Kada Health News & Insights

Kada Health speaks on rising healthcare costs on Relentless Health Value podcast

What happens when there is a reliable market for popular goods or services? Prices tend to be rationalized, and supply and demand curves meet at an equilibrium point; as a result, we have fair prices.

However, for those aforementioned supply and demand curves to remain balanced, they require a series of transactions that trial and error themselves into reasonable prices for buyers and sellers.

Contract law states that both buyers and sellers must be aware of the price and quality of goods at the time of the transaction. This process validates a transaction, which essentially is what a market is, a bunch of transactions.

But what if you don’t know the price you’re buying or selling at, especially in healthcare transactions? How does a non-market affect health systems?

Kada Health’s Senior Advisor of Quality, Safety, Performance Improvement and Population Health Dr. Sam Flanders and I were recently invited to speak with Relentless Health Value to discuss three problematic healthcare myths:

1. There is a functional healthcare market where carriers control the prices of consolidated health systems.
2. Hospitals simply cannot afford to operate when prices paid by commercial contracts are less than 150% or 200% of Medicare. There must be cost shifting for local employers, otherwise, they’d go out of business from a clearance sale.
3. When prices go down, so does quality.

Let’s uncover the real story behind these assumptions.

Myth #1: There is a functional healthcare market.

False. We’re closer to a nonexistent market, not even a broken one. Functioning markets must have free and fair competition, but there’s no competition in healthcare pricing because nobody understands it. Even with the latest efforts for price transparency, we’re still nowhere near a place where people can use price to factor into their decision-making.

An example I like to give is this: Imagine MasterCard or Visa have high purchasing power and negotiate the price of milk at your grocery store. However, you won’t see the line-item price, you’ll just get one bill at the end of the month with all your grocery expenses included. When your bill gets higher, MasterCard or Visa will offer a program to help you reduce your milk consumption, rather than lower milk prices, but their help comes with additional fees.

Unfortunately, that is similar to how healthcare works.

It's nearly impossible for a patient or a physician to really know the prices for a service, much less what the patient will have to bear. We need transparency, but we also need price simplicity so that doctors and patients can factor that into their decisions for care.

Organizations may negotiate with payers to reduce prices in one area but may try to include different pricing models or payment methods in other areas. It ends up being a confusing market of messy negotiated rates.

Myth #2: Hospitals cannot afford to operate at less than 150% or 200% of Medicare

False. Kada Health put together RAND data to share 22 hospitals in the U.S. that are top quality, nationally rated and can get by on less than 200% of Medicare. Operation sustainability depends on whether the hospital can do the correct kinds of improvements that are needed to work on both quality and cost.

Hospitals with small margins can either be working or truly struggling. The reality is you can have small margins if you’re good at spending all the money that is given to you. Without a competitive marketplace, it’s impossible to discover what’s possible.

There are hospitals that do very well at 160-180% of Medicare, but they’re not being rewarded by the market for that level of performance, when they should be.

To get the ball rolling, said Dr. Flanders, there has to be a mechanism to incentivize hospitals to want to offer competitive pricing. Once that happens, the impetus for quality and cost improvement will be very transparent and we can focus on other advancements.  Until then, it’s low-hanging fruit that hasn’t been harvested.

Myth #3: When prices go down, so does quality.

False. Since right after World War II, thanks to the work of Dr. W Edwards Deming in Japan and later in the U.S., we know that improving quality lowers costs and that lowering costs is often less expensive; there’s no quality barrier.

We’re big proponents of the Toyota model, which Dr. Flanders and I have successfully implemented in healthcare organizations that we’ve led. It changes the way you approach performance improvement for both cost and quality because it empowers frontline workers to be able to be much bigger participants than they typically are in most health systems.

One thing that we often forget about hospitals is that they’re large bureaucracies and there are hundreds, even thousands, of problems in health systems everywhere that need to be dealt with, but you can’t have a central quality team or department to be aware of all of them. The Toyota structure is conceptually very simple: every employee needs to do their job and perform it well every day. But it’s also important to be thinking and making changes on how to improve the way their job is done.

The people that are doing the work know how to improve it if you let them, encourage them and coach them. Those practices make an enormous difference and give you continuous improvement. It’s like a giant flywheel: if you get the entire organization pushing on it, the flywheel begins to turn faster and faster.

