In Big Med: Megaproviders and the High Cost of Health Care in America, Dranove and Burns examine the rise of these megaproviders and their role in the deterioration of health care as well as its rising costs. They reveal that these megaproviders are ever present: Your local hospital is likely part of one, as are your doctors.
Brett LoGiurato, senior editor at Wharton School Press, sat down with Dranove and Burns to discuss their book.
The conversation has been edited for length and clarity.
Brett LoGiurato: What spurred you to write the book?
David Dranove: Ive written several research papers on the topic over the years, and I felt the research had finally reached a point where it warranted a book. I started writing down an outline and I realized that, while I know the economics side of this, I dont know a lot about the management side, but I happen to know somebody who does. I called Rob, and thats how we ended up doing this together.
LoGiurato: Americans tend to blame drug companies, insurers, even the government, for high costs, but you write that the lions share of responsibility belongs with the health care providers. How did it get this way?
Lawton R. Burns: Health care costs have been rising at a fairly steady rate for a long, long time. Earlier on, people usually pointed the finger at technology. And its still the case that it plays a role. But attention has shifted at least over the last two to three decades to the providers, particularly the large hospital systems.
Dranove: As one of the surveys that we cite in the introduction shows, in the minds of consumers, the rapacious beasts are the insurers and the drug companies. Perhaps because theyre faceless. While you may pass by your local hospital, you dont see the insurance company that is processing the claim, making sure the provider is not billing for an unnecessary procedure or perhaps keeping the provider from doing an unnecessary procedure. You dont see any of that. Its a black box and, lets face it, the drug prices have gotten really, really high. When you hear that a new cancer treatment costs $500,000, thats scary stuff.
We could get rid of the insurance sector, we could eliminate all profits from the drug industry, and wed still be vastly more expensive than any other country in the world. David Dranove
And it doesnt help when a guy like [former hedge fund manager] Martin Shkreli comes along, and he starts buying up cheap drugs and jacking up the prices 10,000%. You start to think that thats the industry. My next-door neighbor works for a drug company. Hes in a lab every day for 10 hours trying to find a cure for diseases. And hes joined by hundreds of others at his company alone. Its an expensive proposition. And people dont understand how expensive it is, and so the industry gets the blame. And then the other thing is, how could my doctor ever be responsible for everything? We still love our doctors. We dont put them up on the pedestal as much as we once did, but they are still, along with our nurses, perhaps the highest respected of all professions, and we could never consider that they might be responsible for high costs or poor outcomes.
LoGiurato: Whats an example of something Americans blame on drug companies or insurers thats actually the fault of the system at large, and these gigantic providers?
Dranove: If you look at the statistics on U.S. health spending, we spend in the commercial sector around three to four times as much per capita as a similarly aged person would spend in any other developed country. And [we] blame that on high drug prices and on insurance companies, on the high salaries of insurance executives, et cetera. As we point out in the book, we could get rid of the insurance sector, we could eliminate all profits from the drug industry, and wed still be vastly more expensive than any other country in the world. And the reason is that our medical providers deliver far more care than is necessary and charge far higher prices than is necessary for that care. A popular expression is that the most expensive medical technology is the physicians pen although nowadays it would be the physicians tablet computer.
Burns: Fifty-three percent of all health care spending in this country goes to a hospital or a doctor. So, if were looking for high costs as well as rising costs, theyre the bullseye on the target.
LoGiurato: You talk in the book about the way the mega providers operate and how theres a vicious cycle in the health care system. How does that affect physicians and their morale?
Burns: Physicians get shoved further down the organizational hierarchy because as these systems come together, they develop bigger bureaucracies, bigger headquarters, and the people in the front office (executives) are even more removed from the people on the front line (physicians). The latter are a bunch of unhappy campers.
Dranove: You cant blame the physicians for seeking refuge in larger organizations, but when they do that, as Rob said, they become less satisfied with the day-to-day work that theyre doing. They may have more financial security, they may have more guaranteed hours, but theyre not as happy.
LoGiurato: Lets talk solutions. Can you give us a picture of what could be done to fix the problem?
Dranove: On the competition policy side, a lot of these are simple remedies. A lot of states still have certificate-of-need laws that block innovative forms of competition. There are quite a few states that have passed certificate-of-public-advantage laws, which allow hospitals to bypass federal antitrust scrutiny. Those are flat-out mistakes. Those are politically motivated. They have nothing to do with serving the public interest.
On the antitrust side, its important to think about the need to preserve alternative forms of delivery in health care markets. Ill give you an example. United Health Groups Optum division is buying up physician practices in many parts of the country. I dont know if thats going to prove successful or not. Im not sure if they know if its going to prove successful or not. Its a bet that theyre making. A lot of people feel we shouldnt allow that. Thats a big powerful insurer buying up physician practices, and Im thinking, thats an experiment. Thats a new way of trying to do things. Lets see if it works.
