Big Med: Megaproviders and the High Cost of Healthcare in America

Big Med: Megaproviders and the High Cost of Healthcare in America by David Dranove & Lawton Burns argues that the source of most of the high healthcare costs in America can be attributed to megaprovider healthcare systems. These are also known as Integrated Delivery Networks (IDN).  'Megaproviders' refers to large, integrated hospital-based systems which own and operate multiple healthcare facilities ranging from inpatient to outpatient need. As of this book written in 2020, US health spending approached nearly 18% of GDP. Translated to hospital systems, these entities, although viewed largely as beneficent, are huge companies. “About 52% of every dollar spent on health care goes directly to hospitals and doctors,” (p4). According to the authors, there are several issues related to megaproviders: on the administrative side, many administrators are business people, not doctors, creating a cultural incongruence between those who run the institution; anti-trust practice struggles with how to define a market appropriately; on the political side, megaproviders are seen as trusted healthcare providers in a community- not exploitative businesses, like Pharma and insurers are perceived.

When hospitals, physicians, and insurers integrated in response to the never-realized Clinton Health Plan, it was a race to become big. Megaproviders, aka IDNs, typically included the four components:

• Horizontal mergers with other hospitals, especially community “feeder” institutions
• Primary care and specialty physician practices
• Freestanding outpatient and/or diagnostic facilities
• Therapy and/or home health care services
• Long term care facilities
• PLUS sometimes their own insurance

Many physicians were intrigued by this model because of the appeal of a fixed base salary at a hospital. However, where this model fails catastrophically, is the megaprovider administration’s lack of coordination with individual care providers, resulting in a “power of the [physician] pen” that disregards cost of administration for each service. The thesis of the book is this: “Physicians authorized or influenced most hospital spending; if they were not attuned to cost containment or quality improvement, hospitals would have a hard time satisfying the dictates of managed care. IDNs could not profit from [insurance plans] without reducing health spending, [which required] changing the profligate ways” physicians were rewarded for fee-for-service medicine ([69). Physicians control about “85% of all healthcare spending, either directly or indirectly,” (p64)

As hospitals acquired practices, they offered physicians annualized salaries. Hospitals grew and grew in the name of integrated care. But, anyone who has been to a hospital knows that they do not typically receive coordinated and holistic care evaluations. Administratively, meaningful change in care provision is impossible without provider buy-in (p148). An example of what coordinated care could look like is, within an IDN, the insurer requiring lower copays for prescription drugs prescribed to prevent more expensive medical care (p212), but that does not happen often. From a business perspective, the hospitals offered salaries they could not pay without increasing patient volume, incentivizing myopic care, longer hospital stays, and other billable expenses to be paid by payers. Furthermore, total reimbursement to hospitals for the same service as an independent physician is far higher, due to the payment formula (114). 

Additionally, the authors contend that a big part of high healthcare costs is due to the monopolistic behavior of hospitals. Thus, authors suggest, and federal agencies have pursued anti-trust law to prevent monopolies in healthcare. The authors provide two main goals to drop healthcare costs: 1) Maintain at least three competing value chains 2) One value chain should consist mostly of independent providers (p235). The authors assert that “competition should promote experimentation, but that doing so requires…independent providers” (p231). 

Big Med poses a challenging idea that the doctors and hospitals people think of as 'their' doctor or hospital likely has a much bigger role in that person's healthcare cost than they expected. They suggest leveraging basic economics to ensure lower healthcare costs. Overall this was a pretty good book. It took me a bit of catching up on healthcare policy, but I learned a lot. Thanks to my friend, Melissa, for the recommendation!

Not related to the book topic is an interesting theme, though influenced by the backgrounds of the authors as first-hand accountants of megaprovider cost and academics: I didn’t fully appreciate how intertwined academia is with everyday life. Without academic reports and papers providing the basis for new healthcare models and a review of antitrust, major providers would not be broken up and costs would remain high. 

Miscellaneous definitions:

• There are two main ways to look at care provider payments. Fee-for-service payments refer to payments made for a specific service, such as MRIs, bloodwork, etc, and are most common. Value-based care refers to payment for outcomes of the patient and can include overall health, patience experience, etc.  
• Preferred Provider Organization (PPO): allow use by enrollees in and out-of-network without referrals. 
• Accountable Care Organizations (ACO): a group of healthcare providers that provide coordinated care between specialties. 
• Health Maintenance Organizations (HMO): care only by in-network providers who have contracted with the HMO. This care is typically local and focused on prevention and wellness. 
• There are a number of different entities represented in the healthcare ecosystem. Payers are the entities which pay for the service. This is typically a commercial insurance company, government provider, or employer, or patient. Then there are also full risk contracts, which can refer to value-based care, as it transfers the full risk of patient care to the provider from the insurer. This was referred to often throughout the book.