It’s [Still] The Prices, Stupid

Inefficient markets create price differentials for identical goods. These price differentials frequently occur among markets dominated by oligopolies. Taking advantage of market pricing inefficiencies is known as arbitrage. Commodity traders frequently arbitrage by buying low and selling high. In inefficient markets for perishable goods, such as airline tickets, hotel rooms, or medical imaging, there is no opportunity to re-sell these goods. Thus consumers of these goods, such as health insurance companies, will attempt to buy at the lowest possible price to maximize value. Today we see many apps and websites, such as Expedia, that engage in improving these markets in airline and hotel industries. Stroll Health is one company attempting to scale this behavior to medicine.

Our current Hospital Outpatient Department (HOPD) payment schedule is one example of an inefficient market where identical CPT codes are priced very differently based on whether they are provided in a grandfathered hospital outpatient department or a freestanding outpatient medical center. Hospital accountants will justify this higher payment schedule by attributing social expenses such as police and training programs. Other HOPD supporters will claim they deliver relative value through higher quality (outcomes) that justifies (often disproportionally) higher prices. Yet increasingly “illusions about value: that we know what it means and can measure it, that the same things matter to all patients” are being voiced.

If the value numerator (outcomes) in healthcare is increasingly viewed as subjective and difficult to measure, we are left with no choice but to default to quantifiable metrics such as price and access. Policy discussions along the dimensions of price and access tend to make academicians anxious, as they fear “commoditization” of healthcare; but ironically the academic bastions of board certification and Maintenance of Certification have already made healthcare fungible, fungibility being one of requirements of a commodity. While commoditization continues to be used inappropriately in the medical field, it is time to accept that much of what physicians do is best differentiated by price and access, certainly not geography.

Hospitals, with support from organized medicine, are clinging to geographic HOPD structures in-order to boost their revenues. This strategy is not sustainable long term as markets and prices tend to be efficient. Sticky prices tend to equilibrate. Arbitrage often disappears.

Future healthcare strategy, or the creation of sustainable competitive advantage, must focus on customers; that is the needs of patients, providers, and payers. Access to compassionate and meaningful patient centered care, with respect for patients’ or their employers’ financial wellbeing is what the marketplace craves. The current trend of consolidation and monopolistic pricing practices from hospital systems may fail if patients become willing to travel or new competition enters a market. Thus, hospitals and medical societies who wrap their strategies around unsustainable market inefficiencies will face difficult futures as customers increasingly find value exclusively in price and access to services.

Yet as networks become increasingly narrow, access as an operational priority will fall away. Strategy will be distilled to price. To paraphrase political strategist James Carville “It’s the [prices], stupid.” Healthcare leadership can no longer ignore fundamental economics or our national mood of economically motivated political populism. Leaders who cling to grandfather’s HOPD business model will find themselves struggling as the working middle class becomes increasingly price sensitive in all markets. As the healthcare economy consumes a disproportionate amount of blue-collar employers’ and employees’ income, the sustainable strategy is to provide a fair price. Finally, because of narrow networks and limited substitution effect, any paranoia regarding perfect competition and a “race to the bottom” in healthcare is not likely to happen.

2017 was a hard year for retailers who could not match Amazon’s strategy of aggressive prices and ubiquitous access.   There is nothing special about hospitals and organized medicine that differentiates them from the failing brick and mortar retail sector. One hundred seven year old retailer L.L. Bean understood the central tenant of business, whether dealing in boots or biopsies, when he stated, “Sell good merchandise at a reasonable profit, treat your customers like human beings, and they will always come back for more.”

Pilots Are Not Physicians

It has been quite trendy over the past few years for physicians to use aviation as a metaphor. Perhaps it began with the book The Checklist Manifesto.  Recently this poor metaphor has extended to an article published by the American Medical Association. Tweets like the following are not uncommon.IMG_0695As someone with a commercial pilots license and a few hours in the cockpit I can claim with absolutely certainty that if a pilot is performing diagnostics, it’s time to look for an airport and prepare to land.

