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The Health Insurance Demand Problem

Posted on July 11, 2014 I Written By

Kyle is Founder and CEO of Pristine, a company in Austin, TX that develops telehealth communication tools optimized for Google Glass in healthcare environments. Prior to founding Pristine, Kyle spent years developing, selling, and implementing electronic medical records (EMRs) into hospitals. He also writes for EMR and HIPAA, TechZulu, and Svbtle about the intersections of healthcare, technology, and business. All of his writing is reproduced at kylesamani.com

A family friend was recently admitted to the hospital after a traumatic motorcycle accident in Colorado. He’s not in great condition, but he’s hanging in there. In light of having just written this post about the cost of highly acute care, I couldn’t stop pondering about his health insurance.

Health insurance is a bizarre creature. Unlike other forms of insurance, people actually want to consume what they’re insured against, defying the very premise of the insurance model!

Confused? Let’s dive in.

No one wants to consume traditional insurance

People never file claims for traditional forms of insurance unless something bad has happened, like car or home accidents, natural disasters, or death (covered by life insurance). In some of these cases (like minor fender benders), the insured customer often elects not to file a claim in order to avoid a premium increase. When people do file traditional insurance claims, that means something sufficiently bad has happened, and the insurance system kicks in place to recoup the damages.

People do want to consume healthcare insurance

Healthcare insurance is a wildly different animal. Only a small percentage of total hospital admissions are highly acute, catastrophic cases. A large majority of the care delivery system services non-catastrophic cases, from preventive care to counseling, scheduled (and elective) surgeries, and skin rashes, for example. Patients want as much (non-catastrophic) healthcare as reasonably possible, and they want their insurance companies to pay for it.

This is a classic principal-agency problem. The person making financial decisions isn’t bearing the cost of those decisions; in fact, the person making financial decisions is empowered to blindly spend without thinking. To make matters worse, many healthcare providers encourage patients to consume costly diagnostics and procedures with little regard for value, knowing that insurance companies will pick up the tab.

Realigning incentives

As it currently stands, this system breaks most of the basic assumptions of capitalism: the principal-agency problem, pricing information, and ability to compare producers/providers.

Reducing demand and utilization of healthcare resources is impossible. Since patients are currently incentivized to demand unlimited care without caring about cost, supply will always find a way to satisfy demand. So, how can we realign the incentives to fix the system?

The only way to reduce demand is to make patients accountable for their own healthcare expenses. With the insurance customer suddenly conscious of the cost and value of their subacute healthcare consumption, providers will be incentivized to compete and offer lower costs.

Thus, insurance companies should provide patients “catastrophe-only” plans. These plans would fully and generously cover highly acute care needs, like trauma, cancer, or stroke care. However, like a vehicle insurance plan without comprehensive coverage, the cost of treating the medical equivalent of a keyed car (e.g. a purely speculative blood test) would fall to the individual.

As CEO of a company in the healthcare space, it pains me to know that I’m contributing to the healthcare incentive problem by providing employees with a traditional healthcare plan. But until healthcare insurers offer catastrophe-only plans, patients will continue to blindly consume. In fact, even the Affordable Care Act failed in this light; the national and state-based exchanges don’t offer a single catastrophe-only insurance plan. They are all bundled and are ripe for unbundling.

You Better Stay Healthy, or Else…

Posted on June 23, 2014 I Written By

Kyle is Founder and CEO of Pristine, a company in Austin, TX that develops telehealth communication tools optimized for Google Glass in healthcare environments. Prior to founding Pristine, Kyle spent years developing, selling, and implementing electronic medical records (EMRs) into hospitals. He also writes for EMR and HIPAA, TechZulu, and Svbtle about the intersections of healthcare, technology, and business. All of his writing is reproduced at kylesamani.com

As I read Jonathan Bush’s new book, Where Does It Hurt?the most salient problem that Bush discusses is that hospitals can’t effectively measure or attribute their costs. As a result, they can’t make good decisions since they don’t know how to attribute costs and revenues.

Although this has been widely known for sometime, the implications of this are particularly interesting. Since hospitals don’t know how much it costs to actually deliver care (especially multi-faceted, complicated care), their various revenue streams are effectively subsidizing their expenses in an almost random manner. Accounting for costs and attributing revenue is nearly impossible.

Bush notes that more focused care centers – such as standalone labs, imaging centers, and minute clinics – can afford to offer many of the same services as hospitals with equal or greater quality at a lower cost. They can achieve this because they have dramatically less operational overhead than hospitals and have staff performing the same core basic functions repetitively. Indeed, practice makes perfect.

