A Conversation About The Hospital Cost Crisis and What To Do About It

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[00:00:00]Uh, welcome to Paragon Health Institute's virtual symposium, a conversation about the hospital cost crisis and what to do about it. My name is Brian Blae and I am the founder and president of Paragon Health Institute.

[00:00:13]Uh, Paragon is a health policy research organization that is dedicated to evaluating how government health programs are actually working and developing a set of policy solutions that empower patients, uh, expand competition in the market and really address a lot of perverse incentives that underpin a lot of government programs. Today's event is going to begin with a short presentation from my colleague John R. Graham, who authored the paper, our most recent study, uh, the hospital cost crisis, how government policies drive consolidation, undermine competition, and fuel soaring prices.

[00:00:55]After John's presentation, we're going to bring on David Johnson, CEO of Foresight Health, for a dialogue about high hospital prices and costs and relevant public policy. And then Al Hubard is going to join us. Al is the former director of the NA White House National Economic Council and he has fought for years um to lower high hospital prices in his home state of Indiana. Uh we're going to incorporate uh your questions the best that we are able into the discussion. Uh and you can feel free to send your questions through the Q&A uh chat on Zoom. Uh we're going to begin with a short presentation from John. John is a visiting fellow at Paragon and he brings nearly 30 years of health policy expertise um to research across all of Paragon's initiatives.

[00:01:46]John, uh great work on this paper. Uh we're very proud of it and uh happy to have you um give a brief um uh presentation of the main findings.

[00:02:02]John, uh you're on mute still. This paper's had a big impact. Thank you, Brian, and thanks to Paragon for inviting me to write this paper and give this presentation. Uh, in my brief time, I'm going to give you four takeaways that I hope you will take with you as we continue to address this hospital cost crisis. The first is that hospital price inflation is at the center of the healthcare cost crisis.

[00:02:27]There are challenges with insurers, with drug makers, with pharmacy benefit managers, the middlemen. We can fix all those problems, but until we fix hospital price inflation, we will not get to the center of the health cost crisis and we will not fix it. The second takeaway is that government set incentives, not market forces, drive the crisis.

[00:02:50]The third is that hospitals make money from Medicare and Medicaid. This is perhaps the most controversial of these four points.

[00:03:00]Fourth, hospitals suffer from poor productivity, not a lack of subsidies from the government. The next slide comes from Mark Perry who has been affiliated with the American Enterprise Institute. It's known as the chart of the century. It's well circulated. Many of you have probably seen it before. It looks at the prices of many goods and services and it highlights that prices of goods and services which are subject to government interference inflate at a higher rate than goods and services that are not subject to government interference. Now, I'm going to put an arrow beside the first line that I want you to focus on, which is medical care services, which have increased at a higher rate than the consumer price inflation overall, a little bit more than average hourly wages, but not completely out of control. The second arrow will point to that line that goes up almost like the Aremis 2 moon launch. The price inflation of hospital services which have risen at three times the rate of general inflation and stand out versus medical care services overall. So this illustrates the whole point of this paper that until we get a grip on the price inflation in hospital services, we can fix everything in every other part of the healthare system that is not going to get the health care crisis under control.

[00:04:33]The next slide illustrates Medicare's hospital patient spending on inpatient versus outpatient. Now most folks that I talk to when they think of a hospital they think of a place where you go and you get admitted for at least one night maybe a few more nights for a very complex procedure and you are very ill and therefore you need to be admitted. That is still the bread and butter of the hospital business. That's the lighter gray line that is at the top of the figure. However, the darker blue line shows hospital outpatient spending that is projected to increase at a farther rate through 2034 at a faster rate than inpatient spending. And what's really shocking is when we compare this to the orange line that's almost flat all the way through 2034 which is a physician fee schedule which pays for physicians not hospital outpatient departments that is flat. Now the shift from inpatient to outpatient procedures is a very important positive step. It's driven by technology and improvement in practice.

[00:05:50]Many of us in our lives, we can think of procedures which might have needed an inpatient stay that can now be done on an outpatient basis at a physician's office or in an ambulatory surgery center. And that is going to continue as technology improves and as practices improve. The problem we're facing is the way Medicare pays hospitals for their outpatient procedures is it allows hospitals to allocate their overhead costs, their bureaucratic costs, their fixed costs onto outpatient procedures which can which can be done at a much lower cost in a physician's office or in an ambulatory surgery center. And this slide which is from the Congressional Budget Office shows us that if we are if we don't change the way we pay the hospitals, this problem is going to get worse and worse and worse and worse.

[00:06:45]That most of that gap between the orange line and the blue line is unnecessary cost that we do not need to spend. The next slide illustrates the most controversial claim I'm probably going to make during this presentation which is that hospitals earn marginal profits from treating Medicare enrolles Medicaid as well but this figure does not show Medicaid. Now the this shows that from 2014 hospitals marginal profit on Medicare is 5 to 10% positive. Now what does that mean? That means when a Medicare patient goes into the hospital for treatment, the hospital has certain expenses which are variable or marginal doctors, nurses, bandages, drugs, services and goods that are used to treat that patient. If the Medicare patient had not shown up at the hospital, the hospital would not have incurred those costs. Hospitals do not like this slide. They don't want me to talk about this slide. They don't want you to know about this slide. And they don't want you to know about this measurement of profitability which comes from MedPAC which is the official congressionally established Medicare payment advisory committee which is got academics from universities around the country which produce this this measurement of profit. What hospitals will always and only emphasize is what they call operating margin which is about negative 12%. which is once they've allocated all the cost of their overhead, their bureaucracy, their fixed costs, their CEO's salaries, which are 10, 20, $30 million and salaries of all those other high earning executives.

