructure may discover that accepting delegated risk capitation, (If, and a large if indeed, it is available in their market) is a better strategy than “owning the whole premium dollar”.

Stop Relying on Market Anomalies to Justify Physician Employment

Physicians are complex professionals, not pawns on a three-dimensional chess board. Aggrandizing the market for physician care is not a cost-effective means of leveraging other healthcare businesses, be it hospitals, health insurance or pharmacies. Subsidizing physician care as a “loss leader” is not vertical integration;  vertical integration was about capturing margins and leveraging economies of scale, not frantically grabbing market share. 

The rush to dominate the physician marketplace has created substandard working conditions for busy professionals and conveyed the impression that physicians’ services are a means to an end, not a valuable end in itself. It also fosters the toxic illusion that those physicians’ patients belong somehow to the “owner”, not the clinicians who are responsible for them. The push by major retailers like Amazon, CVS and WalMart into the physician business is likely to end in tears, both for the companies and the professionals they employ.   

Hospitals will likely lose the Medicare subsidies for employed physicians as federal budgetary conditions worsen.  It is also likely the FTC will also outlaw non-compete clauses in physicians’ contracts (though non-profit hospitals and systems may be exempt). Relying on coercive measures like non-competes clauses that compel physicians to leave your community if they resign (and laying claim to their patients as if they were your property) is a sad confession of a bankrupt corporate culture. Outlawing non-competes as FTC intends will probably damage the big retail “disrupters”, the contract physician providers like Envision and Team Health and the vast enterprise that is Optum Health more than it will damage hospitals and systems.       

Conclusion

Healthcare providers of all stripes must leave the industrial world behind. The value chains in health services are not physical, but rather comprised of human relationships, sustained by trust. Virtual care, the advent of AI in healthcare and consumer demand will require a flexible, 24/7 and care anywhere business model. Those who build the best modern clinical mousetrap will end up with a committed clinical staff and loyal patients. Healthcare isn’t about the building, or the brand, or scale. Surviving and thriving in the future will require engaged clinicians who foster trust on the part of their patients and the community.

Jeff Goldsmith is President of Health Futures, Inc. and a long time THCB Contributor. Jeff wants to thank the following individuals for comments on this writing: Tom Priselac, Andy Mueller, Stephen Jones, Steve Motew, Troy Wells, Kerry Shannon, Trevor Goldsmith, Nate Kaufman and Rebecca Harrington.

BY JEFF GOLDSMITH

Robert Frost once said,  “Home is where, when you have to go there, they have to take you in.”

Increasingly, in our struggling society, that place is your local full service community hospital.  During COVID, if it wasn’t your local hospital standing up testing sites, pumping out vaccinations and working double overtime helping patients breathe, we would have lost several hundred thousand more of our fellow Americans.  

But it wasn’t just COVID where hospitals leaped into the breach.    As primary care physicians’ practices collapsed from documentation overburden and chronic underpayment, hospitals took them in on salary.  If it wasn’t for hospitals, vast swatches of the northern most three hundred miles of the US and large stretches of our inner cities would be a physician desert.  Hospitals subsidize those practices to a tune of $150k a year to have a full service medical offering and keep their own doors open.  

As our public mental health system withered, the hospital emergency department  (and, gulp, police forces). became our main mental health resource.   Tens of thousands of mentally ill folks languish overnight in hospital observation units because, despite not being “acutely ill”, there is nowhere for the hospital to place them.  And as our struggling long term care facilities withered under COVID, those mentally ill folks were joined in observation by seriously impaired older folks too sick to be cared for at home.  As funding for public health has withered on the vine, hospitals have become the de facto public health system in the US.  

In a responsible society, those public health expenses would be funded directly as a system of social care, or paid for by local tax levies.  In the system we have, paying for all this rests on hospitals caring for a small number  of privately insured patients.  Their health coverage pays hospitals rates in excess of the actual cost of care for the covered and relatively wealthy folks in the community.   Private insurance is the real safety net in a health system which lacks both universal coverage and a commitment to public health as a social responsibility.
This is where the controversy over permitting more physician owned hospitals comes to rest.

There are over a \ hundred physician owned hospitals in the US.  Their number was frozen by the 2010 Affordable Care Act (aka ObamaCare), over concerns that increasing their number would destabilize our health financing system. This prohibition is being challenged 13 years later by folks who believe the “competition” between hospitals is good, regardless of the downstream consequences, and  would thus reduce society’s cost of care.  

Not all physician owned hospitals are alike.   Some have emergency rooms and take all comers.
Most do not.  Some service a full range of the community-regardless of their insurance coverage.  Most do not.  Rather, most physician owned hospitals focus on providing privately insured folks elective  imaging, surgery and other forms of intervention that generate large margins at relatively lower unit costs than the local community hospital.  Physician owners  get paid twice- once when they render the care, and again when they collect their partnership dividends at the end of the year, creating a compelling incentive to treat the marginally necessary cases.  
Caring for the “worried wealthy” is a much more profitable business than caring for the poor or the multi-functionally impaired chronically elderly. It is also cleaner, whiter, more orderly and less disturbing to patient ambience. You won’t find a lot of them in our inner cities, or for that matter, working class neighborhoods, let alone in small rural communities,     Catering more or less exclusively to the privately insured is actually  “skimming the cream” which provides the vital nutrients to the local community hospital. 

The smaller the community hospital, the more damage that cream skimming does.  

Perhaps a thousand rural hospitals are dangling by a thread post-COVID, and the loss of any of their patients to “exclusive” physician-owned facilities thirty or sixty miles away may be the difference between life and death for the hospital.   So the idea that “competition” from physician-owned hospitals will force community hospitals to lower their costs is a toxic illusion.  

Have circumstances changed in the thirteen years since ACA froze the development of physician-owned hospitals?   Yes,  circumstances have markedly worsened.   Despite ACA and COVID era coverage expansions, in 2022, hospitals in the US faced the worst economic crisis since Medicare and Medicaid were create in 1965. Some have recovered so far in 2023, but many have not.   The smaller the hospital, the harder it is to find clinical staff, purchase needed supplies and pay their bills.  

It is difficult to imagine a worse time to siphon off the tiny number of privately insured elective patients that cover the cost of hospitals’ staying open.  Re-opening the ACA’s ban on physician-owned hospitals would markedly worsen the economic circumstances of struggling rural and urban safety net, and damage the public health.  

Jeff Goldsmith is President of Health Futures, Inc. and a long time THCB Contributor.