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Health Policy

Health Care Market Distortion – by John McCall with contributions from Jack Militello and Jean-Marc Choukroun

Friedrich Hayek was convinced the markets provide the best means to order the world.  For him and his circle of economists, top-down planning is necessary but that no single group of planners are able to manage the complex of modern systems.  Therefore, the markets need to be free to organization the business flow of economic systems.  On the other hand, markets cannot be left to complete self-regulation.  Governments should exist to insure that markets function well.  Today we see the interaction of health care markets and government playing out on a dysfunctional path of failed legislation, escalating costs, and diminished coverage.

A recent New York Times article (Mankin, 7/30/17) notes that in Econ 101, students learn that market economies allocate resources based on the forces of supply and demand. Prices adjust to bring supply and demand into balance.  This usually works out well, but not in the case of health care.  Blame can be shared among all the actors within the health care system.  Yet, reigning in the culprits may do little good because of the way policy making as distorted the health care market itself.


Market distortion is defined as any aberration in market behavior due to influences, events, or policies that are not consistent with perfect market competition and rule of law.  We should pause and reflect on the numerous ways our system has been distorted, and ask if reverting to a “free” market actually serves our needs or further complicates what is already an elusive challenge.

Distortion Number One: Tax-free employer-provided health insurance

Employer-provided health insurance enjoys an exemption from taxation. This exemption includes income as well as payroll taxes such as social security and Medicare tax. While private individuals need to purchase health insurance with after-tax dollars, exposing their total income to income, social security, and Medicare taxes, employees of corporations providing health insurance enjoy a tax break. Just under 50% of the U.S. population (155 million) is insured by employer-provided benefits. A rough estimate of the value of that exemption is $250 billion annually.   Also, this group is now taken out of the exchange-based insurance pool, failing to mitigate broader risks.

Whether or not one believes this is a good or bad thing, it is certainly a profound distortion of the market. It allows employers to offer a reduced-cost benefit to employees that smaller businesses and private individuals cannot.  Often, people prolong their working lives in order to maintain health insurance benefits that would otherwise be unaffordable as retirees.

Distortion Number Two: Insurance Regulations

Health insurance is regulated at the state level. Individual states may have disparate regulations governing coverages, provider access, provider due-process, pre-existing conditions, and a host of other purviews. Legislation specifically empowers the states to regulate insurance, but there is no question that doing business across all fifty states and the District of Columbia, with varying fees, applications, and regulatory requirements increases the cost of health insurance countrywide. In many states, there are oligopolistic conditions where a handful of insurers dominate the state market and have effective barriers to the entry of competition.

Distortion Number Three: Taxpayer Funded Health Care

In the private insurance market, insurees pay insurers to manage the financial risk of health care events. Private insurance is true insurance, a risk swap. Medicare, Medicaid, and VA Health Care are not true analogs to private insurance. They are entitlement programs to provide health care cost coverage or services based on program eligibility. While Medicare assesses the insured fees to offset the cost of the program, the business model of each is significantly different from true insurance. These three programs constitute just over a third of the entire population, with the percentage rising each year as the population ages.

These programs are funded by the American taxpayer and effectively remove from the potential total insurance pool certain groups that would otherwise have difficulty finding or affording health insurance. As such, they distort both the economics of health care and the health demographics of the population, In effect, the federal and state governments become the providers of last resort. Conversely, the insured pool becomes more predictable, lower cost, and more profitable.

Distortion Number Four: Uninsured Health Care Provision Law

The percentage of uninsured in the U.S. is less than 10% as reported by the Kaiser Foundation for 2015. Does this mean that this segment of the population does without health care? In some cases yes, in some no. Health care providers are obligated by the Emergency Medical Care and Treatment Labor Act (1986) that prohibits all hospitals from denying emergency care to indigent or uninsured patients, and also prohibits public hospitals from denying even non-emergency care. As a result, uncompensated health care cost $84.9B in 2013, also reported by Kaiser Foundation. For public hospitals, these costs are often borne by local or state taxpayers. The costs become highly opaque, in that respect.

As a market distortion, this law provides a less than ideal safety net for all potential patients, especially during medical emergencies. The system maybe prone to abuse and the uncompensated costs are often uncollectable, requiring health care providers to fund through a different means.