[00:08:25]They add those costs on and then they say, "Hey, we lost money." Well, the argument we're making is those costs are not necessary and not appropriate for taxpayers or commercial players and employer sponsors to pay those costs.

[00:08:40]And the next slide really gets to the nut of the problem here or the the outcome of the problem which is productivity in hospitals.

[00:08:50]The blue line shows productivity since 1993 through 2022 about three decades in the American economy overall.

[00:08:59]Productivity has increased 78%.

[00:09:02]We are a very productive economy one of the most productive economies in the world and in industries outside the hospital sector.

[00:09:10]our productivity has increased and what does that mean? It means our wages and salaries have increased because we are very very productive as workers. Now that orange line shows hospital productivity and again this is data from Bureau of Labor Statistics. That orange line shows a little bit of bump between 93 and 2000 and then a downward slope.

[00:09:31]So when I present the slide, I say that the hospital sector has been flat in productivity since 1993. I'm actually being a little generous to the hospitals, aren't I?

[00:09:44]Because if I started this slide in the year 2000, you'd see a negative reduction in productivity of about 10%.

[00:09:51]Why have hospitals not responded like other industries in our economy to become more productive? Well, the answer is one of the answers. There are a number of answers, but a major answer is the way Medicare pays them. Medicare goes to the hospitals and says, "Submit a Medicare cost report, an MCR." And on that Medicare cost report, you add on all your fixed costs, all your bureaucratic costs, your CEO's salary of 10 or 20 or $30 million, whatever else, whatever other cost you've incurred in building these huge campuses in very expensive real estate. You just add those costs on and we will pay you for that with no pressure whatsoever to improve productivity. It's still a cost plus system.

[00:10:41]And as bad as that is on the inpatient side, at least the inpatient needs to stay in in a bed in the hospital, when you add those costs to the outpatient side, that is unbearable and intolerable and unacceptable.

[00:10:55]And that is uh the end of my presentation. I thank you all for your attention. I'll leave you with the four takeaways. Hospital price inflation is at the center of the healthcare cost crisis. Government set incentives, not market forces, drive the crisis.

[00:11:09]Hospitals make money from Medicare and Medicaid. And finally, hospitals suffer from poor productivity, not a lack of subsidies. We can reform our payment and our regulations such that hospitals improve their productivity, reduce costs, and continue to provide highquality care. Thank you.

[00:11:29]>> Hey, John. Thank you. Uh that was great.

[00:11:32]Um I did get a question on the slides being available and the slides are all available. They're all figures in John's paper, the hospital cost crisis. So, you go to our website, paragoninstitute.org, and you can find that paper there. The paper is really, I think, the most in-depth study of hospital finances, how government policies contribute to high and rising hospital prices um uh that has been produced by any major uh uh public policy research institute in the last several years and encourage you to check that out. I am thrilled uh to welcome David Johnson. Uh David was a reviewer uh for that paper and we appreciate uh his expertise so much um in improving that paper. David's the CEO of Foresight Health, an advisory firm working at the intersection of healthc care strategy, economics, and innovation. He's a nationally recognized healthc care thought leader, keynote speaker, and strategic adviser. David's the author of Market Versus Medicine: America's Epic Fight for Better Affordable Health Care and The Consumer Revolution in Healthcare. And David, I guess um to start, I just like you to generally react to um the main points that you think are important to convey about um the hospital cost crisis uh that we have in the US right now.

[00:12:50]Well, first of all, kudos to John for exposing um the underlying operating dynamics of of the US hospital system. Uh John, as you point out, I think it's almost impossible to overstate the extent to which um hospitals in this country operate to get paid the most money for all the things that they do.

[00:13:19]There's a there's a room in every secret room in every hospital that says optimize revenue and that's where all the important decisions get made. And I served on the um the board of the HFMA, the healthcare financial management association uh which focuses on uh revenue cycle which is the business of um who pays how much to whom for services offered.

[00:13:47]And I thought by the time I went on the board in 2022, uh, it I knew everything there was to know about healthcare. I'd written two policy books on it. And I went out on the floor, exhibit floor for my first national conference. And there were 400 companies there, 95% of whom I hadn't um, heard of before, and they were all in revenue cycle. And it just got me wondering how big this this industry is. And I won't go through all the wise and wherefors, but I've now concluded that this business of who pays how much to whom for what now exceeds a trillion dollars annually. A lot of it encoded in the or in the coding of medical treatments. And um that puts it on par with the largest non-healthcare business in the country, which is commercial banking. So that is the beating heart of health care and it operates as you were saying John it's responsive to perverse incentives and we really almost have the worst of all worlds which is uh we've got government rate setting and largely copied by the commercial sector and then ferocious private market exploitation of these these incentives and you end up with that chart that you show which is why are prices as high as they are. It's largely because they can be. So, um, so I I I kudos to John. Um, I I do have some comments on productivity, but maybe we can get to those later.

