What free market healthcare really looks like

As an economics graduate, MBA, and entrepreneur I'm a fan of the free market system. The invisible hand is a beautiful thing, and it's certainly been good for me.  A healthcare management consultant and board member, I make my living from the business of health.Capitalism has a place in healthcare, but in developing policies we should also recognize the limits of free market approaches and be open to the benefits of socialist ideas. For example, before the Affordable Care Act, people with pre-existing conditions or high healthcare costs would experience "job lock." They couldn't afford to leave their employers' group insurance plans even if they wanted to start their own small business. Would-be entrepreneurs used to call me asking for advice --not about business plans, raising money, hiring, or product development-- but about how I handled health insurance. Fortunately in Massachusetts this was not a problem, even before the ACA, because we had guaranteed issue (could not be denied coverage for pre-existing conditions) and community rating (premium based on larger group, not individual risk). In most parts of the country, though, it was a problem, and  if the ACA is repealed it may become a problem again.A recent New York Times article (The Company Behind Many Surprise Emergency Room Bills) provides another example of the limitations of a free market approach. It's worthwhile for free market ideologues to understand this before setting policy. To recap:

• Some hospitals hire outside companies like EmCare to staff their emergency rooms. To maximize profits, those companies sometimes decide not to negotiate contracts with insurance companies. Hence they are "out of network" on purpose
• When patients come in to the emergency department --suffering a heart attack, stab wound or whatever-- they are treated by these out of network doctors, who then bill the insurance company at a rate that may be a multiple of in-network rates. This is true even if the hospital itself, and most of its doctors, are in network
• The insurance company may pass along some or all of the expense to the patient, especially if the patient has a high deductible plan
• Patients get angry, and a story appears in the New York Times

The Times story ends there, and it's bad enough. I guess you could argue that the free market is sort of working here. After all, physicians are setting their own rates, and in theory patients could decide to go elsewhere. The consumer making noises helps to bring the market into equilibrium. And maybe the problem is not enough capitalism. Maybe EDs shouldn't be required to take patients who can't pay...What the Times doesn't say --probably because they don't know about it-- is that there's an additional capitalist ecosystem that comes into play here. Let's say a physician charges the insurance company $100,000 for something that would be reimbursed at $10,000 under a network contract. In case you think I'm exaggerating, this kind of thing actually happens --if not with emergency physicians then with ambulatory surgery centers and behavioral health.The insurance company or third party administrator may then hire a cost containment vendor to 're-price' or negotiate the claim. The cost containment vendor negotiates with a separate "revenue cycle management" company hired by the physician group.Let's say for the sake of argument that they agree to a reduced payment of $15,000 instead of $100,000. The cost containment company might take 20% of the savings (20%*$85,000=$17,000) as a commission and the revenue cycle management company might make $1500 or so for their efforts. So everyone in this scheme is happy:

• The physician still collects $13,500 compared to $10,000 in a network deal. (And in some circumstances if the insurer isn't paying attention they'll get the full $100,000.)
• The revenue cycle management company takes its cut, even if it's less than the others
• The cost containment companies makes more than the physician ($17,000 v $13,500). It doesn't usually work that way but sometimes it does. [Note that I had these numbers wrong until I was corrected in the comments.]
• And the health plan pays $15,000 rather than $100,000. If the payer is acting as a TPA or ASO rather than bearing risk, they may even get a fee from their employer customer for the cost containment service

While it's great that so many new jobs and business opportunities are created, this is not exactly the way to hold down the cost of healthcare and improve affordability.Contrast this scenario with one where the patient is covered by a government program: Medicare or Medicaid. The government determines the fee for services rendered and pays it to the physician. The patient contributes at most a $50 co-pay. The physician may or may not like what he's being paid, but there are no shenanigans.If you adore the free market and abhor government interference, maybe the first scenario is best. Having seen it up close, I have a hard time arguing for it.

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By healthcare business consultant David E. Williams, president of Health Business Group.