Gravity, Sand and a Financial Reckoning

By Tom Robertson, Executive Director, Vizient Research Institute

Did you ever wonder why nautical speed is measured in knots rather than miles or kilometers per hour? Ancient mariners gauged their speed by tossing into the water a weighted rope with knots tied at regularly spaced intervals, then measuring the length of rope that spilled overboard during a prescribed period. As they retrieved the rope, they counted the knots and recorded their speed accordingly. To accurately measure the lapsed time, sailors used what they called a marine sandglass, a version of what we have come to know as an hourglass. The first hourglass is believed to have been invented by a French monk in the 8th century. Gravity, sand, and the diameter of the glass are all constant, lending a reliable consistency to its measurement of time.

Time is a funny thing. The more of it we have, the less we think about it. It's only when we are almost out of time that we give it our full attention. Time is quickly becoming a scarce commodity in the financing of healthcare and the ability of providers to remain economically afloat.

For the last six decades, healthcare providers have struggled to make ends meet on government payment rates, using higher private sector prices to subsidize the public sector shortfalls. As the gap between private and public sector prices grew, providers became increasingly dependent on the cross-subsidization to cover their costs and generate reasonable operating margins. Until now, this business model has been a widely accepted fixture in American healthcare finance. There are troubling signs, however, that its time is growing short.

Medicare and Medicaid payments rarely cover a hospital's costs. To make up the difference, hospitals must typically generate roughly double their costs on the remaining one-third of their business, the privately insured patients. As baby boomers age out of commercial insurance and into Medicare, these payment differentials become even bigger.

Efforts by hospitals and health systems to secure private sector price increases sufficient to subsidize public sector deficits have in recent years been met with resistance by insurers. The ability of a provider to successfully negotiate private sector prices is directly related to their existing proportion of private sector patients. Today, providers with the best payer mix have more bargaining clout with insurers than providers with a weaker payer mix. As a result, the providers who need private sector subsidies the most are the least capable of negotiating them. Requests for double-digit price increases should be expected to result in impasses at the bargaining table for all but the most powerful providers − those who need the cross-subsidies the least. Bargaining impasses lead to contract terminations by providers, insurers, or both, which in turn create disruption for patients and interrupt longitudinal episodes of care, a highly undesirable outcome.

We are fast approaching a time when it will no longer be possible to subsidize government payment rates that cover only a fraction of provider costs by negotiating prices with insurers that amount to multiples of private sector costs. Private sector prices already are resulting in suffocating medical debt for working families. All healthcare spending, for the elderly, for the poor, and for the employed, all come from the same place − wages. The Byzantine cross-subsidies make no sense when the money is ultimately coming from the same place, the productivity of the active workforce. The uneven bargaining power of healthcare providers, where those who need the subsidies most are the least capable of securing them, coupled with the enormous economic burden being shouldered by working households, is like replacing the sand in the hourglass with a finer grain … our remaining time is passing faster.

We've been doing it the same way for six decades, but we may be nearing the end of our rope. There are many fewer grains of sand left in the top of our hourglass than have already fallen to the bottom. We will eventually reach the point where all-payer rate parity and regulated prices replace the cross-subsidies and privately bargained prices that have characterized the last 50 years. The question isn't whether, it's when.

And the sand in the glass is running low.