Corporate Strategy, Healthcare

The Willie Sutton Rule

“Why do you rob banks?”

“Because that’s where the money is.”

– Conversation with Willie Sutton

Last month I posted about joining Cerner in their executive development program.  Since then, I have spent six weeks immersing myself in all things healthcare.  I think it’s fair to say that I’m now an expert.

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Me Talking Healthcare

Actually, as you might expect, after spending six weeks reading every possible news source or book I could find, the only thing I know now is how much I really do not know.  It will come as no shock to anyone that healthcare is highly regulated, very complex, blah blah blah.

But one potential cause of this chaos that I wanted to write about today is what I am starting to call the client/user dichotomy.  The reason healthcare is different is because the clients doing the paying are not the people using the products.

Let’s take, by comparison, a simple retail transaction.  In a simple retail transaction I walk into a store to buy some candy.  The cashier (who represents the owners of the company) takes my money and hands me the candy.  I both buy and eat the candy.  The cashier collects my money and provides me the goods.

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A Typical Retail Transaction

Healthcare is different.  When you or I go to the doctor to get healthcare services (like vaccines or antibiotics), we are not paying them for their service.  Analogous to most insurance companies, we are submitting a “claim” against the service we got.  So if we got an antibiotic, we are saying to our insurance company, “Hey my body was broken so I had to go fix it, can you pay for this?”

The major thing that’s different here is that usually in an insurance setting, the claimant is responsible for collecting the reimbursement.  When you get into an accident in a car wreck, you pay for the repair before submitting a claim.

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What Normal Insurance Looks Like

In healthcare, you receive the service and the provider (doctor, nurse, etc.) has to go through your insurance to get paid[1].  In this sense healthcare insurance is a bit of a misnomer.  It’s more like a proxy paying service.

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Health Insurance is Really Proxy Paying

But this odd situation is compounded by another complication: the healthcare providers are not tied to the payment from their hospital services and systems[2].  In the retail example we gave above, the cashier is paid by the owner of the store to handle transactions.  But there are preset prices for all goods, the cashier does not make this up on the fly.  With healthcare, the amount that the provider and health system is actually able to collect from a patient will depend on their health insurance, which is not known ahead of time.  In addition, payee models are changing from a fee-for-service modality (similar to paying for the candy you buy) to value-based care.  Each of these specific topics deserves its own post to dive into, but for the sake of explaining the dichotomy, this simply means that the provider is essentially no longer an agent acting on behalf of the person collecting the money, but an independent operator whose work is leveraged by the health system to collect revenue at a later date.

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The Users and Providers of Healthcare Are Not Where the Money Is

So we get the resultant flow above.  Which means that there are six potential interactions between the key players in the space[3].  For those building businesses in and around the healthcare industry this leads to interesting questions:

  1. Who is really your client: the agent that is paying (insurance), the agent that is being paid (health systems), the provider and/or the patient?
  2. How can you improve the provider/patient relationship with the presence of these middlemen?
  3. Are there ways to completely disrupt the middle layers to bring efficiency?
  4. How can this landscape be navigated in a highly regulated environment?
  5. How does the fact that 37% of all dollars in this system are controlled by the government shape innovation and delivery?

If you have an analogous industry that would provide color on business models or potential improvements I would love to hear them.  I still have found this model unparalleled, for better and worse.

[1] This does not even cover co-pays and deductibles which are their own strange things.  This is just about the rates that providers get directly from insurance companies as reimbursements for their goods and services.

[2] This is a little different in private practice because the doctor owns the practice and therefore has “skin in the game”.  But recent trends show a major decline in private practice from 62% in 2008 to 35% in 2014 and a massive consolidation of major healthcare systems.  Both of these trends exacerbate the payee/provider dichotomy.

[3] Patient to Insurance, Patient to Health System, Patient to Provider, Insurance to Health System, Insurance to Provider, and Health System to Provider

Credit to John Gallemore for introducing me to the “Willie Sutton Rule” in cost accounting.

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