[00:15:24]>> Thanks, David. Uh, John, um, uh, tell the, uh, folks what you think are the biggest misunderstandings, the myths about hospital finances.

[00:15:38]I think the biggest myth is that hospitals are losing money. They're always on the verge of bankruptcy.

[00:15:46]There's going to be a nationwide collapse in the provision of health of hospital services and we're in a kind of a vicious feedback loop, Brian, on this because hospitals are so unproductive.

[00:15:58]They don't improve their productivity.

[00:16:00]Every time a jobs report comes out, where have the jobs been added? It's hospitals. So hospitals are very able to make this argument, right? Every county, every district, the largest player employer is the hospital.

[00:16:16]And so they can turn on the pressure very quickly to say, "Oh my gosh, we're we're going bust. We're going bankrupt."

[00:16:23]And again, the only reason they can make it look like they're going bankrupt is their operating costs are so unnecessarily high that it looks like that. But it doesn't need to be like that. they can get their operating costs under control and succeed.

[00:16:39]>> So why are the operating costs so high and uh David come into this conversation talk about productivity? I mean we know that economic productivity that's the way that living standards increase over time. We get more productive. We've had a total um you know reversal of productivity in the hospital sector. So why is this sector so uniquely um unproductive and what do policy makers need to know about how government policies contribute to the lack of productivity in this sector?

[00:17:09]>> Yeah, such um such a profound question actually that question in some form was the motivating principle of my my second policy book the u uh the customer revolution in healthcare. I was trying to answer the question, why doesn't this industry incrementally improve the way other industries do? Um, it's not that there hasn't been progress. I mean, there's been incredible progress. We've cured hepatitis C, the uh what we're doing with with diagnostics and cameras inside the body, radioarmaceuticals.

[00:17:47]But the long-term trend, the one that that John highlighted so well is that we spend ever more money on an ever sicker population.

[00:17:56]Um, and I wanted to try to figure out why that happened. Um, and I found myself going back to um, uh, General or President Eisenhower's farewell address uh, of January 1961 um, where he warned about the military-industrial complex and basically identified what we all know industrial complexes to be, which is the conjunction of of industry, bureaucracy and legislative bodies to promote their um, interests at the expense of broader society. So in 1960, the military, believe it or not, was 9% of our economy and healthcare was 5%.

[00:18:40]Uh today, the military is 3% and we have a very active military-industrial complex. Um but healthcare is 18%. So we have in healthcare the equivalent of the military industrial complex on steroids.

[00:18:55]when you think of massive bureaucracies not only at the federal level but at the state level, massive industry and then uh kind of John to your point representatives in every conceivable governmental entity and that collection of individuals um works for their benefit um they they at at the expense of greater society. So that's how we end up with um these exceptionally high costs uh without the commensurate improvement in productivity. Um so I to drive this point home in that second book um Zeke Emanuel and I wrote a paper in JAMAMA where we created something called the affordability index. Uh it was really simple. It was just the price of a commercial health insurance uh policy for a family. So employer portion and employee portion over median household income. And in 1999 that ratio was 14%. Today that ratio is 32%.

[00:20:02]Uh so it's more than doubled. If we'd been able to have the health care sector grow at the same rate as the overall economy, um the average family in the United States would have 13 or 14,000 more dollars in their pocket. Um and this this question about employment, which every time um you know, healthcare comes under, we're you know, healthcare is the engine that's that's saving America because it's creating jobs. But really, all we're doing is the equivalent of digging a hole and filling it back up with rocks. If we could get the same or better healthcare at lower costs, we would free up enormous resources to pay people more money to invest in more productive industries to fund vital societal needs. Um so I think underappreciated in all of the sort of questions about declining standard of living and so on is the role that healthc care has played in terms of taking resources away from everyday Americans. Um and there are reasons why Americans don't appreciate that. Um and not allowing them to live the full productive lives that they'd want. I will say one last thing on productivity. I served on the um the board of a a super specialty health system in India. And these were these doctors that ran this place were as arrogant as any I've ever met. But at the meetings, they were reading the income statement and the balance sheet.

[00:21:30]Um and it was because they were ultimately on the hook for um funding the cost of construction and um making the enterprise run profitably.

[00:21:41]Uh and as a result we ran our operating rooms uh talk about productivity uh two shifts a day seven days a week. Uh there's a concept in industry in manufacturing called uh production index and that's the percentage of time during a week um that the assembly line is up and operating and a good score is in the high 80s or low 90% range. The typical operating room in the US whether it's in an amulatoratory center or in a hospital at best has a 25% production ratio. So all these issues all these questions around access and so on if we just ran our our hospitals and amulatory centers a little bit harder you know surgeries on Saturday for example uh we could dramatically improve productivity but there's enormous resistance to that type of productivity improvement suggestion.

[00:22:38]John uh anything uh uh thank you David that was that was really profound and I love the analogy with the uh medical with the defense industrial complex and going back to Eisenhower I mean that's a famous um speech that he gave his farewell address and we use the term medical industrial complex at paragon and there is now six times more lobbying resources just at the federal level that goes into health care because of the government's outsized role in healthare care than in the defense and defense contracting sector.

[00:23:12]Um John uh any reaction to David's uh remarks on productivity and the lack thereof?

