Parkinson’s Law affirmed.

The best example of that occurred in California for the pricing of knee joint replacements. I don’t recall the local details, but the ultimate pricing at certain hospitals decreased by nearly 50%. Managing market share, net revenue can be offset by price transparency for certain isolated situations, but not for persons with an unusually high load of chronic disease.

Given the usual combination of medications for coronary disease, your health should last a very long time abetted by a trustworthy medical team. The resurgent use of carefully chosen CABG interventions is another example of the inherent adaptability of our nation’s healthcare, isolated may it be.

William Palmer’s point is a key one. And in my experience the non profit insurers go along with the “programitis” of the hospitals with the rationalization that it is good for the community….but we need to keep in mind the Blues are a cost plus business….More cost more revenue and higher compensation packages for hospital and insurer executives….with the wonderful self-congratulatory feeling of altruism and community responsibility.

The thing about the 10% of the population that accounts for 70% of healthcare costs in any given year is that many of them are not the same patients from one year to the next. For example, it’s now been 18 years since I had my CABG. Since then, I’ve had three pretty expensive years, including the year of the CABG, and 15 inexpensive years where medical management was all I needed along with a stress echo every couple of years and a basic physical. All of my drugs are generics and about $1,100 per year altogether.

However, I do think price transparency would be helpful especially for hospital based care that can be scheduled in advance. Alternatively, reference pricing for the services, tests and procedures that lend themselves to the concept would also be useful.

The Power Law Distribution concept defines our fundamental social dilemma for healthcare: 10% of the population uses 70% of health spending, 35% of the population uses 25% of health spending, and 50% of the population uses 5% of health spending. It is unlikely that the current Paradigm for the healthcare of the 70% spending group can be changed with our current strategy for healthcare reform. Unless we have a national mandate to ameliorate the transition process of many citizens between the 5% spending group and the 25% spending group, there is no reason to anticipate a real change in the 70% spending group (other than rationing by a centralized, authoritarian and coercive financial process).

Bigger isn’t always better. It’s management’s responsibility to know what their organization is good at and stay within what Warren Buffett calls its circle of competence. The for profit health insurance companies, for example, want to earn enough to at least cover their cost of capital. They don’t want to get bigger just for the sake of getting bigger. While United Healthcare recently expanded into urgent care centers and ambulatory surgical centers, you won’t see them buying hospitals in the U.S.

As it happens, for hospitals, there are surprisingly few economies of scale outside of purchasing supplies, spreading advertising costs and, perhaps, raising capital. They have to pay the same market prices for labor as their smaller competitors. The main incentive for them to get bigger is to enhance market power enough to raise prices and drive profitability that way. If anything, there are probably diseconomies of scale from the more complex management infrastructure required to run a large organization.

UC Berkeley had set up a graduate school in hospital administration. Its graduates were all over the Bay Area in mid-management and these people were smart and aggressive and wanted to make their marks. They wanted large comprehesive hospital facilities and health systems that they could write research papers about and boast about to their peers. .

E.g. they would plan for weeks to develop strategy to approach the local CON (certificate of need) bureaucracy. Meetings with physicians were very carefully orchestrated, nothing being left to chance.

My point is to see hospitals as human creations no different from any new endeavor or architectural structure or work of art. As such there is a surfeit of pride and ambition and ego. They want to grow big too–just as does an insurer or a plan or a pharmaceutical firm.

My point is that all these vectors are working against the forces now trying to constrain costs; and they are very forceful and very fundamental dynamics in human psychology.

The second issue is that there are fewer and fewer procedures that need to be performed in a hospital. This is a huge challenge to the long term sustainability of the hospital business model. The number of licensed hospital inpatient beds is steadily declining and it appears that trend will continue for the foreseeable future even as the U.S. population ages.

So, it appears to me that hospital systems need to scale down their number of inpatient beds and put more capital into stand-alone imaging centers and ambulatory surgical centers and charge payers rates that fully reflect the much lower cost of operating those facilities. Perhaps they can get paid even more than they do now for organ transplants and other procedures that can only be done in a hospital. It’s understandable that payers have an economic interest in driving as much care as possible out of hospitals.