Russ Roberts

Lipstein on Hospitals

EconTalk Episode with Steven Lipstein
Hosted by Russ Roberts
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Steven Lipstein, President and CEO of BJC HealthCare--a $3 billion hospital system in St. Louis, Missouri--talks with EconTalk host Russ Roberts about the economics of hospitals. They discuss pricing, the advantages and disadvantages of specialization in modern medical care, and culture and governance of non-profit hospitals vs. for-profit hospitals. At the end they talk about the positives and negatives of a national health board patterned after the Federal Reserve.

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0:36Intro. Hospitals: day-do-day operations and policies. Start with pricing: Bills from hospitals are a little mysterious. How do prices get set, what leeway? Where does the money come from? BJC has 13 hospitals, 2 teaching, some small rural, some in urban core, pediatric and adult. About 30% of revenue comes from the Federal government through Medicare, which insures people over 65 and certain categories of the disabled. About 13% comes from Medicaid, which is funded jointly by the Federal government and by the states, and insures those under a certain threshold of the poverty limit and other categories of the disabled. For those two groups, prices are not set by BJC but are legislated by the government. Not based on supply and demand. Other big payers: commercial payers--insurance companies and managed care. Hundreds of managed care contracts. Those insurers wanted to negotiated discounts with hospitals or doctors. The larger the discount, the higher the price grew. Example: If original price was $100 and insurer wanted a 2% discount, effective revenue to the hospital was $98. Over time, insurers wanted to negotiate bigger and bigger discounts, so it took a lot more of a price increase by the hospitals to generate that same $98. If the insurer wanted a 50% discount, price would grow to $200. Because other prices are legislated, because those costs have to be covered from some source, if the Medicare and Medicaid costs cannot be covered by those programs, the burden is shifted to the commercial side. End up with very inflated prices to cover the underpayments from Medicare and Medicaid plus these deep negotiated discounts. What's the meaningfulness of a discount? There's no difference between full price at $100 and half off at $200. Hospitals need to generate about a 3% operating margin. When you take that with their non-cash expenses like depreciation, end up with about 9-10% of revenue that helps them meet their capital expenditure obligations, to replace the facilities, property, plant equipment. About 6% of that from depreciation expense and 3% off operating margin. If operating margin is negative from Medicare and Medicaid, just shift it to the commercial payers. Have to mark those prices up. Prices mean very little inside the industry any more. Very few payers pay a list price. Prospect of trying to reform makes a lot of sense.
6:30Nuts and bolts: Russ, two kids delivered at BJC. Charges on bill, cost $15 but through insurance premiums as employee, covering each other. Long list on bill, including orange juice, very large number, something like $100. If everyone started bringing his own orange juice, really wouldn't reduce the cost of deliveries by $100, would it? Why charged $40 for an aspirin pill while in the hospital? Different explanations: tablet had to be individually packaged and delivered to the floor and delivered by a registered nurse, but also paying for the aspirin pill for everyone not insured, plus Medicaid and Medicare shortfall, plus teaching doctors and nurses how to administer the tablet. All the costs of the social missions: caring for the poor, educating next generation, caring for the patient, plus negotiated discount. Price has little meaning to the consumer or provider. No incentive to bring own orange juice or aspirin. Would bill go down if so? Some situations where bill can go down. Rules and regulations govern administration of medication in a hospital, so discouraged from bringing medication from home. Bringing orange juice from home might not be the most cost effective way to reduce your hospital bill.
10:37Side question: What proportion of day and staff time is spent trying to figure out these pricing complications? Not much of own individual time but a lot of money spent managing outdated revenue cycle in health care industry, estimated $300 billion more than other developed nations from fragmented system. Anecdote on complexity: Experience at BJC, Russ had sore throat that didn't go away, father had had polyp about the same age; doctor took out technology implement that looks like popsicle stick, thought it wasn't anything; then took out more complicated technology, scope, and explored throat. Russ could have declined the expensive technology, come back later if problem didn't go away. Pace of technological innovation. What kind of financial incentives, cost sharing, so that Russ would have thought twice before allowing the scope examination as opposed to a tongue depressor? Midst of that dilemma now. Increased deductibles, higher co-insurance, co-payments. Anything free will have higher demand than anything that costs money. Sometimes Russ would make a mistake, refuse care and end up with throat