Monday, December 23, 2013

Hope for healthcare?

"Can this Man Save Health care?" is another nice article about Dr. Keith Smith, founder of the Surgery Center of Oklahoma (SCO) in Oklahoma City. (Previous blog post here.)  He is trying the audacious, running a low-price hospital with prices posted on the web -- the Southwest Airlines of hospitals that I've been hoping for.

Smith knew that putting his prices online had been a great idea when Canadians began flying down to the SCO for treatment...
In addition to targeting the uninsured and Canadians, Smith has also had success in appealing to people with high deductibles...
Smith’s transparent pricing has already had a significant impact on the healthcare market in Oklahoma City. Smith says, “What we’ve done by putting these prices online is created a price war, and it’s really going on in Oklahoma City.” With the SCO as an option for residents, the big nonprofit hospitals in the city are having difficulty continuing to charge their inflated rates. “The big hospitals,” Smith says, “have been thrust into a market economy whether they like it or not.” Consumers finally have the option to shop around for the best medical care. 
The effects have been felt throughout the region. The Oklahoma Heart Hospital and the nearby McBride Orthopedic Hospital have both followed the SCO’s lead in publishing their prices in an effort to attract consumers. Worried that they were losing heart patients to the Oklahoma Heart Hospital, Galichia Heart Hospital in nearby Wichita has also published its rates, creating the first semblance of the price war Smith has been trying to start.
He believes that his model can cut into the profits of big healthcare: “The big hospital’s nightmare has arrived.”  
This is an interesting observation. The established hospitals, working with the established insurers were not competing with each other. It took an upstart with a new business model to provoke competition. It is ever thus, but this is not the model our regulators use when they think of competition.

Another interesting observation. The existing insurers were not at all anxious to save money through him. He had to go around them to cash customers, Canadians, and directly to companies.
Smith has also had success in appealing to people with high deductibles and to mid-sized companies in Oklahoma and North Texas.
He has directly courted companies that feel that they are overpaying for their HMOs...
Smith admits that his strategy hasn’t won him any friends in the healthcare establishment or, as he refers to it, the healthcare cartel: “I don’t get invited to any big hospital garden parties.” In fact, he claims that “giant hospital chains and insurance companies were lined up arm-in-arm” to prevent the SCO from succeeding. Following its opening, business suffered for several years because it was locked out of insurance plans that would rather pay the higher in-network amounts at the bigger hospitals across town. The SCO only became profitable when it went over insurers’ heads and pursued corporate clients directly. “The big hospitals and insurance companies hurt us for a while,” Smith says, “but we stayed with it; now they’re sucking wind. 
Sometimes people say I am foaming at the mouth too much when I refer to our current system as crony-capitalist, captured-regulator and so on, and getting worse. Perhaps I'm not exaggerating after all.

There is a ray of hope. The large deductibles  on many exchange policies leave people some incentive to shop. Not as much as you'd think -- there still is the in network and out of network business, and once you hit the deductible the sky is the limit. But some. Can a mass of patients who care about money stimulate a competitive supply market?
The big question on my mind, is, will our government allow this ray of hope to emerge?  As Smith found out, there are powerful forces in the local hospitals and large insurers that want to stop him. Now they have a powerful friend in the ACA.

Will the employer mandate allow companies to go around big insurers in this way? Or will they be forced to participate in cross-subsidies through the established insurers? Will these side deals be deemed "ACA-Compliant" employer-provided insurance? Will ACA-approved high-deductible plans be allowed to use him? Will he be allowed to give cash customers a discount? He so undermines the whole structure I can't see how they can let it happen.
Smith hopes, however, that he and a handful of other transparent fee-for-service providers will be the vanguard of a free-market movement that runs parallel to the ACA.
That would be wonderful. A free-market system could emerge alongside the ACA, and then people like me will not have to prove that there is indeed a promised land on the other side of the waters, the promised land will appear on its own.

If the ACA will allow it. Competition undermines cross-subsidies, and competition undercuts powerful lobbies to a very powerful regulator.