[00:23:19]>> Well, I'm so glad that he shared his experience in India and he described a super specialty hospital. I think one of the things is we are fixated on the general community hospital, you know, and and and the hospitals say, well, we got the emergency department, we got the maternity care, and and that somehow gives us the privilege of laying all the costs of this inefficient general hospital uh that's crowding out super specialty. uh Regina Heritzswinger uh professor Regina Heritzswinger who was at Harvard and Dartmouth uh called them focus factories right in Clay Christensen uh and and these big general community hospitals are blocking them out to some degree in the United States.

[00:24:00]So thanks to David to share that experience in India. Can you both talk about um I mean in a normal market force the producers have incentives to minimize costs and cost discipline is really noticeably absent in the hospital sector. Um can you talk about the reasons why um cost discipline is not present um in this in this sector of the economy?

[00:24:29]>> Yeah. Um, you want me to start, John, and then you can hop on? I I I my biggest disappointment um in healthcare at large is that self-insured employers that are the bulk of the commercial market haven't demanded or haven't been able to demand more uh value for their purchases. U most health care services are largely commodities. uh they should be subject to the normal rules of economics which um you know commodities should be price elastic as uh price goes up you should do fewer as price goes down you should do more and un unfortunately um most businesses either don't have the scale or the wherewithal to challenge the healthcare industrial complex um you know they're in another business uh to offer So I think the reason when you dig below the surface in the regional markets what you see um in the in p primarily in the provider sector se sector or monopoly um pricing power u with commercial insurers and then um and in some markets uh insurer pricing power monopsiny. So we the industry is ripe at the regional level where they compete with monopoly and monopsinity pricing power and I I think that goes handinhand with the industrial complex. So until we identify the problem in the right way and start attacking it in the right way uh we're just going to continue uh to let these kind of artificial payment incentives and market failure uh dominate the industry.

[00:26:14]>> Yeah. I think one of the failures in hospitals is that they don't get price signals from patients, right? Only about 2% of hospital revenue comes from a patient directly. Now, the hospitals, one of their big lobbying points is complaints about insurance company bureaucracies prior authorization and things like that. And you know, they're not wrong in the acute sense. However, they never challenge that status quo. You know, I I used to think insurance companies and hospitals were negotiating on opposite sides of the table. I'm increasingly concerned they're on the same side of the table, conspiring uh conspire maybe too strong a verb, but uh uh planning against taxpayers and and employers and and individuals uh and especially we talk about that shift from inpatient outpatient care. The more you move towards outpatient care, the more you move towards productive productivity improvements in outpatient care, you should be able to get a lot of procedures below a cost threshold where middle class people could be able to pay for it through their health savings account or health reimbursement arrangement or FSA, flexible spending arrangement, uh without the involvement of a third party or even fourth party bureaucracy which adds costs, adds bureaucracy and yeah, now we've got the hospital bureaucracies and the insurance companies these bureaucracies working with each other and the patients and the taxpayers are dropping out the bottom.

[00:27:35]>> Yeah. You know, amen to that. John, I I've always thought um ASO contracting, administrative services only contracting, which is how insurers contract with selfinsured employers, is every bit as pernicious as fee for service kind of cost plus pricing. uh and they do really work together to raise prices overall because from the insurers's perspective, they generally get paid as a percentage of claims administered. You know, is it really such a surprise then that when the cost of each claim goes up, the insurance companies benefit from that? So, they don't really want to slow that down.

[00:28:13]>> So, I'm going to ask you guys uh one more question and then I'm going to bring Al on. Um before I ask that question, uh I really appreciate this point. I used to think, well, I know I'm going to get to employers. We're going to get to employers um with Al and then after Al because I have a question on um uh employers, but I think this point that hospitals and insurers are on the same side of the table, it's one of the main observations that I've taken away from my um experience studying health care and health policy over the last decade. Um you in the media you often see insurers and hospitals battling each other. Uh but I don't think that's the way it works behind closed doors and I think ultimately they both benefit um when healthc care spending increases. Um let me ask uh a controversial question about taxexempt hospitals. So 80% of um US hospitals are taxexempt. That is from federal and state and local. Um so state local benefit they don't pay uh state and local property taxes huge huge benefit. Um what are the implications of um uh 80% of US hospitals being taxexempt?

