Can This Man Save Healthcare?

OCTOBER 21, 2013 by JORDAN BRUNEAU

While the country focuses its attention on the sputtering implementation of the Affordable Care Act (ACA), one man is quietly revolutionizing American medicine. Dr. Keith Smith, founder of the Surgery Center of Oklahoma (SCO) in Oklahoma City, is bringing market forces to healthcare by posting his prices online.

Healthcare costs in the United States have increased at an average rate of 7.7 percent per year since 1980 compared to 4.6 percent for the consumer price index. Smith believes price wars and other market mechanisms, not increased government control, are the best way to stem and reverse this inflation. With the ACA’s imminent implementation, the prospects for formal healthcare policy changes are limited. 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. “The price transparency and price deflation,” Smith says, “aims at the soft underbelly of the beast.”

First Came the Canadians

Smith knew that putting his prices online had been a great idea when Canadians began flying down to the SCO for treatment: “The first thing that happened once we started posting our prices online was the Canadians started showing up. They could pay $3,200 from Vancouver for a hernia operation to step out of line.” The line Smith refers to is Canada’s single-payer, government-run healthcare system, which boasts some of the longest wait times for surgical care in the OECD. Smith contracts with a Canadian health broker specializing in finding wait-listed Canadians access to care and describes the high number of Canadians he sees as “fascinating because that’s the healthcare system that everybody in this town thinks we need.”

In addition to targeting the uninsured and Canadians, Smith has also had success in appealing to people with high deductibles and mid-sized companies in Oklahoma and North Texas. He has directly courted companies that feel that they are overpaying for their HMOs, asking CEOs, “Why would you be OK with paying $14,000 for a tonsillectomy across town for one of your employee’s children when we’ll do it for $2,900?” In response, many companies have moved their health plans to the SCO, offering to eliminate employee copayments for treatment on the condition that surgeries are performed at the SCO. As a result, one medium-sized bank in the region was able to drop its premiums by 10 percent. Smith’s corporate accounts have significantly improved his profitability: “In the last year, as a result of our outreach to CEOs of big companies, we are 40 percent busier than we were a year ago, and it’s primarily due to us posting these prices.”

Healthcare Doesn’t Cost That Much

According to Smith, “Healthcare doesn’t cost that much, but what healthcare professionals charge is another matter.” By cutting out hospital administrators and the bureaucracy involved with third-party payers, the SCO is able to offer healthcare services at deep discounts. For example, for a patient with a bad back, the SCO was able to perform a two-level disc decompression for $8,500. That paid for the surgeon, anesthesia, and supply costs as well as an overnight stay. The patient’s next closest bid was $60,000, saving his company’s health plan $51,500. While few would argue that high four- to low five-figure treatment costs are cheap in absolute terms, in relative terms they are. For major spine surgery, the SCO charges $16,500, which Smith admits “is a lot of money, but people are flying here from Alaska and Massachusetts to get this price because in their home states it’s not uncommon for this surgery to cost $175,000.”

Comparing the SCO’s prices with national average prices backs up Smith’s claims, though it’s tricky: Estimates from different sources vary widely, which is a symptom of an inefficiently functioning market. That said, the SCO comes in under the lower end of national average estimates. The table below lists several surgeries that the SCO does for a fraction of the national estimates compiled by howmuchisit.org.

Price Comparison Between Surgery Center of Oklahoma and National Average ($)

     

Source: Surgery Center of Oklahoma Pricing, www.surgerycenterok.com/pricing/ (accessed  09/13/13); HowMuchIsIt.org, www.howmuchisit.org/surgery-costs/ (accessed 09/13/13).

Put the Patient in the Canoe Where the Money Is

So if the SCO is able to offer care at mere fractions of national average prices, why is healthcare so expensive? A big reason is that consumers and providers are shielded from price signals by insurance companies or government. The healthcare industry consists of a triumvirate of consumers, providers, and payers; neither the consumer nor the provider has an incentive to economize because the former is not directly paying and the latter is not directly charging. Hoover Institution economist Russ Roberts sums up this phenomenon pithily with the statement, “If you’re paying, I’ll have top sirloin.” Without incentives to economize, costs spiral out of control to such a ridiculous degree that providers can charge $100 for an aspirin and consumers can order a bevy of lab tests for a common cold.

Smith believes that the ACA, which further shields the consumer and provider from the cost of healthcare, will only exacerbate this problem. The best solution is to cut out the third-party payers and let consumers and producers negotiate directly, thereby allowing market forces to do for the healthcare sector what they have done for virtually every other sector of the economy: bring down prices and improve quality. Smith says, “Ultimately, the only way to control cost is put the patient in the canoe where the money is, they’ve got to feel like they have some accountability or they’re going to want it all.”

The Silicon Valley of Healthcare

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.

As a result, Oklahoma and Kansas boast some of the cheapest open-heart surgery rates in the nation, at around $30,000. The procedure costs $106,000 at the Cleveland Clinic in Ohio. “In Oklahoma City,” Smith says, “we’re dragging people along because there is work out there for them if they adopt this strategy.” Even outside the region, the SCO is helping people save on their medical bills; patients from around the country are demanding that their hospitals match the SCO’s prices. Many relent. Smith says that he receives several letters each week detailing variants of this story: “I like to think of what is done with all those dollars that are not spent on giant hospital bills.”

Big Hospital’s Nightmare

It remains to be seen whether Dr. Smith’s business model can have a big enough impact to ameliorate some of the negative distortionary effects of the ACA. In the meantime, Smith seems to relish his role as a David figure fighting the entrenched and moneyed industry Goliaths. He believes that his model can cut into the profits of big healthcare: “The big hospital’s nightmare has arrived.”

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.”