  1. I think the large deductibles do present an opportunity. I already undercut facilities by a large amount by doing procedures in my office and I'm exploring how to market that in an environment of rising deductibles. How out-of-network expenses are handled by ObamaCare will be a major determinant of viability.

    I'm not sure SCO is the best model though. They exploit a niche market that targets people with the requisite cash who are willing to engage in medical tourism. We can't all poach affluent patients from each other's geographic cachements. Furthermore, if you travel from NYC to have surgery at SCO and then develop complications, you're going to have a hard time finding a local surgeon in NYC to clean up the mess. They'll tell you to go back to Oklahoma and see the person who did the surgery.

    Anything that makes the cost of services more transparent is fine with me. I am not familiar with typical costs for other specialty procedures, but SCO is NOT Southwest Airlines when it comes to pain management procedures. Toward that end, I'd just like to say that I can beat the prices SCO lists for pain management by about 2/3. Instead of going there for a lumbar epidural steroid injection @ $900 come see me and we can do it for $300. Unfortunately, I post under a pseudonym so it will be hard to find me. The point is that their prices are ridiculous.

    There is one cost issue that I can't address. Although I can do the procedures listed at SCO for a third of what they charge, there are procedures where the cost is prohibitive for most people even if I did the procedure for free. The hardware costs over $10,000 and the procedures require a surgical facility. The best I could do would be to shop them around to different hospitals.

  2. I'm a bit unclear on one issue, why would insurers not want to include SCO in their network? Is that all due to kickbacks, or fear of retribution from larger hospital networks in other regions?

  3. Having worked at and help run surgicenters for years, the reason they are not including his place is that their prices are not that great. He is posting prices roughly equivalent to what we accept as insurance payments where I live, but he is getting cash (and none of the billing headaches). This is great marketing on his part and every conservative/libertarian in the country thinks this is wonderful. However, sooner or later someone will commit journalism and it will become clear that the prices are not great. (There is a big difference between what facilities bill and what they accept as payment.) Not bad either, just not that different than what others are accepting for the same care.


    1. But at least he is offering those prices to cash customers, who normally are soaked and must pay much more than insurers, no?

    2. I recently whined to my pharmacist that I had to pay "cash anyway" for my prescription since my deductible had not been met. He said no, if I didn't have health insurance the "cash" price would have been 4 times as much.

    3. @John Cochrane: Cash customers can usually negotiate down to around the rates insurers pay. It's better for the provider: less overhead goes to billing and they get paid immediately (or on an agreed schedule) as opposed to waiting 60 days - year or more.

    4. I have heard these stories too. But its just another sign of a dysfunctional market. In what world does it make sense for each customer to sit down in a private room where the big insurers can't hear what you're doing and privately negoatiate a price?

      Drive to the airport, go to Southwest ticket counter, "I'd like to fly to Dallas." "Well the chargemaster says $20,000, but our personal negotiator will meet with you, and we can discuss the price." A day or two later, visits to United and American, some haggling back and forth - all these people's time costs something -- and we agree on a mere $5,000. Great.

    5. Isn't car buying *exactly* like this - the sticker price is a total fiction?

  4. John, great post. And no, you are “not exaggerating after all.” I am not surprised that people are finding the big insurers are trying to stop providers like Dr. Keith Smith. My own experience confirms it. Recently I needed a hernia repair—a routine surgical repair performed as an out-patient procedure at hospitals. My wife and I have a high-deductible HSA, and sometimes it seems like we are the only people on earth asking the price of medical procedures. I called around to area hospitals, trying to find the price of the procedure. Seemed simple enough—just give them the surgery code my doctor provided, along with the details of my insurance. My insurer is one of the top three names in the industry. The hospitals couldn’t or wouldn’t provide the price. It was very frustrating. They generally referred me back to my insurer. At that point I still believed that my insurer was working for me—and might even be trying to save themselves some money if I were to go over my deductible. But here is the kicker. When I went to my insurer and asked which hospital would offer me the lowest price, they would not tell me. I went up the ladder, from supervisor to supervisor. Finally, I got this response: “If we told you which hospital had the lowest price, then the higher-priced hospital wouldn’t contract with us.” I was flabbergasted. If that isn’t collusion of some kind, I don’t know what is. I could not believe they had admitted what I had suspected. I was so alarmed that I called the Department of Justice. They seemed interested, took my name and number, but never to my knowledge followed up on it.

