September 2012

Are You Ready for Intense Price Competition?
By Jim Knaub
Radiology Today
Vol. 13 No. 8 P. 18
A keynote speaker told administrators to expect businesses threatened by ever-increasing healthcare costs with new approaches that will change how imaging organizations compete.

When Brian Klepper, PhD, delivered his keynote speech to the audience at the AHRA annual meeting in Kissimmee, Florida, last month, it was not the feel-good speech of the summer. Klepper, whose companies develop and manage worksite primary care clinics for employers and manage specialty care for those employees, told the audience that his company had recently negotiated a deal in Indiana for $450 MRI exams in a market that had technical fees ranging between $1,750 and $3,200. That was the opposite of a warm and fuzzy message to the 900 or so imaging administrators attending the meeting at the Gaylord Palms Resort and Convention Center.

“Somebody like me is going to come in to your market, and your volumes are going to plummet because there is no way you can compete against a $450 imaging price when you’re currently used to getting $2,800 or whatever you’re getting,” Klepper told the audience. “That is the problem.”

Klepper is a principal and chief development officer for WeCare TLC, a worksite primary care clinic and medical management firm based in Longwood, Florida, and managing principal of Healthcare Performance, Inc, a healthcare strategy and business development practice based in Atlantic Beach, Florida. Klepper’s companies control a very small portion of the massive healthcare market, but companies like his are responding to employers’ critical need to reduce employee healthcare costs—and delivering 20% to 25% reductions, he said.

Earlier this year, WeCare opened its eighth clinic, which it manages in West Lafayette, Indiana, for employees, dependents, and retirees of Bioanalytical Systems, Inc. WeCare operates clinics for two other businesses and for Tippecanoe County employees in Indiana. Bioanalytical Systems lets employees choose between using the company clinic at no out-of-pocket cost or traditional insurance coverage with higher costs and copays, according to the WeCare website.

Employers’ Costs
Significant cost savings will get employers’ attention because businesses have borne the brunt of surging healthcare costs over the years. Those growing costs gobble up profits, employee wage gains, and a dangerous portion of government spending. Klepper said the nonhealthcare business community is beginning to respond with more serious cost control efforts than ever before. He noted that with estimates of healthcare spending approaching 18% of the gross domestic product, the only segment of the economy larger than healthcare is the aggregate of all the other businesses not in healthcare.

“The United States has by far the highest per capita healthcare costs in the world,” Klepper said. And paired with what he called “spotty” outcomes, he says the country simply isn’t getting its money’s worth for its healthcare expenditures. “In other words,” Klepper told the audience, “we have the lowest value in the world.”

Businesses struggling to absorb healthcare costs will be one large driver of change. Patients who see more and more of their salaries going to pay healthcare costs will be another. Klepper told the audience that in recent years 79% of the growth in household income has gone to paying for their increased healthcare costs. He also pointed out that the US budget crisis is largely driven by healthcare costs.

“All of the budgetary crisis that we have right now is pretty much due to healthcare,” Klepper said. “Paul Krugman, the Nobel laureate in economics who also writes for the [New York] Times, was on CNBC the other day. On the fly, he responded to somebody, ‘You know, if we had France’s per capita healthcare cost instead of the US’ per capita costs, our entire budget problem would go away.’”

Klepper also cited a 2009 PricewaterhouseCoopers report claiming that $1.2 trillion of the $2.2 trillion spent annually on healthcare in the United States is wasteful spending. The accounting firm’s report calculated the following large areas of waste:

• $210 billion per year in unnecessary tests (including imaging);

• $210 billion in inefficient claims processing;

• $25 billion in care from discharging patients too soon;

• $17 billion spent on medical errors; and

• $14 billion spent using emergency departments as clinics.

Economic Threat
Those five areas total $476 billion annually. In comparison, Congress’ budget supercommittee was tasked with cutting $1.2 trillion ($120 billion annually) from the US budget over 10 years. Their inability to make those mandated cuts will force $500 billion in automatic cuts by law in 2013 (unless Congress acts before then) and has spawned the national discussion about going over the “fiscal cliff” in January.

However these numbers are calculated and debated—other estimates suggest 30% is wasted—Klepper said healthcare costs are threatening the entire economy. He also noted that in the current fee-for-service environment, hospitals, physicians, and drug and device companies have economic incentives to provide more and more expensive care.

“What we’re all facing—whether we’re making money in the industry we work in or not—we’re all facing this apocalypse that is closing in on us because of the situation we’ve been in,” Klepper said.

The high cost of the US healthcare system certainly is no revelation, it’s been seen as a problem for decades. But Klepper sees change coming as the cost pressures intensify and subsequent cost-cutting efforts create a new kind of competition for providers. In general, he thinks healthcare competition is currently about nearby providers competing over a modest percentage of the local market share but not really on price because reimbursement is tied to insurance contract rates and the industry’s pricing is famously the opposite of transparent.

