Why Is Healthcare So Expensive? With Thompson Aderinkomi

Kurt enjoys an energetic conversation with Thompson Aderinkomi, a luminary of the Minnesota health and entrepreneurial landscape, working on his latest venture, Nice Healthcare. Listen in as they challenge each other and you on the central question, why is healthcare so expensive? And more importantly, what can we do about it?

Transcript

Kurt

Thompson welcome. It’d be great if you could tell me a little bit about what you’ve been working on at Nice Healthcare. 

Thompson 

Thank you. Yeah, so Nice Healthcare is a primary care clinic without any physical locations. And we bring all the care to our patients’ homes, same day, same day x rays, same-day in-home labs, and tests, same-day physical exams. And we augment that with virtual care. So we do chat visits and telehealth visits with our own clinical staff. And the last piece that makes us different is we’re not open to the public. We sell our service directly to employers on a capitated basis, and the patients then get unlimited access to all of our prescription drugs, visits, both in-home and virtual. 

Kurt 

It sounds like a great benefit. When we had small kids at home, I would have loved to have home visits instead of carting the whole family out to to get a flu shot. 

Thompson 

Yeah, that’s why we’re there. We’re there for those families today. 

 Kurt

 That’s, wonderful. So why did you create Nice — kind of what’s the story behind that? 

 Thompson

 So the story behind Nice, it starts in, you know, with my firstborn son, when he was one year old. So this is in the winter of 2011. We had a very frustrating experience at his pediatrician’s office, which was a Fairview clinic here in the Twin Cities. And it took four trips, you know, and a lot of phone calls to get a simple diagnosis of pneumonia. You know, we were calling the nurse line, we’re calling the clinic, we’re good healthcare, consumers, we didn’t rush into the ER, you know, we didn’t go to the urgent care. And so he ended up having pneumonia for almost two weeks undiagnosed, you know, because we couldn’t get good care, we couldn’t get consistent care, we couldn’t get anyone to listen to us, we couldn’t get him to see the same clinician every single time. And so on his last visit, I just said to my wife, like I could run a better clinic than this with my hands tied behind my back, my eyes closed, like seriously, you know, and I’d worked in healthcare my entire career up to that point. So, you know, that was really where the first ideas for how do you reimagine primary care came up. 

 Kurt

So yeah, that sounds like a really frustrating process. I know, I think we’ve all probably had interactions like that with, with the health system and, and insurance to when we bring we bring insurance into it. How, you know, I think you had mentioned to me at one point that there was also some surprise billing that showed up with that event, how does the cost play into that?

Thompson

Yeah, or maybe the problem was, it was not a surprise, you know, because we were on a high deductible plan, you know, we purchase our health insurance in the individual market, I was in graduate school at the time, you know, so I was not fully employed. And we ended up getting a bill for $664.28 for the entire episode of care, multiple visits, you know, multiple tests, things of that nature. And that just really just added insult to injury, you know, to pay for service. Because I mean, can you imagine if you went to a restaurant, and they came out with no food, but they get handed you a bill, or the wrong food? I mean, we wouldn’t stand for that. No way.

 Kurt

Yeah, you know, being an entrepreneur. I’m also on a high deductible, ACA sponsored plan and have been for most of, you know, most of my career. It routinely, you know, you kind of pay out the thousand dollars a month in bills and never have any coverage. And so ultimately, you know, it’s just additive, right? You pay for insurance but get no benefit. You pay for healthcare, but to get no benefit. Why is it so expensive?

Thompson

Man, this is expensive. And you’re not alone. My wife is irate about this every day, you know, she’s exposed to the healthcare system. And we talk about the expense of healthcare. And there are many reasons you can’t pin it on one issue. But certainly, the underlying issue is that the cost is too high. So there’s the price, and there’s a cost to provide the services and the goods, and the price is high because the cost is high to provide, and why is the cost high? Well, you have multiple reasons. So one big reason is because healthcare does not behave like a normal good in an economic sense. You know, and so any in any other good or service in this country. Anyways, let’s talk about the US. We’re not going to talk about other countries. If demand increases for a good, you know, the price goes up. If demand goes down, the price goes down, you know, supply increases, like we’ve all seen those charts in econ 101. Healthcare does not obey those rules of supply and demand and price. If the demand goes up, the price goes up in healthcare. If demand goes down, the price goes up in healthcare supply goes up or down. It has no bearing. So we have, unfortunately, a situation where we have a service whose price does not respond to demand and supply whatsoever. And then it’s further obfuscated by government regulation, insurance contracts, and then the convoluted nature in which we manage healthcare in this country. So I could go into greater detail. But fundamentally, that’s where it comes from. It’s in responsiveness to supply and demand and normal economic forces.

Kurt

Now, you were trained in healthcare economics was that that was your master schooling? 

Thompson

I have two master’s degrees. And the first one was in statistics, just pure statistics. And the second is an MBA so that I added my education to my healthcare experience. I wasn’t formally trained in healthcare, Econ, but that’s what I did for most of my career when I was working before starting these companies.

Kurt

So that kind of gives you a neat, a unique perspective. And when we look at those costs that continue to go up and accelerate, you know, as an industry, we’ve been working on trying to shift from that sort of pay for volume pay for service to more of a value-based structure for the better part of the past two decades. Is that having an impact, or why is the cost still going up?

