Tilting at Windmills, Healthcare Style…and the Case for the First Principles of Value For Money in the Health Economy

The story of Don Quixote recounts the adventures of a would-be gallant knight who imagines that he is doing noble deeds to rescue people in distress. Virtually everyone who encounters Don Quixote quickly realizes that he is a fool. 

The story of healthcare innovation is of legions of Don Quixotes – benefits brokers, strategy consultants and Beltway policy shops – believing their (often imaginary) “solutions,” or rather PowerPoint presentations, would solve the problems in the U.S. healthcare system. The difference is that, despite repeatedly failing like Cervantes’ protagonist to deliver tangible results, these modern-day Don Quixotes are revered and lavishly remunerated, a not insignificant portion of that oft-cited “healthcare waste.” 

Over the past few months, Counterpoint has addressed a few of these fantastical quests: 

• The reality of value-based care, a reimbursement scheme that has created extraordinary wealth for a select group of physicians and businessmen but has never delivered value for money to employers or the Federal government; 
• The erroneous presuppositions of the market power of “monopoly” providers based on a pre-algebraic formula of market concentration;  
• The cottage industry of self-referential and self-reverential “innovators” with nothing to show for their efforts. 

Of course, the most quixotic policy notion of the last 50 years is that the Affordable Care Act (the “ACA”) would constrain healthcare costs. Instead, the ACA codified a “cost-plus” revenue model for commercial health insurance. By requiring that medical loss ratios be 80-85%, the ACA capped profits on commercial health insurance at 15-20%, perversely incentivizing health plans to allow costs to increase in order to increase profits. 

The Case for (a Return to) the First Principles of Value For Money in the Health Economy 

Instead of quixotic schemes that enrich benefits brokers and strategy consultants, America’s healthcare system needs to return to “first principles”:  

“If we never learn to take something apart, test the assumptions, and reconstruct it, we end up trapped in what other people tell us — trapped in the way things have always been done. When the environment changes, we just continue as if things were the same. First-principles reasoning cuts through dogma and removes the blinders. We can see the world as it is and see what is possible.”¹ 

Stakeholders in the health economy often tout being “consumer-focused” without understanding the “first principles” embraced by every business that is truly consumer-focused: how do we deliver value to our customers?  

In the health economy, a return to first principles theoretically begins with the Hippocratic Oath. Everyone remembers most of this phrase: “I will do no harm or injustice to them.”² Although other portions of the Hippocratic Oath are no longer in vogue, even a return to the principle of “do no harm” would account for the variable of safety in the healthcare value equation. 

In 2009, I co-authored the Hospital Value Index™, which defined value this way: 

“Value in healthcare is the same thing as value with any other commodity, product or service. Value is the combination of what you receive in exchange for what you paid and the likelihood that you will want it again. The elements of healthcare value include price, quality, efficiency, effectiveness, outcomes, process, experience and on-going perception, to name a few points on our radar. Inherent in value is the cost required to create the good, and the relationship of that cost to its price, demand and availability.  

Some people believe that paying $150,000 for a Bentley automobile is a good value because of the quality of materials and craftsmanship involved in production, as well as its brand reputation. Other people think that buying ten Bic pens for $3.00 is also a good value, because Bic pens are reliable, efficient and easily replaced. Value in healthcare is difficult because patients are more like Bentleys (they are all different) than Bic pens (they are all the same). Yet a laboratory lipid panel processed by a Bioscanner 2000 with automated output, normal range benchmarks and results reporting is analogous to the Bic pen, demonstrating that some components of healthcare are quite commoditized.”  

Commoditization in the health economy has accelerated since 2009, with generic pharmaceuticals and LASIK surgery being notable examples. A more recent example is  Amazon’s “Prime Day 2023” offer of 24/7 virtual care for $12/month through One Medical. The increasing commoditization is catalyzed by the fact that numerous healthcare goods and services are relatively indistinguishable in quality: an ankle x-ray, a blood draw, a telehealth consultation, etc.  

As a general principle, commodity goods and price transparency are frequent companions. CMS and Congress are currently myopically focused on hospital price transparency, although CMS recognizes its shortcomings:  

“In both of those final rules, we stated that our policies requiring public release of hospital standard charge information are a necessary and important first step in ensuring transparency in healthcare prices for consumers. We also recognize that the release of hospital standard charge information is not itself sufficient to achieve our ultimate price transparency goals. The regulations are, therefore, designed to begin to address some of the barriers that limit price transparency, with a goal of increasing competition among healthcare providers to bring down costs.”³ 

Fortunately, another part of CMS’s Transparency in Coverage initiative – health plan price transparency – reveals an existing market rate for both inpatient and ambulatory healthcare services. As we have previously demonstrated, quality – using CMS mandated reporting measures – is tightly correlated, while negotiated rates for the same plan for the same service in the same market are widely divergent.