    I was prepared to go to a surgery center some distance away that treats Amish patients. Amish generally are prohibited by their faith from buying insurance, and this center offered a good discount to cash patients. (This could be the basis of a good study). Ultimately a local hospital was willing to match the Amish price.

    My wife and I have also recently been victims of hospitals low-balling us on price estimates, which perhaps may be an issue nationwide. In each case we received an estimate for services which was one third the final bill. And this was when the provider had full information on our insurance coverage.

  5. Thanks for following our story. The naysayers in the comments above are posting the the same comments and critiques I have seen since we started posting our prices. We decided to post prices at 1/5-1/10 what the so-called "not for profit" hospitals in our area charge. That seemed like a good place to start, recognizing that true market-clearing prices emerge from healthy competition...they are never imposed, top-down. I won't know if our prices are "right" in the Austrian sense, until many others join this effort and choose to compete with me, on quality and price, as value, after all is what people shop for.

    To answer why the insurance companies wanted no part of our pricing: "repricing." Very simply, insurance companies are frequently paid a percentage of the "savings" they render on a medical bill. If a hospital bills $100,000, and the insurance company "reprices" the bill to $20,000, they will many times claim to have "saved" the employer group, for instance, $80,000, and claim as much as 34% of this as a fee for this "service." This, as you can see, perversely inclines the insurance companies to seek out the most gigantic bills they can find, as this maximizes their revenue from this "repricing" scam.

    1. Welcome, and thanks for explaining "repricing." The murky deals between hospitals, insurers, and government are really hard to figure out from my ivory tower! Keep up the goood work.

  6. Note that Dr Smith doesn't say why the "nay sayers" are wrong. There are plenty of doctors who have carved out lucrative niches in cash-only practices. Their services, like those of Dr Smith, are unavailable to people who aren't affluent enough to afford their services. They are cherry pickers cloaked in the language of libertarians. The rhetoric is catchy but these "solutions" don't address the health care accessibility problem.

    I happen to be one of the founders of a physician-owned hospital. We were unable to get even one insurance contract for years after opening. It had nothing to do with pricing; it was simply the big box hospitals telling the insurers that if they gave us a contract then the big box hospitals would drop theirs. The hospitals even got to the regulators and tried to interfere with our licensing. We survived by adopting an out of network model.

    Every time doctors get together to start their own facilities the hospitals face loss of business. They put pressure on the insurers. That's why Dr Smith could charge Medicaid rates and the insurers would still shun him. There's no mystery here, just collusion among the big boys.

    1. That sounds like an antitrust violation to this non-lawyer...

  7. High deductibles have a major downside. They discourage people to seek prompt medical care. They wait too long and then it is either too late or much more expensive. By the way the story about SCO and some of the posts following just confirm a big problem in health care industry: corruption. Free market approach will not cure it.

  8. Government regulation can help with price transparency instead of hinder it. Why not require standardized historical price statistics to be posted by all hospitals like Singapore does? Or has the system become too corrupt for commonsense legislation like this to pass?

  9. In my city, a new company opened a freestanding MRI clinic. The hospitals had been charging $1,200 for a lumbar MRI. The new clinic only charged $400. I had a $10,000 deductible policy.

    My insurance company called me when I asked for an MRI and told me about the new clinic. So I went there. It was new and clean and the staff was very nice. I brought my doctor (who worked for one of the hospitals) the CD with the image on it. She read it and diagnosed my problem.

    I saved $800.

    A few weeks later there was an article in the paper about the new clinic. It had a number of quotes from hospital executives about how much better their MRIs and radiologists are. Sour grapes and B$.

    Anonymous above mentioned pharmaceuticals as another market with opaque pricing. And I second his comment.