cancer. In current world, nobody says no. In America, 55% of households earn under $50,000 a year. If you earn up to $50,000 a year, challenged till recently by high gas prices, food prices, energy prices; concerned with downturn in overall economy; what does a $2000 deductible with $200 copayment mean? People will forego access to the health care. May 4 in a 100. Cost sharing by typical American is causing them to forestall health services, causing people to end up in the hospital for avoidable conditions or experience complications that they wouldn't have experienced had they had access to early treatment. The more cost-sharing and financial responsibility: how much is good and how much causes them to forego much needed care ending up costing more later on? Trade-off. [Taping date: November 24, 2008, financial turmoil and uncertainty.]
18:26At some point in the past, maybe in the 1980s or '70s, most effective non-invasive technique was an x-ray. That changed: got new techniques, MRI, CAT-scans; and they keep getting better. Robotic surgery. Pace of that: when you have to decide when to acquire a new piece of technology, who makes that call? Government, hospital? Governed by intellectual curiosity, affiliated with Washington School of Medicine, driven by desire to figure out which technologies are best. Doctors, scientists, consider whether patients will benefit. Teaching environment: learning, discovery, dissemination of new knowledge; want to be involved in figuring out what works, what adds value and what doesn't. Involved in early clinical trials. By the time proliferation to larger community, usually public and published studies. A 1% improvement that doubles the cost is not a benefit. Most attention now: end of life care. Mother, leukemia, extensive chemotherapy. If physician had said, "There's an 80% likelihood that you are in your last 2 years of life," would she have said she wanted the treatment to see if she was in that 20%. Once she realized that Medicare would cover it, she might have done it. Many families want to try to beat the odds. Probabilities are hard to think about. In technology, certainly there must be cases where you want to make sure the insurers will cover it before you adopt it, and legal pressures. Food and Drug Administration (FDA) approval for drugs and devices. Once approved, typically are covered by insurers, Medicare, and Medicaid. Do factor in if technology is financially viable. Duplicate equipment more of a problem with competitive model, Saskatchewan, Canada.
26:01BJC is an umbrella organization of 13 different hospitals, non-profit. How does profit/non-profit affect competitive environment? Does BJC face competition? Both not-for-profit and for-profit companies generate an operating surplus. Difference is that for-profit companies, hospitals, are able to distribute their earnings for individual benefit--shareholders, owners, investors. Not-for-profits do not distribute their earnings for individual benefit. By law they are required to retain those earnings for community benefit. Community benefit obligations of not-for-profit hospitals and hospital systems: what is it, how is it measured, quantified, reported back to the public? Tenet, for-profit hospitals, earnings could be taken to headquarters in Dallas or elsewhere or distributed as dividends. BJC retains earnings in St. Louis area and redeploys them for community benefit. Sounds good, but cost to that system: in the rest of the economy, role of profit and loss is to induce prudent risk-taking on the part of owners. Loss induces prudence. In the case of a for-profit operation, stock holders, owners judge the bottom line. Not-for-profit whether the community is benefiting or not is not decided by the community. No feedback loop as in a for-profit system. For a not-for-profit hospital, who does the CEO try to please? to whom accountable? Accountable to the patients. Board of Trustees representative of the community is reported to. Patients come at a time of great personal need, anxious, concerned; want to give good personal experience. Have to recruit the best and give a clinical environment and tools to do that. Second, have to be financially responsible, living within resources, with a little left over at the end of the month as savings, like a family budget. Renew property, plant, equipment. Third, position hospital to be around a long time. Not thinking just about next quarter's earnings or next month's earnings or what the value of the stock will be. Asset to the community, provide the community with a sustainable advantage over time. Fourth, stay true to social and academic mission.