The biggest difference between the two professions is that professional pilots receive an immense amount of training in making “go/no go” decisions. This training is summarized by one of my favorite Dirty Harry quotes, “A man’s got to know his limitations.”

During commercial pilot training, pilots learn the limitations of themselves, machine and weather. Pilots learn to stay on the ground during times of internal psychological conflict. In pilot vernacular this psychological friction is called ‘getthereitis’ and FAA mandated training raises this friction to a conscious level. Most living pilots have experienced strong bouts of getthereitis at some point in their flying careers. Furthermore, among pilots there is small cohort who refer to themselves as ‘blue sky pilots’ and there is mutual respect from other pilots who take greater risk.  All good pilots embrace Dirty Harry’s mantra with a high level of primacy because their lives and their passengers’ lives depend on it.

This FAA mandated training in decision-making, and fact that a professional pilot’s life is as much at risk as their customers’, will forever differentiate pilots from physicians. Unlike physicians, pilots have no moral hazard when they make life and death decisions. Whereas, if a physician makes a poor decision it is their patient/customer who pays the price.

Poor decisions on the part of a physician may result in physical or emotional harm to a patient, yet there is an economic side too. As discussed in the Wikipedia link on moral hazard, information asymmetries between an agent (physician) and principal (patient) may also perversely incentivize physicians to make poor economic decisions. The concept of informational asymmetries is a known source of economic inefficiency and market failures. If physicians have a financial interest in a test or service it is all too easy to bias advice, after all physicians are human too.

Just as pilots are trained to objectively evaluate their physical health, skills, weather and machine; physicians must combat moral hazard and informational asymmetries by first recognizing when they exist.   When recognized, physicians should inform patients as best as possible. Across industries, “an educated consumer is the best customer.” This is why few airline customers will grumble about flight delays when they are framed in the context of safety.

Unlike pilots, physicians take an oath to “do no harm” not because they are morally superior, but because physicians can get away with causing harm.  When faced with a difficult patient decision I have no problem explaining options and then leading a patient with “If you were me (or my wife/sister) here is what I would recommend.”  In my opinion the Golden Rule transcends ethical pitfalls and physician oaths, it also acknowledges moral hazard in a way patients can understand.

Until physicians close the moral hazard gap between themselves and patients, they need to stop using the laudable safety and training record of the aviation industry as a benchmark. Professional pilots deserve more respect, their lives hang in the balance every day.

Value of New Technologies in Imaging

During the 2017 annual meeting of the Pennsylvania Radiological Society, there were outstanding presentations on machine learning from Dr. Eliot Siegel, innovative models of early detection and improved staging in pancreatic cancer by Dr. Elliot Fishman, and discussion of value by Dr. Richard Duszak. When looking at the potentially transformational jumps in technology discussed, it would also be wise to examine the economic viability of this technology by asking two questions.

  1. Who are the customers?
  2. Is there a willingness to pay?

Healthcare may be one of the few industries where customers are not the same stakeholders as payers. Assuming these technologies deliver on the promises of improved detection of cancer and more appropriate imaging for customers (i.e. patients), are hospitals going to trade cash, or net income, for this technology?

This economic question is where the concept of value becomes critical. Value is a wedge, a simple machine, used to split costs of the technology from hospitals’ willingness to pay. More value packed into the technology makes the transaction easier. There are a few possible outcomes.

Hospitals that are financially stressed simply will not have the ability to acquire this new technology. They will choose the status quo, which has no impact on their financial statements, and continue outsourcing the interpretation to a group of radiologists.

However, hospitals that are in better financial shape may decide that the new technology gives them a competitive advantage in areas of marketing, quality, or throughput. This competitive advantage will have to add more value than the cost of acquiring the technology PLUS the loss of revenue through less testing and therapy. This business proposition may be difficult for some C-suites.

Finally, if a hospital is taking long term risk on the lives covered, such as our Veterans Health Administration, then the cost side of the value equation becomes much more compelling. A risk-based organization will have an added incentive to adopt new technologies, not only to improve quality and utilization, but also to reduce the costs of caring for the covered lives.   By aligning the customers’ desire for sustainability of wellness with the hospitals’ need for financial sustainability, these new technologies are likely to thrive in select environments.

