Blog Post

The Wasteful Middle

The dysfunctional fragmentation of healthcare is quite possible our most obscene expense

The U.S. spends $3.4 trillion on healthcare every single year. While this may be old news for many, where the trillions of dollars are going and why is jarring.

A colleague recently shared an article with me that had all of the trappings of 2018 high-tech hype. It referenced blockchain, a stable of impressive collaborators, and the need to disrupt the regulatory state (all the hallmarks of a game I like to call healthcare innovation buzzword Bingo.)

Buried in the article was a fascinating figure: $2.1 billion. While it may be a drop in the bucket of healthcare’s trillions, it’s still a big number. But what it represents is the kicker: $2.1 billion is the amount of money spent annually to maintain and update provider directories to meet regulatory requirements.

That is simply shocking.

It becomes even more troubling when you consider what else can be done with that amount of money. California recently invested $2 billion to combat statewide homelessness — that is to get half a million children, women, and men off the streets and into a home with a roof over their heads. $2 billion is also just shy of what it cost to sequence the human genome not so long ago, a discovery that has forever changed biology. So how can the healthcare industry spend the same amount each year on something as pedestrian as physician directories?

The answer is not so simple. Nowadays, we face a morass of health plans driven by varying online marketplaces, narrow network offerings for employers, and the ongoing Medicare/Medicaid revolution. The exploding number and types of plans have long since overwhelmed antiquated systems for tracking physician contract movements (movements which are themselves Byzantine and can take place without their knowledge). As patients switch plans (both voluntarily and involuntarily), they are often met with the realization that their current doctor is now “out-of-network,” for example. And in this vortex of complexity, both physicians and patients continually wrestle with the impossibility of knowing who and what is covered. Thus, the birth of a $2-billion industry ­–– one that does little more than update in-network and out-of-network status.

This example is endemic of a larger issue plaguing the U.S. healthcare system. While the delivery system offers bits of value, there are countless other $2-billion industries dedicated to the interface that we’ve come to recognize as healthcare. Whether it be the pharmacy benefit management (PBM) industry, the claims processing and revenue cycle industry, the network contracting industry, or the “know which provider is in your network” industry — the dysfunctional fragmentation of healthcare is quite possibly our most obscene expense. Rather than simplifying the lives of physicians and patients, these compartmentalized industries raise overall costs and drive healthcare further away from any glimpse of hope for efficient, transparent, and equitable services.

The toll that these intermediary industries take on an already complex service are not inconsequential — they shade and shift profits, control delivery and distribution chains, and complicate business models. If we avoid the debate over whether these intermediaries provide a useful function within the current system, nothing will change

Most patients and physicians are unaware of how and why these layers exist — or the precise costs buried within company premiums and detached payment and point-of-service models. We lack the conceptual framework needed to solve for all these bit players. The bank-breaking cost of American healthcare does not stem from physician fees, nor can it be attributed solely to the cost of the drugs. This common misperception leaves people and politicians angling for change that does not promise systemic transformation. The fact is that the mature business models of these manifold healthcare-related intermediaries produce significant cashflow, and thus present a defensible position to keep functioning. The “middle” may be wasteful, but it’s also the status quo. So, what can we do?

Thankfully, there are some movements afoot to shift the paradigm.

  • Blockchain technology, for example, may be overhyped of late, but the concept does allow multiple players to collaborate and achieve vertical integration by eliminating several of the middlemen. Early applications for lowering costs of inventory management and preempting drug shortage imbalances across a region.
  • Large “disruptive” collaborations, like the Amazon/JP Morgan/Berkshire venture, also hold promise: Amazon simplifies supply chains to lower costs for the benefit of users. JP Morgan utilizes financial engineering and services to stabilize monetary flow and lower costs. Berkshire is a giant in the insurance business and provides a monetization model for the partnership.
  • Unusual marriages, like the Walmart and Humana pairing, albeit expensive, may amount to vertical integration and ultimately lower costs. How? Next to labor, healthcare is often the highest expense for businesses — especially for companies like Walmart that employ masses. And a managed Medicare opportunity creates the highest profitability for those able to limit utilization and cost exposure.

Regardless of which intermediary costs are the focus, there is one thing at the center of all these movements: collaboration. In complexity theory, it is understood that altering any single variable will affect all others. Thus, changing the rules for a few players in the delivery chain will impact all others. It is not enough to disrupt intermediaries only for the consumer, or just for the physician, or the hospital, or the payor. Overall health system disruption requires collaboration between unfamiliar stakeholders to effect real change.

We can no longer afford to masquerade the function of intermediaries as vital. In reality, these cogs are having costly consequences on patients, physicians, providers, and productive value-adding vendors. If we aim to address the wasteful middle of healthcare, new collaborations will be key and we must embrace them. To transform healthcare, we should invite and act upon good leadership and best practices from other industries — and not cling so tightly to deeply engrained routine and systems just because they’re entrenched in our sector. Healthcare innovation buzzword Bingo might be a game worth playing.