[00:29:30]>> Yeah. Um do you want me to take that one first? Yeah. Okay. Yeah. uh you know I think it was Samuel Johnson uh the one who got person who invented the the first dictionary who said that the road to hell is paved with good intentions. Um obviously the the framework for um tax exemption is that the public benefit created generated by nonprofit hospitals is is greater than the cost of that benefit. The American Hospital Association publishes a report that says I I can't remember the exact but it's you know 170% uh greater benefit to society than the cost of the tax exemption. Um it both understates the the benefit and and the cost uh that report. Um, and part of the reason it overstates the benefit is that it claims that any payment shortfall relative to uh commercial rates u in government programs is part of the societal benefit that hospitals uh generate. Well, you know, the for-profit hospitals don't get to claim that on their their taxes. So uh in early two during co Amitatab Chandra uh the Harvard healthcare economist and I uh wrote a paper that ultimately we didn't publish for uh quite a few reasons but we we estimated that the annual cost of tax exemption was in the $40 billion range. Um that puts it on par with the National Institutes of Health. There are other estimates that say that subsidy is as high as $60 billion. So it Brian you're right it is a massive number but I've started to think of it um as as a drag on hospitals at least some hospitals as much as um you know wind in their sales u the truth is if you're a nonprofit institution and your margin gets much over four or 5% everybody comes out of the woodwork demanding um new services more investment in the community and so on uh and that has a pernitious effect I think of uh nonprofit systems tolerating a higher level of inefficiency in their operations than for-profit hospitals. Um also the governance model is a little bit strange um in the sense that most nonprofit boards um are philanthropic in orientation. They often lack vital expertise. they seed strategy to management and you end up with this really kind of strange dynamic where management is on uh contract. They're under contract so they don't they don't own equity in the institution. Um and as a consequence their thinking tends to be short-term not longer term and the board which should own strategy typic the boards which should own strategy typically aren't equipped to make the type of long-term resource allocation decisions that that happen. So I I honestly believe that if we did away with tax exemption um and hospitals started paying taxes even if they wanted to remain nonprofit then suddenly they wouldn't be subject to these societal demands for reinvestment, community development and so on and they could focus on what we need them to focus on which is how do we deliver uh the best cost uh or the best care at the lowest cost with the best customer experience. How do we train the next generation of doctors? How do we do pathbreaking research? And unfortunately, I think all of that gets kind of ma, you know, mashed up inside the nonprofit structure.

[00:33:18]>> So, I gave a case study in the paper.

[00:33:21]So, another teaser that people should go read the paper and enjoy it. Common Spirit Health. And I just I don't want to pick on them. They're they're an example that that I could have picked another example, but it's a Catholic quote unquote health system in the West.

[00:33:36]and uh covers about 18 states. CEO earns about $30 million. Well, I traced it through about three or four waves of mergers and one of them was a hospital in San Francisco founded in the mid- 19th century by religious sisters who came half a dozen of them came on a ratinfested ship from Ireland to treat chalera patients. They had taken a vow of poverty. They worked as the nurses in the hospital they set up in San Francisco. that is what the tax exemption is meant for, not for your 300 $30 million CEO. So, we certainly need uh to look at the way the IRS looks at the requirements to get this tax exemption. We we need to tighten that up. And uh you know, you just got to look back to what you think of as a hospital in the 19th century founded by a bunch of religious sisters from Ireland or France or Bavaria or something and what they are today. Uh, it's shocking.

[00:34:34]>> All right. Uh, hey, uh, John and David, uh, thank you. We'll bring you back on for some closing thoughts and something on recommendation, but I want to invite our next guest, uh, Al Huard on. Um, I got I've gotten to know Al, uh, pretty well over the last seven years. Uh when I left my time in the White House, uh I got a call from Al and had worked uh worked on a project with Al um on an effort that he took on uh to take tackle high hospital prices in Indiana. Al I consider Al personal hero um and a mentor. Uh so this is really a thrill to have Al on um today for me. Al uh is co-founder and chairman of ENA companies and served as assistant to the president uh for economic policy and director of the national economic council under President George W. Bush. Um I mentioned he's been a leader um in this uh fight against high hospital prices. Al had um most of his um philanthropy work was in education policy um and promoting school choice, but he got involved with um high hospital prices in uh 2019. And Al, uh it's great to have you with us. Uh can you uh start by talking about why um this issue got on your radar in 2019?

[00:35:54]Well, uh, Brian, thanks for inviting me to join y'all. And, uh, congratulations to Paragon. You created it, I don't know, four years ago, and now, uh, I I you're, uh, I see your studies are being cited weekly. So, um, you're having a huge impact, uh, positive impact, I might add. So, I I got I I've actually been concerned about health care costs since the 80s as an employer. Uh you know, we pay the the health care costs of our employees and and uh so ended up being on Anthem's board. Then I when I was in the Bush administration in 43 I I worked on healthc care reform and unsuccessfully I might add uh we had a proposal in the president's state of the union in ' 07 and were unable to get Congress to any traction with Congress uh to to encourage more uh privatizing the whole uh uh system so people could buy their their own healthcare uh insurance plans.

[00:37:03]But anyway, in in 2019, uh there was a study that came out uh by Rand that showed Indiana had the fourth highest hospital prices in the country. And to be perfectly frank, I was just outraged by that. I mean, we are a lowcost state.

[00:37:18]Our our cost of living's 9% below the national average. Our earnings are 12% below the national average. And uh the idea that we were uh uh our hospital prices were close to the highest in the country I thought was indefensible. And I just decided I would uh take this on and uh it's been quite a fight. Uh and uh the good news is uh it's it's uh we've made progress. we haven't gotten to where we want to get, but uh I just had lunch today with one of the big uh hospital CEOs who reached out to me and and he's new and he says, "Hey, I want to be part of the solution, not part of the problem." He admitted they have high costs and that they have to deal with that. So, uh it's been quite a quite a a journey. Uh one of the first calls I made, if not the first call, was to to Brian and to see if he would help us.

[00:38:14]And he signed on. He's now a member of our board and he's been invaluable and when we have major meetings like with the governor just recently we Brian's there with us and uh he has such stature in the industry it's very helpful to have him uh participating. So I'm happy to be here.

[00:38:35]>> You're very kind. Um, so you got involved and you, for those of you that don't know, Al is very prominent in the state of Indiana. So he has a lot of connections and really has a very successful um, entrepreneur, businessman, uh, who knows a lot of the political establishment in the state.