Distortion Number Five: Agency Problems

Agency problems typically involve two parties where one is acting on behalf of, and in the best interest of, the other party. In normal economic transactions, there is usually a buyer and a seller, and the two parties agree to a product/service at a price, consummating a transaction. In health care, there can be three or more agents involved, which complicates the buyer-seller relationship.  For the typical insured party, the cost of insurance may not be all that transparent, particularly employer-provided insurance. The employer manages the insurance purchase function, administers a good deal of the claims process, and acts as an advocate for the employee during dispute resolution. The cost of care is patently opaque, as the employee and even the employer are not privy to the details of the contract negotiation between the insurance payer and the provider.

As a result, consumer behavior is altered. Patients want the best care available and want it quickly. Where conditions are life-threatening, patients want the freedom to choose life-saving and life-extending treatments and expect them to be paid for through their insurance or alternative coverage. Patients behave less like rational consumers in health care than in most other markets. The layer of insurance and agency insulates the consumer from the normal repercussions of economic transactions.

The consumer/patient is often in a position of not knowing what is needed and relying on health care professionals to make care-related decisions.  Services and tests may be ordered out of caution, not necessity.  Insures apply guidelines to cover access and its related cost.  This may lead to the consumer/patient to accept these terms with being affected by the cost.



There are other distortions in the health care marketplace, but these five appear to have a predominating impact.

When the health care conversation leans toward free market solutions, one needs to be very careful to remember the following:

  • There are very few, true free markets. Almost all markets are encumbered with regulations, laws, policies, and other externals that influence their behavior.
  • Very few markets behave like true, free markets. Almost all markets have some level of monopolistic, oligopolistic, or regulated monopoly behavior. Where barriers to entry are high, regulatory influence is great, and public interest/health are affected, there is likely to be less entrepreneurial behavior, at least in the short run.
  • True free market approaches (laissez-faire, caveat emptor) can result in failed transactions where one or both parties suffer. That suffering is how the market develops and refines. Is suffering tolerable in the health care market?

Imagine what the health care market would look like if we removed the distortions listed above. Take away the tax advantage of employer-provided health insurance and how many companies would get out of providing insurance altogether? What would happen if gradually all employer-covered insured became a part of the private individual insurance market? What would happen to insurance pools?

What if Congress decided to exercise the Commerce Clause and allow health insurers to market across state lines? Would the criteria selected for national implementation be the low cost bar, or the high cost bar? Would opening the gates provide a more competitive insurance market? Would the insured benefit? Or would we wind up with 3-4 major insurance companies dominating the market?

The federal government isn’t getting out of the health care business, but it can profoundly influence the rest of the market by how it decides to reimburse providers. Today, providers flourish with privately-insured patients, break even with Medicare patients, and lose money on Medicaid patients, generally. What if the government reduced Medicare benefits to the level of Medicaid? What would be the impact on providers?

What would happen to providers who carry a significant amount of uncollectable, uninsured receivables if other payers such as local and state taxpayers decide to not fund these debts? Would there be a sector shakeout putting public hospitals at risk?

As deductibles move higher and higher, and as patients slowly become health care consumers, how will the market be impacted? Will patients make more health care decisions based on economics?

Our evolving health care system will indeed shake out over time. That’s the predictable outcome of disruption and change. But when we consider how to change, alter, repeal, and replace ACA, when we think about how to move in the right direction toward a marketplace where people can get the care they need without breaking the bank, it’s likely that this market will always be encumbered with social policy and safety nets that limit free market approaches. Ideally, those distortions can be safeguards against excess, but not preclude innovation and entrepreneurship


