Windstorms, Flash Floods, and Forest Fires: A Hard Look at Healthcare Pricing

by Tom Robertson

Executive Director, Vizient Research Institute

In his latest blog, "Windstorms, flash floods, and forest fires: a hard look at healthcare pricing", Vizient Research Institute executive director Tom Robertson suggests that the way we pay for healthcare – in particular, the cross-subsidization of public sector patients by private sector pricing – is a significant contributor to health disparities. 

The largest disaster relief organization in the world is the International Federation of Red Cross and Red Crescent Societies, or the IRFC, which is comprised of charitable organizations in 192 countries involving over 14 million volunteers who respond to natural disasters, wars, or any other catastrophes resulting in a threat to human well-being. A prominent member of the IRFC is the American Red Cross. Founded in 1881 and now with an annual budget of just under $3 billion, the Red Cross - with its iconic symbol - appears during wildfires in California, hurricanes along the gulf coast, or tornadoes in the Midwest. Alleviating suffering during some of the worst moments in peoples' lives is a mission that the Red Cross shares with healthcare providers…a calling that brought most of us into the field.

Funding for the Red Cross and other disaster relief organizations such as UNICEF or the World Health Organization comes largely in the form of charitable donations. Who hasn't heard the bell ringing or seen the red kettle of the Salvation Army around the holidays? We give to these organizations, in the form of tax-deductible contributions, with the anticipation that they will use the funds to bring the most good to the greatest number of people. We don't restrict the use of the funds or tell them what to do with the money; we count on them to respond to the most urgent needs and to alleviate as much suffering as possible.

But what if we funded disaster relief the way that we pay for healthcare? What if the Red Cross raised more money for hurricane relief than they needed but not nearly enough for forest fires…and what if the funds were not completely fungible? What if disaster relief organizations made enormous profits caring for victims of wind damage but lost hundreds of millions of dollars dealing with drought-related famine? Or what if major revenue sources stipulated that those funds be used only in limited geographies, whether the needs were greater elsewhere?

Imagine a warehouse of bottled water and other supplies located near traditional flood plains because the donations had earmarked those resources for coastal flooding. Consider what our reaction would be if the Red Cross indicated that wildfire victims in the mountain west were welcome to the water but only if they could travel to the southeastern flood plain to get it because it had been purchased with flood relief donations. What if the Red Cross responded to resulting criticism by explaining that the only way that they could offer any water at all to the fire victims was because their flood relief efforts were highly profitable, thereby subsidizing the limited wildfire relief and making it imperative that they build infrastructure to combat coastal flooding and not western wildfires? And finally, imagine society's frustration if after profitably assisting flood victims while (by their own estimation) largely failing to meet the needs of the wildfire victims, the Red Cross closed the year with an operating margin of several hundred million dollars.

It's fair to assume that we would re-examine disaster relief financing if the money repeatedly failed to get where it needed to be. We would take a critical view of a funding system that made flood relief highly profitable while leaving only what the Red Cross could scrape together to care for wildfire victims, whose homes were just as destroyed and whose lives were just as disrupted as the victims of coastal flooding. And as uncomfortable a topic as it is to confront, the country would question the merits of the tax-exempt status of the relief organizations if they overtly favored flood relief over wildfire victims to achieve positive operating margins.

The social good arising from healthcare is not very different from the social good arising from disaster relief; both are admirably aimed at alleviating human suffering. The way that we finance the two endeavors, however - particularly the flexibility that we grant to use their discretion to bring the greatest benefit to the largest number - is nothing alike. We give disaster relief organizations billions of dollars and count on them to do the right thing with it, and they do. We link healthcare revenue to specific illnesses, to certain procedures (some of which are purely elective), or to subsets of the population then challenge the providers to make the economics work, often with one hand tied behind their back. We cannot then be surprised to see warehouses of bottled water or other supplies near disasters that we decided to pay for, with very few trucks bringing only a fraction of what is needed to those suffering from disasters that we underfunded.

Our house is on fire.