[00:38:56]when he got involved um it got a lot of attention um and uh you got some negative attention uh from the existing uh healthc care industry al so why don't you talk about like your what your goals were and what you've learned about both sort of interacting with state legislators um as well as the interactions um that you've had with the healthcare industry >> uh well the one of the most interesting calls I got well I when I decided to take this on I called the uh CEOs of the major hospital groups there were five of them to tell him what I was doing and and one of them said to me we spent 50 minutes on the phone and he he was outraged that I was doing this he said who gives you standing to do this you know you don't know anything about hospitals and hospital prices and costs etc. uh and basically said you know it was a it was a very arrogant you know we will do it the way we want to do and get get you know don't don't play in our sandbox u another hospital one of these CEOs said yes our prices are high and the reason is because we can charge it you know if you know we charge as much as we can so our initial effort was we you know I'm a I'm a big believer in the free market that's what we were trying to do in Bush 43 uh so our thought was let's create more transparency.

[00:40:21]Let's give the consumer incentives to to be good good uh consumers and wise consumers and and uh let's see if we can create a free market. Uh and so we were able we uh fortunately I have very good relations with leadership in in the U uh in the legislature and we were able to get laws passed that required more transparency. Uh and what we discovered, number one, the hospitals, although they acted like they wanted to be helpful, they were not, and they dragged their feet as much as they possibly could. And then secondly, you know, it it just uh it it it hit home that this is an industry where the consumer is not used to shopping. The consumer listens to his or her doctor and goes to the hospital that his or her doctor recommends.

[00:41:12]uh it is rare that they shop for a service and and to make that transition is is virtually impossible given where we are today. Now perhaps on you know the shoppable services I think there are 300 shoppable services that Medicare has identified. We can encourage them to do that but for the bulk of the consumption it's it's not going to work. And so we have transitioned to really using leverage to push down hospital prices.

[00:41:43]And we've done it through social media and marketing and revealing to the public how outrageous the prices are and how we're paying so much higher than other people in the country. And then we've also used the legislature to uh pass legislation to encourage lower prices.

[00:42:03]So, how important do you think the uh the role of shaming is here and going to the public uh with examples of outrageous billing and um really I mean prices that just aren't they're not rational in any sense of how much it should cost uh a typical person to receive a medical service in a hospital? Well, I think it it obviously depends on the hospital, but we it it it has worked for us and uh one of the biggest systems actually came to us and said, "Okay, we agree. We will lower our prices to the national average within x number of years and they made that commitment and it was because of our social media and marketing efforts. We've also worked hard with the legislature. Now that you know it's a big challenge because in in in rural legislative districts, the hospital's off often the biggest employer. They have all the prominent people on their board. So it makes it very difficult for legislators to do anything that uh is viewed as not friendly to the hospital. But we have worked very hard at educating these legislators and explaining what it's costing their their their constituents.

[00:43:18]So it's it's a you know I think it's extremely important to have both you know both the uh uh the social media and marketing campaign but also the campaign in the legislature because it's important to educators are unaware of this and it's very important to educate them.

[00:43:43]>> Yeah. and they hear from uh the hospital industry. And I mean from what I have heard and seen sort of in my um work in Washington and in state capitals, uh the hospital lobby is very powerful in Washington, but it's even more powerful in state capitals. So being able to um advance arguments and take on the hospital industry um is really important. And really, I think that Indiana over the past several years, in large part because of your group, has put um uh hospitals and the high prices on the defense.

[00:44:22]How how should other states think about um the success that you've had in Indiana and what they could do to replicate those successes?

[00:44:34]Well, let me just, you know, when I started out, the the leaders of the top hospitals did not want to talk to me.

[00:44:42]They treated me like a pariah and uh they viewed me as the enemy.

[00:44:49]And now, I mean, like today, I had lunch with the second large the the head of the second largest hospital system at his request. Uh I have met recently several times with the the leader of the largest system at his request. Same thing with the third largest system. And it is because of the pressure that we have applied and they realize that they're in a in a position that's indefensible and they now recogn and and and and we we keep hammering on the this whole nonprofit idea. If you're if you're in this as a nonprofit for the good of the community, you're supposed to provide excellent service, uh, excellent quality at the lowest price possible, not with the highest price possible. And by the way, just to give you a sense of, and I'm getting a little bit off the the subject, but our our hospitals, you know, nationally, the the the uh uh margin for uh hospitals is 3%.

[00:45:52]For our big five, it's 15%.

[00:45:55]And they have billions of dollars in investments that have nothing to do with healthcare. It's all they're they're they're invested in the stock market and and other, you know, private equity.

[00:46:07]>> You're not off topic at all. That's a feature of John's paper.

[00:46:10]>> Yeah. Oh, well, good. Uh, so I mean, l literally our our largest system earns $2 billion a year and has $10 billion in the bank. Uh, it's outrageous. I and and the other thing that you know when they say, "Oh, it's a" and they keep arguing, "Oh, it's a free market." Well, how many times have you seen a hospital and they advertise all the time on TV? When's the last time you seen it seen them advertise a price? Never. If it were if it were a free market, they would be advertising their prices. So I I think our experience is that it takes an enormous amount of effort in terms of social med educating the public and educating the legislature and educating the governor uh about you know the the outrageous prices and and uh what we have found is after seven years they're now f reaching out to us and say okay we want to work with you.