Challenges and Solutions in Health Systems

In an inefficient heath system, the real achievement comes from creating a culture that focuses on two things: making it easier for clinicians to deliver care and making it easier for patients to receive care.

It doesn’t matter if your team is composed of thousands of people, you must focus on helping make it easier for doctors, nurses and caregivers to deliver care. This goes back to the Toyota model and engaging with frontline workers to make improvements. In the end, productivity allows an organization to drive down the cost of care and ultimately lower its prices.

It's equally important to make it easier for patients to access the care system and move through it. Anyone who has been through the care system knows it can be a very challenging and difficult process.

You need an organization where both leadership and staff are focused on those two things in addition to all the other work that needs to be done to run a high-quality, efficient organization. Unfortunately, as health systems get bigger in centralized decision- making, they have a tough time achieving these goals.

Implementing the Toyota Model

The Toyota Model is about teaching people to be great problem solvers and unleashing them to do their job and support them from top leadership. Toyota has a principle that no one will ever lose their job because of improvements. They use improvements to grow without adding costs, and that's how the model should be used and never in a way to cut staff or to just chop expenses, said Dr. Flanders.

It's important to remember that the approach to making it easier for caregivers to see patients and patients to receive care is a cultural aspect. But the tools that Kada Health have used with the Toyota Model is all at the frontline, not in a conference room. It's working with frontline staff, seeing problems and hardwiring the changes that make the most sense.

It's a dramatically different approach than almost anywhere else; yet, it has been essential to our success in performing at high levels with low commercial rates.

The Toyota Model in Action

Dr. Flanders shared a personal experience about using the Toyota Model with a hospital:

“Our CT scanner was running near max capacity, and we were close to needing a replacement. So, we took a closer look at how our small team of x-ray technicians was managing workflow. Turns out, they were juggling both imaging and patient transport, and that created big gaps when the scanner sat idle.

“We ran a quick test: as soon as one patient left the room, the next rolled in. Just like that, we nearly doubled throughput without adding to the techs’ workload. All it would take to sustain that pace is a dedicated transporter, making it far less expensive than investing in a new million-dollar machine.

“If everyone in the organization is working with clarity around their goals and using the Toyota principles, and if they're empowered to make appropriate changes locally when they can, a lot of the changes occur without the leadership team knowing about them or authorizing them, and as it should be.”

The Role of Employers in Healthcare Pricing

The U.S. has an employer-sponsored health insurance model. Employers shouldn’t rely on others to make changes; they must take the reins and take control. We believe that this initiative will create competition and dramatic improvements in the country’s healthcare value. But it's all based around employers working within metropolitan markets to create price competition. They must reject third-party negotiating prices and set them through a two-party negotiation model, which is how our whole system is based today. Employers within any single market could achieve 15%-25% reductions in prices just in the first year of working together.

We discussed this with other national leaders at the National Alliance Annual Forum in early November. We shared a model that employers can use in their markets to achieve this without narrow networks or excluding any providers, but by creating incentives for team members to utilize lower cost providers and letting market forces flow naturally.

Final Thoughts

There are so many healthcare issues that need to be addressed, but pricing needs to be prioritized before pivoting elsewhere. By adopting the Toyota method within your organization, you’ll see a drastic difference from small, meaningful changes.

At Kada Health, our mission is to make exceptional healthcare affordable and accessible. Everything we do is built around anything that leads to that goal for our country’s system. We serve providers with advisory services and help implement programs to help achieve results that we’ve seen are possible.

If there’s one thing we’d like to say to employers, it’s this: you can restructure your market, take your reins back and refute the common myths used to discourage you.

If you’re ready to see how we can help your organization and learn more about employer-led solutions, contact us today!

Listen to our episodes on the Relentless Health Value podcast:

Part 1: https://relentlesshealthvalue.com/episode/ep490-the-problem-show-3-problematic-hospital-myths-including-there-is-a-healthcare-market-with-shane-cerone-and-sam-flanders-md

Part 2: https://relentlesshealthvalue.com/episode/ep492-the-solutions-show-how-to-run-a-high-quality-hospital-at-143-of-medicare-with-sam-flanders-md-and-shane-cerone

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