34:06Goals conflict, tradeoffs, weird environment, incentives faced are unusual. Must be political pressure within and without organization to try to balance those goals. Board understands needing to be financially responsible and there needs to be a balance. Can't spend all in savings account today, not always able to build state-of-the-art facilities because buildings don't take care of patients--people do. Have to have the right balance. Doctors, nurses, technologists still at the core. Specialization: intense in the medical profession. One hundred years ago, you might just be a surgeon. Today, pediatric surgeon, etc. How does a hospital, given the benefits of that specialization, balance that against the holistic complexity of the human body? How do you keep one specialist from doing something that might benefit the liver but not the rest of the body? Family goes in as an advocate. How does hospital try to reduce those problems? Surge of new knowledge drives specialization. Used to be that family doctor was based on five or six elements, e.g., x-ray, physical exam. Now, knowledge of over 30,000 gene-pairs introducing a whole new set of information. Different kinds of diabetes. Huge specialization. The more specialty training, the higher the income. Causes doctors to pursue careers in the specialties. System rewards specialty training, so generalists are dependent on specialists or information technology. Why do the specialists make so much more? Whole 'nother weird market. Determined by work units. Requires more education, more residency, more highly valued. Over time, those differences have gotten out of whack. Medicare pays doctors out of work RVUs, relative value units, value for every hour of work provided, disproportionately weighted toward procedures involved. Shortages of primary care physicians--less remunerative and fewer and fewer doctors. More specialization, has costs, ability to communicate with each other; can use technology to help the communication, but imperfect. Hospitalists: physicians who spend 100% of their time in the hospital, coordinate the care you receive. Episodes of care go beyond the hospital. Hand-off involved. The more hand-offs you have, the greater the opportunity for failure of care coordination. Increasingly reliant on physicians and hospitals to coordinate our medical care. Fewer visits to primary care physician today. Whether in the hospital or home, need to involve family members in coordinating care. Hospitals can aid through communication strategies, electronic health records, being open. Mother leaving chemotherapy treatment, fell in parking lot, broke leg, ended up in emergency room. Needed coordination, family best.
47:03Role of data in making decisions in the hospital. Leonhardt podcast: door-to-balloon time, person comes in with heart problems. Measuring is a good thing in general. People come in with congestion, but could be pneumonia; go to doctor, stethescope, doctor says fine; hospitals do x-rays so as not to miss it, but that's expensive. Hand-washing data versus reality: probably a good idea but not in the habit. BJC has organization called center for health care quality and effectiveness, measures everything. Timeliness of service is directly correlated with outcomes. Last four years. Have 68 black-belt trained technicians, lean--trained to eliminate waste--and six sigma--eliminate variability. Aspire to get it right. Example of improvement: might have been in upper quartile, now in top ten for speed of administering. Timeliness, accuracy, completeness. Effect on outcomes? Use national indicators: evidence-based-medicine, use what you know and do it consistently. Doctors uncomfortable with that? Over 2000 physicians, over 1000 academic; trained at different times; some more facile with new technologies than others. More senior physicians have accumulated experience; learn from each other. Learning and innovation feed off of each other. What kind of regulations keep you from making those improvements? Some may slow down the process. Health insurance privacy and portability act (HIPA): information not always shared that perhaps should be shared. Want to ensure confidentiality but make it available, say, in emergency room at a time it's needed. Personal health records, as differentiated from electronic health records. BJC, myhealthfolders.com, medications lists online in family folders, would be available from any emergency room in the world. Security issue. Software changes pin number every two weeks. Electronic chip in one's arm. Could be scanned by anyone walking by.
57:38What would you change in the current regulatory environment? Max Baucus, 89-page white paper on everything wrong with the American health care system. Volume and complexity. Change: recognize that founding fathers didn't create those branches of government to design and implement our health care system. Federal Reserve model: Board legally chartered by Congress, commissioned with guaranteeing access to health insurance, affordable; and give individuals choice. Set up U.S. Health Board, delegate supervisory responsibility. By setting up the board, could begin to tackle real problems like administrative cost burden. Wouldn't have to set pricing nationally, could just create the units of service. Would be more consistency, less fragmentation. Take long-term planning horizon. Cannot be election cycles, even 2 or 4 or 8 years, not long enough planning horizon. Hayek, from The Fatal Conceit: "The curious task of economics is to demonstrate to men how little they know really know about what they imagine they can design." Surfeit of design in the current system. Board might be step in an improved direction. Governors in Fed Board of Governors appointed for 14 years. Buffered from political concerns, not lobbied directly about Fed Funds rate. Not best month to use the Fed as an analogy. Probably been spared some mistakes in health care by lobbying. Fed has acted fairly deliberately. Without central bank might be in worse position than today. No answer to which is better: explicit lobbying or implicit?

