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Health Care 101: An Industry Like No Other

Apr 3, 2017

Health care is unlike other industries.  Despite being encountered by most all of us routinely, its distinctiveness as a business is not understood by many.  Greater understanding is critical as National Health Expenditure (“NHE”) approaches some 18% of GDP.  This article is the first in a series focusing on the provider/payor segment, as distinct from pharma or medical equipment. 

Three key elements stand out as defining the difference between health care and other industries:

  • Insurance Dis-Intermediation
  • Government Impact
  • Distinctive service

Dis-intermediation fundamentally changes the relationship between buyer and seller.  Unlike other industries, the buyer doesn’t typically pay directly for the services, nor even understand costs.  That relationship results from how health care insurance works.  In short, patients enroll with a health plan, which acts as their agent in defining the network of providers whom they can see and the price paid for each service.  Those rates are not even shared with individuals, who only see the “co-pay” or other balances.  (Although the growth of “High Deductible” health plans is beginning to change that.)  In turn, providers serve their patients, but depend on the insurance companies for reimbursement.  Historically, providers have no incentive for clear pricing.  Furthermore, they are largely rewarded for doing more units, rather than better care results.

While regulations exist elsewhere (especially in financial services), the government plays a truly out-sized role in health care.  As of 2015, over 37% of total NHE came from Medicare and Medicaid alone.  This level of spending gives government not only regulatory control, but also where Medicare leads, much of the private sector follows.  For example, Medicare is the benchmark of reference.  Most private insurers (and providers!) talk about fees in terms of “percent of Medicare.”  What services are reimbursed follows Medicare.  Innovations such as ACOs or bundled payments are advanced by Medicare—even if that innovation first occurred in the private sector—because of the legitimacy that Medicare confers.  

Finally, health care services are unique.  Purchasing decisions really could mean life or death.  Patients do not know how to assess product, in terms of the true quality or outcomes achieved.  Actually, academics, insurers and regulators have not really agreed on metrics of quality that are universal.  Websites, etc., offer little true help, so people rely on weak measures, such as word of mouth.  This dynamic appears to be changing.

There’s much more to come—stay tuned!

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Bert Orlov

Mr. Orlov is a Managing Director in the Health Care Consulting Group with experience as a management consultant specializing in strategy, transactions, operations and project management for physician groups, hospital systems, and not-for-profits.

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