    However, I found that the website allows you to print coupons that will get you substantial discounts for many medicines. My wife needed a migraine medicine that our insurance would not cover. The cash price at the nearby national chain pharmacy was $30 per pill. The coupon from allowed us to purchase the medicine for $2.50 per pill.

    My bottom line is that the current system is badly in need of a lot more transparency.

  10. Good for Dr. Smith. I've always felt that a legal mandate for all medical centers to post their prices online would drastically reduce how much we pay for health care in this country. For anyone who hasn't done it, google "chargemaster rates" and prepare to see your blood pressure rise to dangerous levels when you realize how much hospitals rip us off.

  11. Even though I served as chairman of the board of our hospital I have never been quite certain about the charge master. It has a black box quality to it that people in suits seem to be able to conjure amazing results from. :-)

    I want to clarify something. I'm not saying that what SCO is doing is inherently bad. It shines a light into a very dark corner of the health care system. However that facility, like my own, like goodrx, like the MRI center, lives in the interstices of the system. These businesses are not a framework upon which you can build an entire system. They are reactions to the current system that reveal its flaws, like Argentina's currency black market or India's gold smuggling highlight the problems with financial repression in those countries.

    The common root of many of the problems our little businesses address is insurance, which in a way derives from the financial repression during WW2. There are other players that garner favors from government such as hospitals and pharma, but insurance is the Great Distorter.

  12. Great piece. We couldn't agree more. It is true, as you say, that "a mass of patients" are starting to care about the money.

    The free market has been emerging for quite some time -- and the forces supporting it gain impetus from the ACA but are by no means dependent on it.

    We've been working on price transparency for about 3 years now at, as part of a growing ecosystem (, Because more people are on high-deductible plans,and because it's so much danged money, there's much more interest now in the pricing disparities we have been revealing.

    Also people without high-deductible plans are more aware of the problem and its downsides, partly because of the ACA and mainstream media attention (See Steve Brill's "Bitter Pill" piece and Libby Rosenthal's great work in The New York Times, plus your blog). Plus, the internet hates secrets, and aids market transparency (see,, Those were markets where crony capitalism and captured regulators connived. But now: no more.

    It seems clear that there's a general shift from discussing the problems in our health-care marketplace to looking for a solution. Extending coverage to a great swath of the uninsured is part of the solution to the problem of lack of coverage --- but another part of it must be transparency of price, or charge, or cost, in the health-care marketplace.

    1. I wouldn't limit it to people without formal coverage since people with ObamaCare and other plans are functionally not covered. I can do a lot for someone before they hit their $5,000+ deductible. At SCO $5,000 would cover 5 lumbar epidurals. At my office it would cover 3X as many.

      This is exactly what I've been looking for. You'll be hearing from me.

  13. I can hardly wait to launch my new surgery center website with transparent prices in Southern California. Dr. Smith has provided hope, encouragement and enlightenment to help with our effort. He did this because he is a true believer in the cause of his conviction. Free markets are scary to many because of the amount of misinformation about healthcare. SCO and its transparent pricing model is just but one step to empower patients and try to HONOR the patient-physician relationship. When I immigrated to the United States, in 1979, it was to escape a socialist structure to the society I grew up in. We need more transparency and discernment by the public.

  14. The idea of going over the heads of insurers and dealing directly with patients is a growing concept. More and more primary care and other specialty doctors are going with this kind of direct-pay model. I, myself, started a direct-pay family medicine clinic a little over 2 years ago. (We also post our prices openly.) Interestingly, we have both insured and uninsured patients.
    (As a side note, we have sent some patients to the Surgery Center of OK; they have been pleased.)

  15. Does SCO have an ER?

    There's a mandate on ERs to stabilise everyone that walks in the door, and they normally are cross-subsidised from the rest of the hospital.

    If someone's found a way to make a hospital-with-an-ER profitable with open pricing then that's great. If not, then it's just another medi-center, and that's not a new model. It's not a bad thing, but the treatment mandate on ERs is what makes solving US healthcare hard.


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