Applied Principles
Applied Principles | Transparency, Healthcare Costs, Healthcare Payment System, Consumer Directed Healthcare, Larry Van Horn, Owen Graduate School of Management

Dr. Van Horn.

Using Transparency to Create Sustainability

In a capitalistic society, there are certain hallmarks of successful entrepreneurs. Industry titans understand the relationship between overhead and profit … supply and demand … costs and benefits. Business leaders appreciate the need to educate consumers about the quality and worth of proffered products and services and recognize that if the public doesn’t perceive the inherent value, the business will ultimately fail.

What holds true for the vast majority of businesses in America, however, has no real relationship to the manner in which we deliver and consume healthcare in this country. But Larry Van Horn, PhD, executive director of Health Affairs at Vanderbilt University’s Owen Graduate School of Management, thinks that must change if we are to build a sustainable system going forward.

The current healthcare system of co-pays with no real thought or understanding of the true cost of care and no incentive to shop around is a relatively new business model, Van Horn pointed out. The associate professor of Health Management for Owen noted this model, “caught traction with the managed care movement, which was not effective.” As a child, he recalled, his parents paid out-of-pocket for office visits and medications with insurance only covering major medical. As for the new ‘norm,’ he noted, “We all like it, but we can’t afford it. It isn’t sustainable … it might be nice, but it can’t continue.”

Quoting from the Bureau of Labor Statistics, Van Horn noted the average U.S. household spends 34 percent of income on housing and only about 5.7 percent on healthcare … the same amount as is spent on entertainment. What, he questioned, does that say about the value we put on health? The answer isn’t clear because the system obscures costs.

“For people to make informed decisions, they should have an understanding of what the costs and benefits are for their purchase,” Van Horn explained. “Right now, consumers of healthcare have no idea what true costs are, and they’re not incentivized to care.”

As an example, he pointed to an office visit with a price tag in excess of $200 for which the consumer pays $20. There is a total disconnect, he said, between the true cost and the perceived cost. If consumers were expected to pay the full amount, might they shop around, compare quality for their dollar outlay, or opt not to spend their money on the appointment at all?

“At the end of the day, it’s important that people buy things they value in excess of the cost,” he stated.

For physicians worried that patients might skip treatment because of cost, Van Horn said he believes transparency would create a downward effect on pricing. “It won’t be the entire solution, but it will start to move in the right direction,” he said. He also pointed out people spend more out-of-pocket money annually on new car purchases than on healthcare. In fact, Van Horn noted, “Americans — as a share of healthcare costs — have never paid less of the bill out of their own pocket than they do today.” Again, he reiterated, realigning the healthcare payment system will require people to make tough decisions and do some soul searching as to what they value and expect for their dollar.

As for the recently passed healthcare reform law, he said, “It increases the entitlement mentality and expands a system that is unsustainable. I would love it if everyone could have as much healthcare as they wanted and someone else was always there to pay for it, but the problem is Americans are unwilling to increase their taxes enough to afford that.”

Currently, payment is a function of the way we measure and bill for healthcare services from an insurance carrier’s perspective. This, Van Horn said, is very different from the way the system would be constructed if there were more consumer directed health plans.

“What needs to happen for transparency to work is we need to redefine what we buy in a way that the consumer can shop. We need to simplify the unit of purchase to something people can understand. People need to pay more out of pocket so they have the incentive to shop (around), and we’ll likely consume less healthcare as a result,” he explained.

He added that such a scenario also was likely to have an impact on individual choices. “Right now there is very little consequence to me making bad lifestyle decisions because I’m not held accountable,” he said.

“I’m a balding, middle-aged, fat man, and I take lots of prescription drugs … and I shouldn’t,” Van Horn stated. “I should eat right and exercise more, but I don’t have to, and I should have to. If I knew there were consequences to my behavior in the short run, I’d be more inclined to do something about it.”

Unfortunately, Van Horn said there isn’t a lot of political will to truly effect change because most people enjoy the current system … they just don’t want to fund it. Instead, most people want to have their cake and eat it, too … and then have someone else pay for the cholesterol-lowering drugs necessary to offset the cake consumption.

“I think it’s going to take some very significant event to force a change,” Van Horn said. It might be coming sooner rather than later. “Medicare is $37 trillion underfunded. That’s three times the size of our entire economy.

“It’s like we’ve been playing kick the can for all these years, and we’re running out of room. I don’t think we can play much longer,” he concluded.