There are hundreds of companies all over the country building healthcare practices based on this very premise: labs, imaging, procedures, home health agencies, ASCs, birthing centers, cath labs, urgent care, retail clinics, and more. Focused-centers are slowly eating away at hospitals by providing better services at lower costs.

Today, hospitals make enormous profits by dramatically marking up routine procedures and services. But that won’t continue forever. As the ACA pushes patients towards high-deductible plans so that patients act more cost consciously, they will seek the more affordable alternatives. Patients will not agree to pay a $300 ER copay and $2000 MRI when the urgent care center down the street offers a $99 copay and $400 MRI. As patients make better decisions, hospitals will lose some of their easiest, most profitable revenues: extremely marked up lab tests, images, procedures, etc.

What will hospitals be left to do when their easiest, most profitable revenue vanishes? They will shift focus to what they do best: performing miracles. Hospitals will compete for high-end services such as-complex surgeries and intensive care. However, because routine services subsidize the hospital’s overhead, they currently offer surgeries and intensive care at a “discount.” When hospitals can no longer subsidize their complex care with routine care, hospitals will raise prices for the highest acuity services that can’t be performed elsewhere. If you thought acute sickcare was unaffordable, think again. The cost of complex care is going to grow dramatically in the coming years.

Why Is It So Difficult To Reduce The Cost Of Care?

Posted on April 17, 2014 I Written By

Kyle is Founder and CEO of Pristine, a company in Austin, TX that develops telehealth communication tools optimized for Google Glass in healthcare environments. Prior to founding Pristine, Kyle spent years developing, selling, and implementing electronic medical records (EMRs) into hospitals. He also writes for EMR and HIPAA, TechZulu, and Svbtle about the intersections of healthcare, technology, and business. All of his writing is reproduced at kylesamani.com

By refusing to pay for readmissions within 30 days of discharge from a hospital, Medicare has sent a strong message across the healthcare industry: < 30 day readmissions should be avoided at all costs. As a result, providers and vendors are doing everything in their power to avoid < 30 day readmissions.

This seems like a simple way to reduce costs, right? Well, not quite…

The vast majority of costs of care delivery are fixed: capital expenditures, facilities and diagnostics, 24/7 staffing, administrative overhead, etc. In other words, it’s extremely expensive just to “keep the lights on.” There are some variable costs in healthcare delivery – such as medications and unnecessary tests – but the marginal costs of diagnostics and treatments are small relative to the enormous fixed costs of delivering care.

Thus, Medicare’s < 30 day readmission policy doesn’t really address the fundamental cost problem in healthcare. If costs were linearly bound by resource utilization, than reducing readmissions (and thus utilization) should lead to meaningful cost reduction. But given the reality of enormous fixed costs, it’s extremely difficult to move down the cost curve. To visualize:

Screenshot 2014-04-14 23.46.37

Medicare’s < 30 day readmission policy is a bandaid – not a cure – to the underlying cost problem. The policy, however, reduces Medicare’s outlays to providers. Rather than reduce (or expand, depending on your point of view) the size of the pie, Medicare has simply dictated that it will keep a larger share of the metaphorical pie for itself. Medicare is simply squeezing providers. One could argue that providers are bloated and that Medicare needs to squeeze providers to drive down costs. But this is intrinsically a superficial strategy, not a strategy that addresses the underlying cost problems in healthcare delivery.

So how can we actually address the fixed-cost problem of healthcare? Please leave a comment. Input is welcome.

Healthcare Pricing, Wiki Style EMR Editing, and Quantified Self Data – @nickdawson Edition

Posted on August 4, 2013 I Written By

John Lynn is the Founder of the HealthcareScene.com blog network which currently consists of 10 blogs containing over 8000 articles with John having written over 4000 of the articles himself. These EMR and Healthcare IT related articles have been viewed over 16 million times. John also manages Healthcare IT Central and Healthcare IT Today, the leading career Health IT job board and blog. John is co-founder of InfluentialNetworks.com and Physia.com. John is highly involved in social media, and in addition to his blogs can also be found on Twitter: @techguy and @ehrandhit and LinkedIn.

It’s time again for my roundup of interesting EMR, EHR, and Healthcare IT tweets. Today’s tweets all come from Nick Dawson. I don’t know Nick really well, but see him online quite a bit. Plus, I did a Google Plus hangout with him after TEDMED. He’s a very interesting guy and these tweets illustrate some of his thinking.


I’ve been hearing more and more of these cases and many of them are not even international. I’m not sure if the shift is because of the growth in high deductible plans, but there’s definitely a shift happening as far as awareness of what healthcare really costs. I hope we see a sea change in this regard.