Burns: We also need some more energized state attorney generals to step in and monitor some of these deals.
LoGiurato: What about on the management side? What can these organizations do better?
Burns: The basic strategy that everybody is following is just get big. Thats it. You ask CEOs whats your strategy, its get big. The surprising thing is theyre now not afraid to say that. Everybodys saying it, so theyve got political cover. Do you remember Al Davis, the former owner of the Oakland Raiders? Hed say, just win, baby. Well, thats what the boards and the CEOs are telling their staff. Just grow, baby. And so thats the strategy. But to what end? Its not to benefit society. Its basically to pursue some self-interested aims of these systems to survive, to grow, to dominate markets, make more money, to spend it on themselves.
The basic strategy that everybody is following is just get big.Lawton R. Burns
Dranove: Many of these organizations have drunk the Kool-Aid that big actually will translate into value. And they need to take a step backward and ask, how exactly are we delivering this value? Because size becomes its own end if you dont question the theory that size by itself generates value.
LoGiurato: Is there anything that the past year has done to change the system itself? Weve seen a world in which vaccines are free for everyone and the U.S. is waiving patent protections. Weve also seen some political solutions being discussed that include Medicare for All and a public option.
Burns: Good question. There are two definite benefactors of this past year. One is the drug companies who all of a sudden have gone from the doghouse to the White House by virtue of coming up with these vaccines in a very short period of time. The publics perception of drug companies has changed pretty quickly. The other benefactors were the insurance companies because nobody went to a doctor or a hospital [for routine care], and so the insurers collected all the premiums and then amassed all of this money. Maybe they are using it to accumulate and employ doctors inside their bureaucracies as hospitals have done. God knows what theyre going to use it for.
Dranove: In a way, the big megaproviders were talking about also win. They suffered losses like anyone else, because people postponed all the elective procedures that are so profitable. But they had war chests to survive. The number of independent players who have gone bankrupt or nearly bankrupt last year was astonishing, and there are more smaller providers than ever before that are seeking the shelter of big organizations.
LoGiurato: Has the past year just made the problem even worse?
Dranove: Yes. Once we get through this and we return back to a world where everybody seeks out health care the way they normally did, were going to be shocked once again at how expensive health care is. Medicare for All has been on the back burner. Once people see how expensive health care is, thats going to come up to the fore again. And even if we have Medicare for All, nobodys talking about a government takeover of hospitals and doctors, which means that youre basically going to have a totally politicized system where the government is trying to regulate a handful of powerful providers.
So the problem of the megaprovider is going to be larger than ever, once the dust has settled.
LoGiurato: You mention private corporations like Amazon and Walmart moving more into health care and related business. What is your take on whether that will help move us toward a solution?
The problem of the megaprovider is going to be larger than ever, once the dust has settled.David Dranove
Dranove: Lets start with Haven, or what was once called Haven, which was Jeff Bezos, Warren Buffett, and Jamie Dimon. If you Google that venture from two or three years ago, whenever it started, they were going to change health care. The three biggest business geniuses of all time, and now theyre going to turn their attention to health care. Watch out everyone. And they ran with their tails between their legs.
Burns: The general answer to your question is that in the long term, these tech companies may have a big impact. In the short term, they probably wont. Partly because of the overhype of these companies, but also because they have either no track record or a lousy track record previously in health care. Many of them have very specific capabilities: Amazons capabilities are in logistics; none have real abilities in health care delivery. So, its not clear that thats going to solve a lot of our problems in the short term.
Dranove: What may be more interesting is what some of the insurance companies are doing, because theyre huge and they have huge amounts of data. United has been most upfront about that, but Cigna and Aetna have been making waves about transforming their relationships with providers. And they have huge experience with data. Weve seen Aetna get involved with CVS, and now CVS is starting to integrate with care providers. There are potential disruptors out there. We dont think theyre people who are going to come in from the outside wearing the white hat and saving the day.
LoGiurato: Last question: Whats the big lesson that you want people to take away from the book?
Dranove: Be better shoppers for health care. Insist on value. Make legislators feel comfortable going after big health care provider organizations.
Burns: Another message is bigger is not better.
Dranove: And we want the systems themselves to do a little bit of introspection and understand this. Have we set up an organization thats designed to deliver value, or have we simply set up a big organization?
Burns: One last comment I would have is that structure is not the solution. These big mega providers are structures. Thats not the solution to our health care industrys problems.
This article was first published in Knowledge@Wharton