Careers in Health Care – Skills Needed to Manage in Tough Times

pic050109.jpg The health care sector is not exempt from the financial restructuring affecting most industries. Health care managers have to think more strategically in order to cope with current economic trends but still have reason to be optimistic about the economic health of the sector.
Some current trends in our region include:
•Consolidation of facilities into large, integrated systems which are driven by cost controls.
•A decrease in patient volume due to high-deductible health plans that demand larger out of pocket expenditures from the consumer and to an unwillingness (or inability) of patients to take leave from work during these difficult economic times. As a result, elective and, perhaps, necessary procedures are delayed.
•Receivables are rising because providers are getting lower reimbursements from health plans and individual consumers are slow, or unable, to pay.
•Health IT projects are somewhat on hold due to uncertainty in standards and levels of government assistance.
•The health care sector has been growing at a slower rate than it has grown in the past and has experienced its first decrease in hospital workers since 2004.
Reasons to be optimistic:
•Health care reform is now a national priority with a commitment from the federal government to address it.
•Health care institutions are becoming more deeply committed to excellence in business practices and are using those business skills to complement clinical skills.
•Initiatives such as evidence-based medicine and comparative effectiveness research are bringing together stakeholders from across the sector to jointly address the ways to deliver higher quality at lower costs.
•More savvy health care leaders are emerging in the public eye. As a result, there is greater trust in proposed solutions.
The Health Care MBA at the University of St. Thomas recently sponsored a workshop on careers in health care. The panel was comprised of Brad and Cindy Chandler from the Chandler Group, an executive search firm that works in the health care sector; Liz Swanson, vice president of Human Resources at HealthPartners; and Linda Sloan, director of Graduate Business Services, Opus College of Business, University of St. Thomas.
We were particularly interested in the portion of the presentations and subsequent discussion that centered on the skills needed to manage health care organizations in these tough, uncertain times. The nature of these is no surprise, yet their presence in health management seems to be scarce. The most prominent skills are:
•Innovation – developing new ways to deliver better value in the health care system. Creating new products and services that draw the consumer into participation in their own care is a growing area. Consumer-based activities are a vital part of any marketing initiative, yet the challenge of consumer involvement in health care is unique because of the very personal nature of that involvement.
•Operational enhancement – finding and implementing models that better deliver the health care experience in ways that reduce costs and improve outcomes.
•Financial skills – risk management and debt collection are becoming more and more important in the current health care system. Understanding cost structures and demonstrating fiscal prudence—“the ability to do a lot with a little”– are critical skills.
•Technology development – data driven processes have to be blended with care delivery in a way that care delivery quality and patient satisfaction is improved.
•Leadership – change management is essential in tough times. People need to be properly focused and motivated to deliver quality outcomes while maintaining the financial viability of the health care system. Excellent communication and team-building skills are always crucial.
The perception of the panel was that these skills are scarce, but in demand. As health care providers are increasingly rewarded for providing value and creating efficiencies, we are confident that these skills will be needed more and more at all levels of health care organizations.
We are interested in comments from our readers. How can skills that are prominent in other industries be translated to health care? What are the obstacles to developing these skills to a greater degree in health care?
Jack Militello and Cindy Lorah
Health Care UST MBA


General Systems Thinking and Health care

In this post we will revisit some of the basic systems principles that underlie the functioning of the health care system today. To make effective change in any portion of this very complex system, the interactions of its parts must be understood.
There are five basic principles of an effectively operating system:
1. A system is greater than the sum of its parts and requires investigation of the whole situation rather than individual parts of the system.
2. Though each sub-system is a self-contained unit, it is part of a wider entity.
3. Every system is an information system and must be analyzed in terms of how suitable information is transmitted between units.
4. Open systems means high interaction with and between the system and its environment.
5. The purpose of the sub-systems must be aligned with the purpose of the system as a whole.
General Systems Theory
A primary developer of the concepts for general systems thinking is Russell Ackoff. His criteria for working with a system:
1. Systems are democratic organizations in which all voices should be heard and authority is collective.
2. Systems have an internal market economy where there are continued trade-offs among sub-sets of the system.
3. Systems are multidimensional structures designed by the allocation of resources.
4. Systems-based planning has to be interactive. Ends have to be clear before means are discussed.
5. Systems-based planning must have control systems in place to make the process manageable.
The Clinical System
The general systems thinking concept can be extended to health care. To improve health care operations, it is important to understand the systems that influence the delivery of care. Clinical care delivery is embedded in a series of interconnected systems (see figure).
The patient care microsystem is where the health care professional provides hands-on care. Elements of the clinical microsystem include:
• The team of health professionals who provide clinical care to the patient;
• The tools the team has to diagnose and treat the patient (e.g., imaging capabilities, lab tests, drugs); and
• The logic for determining the appropriate treatments and the processes to deliver this care.
Because common conditions (e.g., hypertension) affect a large number of patients, clinical research has determined the most effective way to treat these patients. Therefore, in many cases, the organization and functioning of the microsystem can be optimized.
The organizational infrastructure also influences the effective delivery of care to the patient. Ensuring that providers have the correct tools and skills is an important element of infrastructure. For example, the electronic health record is one of the most important advances in the clinical microsystem for both process improvement and the wider use of Evidence-based Medicine. Another key component of infrastructure is the leadership displayed by senior staff. Without leadership, effective progress or change will not occur.
Finally, the environment strongly influences the delivery of care. Key environmental factors include competition, government regulation, demographics and payer policies. An organization’s strategy is frequently influenced by such factors (e.g., a new regulation from Medicare, a new competitor).
Significant improvements in health care can be achieved when the change leaders base their strategy on both general and health care specific systems thinking.
(Additional information in this post provided by Dan McLaughlin)
1. On Purposeful Systems: An Interdisciplinary Analysis of Individual and Social Behavior as a System of Purposeful Events (Paperback) by Russell Ackoff and Fred Emery, Aldine Transaction (2005).
2. Figure Source: Ransom 2005. Based on Ferlie, E., and S. M. Shortell. 2001. “Improving the Quality of Healthcare in the United Kingdom and the United States: A Framework for Change.” The Milbank Quarterly 79(2): 281–316.
3. McLaughlin and Hays, Healthcare Operations Management, Health Administration Press, 2008


Is your strategy doing the job?

