In an article published on LinkedIn last spring, Michael Dendy, the CEO of the healthcare cost management company AMPS, compared skyrocketing healthcare costs to oil prices in 2008.
“Like the oil producing cartels that for many years controlled the cost of the world’s energy in unencumbered fashion, there is absolutely no catalyst for healthcare providers to reduce their costs or for an employers’ covered members to be concerned whatsoever with their spending,” Dendy said.
An interesting comparison. Let’s explore the parallels and see what the oil industry can teach us about controlling costs in healthcare.
When OPEC had free reign, oil prices soared
At their height in 2008, OPEC was selling oil at more than $140 a barrel, Wikipedia said. But then we found ways to increase oil production in the US; meanwhile, demand declined from other countries. As a result, in 2014 the price came down significantly, said the Wall Street Journal. As of last February, OPEC was charging less than $30 a barrel.
In some countries, $30 is below the break-even price, but for OPEC, it’s a viable figure. “Saudia Arabia and Kuwait can pump a barrel of oil for less than $10, on average,” CNN Money said. “Iraq can produce oil for about $10.70 per barrel.”
So it’s not that there wasn’t room for OPEC to come down earlier. Rather, it’s that there wasn’t an incentive. OPEC wanted to make money, and without any competitive pressure to reign them in, they were unwilling to bend. Their stranglehold, in Dendy’s words, didn’t loosen until that dynamic changed.
Healthcare costs, too, are rising unchecked
According to the Kaiser Family Foundation, in 2005, family coverage cost over $10K in worker and employer contributions combined. Last year, it surpassed $17,500 – an increase of 61 percent.
According to Dendy, costs are skyrocketing because, as with OPEC, the players who set the prices feel no pressure to keep them low. When profit is the only driving ethic, we cannot expect prices to fall until we exert the pressure to bring them down.
What can we learn from this?
For a problem so complex and interconnected, it would be simplistic to suggest a single answer to solve it all. But there are steps we can take in the right direction. For his part, Dendy urged employers to adopt defined contribution healthcare plans.
In this type of plan, the employer sets a budget for basic services, and allows providers to opt out if they’re not willing to work for that fee. When CalPERS took this approach, some hospitals didn’t accept their fee schedule at first. Yet when they saw the business they were losing, they changed their minds, Dendy said.
When direct competition isn’t doing enough to keep services affordable, this approach can provide the pressure needed to achieve some form of balance.
Without a budget, medical service providers have no reason to lower their fees. And if the employee has full healthcare coverage, they have no incentive, either, to seek out services that are reasonably priced; because fully-covered costs are invisible to them. In Dendy’s view, this makes no sense. Rather than allowing the costs to remain invisible and uncontrolled, employers should set a fair budget and give providers a reason to compete for their business.
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