Time For A Expanded Mission At The CDC

As a fiscal conservative I am loath to see the expansion of our federal government, yet we may be at one of those rare inflection points in our country where such expansion is appropriate.  With the recent appointment of Dr. Brenda Fitzgerald as head of the Centers for Disease Control, it is time to reflect on one of the biggest heathcare threats in our nation; the financial wellbeing of our hospitals.

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The CDC Mission webpage displays a medical xenophobia that is pervasive throughout the industry.  It describes an organization filled with brilliant microbiologists and policy wonks, with no regard for finance or economics.  This is expected due to the fact that the CDC is handed their financing from Washington, DC as well as the structure of our educational system.  Across town the Emory Masters of Public Health program does not list Finance or Economics as part of their curriculum, which is I am sure typical, nor is there room in medical education for such topics.

Reuters is a rare organization who has acknowledged concern over the riskiness of the hospital finance environment, concluding “I don’t know that it’s quite in the category of frothiness, but it’s getting close.”   In an environment of rising interest rates and declining quality of credit, hospitals may have significant difficulty rolling their debt forward in a manner that allows sustainable operations.  Within this financial backdrop there is significant likelihood of the current crisis in rural hospitals escalating.

The environment in Maine is perhaps a typical example.  Maine Medical Center in Portland may be the only viable healthcare organization in the state, partly due to the population density and local wealth.  As I-95 winds north, hospital systems in Augusta and Bangor are looking increasingly weak.  Both systems seem caught in a downward spiral of “junk” bond downgrades.  Further weakness is likely due to the “negative outlooks” and continued losses from operations.  Augusta may be the first capitol city without a hospital.

Across the river in Augusta lies Togus VAMC.  If civilian employees at Togus can not get access to quality healthcare locally, employees may flee. If so, Togus may fail in its mission to deliver quality care to veterans.  Weakness in hospital finances may lead to contagion within other public and private organizations within those communities.  VHA is in a unique position to offer healthcare to their employees and prevent any healthcare access contagion among their stakeholders.

At the turn of the 20th century, our banking system suffered cycles of defaults that wiped out the savings of Americans.  In order to stop these losses, the FDIC was born and since then not one depositor has lost their principal.  The FDIC has a small army of regulators who monitor and evaluate the financial health of banks.  If one is failing, they move swiftly to ensure that depositors have access to their money, and they are busy.  Today, even the most hardened conservative will have trouble arguing against the value of this government intervention.

As Dr. Fitzgerald enters the honeymoon period of her new position, it may be time to reevaluate the threats to our nation’s health.  The greatest threat may not be an African microbe, waning acceptance of vaccines, or data that is not big enough.  The greatest threat may be one of perception.  The CDC needs to consider all threats, even ones previously ignored such as finance and economics.

It may be time for the CDC to duplicate the work done by the FDIC, and insure access to hospitals and healthcare services remains available for all Americans.  As hospitals fail, it is time for our government to step in and transfer those assets to a more viable organization.  A more liberal mind might even suggest nationalizing distressed institutions into a fabric of federal hospitals, to allow for basic and primary medical services to be provided in those communities, complete with a helipad to whisk patients away to a center of excellence.  Whereas our central bank is the lender of last resort for something as ephemeral as money in a bank account, there is no reason our federal government can not grant the same priority for an asset that is much more real, our health and wellbeing.

Sunk Costs in Medical Education

Physicians commit an immense amount of time, money and energy into their training.  The typical physician attends 4 years of postgraduate school, followed by an apprenticeship of 3-8 years.  The cost of the time alone is tremendous, but when factoring in tuition, lost wages, taxes, and interest; the break even point can be well into a physician’s 40’s or 50’s.  Is it any wonder that physicians have a certain attitude of entitlement when it comes to wages; or panic, anxiety, and occupational dissatisfaction in an increasingly unstable medical economy?  These concerns are perfectly reasonable from the perspective of psychology, but not economics.

