How did healthcare get off track?

That graph hurts to look at. American’s spend 2x more than any other country for healthcare, yet our outcomes aren’t 2x better. We actually die 5 years sooner than our peer nations.

Why is the United States so far off track compared to other countries? There are many problems stemming from one root cause: How we pay for healthcare

Specifically, using the insurance business model to pay for our healthcare. Let’s get this straight: 

Insurance Coverage ≠ Health Care

Insurance corporations are value-extracting financial intermediaries who move money around. They don’t provide care, yet they influence the entire healthcare system.

Health insurance requirements add complexity, leading to more bureaucratic regulation, which leads to needing more administrative staff to manage insurance, which leads to higher costs for the system, which is finally passed on to patients in the form of higher premiums and deductibles. It’s a negative feedback loop growing out of control as seen in this chart:

Insurance corporations are majority-owned & controlled by institutional shareholders that exist to maximize profit, not to help patients. Capitalism is one of our greatest economic creations that built the modern world we live in. Unfortunately, our beautiful invention of capitalism has become ridden with crony regulations & perverse incentives that make the game unfair. It’s turned our healthcare system into the “medical-industrial complex” that puts corporate profit ahead of people.

Two core reasons that fueled our medical-industrial complex

Reason 1: In 1970, Milton Friedman, an American economist & Nobel Prize winner, introduced the “Shareholder Theory.” In it, he argued that a company has no “social responsibility” to the public or society — its only responsibility is to maximize profits for its shareholders. Friedman states:

“In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires…the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation…and his primary responsibility is to them.”

Shareholder theory has had a significant impact throughout healthcare, being taught at all leading business schools starting in the 1970s. Harvard professors have stated that maximizing shareholder value is now pervasive in the financial community and much of the business world. It has led to a set of behaviors by many actors on a wide range of topics, from performance measurement and executive compensation to shareholder rights, the role of directors, and corporate responsibility.

Healthcare corporations fully embraced this poorly designed incentive system which created conflicts of interest with their patients. Executive compensation became tied to their company’s share price, which led to a finite mindset of “winning” each quarter to generate more revenue. While there is nothing wrong with profit, there is something wrong when you constantly put profit ahead of people in healthcare.

Now that healthcare executives were financially motivated with a fiduciary duty to maximize shareholder profit, a blueprint for maximizing this profit was put into law with billing codes.

Reason 2: In 1983, the Health Care Financing Administration (now CMS) switched from a basic payment system in which the government simply covered the costs of treatment retroactively, to a complex billing system of CPT & DRG codes. This approach, which was soon adopted by all insurance companies, established fixed payments for the treatment of specific conditions. The basic idea was right, but it has proven to be overly complex and “gameable.” It created a federally mandated blueprint for printing money where the more things you did to a patient, the more you got paid — AKA, the era of “Fee for Service.”

Billing codes combined with the Shareholder Theory created a money-hungry monster called the “Medical Industrial Complex.” Pretty soon, hospital corporations backed by private equity groups realized they could play this game well. You bring patients in, you perform these surgeries and prescribe treatments, you get paid X. The more you perform those surgeries and treatments, the more you make. Rinse, repeat. 

We created a system that rewards hospitals for work done to people, not for people. It’s called the Law of the Instrument: “If you give a man a hammer and pay him to hammer nails, he’ll go looking for nails.”

Before long, doctors started to innocently look at the measurement as the goal. If a person comes in with a hurting knee that could be operated on, do you think the surgeon is going to tell the person they just need to get better shoes, lose some weight, and work out a bit? People do what they are paid to do. 

I’m not blaming or judging hospitals and doctors for these actions. It’s simply the incentive system that was required of us all. This perverse economic model has caused many irrational behaviors to form over the past 5 decades. It was slow at first, but now it’s clear we got the fundamentals design wrong.

As the great American investor Charlie Munger says: 

“Show me the incentives and I will show you the outcome.”

Unfortunately, we’re living in the outcome:

The key takeaway here: When you put Wall Street in charge of healthcare, what do you think will happen? It leads to profits first, people second. While this mindset has paid off great for shareholders over the past 50 years, we are reaching a tipping point where people—patients, physicians, & providers—are starting to get hurt.

It’s time we rethink the whole system.

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