COMMENTS (12 to date)
NormD writes:

I was somewhat disappointed that Russ did not take the opportunity to really dive into some of the economic issues of healthcare.

What are the factors driving costs higher each year?

Usually technology delivers improved performance at lower cost. Why does this not seem to be happening at hospitals?

Does the better technology really improve outcomes?

Lipstein implied hospitals lost money on Medicare and Medicaid patients. How much? 10%? 50%? 90%?

What is the cost burden of providing care for the indigent?

My wife had an appendectomy recently. The hospital list price was $70K. The insurance contract rate was $5K. The surgeon's fee was $3K. I would expect $5K-$10K for this most common of procedures. $70K is just way out of line. A 93% discount rate says that something is just massively screwed up. What would you think if the list price on a Honda Accord car was $300K, but because you hired a car negotiator the out the door price was $21K?

I don't want a government run system, but the current system is so messed up and I just do not hear solutions from free market advocates that make sense.

Russ Roberts writes:

NormD,

We have explored a number of the issues you mention in earlier podcasts. Please check out the archive category of "Health" and you'll find conversations with Kling, Hanson, and Cogan that deal with costs, the relationship between technology and outcomes, and the cost burden of the indigent.

On your last point, one of the things the Lipstein podcast reinforced for me is that we already have a de facto government run system where prices bear no relationship to the supply and demand.

eric mcfadden writes:

Lipstein is the suit and the car sales manager you interviewed earlier this year is the geek. I think I finally understand what gets Mr. Kling so worked up in the financal realm. Lipstein talks like a politican. He doesn't seem like the type of guy who is losing hair over finding suppliers that can provide a 100 IV needles for 50 cents less than his current supplier.
This guy keeps refering to national health care problems when pressed about specifics in his hospitals. You probably wanted to know why a glass of orange juice costs 50 bucks instead of 40,not listen to a rehash of C-SPAN. It seems obvious to me that when over 60% of your revenue comes from the government directly and your CEO "kinda likes to think he is accountable to the patients" this is not a typical business model. No Mike Dell is gonna invent a great hospital in his dorm room and put this guy out of business.
Good interview considering you can't piss the guy off in the first 15 minutes and have him hang up on you. How much would econ-talk have to pay for you to be able to press your subjects harder, you might have to interview 5 or 6 hospital managers to get a full hour. You make Mondays fun Russ, good job.

Schepp writes:

Russ,

Great podcast. Taking guest that are not economists and engaging in conversation about the economic views seems challenging, but illuminating.

Straight off I noticed group pay thinking of the hospital. I am going start bring my own form to the Hosipital requesting most favored patient status(similar to most favored nation status) where the hospital promises to charge me no more than the lowest price the Hospital charges to any private group.

Hospital can certainly decline to sign my form but Hospitals acknowledging their over charging will provide some pressure.

tw writes:

Russ,

I know you were running out of time at the end of the podcast to go too in depth, but I can't imagine the problems of having a National Health Board akin to the Federal Reserve Board. We know that bureaucracy is driving up costs, and we're going to solve that by.....creating a new bureaucracy? I did laugh at your comment that this isn't the best time to be using the Fed as your benchmark/ideal (or however you phrased it).

What struck me the most in this podcast is the alarming calm with which Mr. Lipstein explained the cost of a $50 aspirin tablet. I'm guessing that he really does understand the outrage that something like this evokes, and that he's given that explanation so many times that he just delivers it in an unemotional, nonplussed manner.

Kevin W writes:

I am glad you are exploring organizations that have a bottom line that is not strictly financial and/or profit. I work for a municipal government that is also constrained by state and federal laws, such as revenue generation, which make it difficult to provide service that the community expects. There are challenges that these organization have, such as tax caps and internalizing negative externalities - serving the public in ways that are not profitable and as such are not provided by the private sector. I look at providing medical care to those who cannot pay as similar to providing police or fire protection - there is a greater public good for providing these services, so all taxpayers (or health care users) pay an increment above the actual cost to them to serve that public good.

I have been an econ talk listener for the past few months and have thoroughly enjoyed it. I would like to hear the perspectives of economists on local governments - how economic forces impact local governments, and how local governments impact markets.

Ed writes:

Russ,

Good podcast. It's nice to hear from someone who actually works in health care rather than a politician or a pundit.

I disagree over the guest's suggestion of a Federal Reserve type of board to tackle problems in the health care industry. Too much centralization is the problem we have already.