Courses in economics or finance are not required of physicians and thus few understand the concept of sunk costs.  When faced with a career decision today, past educational expenses are irrelevant.  Framing effects and loss aversion are two important behavioral economics concepts that trick smart physicians into making stupid career decisions.  For example, they may not choose to pursue a dream outside of medicine because all the work they put into becoming a physician would be “lost”.  What sunk costs demonstrate is that time and energy are already lost, in any moment an individual should be mindful of their best choice.

The value of education is immense and arguably the greatest investment one can make in themselves.  However, the 30 year liability of school loans is a very concrete anchor.  This anchor may negatively bias physicians’ future career decisions, and it is unfortunate when an unhappy physician feels compelled to keep a higher paying job to recuperate sunk costs.

While interviewing medical schools I met a Neurologist dying from ALS (of course he specialized in neuromuscular disorders during his career).  While gasping for air on his Passy-Muir valve, his advice to me was to choose a career and never complain about that choice.  This sage’s paternalistic expression of agonal energy and choice not to be bitter, left an impression we can all learn from.

Undergraduate students need to understand the concept of sunk costs as well as the cognitive dissonance that burdensome student loan debt creates.  If only to have increased awareness of the system and its pitfalls when loved ones become sick the value of a medical education is tremendous.  A young physician is owed nothing by society, the risk they have taken in becoming a physician is entirely their own.  From a temporal perspective, students need to structure the value of their education well beyond the fiscal liability of their student loans.   They need to understand that the time and energy spent in achieving that education can never be recovered.  Ultimately, happiness and career satisfaction is entirely within their personal control.

Keep Everyone Close

The origins of the idiom “keep your friends close but keep your enemies closer” is not well known.  It might have been said by Sun Tsu or Niccolò Machiavelli.  The phrase was used by Michael Corleone in the Godfather movies.  The concrete meaning is to watch your enemies closer than your friends but like all idioms there is a less literal meaning, a more sublime and humble interpretation.

I believe humans have poor insight into who our friends or enemies are. Friends sometimes disappoint us, but people we discounted as unfriendly will surprise us with acts of generosity, kindness, and support. We tend to have too much confidence in our ability to perceive others’ motives and are often overly judgmental.

“‘Closer’ than what?” is the question.  The answer is not closer than our friends, but in a more enlightened sense, closer than we might think we have time for or feels comfortable.  In an era of hyper-partisanship and commercialized vitriol in the media, investing in a diverse group of friends is the strategic option. Keeping everyone close is the wise choice.

Beware of Rising Interest Rates

Interest rates are the most important economic influence on our economy; they reflect the value of money. Entities with excess money become lenders. Borrowers, such as hospitals or larger healthcare systems, exchange money from lenders based on this interest rate. During times of normal interest rates these rates include a premium based on the creditworthiness of the borrower, which is known as the risk premium.

In the past decade we have seen record low interest rates as central banks have used monetary policy to stimulate their economies. Most recently, and for the first time in history, some central banks have been using negative interest rates with the hopes of stimulating supply of money and economic activity.[1]

In low interest rate environments there are significant economic risks including:[2]

  • Hurting pensioners who are dependent on interest from savings
  • Encouraging speculative activities as there is cheap access to money
  • Indiscriminate lending by insurance companies, pensioners, and institutional investors who need income (aka “reach for yield”) and ignore risk premium
  • Increased assumption of debt by hospitals, firms, and governments

The last three items are important as we consider the economic health of the hospitals or radiology departments in which many of us work.

In an article on the debt crisis rolling from the real estate industry into other markets, The Economist notes, “there is plenty of evidence to suggest that rapid debt build-ups are the hallmarks of periods of indiscriminate lending that eventually end in tears.”[3] Should interest rates start to rise, rates of risky loans are likely to increase disproportionally as lenders become more discriminating thereby adding higher risk premiums on top of the already higher interest rates. Hospitals with debts that must be refinanced in the next few years may find themselves in a difficult position.