[00:47:09]Let me uh let me say three things that I learned from you and let me invite um David and John to come back and join the conversation. Uh one thing that I learned from you is how to try to keep things as simple as possible um and boil down the issues. Um but then a second a second thing and I lead a lot of my talks with this is the first line is we do not have a free market in healthcare.

[00:47:33]we have a market that is incredibly distorted um by government policies and where there's monopoly pricing. Um and uh the third thing and it's related to this community benefit standard. You know, nonprofit hospitals um are supposed to provide community benefit and we often think of that in terms of charitable care. But the best community benefit that a hospital can provide is having high quality care at affordable prices. And on that measure, the vast majority of hospitals have failed because prices are unreasonable and have experienced explosive growth over the last 25 years.

[00:48:17]>> Uh I I agree. And the other thing I I I always work hard. People want to say, well, you know, our nonprofits are not contributing, doing enough charitable work. Well, I I'm not concerned about their charitable work. I'm concerned about their prices because that is the best charity they can provide to our society and to our state is the lowest possible prices possible.

[00:48:39]>> And which is flows with what David said on the uh beginning is that they're this leads them to be less efficient. Uh John, you should uh join us. I've got my next question for you and then Al, David, and John, I'm going to ask you about solutions. Uh, one question, John, I do want to get to you. Um, uh, first deals with this narrative around h around cuts. Um, there's a, uh, perception from the reconciliation bill last year that there are massive cuts coming um, uh, towards hospitals that are going to force them to close. Can you provide some context around both that argument of hospital cuts and uh this issue of hospital closures?

[00:49:23]>> Sure. I think people can be forgiven for thinking that because the media just say cut cut all day long. So for people who like high Medicaid spending or high Obamacare subsidies, I suppose at the risk of being facitious, I have good news. There are no cuts. There's everinccreasing spending. Uh if we look at the Congressional Budget Office baseline, which is the projection they do every year, you go back to 2021, the height of the COVID pandemic, and then go to 2025, the last baseline projection before the uh one big beautiful bill, the projected spending over the 10-year window had increased by one and a quarter trillion dollars on Medicaid and almost $600 billion on Obamacare. The one big beautiful bill, it didn't cut. It reduced the projections of future spending. We are still going to spend about $650 billion more on Medicaid than was projected in 2021 at the height of the pandemic and about $212 billion more on Obamacare than was projected in 2021. So, no cuts, increasing spending.

[00:50:37]>> Yeah. Yeah, and I'll make uh one additional point here about government programs in hospitals. Um it used to be that Medicaid was a poor payer, but really over the last 5 to 10 years, Medicaid um because of a lot of these state financing gimmicks and because of something called state directed payments, Medicaid reimburses hospitals very well in many states up to average commercial rates and has you know from the work that Al has done like looking at we know that average commercial rates are way in excess of what hospitals receive from the Medicare program. So, the Medicaid program, which is a welfare safety net program, um in part because of really bad incentives that states face for Medicaid, has turned into a profit center um for big hospital systems, and you have a lot of corporate welfare going through the Medicaid program. That's an issue that Paragon has spent a lot of time uh focused on.

[00:51:31]Let me I'm going to uh close with two questions uh and I get everybody's feedback on each of these questions. The first is the role of employers. I think uh we know uh uh you know these higher health care costs are largely borne by employees in the form of lower wages. Um so employers are offering less wages. Um and it seems like there's a lot of problems with incentives uh around employers and I know each of you have thought about this. So, could you each maybe uh uh give a brief answer on what what you think employers should do um here uh uh to get a better hold on the hospital cost crisis. And let me start with I'll start with David.

[00:52:16]>> Uh in a nutshell, Brian, employers need to become better buyers of of health care services. As I said in my remarks earlier, it's it's not always their fault that they pay premium prices for largely routine services.

[00:52:31]uh because of the monopoly properties, monopoly and monopsy properties in in regional markets. But with there are new technology platforms that enable much greater transparency, much better uh individualized programs for employees that should both not only drive down the cost but improve the overall health of of their employees. So I' I'd encourage him um you know we we got we're Indiana here. So I used to be a fan of Mitch TV and I I saw him give a speech once where he quoted the uh motto of the Special Olympics and uh which is let me win uh but if I cannot win give me the courage to try. So we have to have our employers have the courage to try like Alice done.

[00:53:19]>> Uh John.

[00:53:21]>> Sure. Uh I think we got to remember mo most people know this. The reason we get our health benefits from our employer is a World War II response to wage and price controls. That's why we have it and and that's the way it is and we're we've been conditioned to it to it for you know 80 years now. Uh so I think there are some reforms the Trump administration has made that are especially beneficial for small businesses. Ira u the uh which has now got a new name. I don't think we're supposed to call it IKRA anymore, but uh something where you give you give the decision making more and more down to the employees and let them make the choice. I mean, one problem with even in a large company, you know, the the the HR bureaucracy in the company makes a a decision about what health plan to go to and the individual might have a choice of two plans, but they're both offered by Etna or the blue plan in your state or United Health Group or whatever.