Ed

emerich writes:

Lipstein was, as it were, too smooth, too practiced, as though he's so used to addressing such questions that he has all the pat answers. But he doesn't sound like he's ever thought of the underlying economics of his business. "Like to think I'm answerable to patients"? Sounds lovely and doubtless hits the spot with almost any audience. But meaningless as a decision rule.

Matt writes:

the podcast was enjoyable, as always.

It was great to hear someone within the industry talk about the weaknesses of the system. Like many CEOs, Lipstein has a problem seeing the larger framework that has screwed up incentives and prices. Plenty of great buzz words all leading to a very disappointing end where he suggests a board like the fed.

It makes perfect sense that Lipstein would see a governing board as a solution. Larger firms would have more influence on policy over smaller firms, and his firm would be able to solve their problems. Just as really large banks have been able to wedge themselves into favorable positions with financial regulations.

Justin writes:

Russ, I love it when you interview people outside of the mainstream such as this one and the one with the ticket scalper awhile back.

Also, I am dying from some more Vernon Smith or Tyler Cowen -- when will you feed my hunger?

Thanks again for the great interviews!

James writes:

To me this guest seemed far more interested in advertising how wonderful BJC HealthCare is ratehr than actually discussing health care issues (not that I found this surprising given his position). I thought his explanation of the 'fourfold mission' of BJC sounded like a whole lot of slogans and propaganda without much real substance. Of course things like "financially responsible", "not thinking just about next quarter's earnings", "asset to the community", "sustainable advantage" and "staying true to social and academic mission" sound nice, but what do they really mean? I nearly laughed when he said that these goals did not conflict with each other, but merely required trade-offs - isn't that exactly the same thing as conflicting?

It’s a shame that Russ didn't mention the role of prices as conveying information, in this case information about the relative importance of different activities. Without (meaningful) prices and profits, I do not see how any organisation can rationally allocate its resources in the most efficient manner. As Milton Freidman said 'the social responsibility of a firm is to make profits'. By this he meant that, barring significant market failure, when a firm maximises profits it also maximises value to the community. If we think the poor need more health care, surely it is better to give them a bigger claim on production (i.e. money), rather than to trying to provide this care directly without the enormous benefits of information, innovation and competition that come with free markets.

I also found it rather odd that at one point in the podcast, Lipstein said that we had to be careful about encouraging higher co-payments, as this would encourage people to take excessive risks which would increase long-term costs and difficulties. Then later on, he said that patients needed to take more of an active role in co-ordinating their own health care. My opinion in the matter is that people should be left alone to do what they think is best for them, without being told what to do by government regulators (whether this takes the form of subsidies, regulations, or whatever). Lipstein himself pointed out that no one was going to care more about his mother than he was, and therefore he was best placed to co-ordinate her care and make sure she was looked after. Why not apply this to everyone for health care generally?

I was very sceptical about his claim that government regulation does no more than 'slow innovation down a little'. Did he not say that the FDA had to approve every new drug and procedure? Can this not sometimes take years? Of course, I'm sure he knows a lot more about it than me, but still, government bureaucracies are not known for being paragons of efficiency.

The last part of the podcast was very interesting. After Lipstein put forth his Fed-style model for national health care, I could almost feel Russ wanting to burst out "what? that's a horrible idea! We need less government, not more!" Of course, Russ was too gracious for this, and so instead he got Hayek to say it for him.

I thought Lipstein's point about 'the founding fathers not designing the government to organise a national healthcare system' was interesting. He seemed to present this as an unfortunate oversight, but from what I understand a nationwide, top-down, non-accountable government healthcare bureaucracy was exactly the type of thing that the Founding Fathers wanted to prevent from being created. That is why they made elections so frequent, made the branches of government so difficult to reconcile. To me, this separation of powers and accountability to the people seems to be a much more effective way of counter-acting 'factions' (or as we now say, lobbyist groups), than giving all power to a small group of people, shutting them off in a room, and hoping that they aren't subject to political influence.

Layne writes:

Russ, First time listener to your podcast loved it.

You asked about the discrepancy between proceduralist/specialists and primary care. A big part of the problem is that the Relative Value Update Committee at the AMA is stacked with specialists. Those are the guys that value the RVUs, etc and of course value themselves. That would be a good topic for you to look at. Thanks.

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