Furthermore increasing government regulation, uncertainty with the Accountable Care Act, or decreasing revenue from MACRA add to any pain of future interest rate increases as these additional burdens reduce operating revenue. Warren Buffet encapsulates this difficult dynamic when he states, “When the tide goes out you can tell who’s been skinny dipping.” The tide is already receding in our rural hospitals were 700 may be at risk for closing.[4]

On a national scale, in an uniquely American Shakespearean tragedy, one of our largest for profit hospital networks swallowed “a poison pill” as they struggle to refinance $2.2B in long-term debt due in 2018.[5] As Community Health Systems struggles to roll their debt forward, they plan on selling up to 25 hospitals[6] two of which have been in Easton and Sharon, Pennsylvania this past February.[7]

Case in Point

A medium-sized medical center in rural New England opened a new hospital in November of 2013, with the help of a $280m bond offering. At the time of the initial sale, these bonds received a middle-to-low investment grade rating from Fitch and Moody’s. The new hospital is aesthetically beautiful with a light-filled, spacious entrance, glass, tile, wood panels and a pagoda garden, featuring a waterfall and fountain. The floor plan is efficient, there are new computers and scanners, and the building is efficient to heat and cool. Yet, the annual cost to service this debt is approximately $20 million per year.[8]

Does $20 million per year buy you an improved business? Certainly the new building is a huge marketing asset. Yet does it help with management, cash flow, accounting, or organizational strategies? Probably not, most of these functions could be performed in a trailer with a dial-up modem.

Does $20 million per year buy you improved financial stability? The short-term trend for this institution is not good. In FY15 the hospital lost $24 million from operations. In 2016 they just broke even.

Does $20 million per year buy improved quality? Apparently not, the length of stay at this hospital has increased 11% over the past 4 years from 4.8 to 5.4 days.[9]

This hospital’s bond rating from Moody’s has dipped two steps below the “junk” threshold. Fitch has a negative outlook on the debt, which signals to investors that further downgrades are possible. When this hospital needs to roll their debt forward they may have to do so at higher rates, further compromising their cash flow and long term sustainability.


Radiology and Radiation Oncology are perhaps the most capital-intensive specialties in medicine. We are dependent on continuous investment in expensive equipment and IT infrastructure. Some debt is normal and can even be healthy. However, too much debt can be an unsustainable burden. The low interest rate environment of the past decade may have created scenarios where our hospitals or healthcare systems have taken on too much debt, risking their ability to deliver medicine into the future. As rates rise (or the proverbial tide recedes), a skinny-dipping hospital administrator is likely to expose him or herself. In the current environment of diminishing reimbursement and increasing regulation, the number of exposed administrators would be an especially gruesome event.

Ultimately, the choice of spending money on debt payments vs. patient care is tricky. From the perspective of a community and physician, there are significant risks to working in a highly indebted hospital. Finding a conservative, well-capitalized hospital in which to work is increasingly difficult.

A basic understanding of the financial and economic forces affecting our hospitals is essential as we plan and manage our careers. We need to be aware of our institution’s amount of debt, bond ratings (if they exist), and interest rate trends to appreciate the relative security and stability of our home institutions. A large amount of debt, or a low credit rating, may be a concern to a young physician choosing a future employer. Working at a veterans’ hospital may be attractive to physicians as the owner is the same organization that prints money. Thus, the parent organization of the Veterans Health Administration retains a nearly perfect credit rating.

[1] Bankers v mattresses. The Economist; November 28, 2015. accessed November 30, 2015.

[2] Kliesen KL, Low Interest Rates Have Benefits… and Costs. Federal Reserve Bank of St. Louis. accessed November 18, 2015.

[3] Pulled Back In. The Economist; November 14, 2015. accessed November 16, 2015.

[4] Already troubled, rural hospitasl brace for effects of Obamacare repeal. accessed February 22, 2017.

[5] Community Health Systems Adopts Poison Pill. Wall Street Journal accessed February 22, 2017.

[6] CHS Stock Rallies After Chain Meets Guidance, Says It Will Sell a Total of 25 Hospitals, accessed February 22, 2017.

[7] CHS to Sell 8 Hosptials to Steward Health Care. accessed Februrary 22, 2017.

[8] MaineGeneral Health and Subsidiaries Annual Report accessed November 30, 2015.

[9] MaineGeneral Health Annual Financial Information for Period Ended June 30, 2016 accessed February 22, 2017.