[00:54:18]that's not really enough choice. So, anything we can do to give allow the employers to pass the decision-m down more to the employees and their families is is going to make sense. Things like, you know, the health savings accounts and HAS and FSAs, which at least give patients a little bit more control of the cash is beneficial. Uh they're important steps, but they're they're they're not fully adequate. So, there's a lot more to do. And Al, you've spent obviously a ton of time uh talking to employers in the state of Indiana about this.

[00:54:51]>> Yeah, I I'm frustrated that they have not been more aggressive. Uh actually, one of the more aggressive ones has been Eli Lilly. They've been very frustrated with the high hospital prices and have actually diverted some of their their not diverted a number of their employees to go to the Cleveland Clinic because it's a lot less expensive than than getting services here in Indiana. The other thing we are doing is the the largest plan in the state is the uh the state plan for the its employees and it covers 60,000 lives. And we are we have been trying to do this. Brian actually gave us the idea of working with the state to develop a a uh a plan that would be much more aggressive at at at managing health care costs and managing hospital costs. And so, in fact, we just met with the governor on this and his senior people. Brian was part of the meeting to develop an an RFP to so the insurance companies will have to make a proposal that is much more focused on costs and uh we're we're hopeful that this could be the model for the for the state and for other employers in the state. So um but I I I think employers have not done what they should have done and have not been nearly as aggressive as they should have been. You know they are afraid you know it's it's it's hard to hard to find good people. So and they don't want to have uh narrow networks because then they'll get complaints because well I can't go to my doctor etc. Um, so that's been the reason they have, you know, been reluctant to to be more aggressive. But I I think it's been a mistake and it's cost our community a lot of money and and cost our employees a lot of money because as Brian points out, it's the employee who pays the cost of healthcare. It's not the employer.

[00:56:38]>> All right, let me uh uh closing question. Let's talk about the government and what the government can do. and John's paper, we have a dozen recommendations to address things on the supply side of the market and the demand side of the market. Recommendations geared some towards states, um some towards Congress, some towards the administration. Um let's go in the same order. Uh start with David. One or two uh key recommendations that you have for reversing the hospital cost crisis.

[00:57:08]Well, I I'm going to echo John on the site neutrality uh and sort of eliminating these buckets of um sort of artificial payment 340b site neutrality, Medicaid match formulas and so on. The second thing is is observation I want to make and I'll end with this is it's really a pernicious problem because imagine we actually solved the health care challenge which is we we got a market where we delivered better uh better health care outcomes at lower cost with with better customer service.

[00:57:44]If we do nothing about the distribution of resources going into uh treatment relative to prevention and health promotion, then yeah, we'll be spending less on healthcare, but we'll still have a sicker population. So, one of the things we have to think about is not only how do we lower costs, it's how do we achieve better balance between health provision, health promotion uh and or health health promotion and healthcare provision.

[00:58:13]>> Thanks, David. Uh, John.

[00:58:14]>> Well, I'll just reiterate the sight neutral because I think it's the most bipartisan. The first time I heard about this problem was in President Obama's 2012 budget. And after that, in 2015, Congress passed a law to try and get a grip on these payments, but it didn't work out. It didn't have the outcome that was expected. And just to make it stick with people, if you'll bear with me for a little metaphor, you go out for happy hour, and you've got Patrick's Tavern on one side of the street, you got the hotel bar on the other side of the street, and you decide to go to the hotel bar for your happy hour, and the bartender, when you're done, gives you the check for here's how much you owe for your beer or your glass of wine. Oh, and here's another bill for a facilities fee to pay for the rooms and the overhead of the hotel in which we are situated. Now, your answer would be, "But I'm not checked into a room. If I was checked into a room, I'd pay a room fee, right? Why should I pay that overhead just because you're you have that cost?" You know, that's what we're doing in our Medicare payment system, and it doesn't make any sense.

[00:59:17]>> Thank you, John. Uh, Al, >> so Brian, you're going to have to help me. What's the phrase that you use to describe when you're shopping for shoppable services and you actually get the benefit if you're able to get it for?

[00:59:30]>> Oh, the shared shared shared savings.

[00:59:33]the this whole I I I would put that at the top of my list if if if uh we incented uh the consumer for the 300 shoppable services to seek the best price and shared the savings uh against a a standard I think it's 65% of I I can't remember how the system how >> yeah so you're talking about the uh the what Kalpers did the best example they set the reference price really a reverse deductible where The plan pays 100% up to a certain amount and then beyond that the consumer would pay. It incentivizes the consumer to shop. And what we saw is that the high price providers lowered their prices dramatically because they didn't want to lose customers.

[01:00:17]>> Yeah. And I think the benefit if if if we did that uh then all of a sudden people are at least shopping for part of their medical their health care consumption and I think it it would hopefully it would it would grow beyond that. And I I just think it introduces some free market principles in in into the whole healthcare industry.

[01:00:38]>> Uh well, I want to thank everyone for attending today. I want to thank John um for the paper uh and the work in developing that paper. David, thank you for reviewing the paper and for your expertise. Al, thank you for your example of uh taking on high hospital prices in Indiana. Uh it's a pleasure to have this conversation with all three of you. Uh for those of you that want additional information about Paragon, please go to our website uh paragoninstitute.org.

[01:01:06]Um and you could find this paper as well as all of our other uh recent uh research and policy work. Thank you very much. Bye.