Financial pressures and the strong possibility of significant health care reform are forcing many health care organizations to reexamine their strategic plans. In this environment it is useful to review some of the key theories of strategic planning that may apply to your organization.
Henry Mintzberg, in Strategy Safari, provides a comprehensive review of strategy and defines it in terms of a number of differing management activities.
Strategy is a plan. It is a direction, a guide or course of action into the future, a path to get from here to there. There is a high level of intentionality in this definition.
“In planning, strategies result from a controlled, conscious process of formal planning, decomposed in distinct steps, each delineated by checklists and supported by techniques. Planning responsibility usually rests with the chief executive and execution responsibility with staff to which it is made explicit so they can pay attention to budgets, programs, objectives, etc.” –Mintzberg et. al. p. 58
Fully completed plans are usually handed down to staff from the board of directors, the CEO or analysts. The direction is usually firm and well thought through. Ideas have been tested and the plan is ready to go. A staff’s job is to implement the plan. Strategic thinking, left to an executive or management team, has been separated from executing the plan’s actions. As a result, this type of planning can be inflexible and creativity can be sacrificed for direction. The plan better be a sound one.
Most large health care organizations use this very traditional approach to strategic planning.
Strategy is a position. This involves the locating of particular products in particular markets. This is a deliberate approach to counter the positions held by rivals in the same markets.
“Strategy is the creation of a unique and valuable position, involving a different set of activities. If there were only one ideal position, there would be no need for strategy. Companies would face a simple imperative – win the race to discover and preempt it. The essence of strategic positioning is to choose activities that are different from rivals’. If the same set of activities were best to produce all varieties, meet all needs, and access all customers, companies could easily shift among them and operational effectiveness would determine performance.” -Porter p. 68.
Positions are usually defined in generic terms and tend to be directed by universally understood rules or laws of competition. Michael Treacy and Fred Wiersema, in The Discipline of Market Leaders, use the generic positioning categories: best cost, best product and best service. While limited in addressing issues that are organizationally unique, this generic positioning framework can be very useful in providing a broad view of a firm’s strategic relationship with its rivals.
Walk-in retail clinics are an example of this strategic approach with their focus on “best cost.”
Strategy is a pattern. This model is evidenced by a consistency of behavior over time. There is a high level of reflection in this definition and the implication is that strategies are emergent from the firm’s core experiences.
Planning and positioning are both deliberate activities that focus on controls so that the intentions of senior managers are realized. Strategy can also be emergent, growing from a rich understanding of the firm’s core competencies and how those competencies can be expanded into new markets or developed into new products and services.
Pattern recognition usually demands a democratic planning process where those closest to the business can determine where direction can be taken.
“To invite new voices into the strategy-making process, to encourage new perspectives, to start new conversations that span organizational boundaries, and then to help synthesize unconventional options into a point of view about corporate direction – those are the challenges for senior executives who believe that strategy must be revolution.” – Hamel, p. 82
Pattern recognition and group learning may need a distinctive brainstorming component. In these cases two heads are better than one. Facilitated planning meetings play a significant role in this type of strategic management.
The Mayo Clinic is an excellent example of this strategy. Mayo has always valued group practice, teamwork and a systems approach to care. This consistent approach has supported Mayo’s growth from a small rural practice into an internationally renowned resource.
Which approach is right for you is dependent on your history, culture and leaders. I will address other aspects of strategy and leadership in future posts.
Mintzberg, et al. Strategy Safari: A Guided Tour Through the Wilds of Strategic Management. New York: Free Press, 1998.
Porter, Michael and Elizabeth Olmsted Teisberg. Redefining Health Care: Creating Value-Based Competition on Results. Boston: Harvard Business School Press, 2006.
Treacy, Michael and Fred Wiersema. The Discipline of Market Leaders. Cambridge: Perseus Books, 1997.
Hamel, Gary. “Strategy as Revolution.” Harvard Business Review, July-August 1996.