Also, don’t underestimate the medical tourism part of this. I think there are going to be regions of this country and around the world that are going to battle for medical procedures. Eventually we’ll know that certain regions of the country are known for certain medical specialties just the same way we know Texas has oil and Nebraska has corn.


Just the thought of this will make many doctors stomach’s churn, but I like the concept. It would definitely need to be refined so there was a well defined chain of who edited what and when. Not to mention some sort of method for knowing when something was modified and by who. A novel concept, but not one I think we’ll find anytime soon.


I love to read stuff like this. I wonder if Nick pays for the action that happens. This is what really has doctors scared. Nick saved a visit, but the doctor missed out on the revenue that visit would have generated. It’s also why we need to start reimbursing doctors for online visits.

Major Healthcare Issues I Think IT Could Help Solve

Posted on November 16, 2012 I Written By

John Lynn is the Founder of the HealthcareScene.com blog network which currently consists of 10 blogs containing over 8000 articles with John having written over 4000 of the articles himself. These EMR and Healthcare IT related articles have been viewed over 16 million times. John also manages Healthcare IT Central and Healthcare IT Today, the leading career Health IT job board and blog. John is co-founder of InfluentialNetworks.com and Physia.com. John is highly involved in social media, and in addition to his blogs can also be found on Twitter: @techguy and @ehrandhit and LinkedIn.

Yesterday and today I spent my time at the Accountable Care Expo in Las Vegas. It was a small intimate event, but those that were there were some really smart people who knew a lot about healthcare and about accountable care organizations. It was quite the education for me. Plus, as with most learning, as I learned more about ACOs I realized how much more I still don’t know.

During the conference I started to think about something I’d heard quoted quite a few times. At this conference they said, “3% of patients are consuming 60% of healthcare dollars.” I’ve heard a lot of different numbers on this. I remember hearing that 10% of patients have 80% of healthcare costs. Regardless of the exact numbers, I’ve heard this enough to believe that a small number of patients drive a abnormally large portion of the healthcare costs in this country.

When you think about this, it becomes quite clear that these “expensive patients” are likely those with chronic conditions. That’s the easy part. The harder part is that I’ve never seen anyone analyze the makeup of the 3-10% that are driving up healthcare costs. For example, what if 90% of those “expensive patients” are chronic patients over the age of 65. Solving this problem would be very different than if we found that 50% of expensive patients are diabetics under the age of 20.

How does this apply to health IT? First, health IT should be able to sort through all the big data in healthcare and answer the above questions. How is anyone going to solve the problems of these “expensive patients” if we don’t really know the makeup of why they’re so expensive?

Second, I believe that some health IT solutions can be implemented to help lower the costs of these chronic patients. I’ve seen a number of mHealth programs focused on diabetes that have done tremendous things to help diabetic patients live healthier lives. That’s a big win for the patients and healthcare. We need more big wins like this and I think IT can facilitate these benefits.

Since this post has taken a slight diversion away from my regular topics, I wanted to look at another thought I had today about healthcare. This tweet I sent today summarizes the idea:

All of the numbers I’ve seen indicate that hospitals are the most expensive part of healthcare today. Hospitals are just expensive to run. They have a lot of overhead. They work miracles regularly, but they come at a cost. While more could always be done, I feel safe saying that many hospitals have squeezed out as much cost savings they can out of the hospital. This means that in order to save money in healthcare we can’t strip more cost savings out of hospitals. Instead, we need to work to keep patients from going to the hospital.

There are a lot of ways to solve this problem (I heard of one payer putting instacare clinics next to ERs to save money), but the one I hear most common is the need for primary care doctors to have a more active role in the patient care. If they had a more active role once a patient is discharged from the hospital, then fewer patients would be readmitted to the hospital.

How then can we structure a program for primary care doctors to be paid to keep their patients from being readmitted to the hospital? That’s the million dollar question (literally). Everyone I know would happily pay a primary care doctor a half a million dollars in order to save millions of dollars in hospital bills. That extra money might also help us solve the primary care doctor shortage that I hear so many talk about.

I can’t say I have all the solutions here, and I don’t expect these things to change over night. Although, I think these will be important changes that will need to happen in healthcare to lower costs. Plus, I think IT will facilitate an important role in making these changes happen. Imagine something as simple as an HIE notifying a primary care doctor that their patient was admitted or discharged from the hospital. This would mean the doctor could go to work. Now we just need to find the right financial mechanism to be sure they act on that notification.

I’ll be chewing on these ideas this weekend. I look forward to hearing other people’s thoughts on these issues.