Except for elective procedures, most healthcare services aren’t really planned. He pointed out that prices for the same service can vary widely in the same market, depending on the doctor involved, the care setting, and other factors. The wide reimbursement spread for services—including advanced imaging procedures—combined with plenty of service capacity in many markets and the business community’s increasing determination to reduce healthcare costs will produce a new intensity of competition in healthcare. That competition is already forming in companies such as WeCare. In short, the American healthcare industry of the past 45 years will face a fundamental change.

“For the capitalists here among us, this is a market opportunity,” Klepper added. “We can go in and identify spots where there are egregious healthcare practices, and we can offer alternatives to those. We leverage and take advantage of those. And that, ladies and gentlemen, that is the challenge you are about to face in imaging.”

McDonald’s Model
The strategy reduces revenue and margins but wins on volume, Klepper said, telling the audience he operates using a McDonald’s model, not a Ruth’s Chris Steak House model. “I’m going to win on volumes,” he said. “I’m going to have the highest technology. I’m going to have the most appropriate care, and I’m going to have the best outcomes. You watch.”

Klepper’s main point in addressing the AHRA audience was to point out that a different kind of competition is coming to healthcare—and that the way for imaging administrators to remain standing through this tectonic shift is to understand and manage revenue and cost data in their markets and adjust their businesses accordingly. He believes healthcare is moving toward a future where revenue and margins will be “intensely competitive” and that savvy organizations need to be preparing for that now.

“The real point is you can’t do any of this unless you really, really understand data,” Klepper said. It’s possible to ascertain the average episodic cost for each facility for a given diagnosis in a market, he notes. Klepper’s company uses such information to control costs for its clinics. Paired with outcomes quality assessments—and he noted that there tends to be little correlation between cost and quality outcomes—he believes medical price competition will spread in healthcare.

Klepper suggested that where three or four hospitals may currently compete in a market and have margins large enough for all to succeed in a given service line, the future will be about succeeding with a lower margin on greater volume. Instead of succeeding on 25% market share in a given service, facilities will get “85% referrals in a market and make less money per patient. The paradigm is shifting.” He noted that there will be winners and losers.

Part of the shift involves movement away from fee-for-service care. Klepper’s worksite clinics do not make their money through this type of care. He said they’re paid two ways. First, the business contracting with Klepper’s company is billed monthly for what it directly costs to run the clinic, with no markup. Second, Klepper’s company receives a per member per month management fee. Quality and outcomes reporting need to be strong to retain the corporate account. The capitation arrangements of the 1980s and 1990s ran into backlash from patients who thought insurers were not providing needed care or creating obstacles to obtain it and complained loudly to their employers.

“I’m not making more money if patients get more care,” Klepper said, “so I have no financial incentive to deliver unnecessary care or—equally important—to deny necessary care.”

Klepper said he provides data to show that his company has managed both care and cost effectively and is satisfying patients. “That means I have only one incentive: I need to create mechanisms that ensure the appropriateness of the care inside my clinic and anywhere I can downstream from my clinic,” he said.

Klepper explained his company develops cost and quality data per episode of care for services his clinics will need but do not provide in house, including advanced imaging. He said that in most sizable markets, the company can find multiple facilities that provide similar services at a wide range of prices. It’s not unusual for the highest-price provider to charge six times more than the lowest for the same service.

Cost Does Not Equal Quality
Important to the calculation, Klepper said quality and outcomes don’t tend to correlate with cost. The adage that you get what you pay for often does not hold up in healthcare. When WeCare is looking for service providers to contract with, it analyzes the market. Providers that show similar high quality and outcomes are ranked on price. The clinic’s referral business goes to doctors who will service the clinic’s anticipated volume at the best price. “If you don’t keep to the top three, you don’t get any business,” he said.

WeCare succeeds on its ability to gather, analyze, and act on data about the markets it serves. “Think about what you would have to do to compete in that environment,” he cautioned the audience.

Some healthcare markets already feel this kind of pressure. One attendee told a nearby colleague that he faces that kind of pricing, too. But for a significant chunk of the imaging community—judging by murmurs in the audience—such price competition seemed an unheard of situation.

“If we didn’t have a lot of excess capacity, I couldn’t go in and cut a $450 [deal] for a high-quality MRI,” Klepper said. “It wouldn’t be possible.”

Klepper expects inappropriate imaging to tail off, but that volume will be replaced in coming years by an aging population demanding more services and by new people brought into the insurances system because of the federal Patient Protection and Affordable Care Act. But Klepper expects intense competition involving revenue, margins, and patients to be the future of imaging.

— Jim Knaub is editor of Radiology Today and attended the recent AHRA meeting.