Is Volume-Based Pricing Destroying the U.S. Healthcare System?

Is Volume-Based Pricing Destroying the U.S. Healthcare System?

“We have the best medical care in the world.”

That’s a common notion among citizens of the United States. Many believe that the U.S. healthcare system offers the finest possible care. Many believe that there’s no better place to be cured of what ails you — or to maintain the health you have — than in the United States. You might even believe the very same.

There’s just one problem: It’s not true. Even worse, the exact opposite is true; the U.S. has the worst healthcare system in the world among high-income countries.

Don’t believe it? Consider what the American Medical Association recently discovered.

Spend More, Die Younger

That’s what’s happening in American healthcare, the Journal of the American Medical Association reported.

The AMA performed research that compared the U.S. healthcare system with those of ten other high-income nations. The results were rather shocking:

  • The U.S. spends nearly twice as much per-capita on healthcare
  • The U.S. has the lowest life expectancy, ranging from about two to five years less than other countries
  • The U.S. has the highest infant mortality rates — close to double the average infant mortality rates of other high-income nations

Why are U.S. citizens spending so much more, and receiving so much less for each of their healthcare dollars? The report concludes that the prices of labor and goods in the U.S. healthcare system are largely responsible.

An article published in the Washington Post several years ago put it a bit more bluntly. “There is a simple reason health care costs more in the United States than it does anywhere else: The prices are higher.”

What Happened to Health Care Costs?

How did U.S. health care deteriorate to a point where Americans pay more and receive less than in any comparable nation? Why has the cost of healthcare services skyrocketed so high and so fast?

On the surface, at least, the answer is startlingly simple: Over time — and for multiple reasons — the American healthcare system has evolved into a volume-based system. Every time you visit a doctor, have a hospital stay, or have a prescription filled, you’re not paying a value-based price for the product or service. Instead, you’re paying a volume-based price.

Healthcare providers can earn more by providing more expensive products and services — more expensive tests, costlier procedures, pricier prescriptions, etc. For a variety of reasons, healthcare providers are incentivized to choose volume over value in providing medical services to you and your family. And there’s little to restrain them from doing so.

As the Washington Post article noted, “The result is that, unlike in other countries, sellers of healthcare services in America have considerable power to set prices, and so they set them quite high.”

Volume vs. Value

How can America’s broken healthcare system be fixed? The system must transition from volume-based to value based.

In a value-based system, everyone involved, from practitioners to patients, are incentivized to make decisions based upon value. Decisions about procedures, prescriptions, and even the quality of care provided are made based upon the value they deliver, both to the patients and to the healthcare provider.

It’s how business is conducted in virtually every other industry. And, in essence, the entire global economy is value based. The U.S. healthcare industry is an outlier in its present form as a volume-based system.

And that must change.

A Simple Example…

In a volume-based healthcare system, costs continually spiral upwards. But in a value-based system, both healthcare providers and patients are motivated to reduce costs. Procedures and products are selected based upon the value-to-cost ratio they deliver, and the long-term outcomes they’re likely to provide.

Consider a simplistic but relevant analogy.

Imagine that you’re travelling on business, and that your company has supplied you with a generous expense account. When it’s time for dinner, what will you choose: a cheap fast-food place, or a high-end steakhouse? Either way, the cost to you will be zero, so you’re likely to choose the more expensive option.

But if you’re traveling on your own dime, you’ll likely make a different decision. While you might not choose the cheapest option, you probably won’t choose the most expensive option, either. You’ll simply choose the option that offers you the best value, balancing cost with value received.

The decision methodology should be the very same for healthcare. Healthcare decisions should be:

  • Evidence-Based: Is the procedure, prescription, or test truly needed?
  • Value-Based: Once it’s determined that the product or service is justifiably necessary, the one chosen must provide reasonable value for the cost.

It’s Already Happening

The U.S. healthcare system is already transitioning from volume-based to value-based — as it must. Evidence of this transition can be found by studying consumers’ reactions to the soaring health insurance deductibles of recent years. Multiple studies have found that healthcare expenditures drop significantly when consumers must pay a greater share of their healthcare costs.

And Forbes recently reported that the nation’s largest health insurance company, UnitedHealth Group, is currently paying more than half of its reimbursements through value-based models. But it’s only the beginning of a paradigm shift that must ripple throughout the entire healthcare industry.After all, Americans are paying more for their healthcare than any other nation and dying younger for the privilege. That’s a healthcare system that is simply not a long-term sustainable model.

Tom Morrow