Thompson

So you know, all the healthcare people out there, a lot of them don’t like me, all these buzzwords are complete garbage, it’s complete nonsense. You know, they’ve completely hijacked normal words in the Webster dictionary and given them completely different meanings, value-based care, that is not going to change underlying issues. I love speaking to students at the University of Minnesota, because they just took econ 101, you know, a semester ago, a year ago. So these things really resonate with them. You have to bring it back to the basics, always we were talking healthcare, especially with healthcare policy wonks, because they love throwing out all these terms, all these issues, all these models, if you take value-based care, how in the world is paying on value, going to change the underlying cost structure of a business, it is not going to change your cost structure. If anything, we’re just going to end up paying more for more value, which is fine, I suppose, if that’s what we want to do. But don’t think so. You know, not at 20% of GDP, you know, not that GDP is the number to peg to it’s not entirely accurate these days. But it’s a good proxy, right. So value-based pay is complete nonsense, it is not going to change the underlying cost structure, that we’re talking about basic blocking and tackling, in an economic sense, at the firm level, that is how you change the economics, that’s how you change the cost structure of providing a service or good, which will ultimately lead to higher prices because firms will seek to maximize profit through increasing market share like there’s just no way around it, you increase profits somehow, either by lowering your cost structure, the only reason you lower your cost structure is because you’re going to increase market share by doing it, or you already have all the market share. And you can just do whatever you want because you’re a monopoly. So value-based payment, I could talk about that all day in a disparaging way.

Kurt

So if I understand what you’re saying, whether we’re paying for the service, or we’re paying for the value the service generates, none of that affects the underlying cost structure of how we deliver the service. And that’s really where the root of the problem is. Is that right?

Thompson

Absolutely.

Kurt

So what are those costs, you know, when you kind of dig into the things that are making those costs be high? Where does that stem from the traditional healthcare system?

Thompson

So, you know, let’s take a framework approach, so let’s take the services and separate that from the products. So you have, you know, prescription drugs and treatments, you have, you know, diagnostics, you know, things of that nature machines that, you know, are outside of bodies and inside of bodies, that’s a whole animal right there. And then you have the actual services that are being provided. Let’s talk about the services because they make up a larger chunk of the pie in terms of healthcare spend. Certainly, pharmacy is expensive, but it’s not the biggest bucket, you know, not yet it’s good to get there for keeps going. So if you talk about the services, the underlying structure comes from the people that are providing the services, and then the overhead costs that are required to enable them to provide those services. Now, are we going to go all of a sudden and chop the salaries of all doctors and nurses in half? Like that’s not going to happen. You know, but what we do need is a redistribution. We need a redistribution of the types of doctors, the types of nurses that we have, and then those salaries will become redistributed. But then why are the salaries so high in the first place? Well, for goodness sake, these people are graduating with hundreds of thousands of dollars in debt. So we should be it one of one quick but painful way depending on which side of the political spectrum you’re on to solve part of the cost problem. Make medical school free. Like people, we’re keeping people alive and out of pain, make the bloody thing free, encourage people to go into the field, so they don’t graduate with a bunch of debt, support them and help them help us. And then they don’t need a half-million-dollar salary. You do that simultaneously by redistributing the, um, the makeup of the physician and the nurse workforce, you know, and push more, get more people to primary care, pay primary care clinicians more to prevent people from needing the downstream care like that is when things… Don’t get me wrong, Kurt, like, but today, you are not going to hear me talk about making patients healthier. Like that’s not what you’re gonna hear. I hate that argument. Oh, healthcare is expensive because people are sick like this is absurd. I mean, yes, of course, you know, but you know, behavior change is a very difficult game, you know, especially when you’re talking about 300 million people. So you got to start with the business of healthcare first, then you can get to behavior change. So you have the cost of generating the physician is too high right now, is it bringing that cost down. And you can make it more accessible to more people to become physicians to become nurses. But then on the overhead side, you have state regulation, it’s incredibly difficult to license that permission in all 50 states is expensive. It’s very expensive to credential physicians, nurses, and insurance companies is very expensive. The overhead that’s in healthcare is tremendous. But again, the basic blocking and tackling what happens when your good or service does not respond to demand and supply, in a normal economic sense, is your fixed costs will spiral out of control because it just won’t matter. There’s no incentive to manage fixed costs, you know, and you don’t even care about your contribution margin either. Because how many healthcare hospitals, clinics there are all we have razor-thin margins? Well, yeah, you don’t manage your margin. We need to cover our fixed costs. And we need to charge more because our fixed costs explode. So it’s just a self-fulfilling prophecy. They don’t manage it, basically their business, which then erodes the gross margin, which then produces less contribution margin to cover their fixed costs, which are also running out of control. So you have to take a forcible approach to managing gross margin and fixed costs to change the structure of healthcare. But again, there’s no incentive to do that today.

Kurt

So back up, and let’s just take a look at the education idea. So what we’re saying today, from a society perspective, we’re looking at a macro view, the, you know, 18-20% of GDP that we’re spending on health care, it would be cheaper for us to pay the educational costs of new nurses and doctors to get more in the pipeline than it is to pay the higher salaries further down the line once they’ve already taken that risk on as individuals. So we could cut some of that spend out as a society by funding it in a different way. Which seems like a really great place to start. The second point I heard in there was on the margin side and paying attention to the efficiency gains. So in a normal competitive business, where I’ve got a lot of competitors, my customers can go to the guy down the street, if I’m a hardware store, right, I can go to Home Depot, I can go to Menards, I can go to Ace Hardware. And it gives me an incentive to be efficient and to manage those margins so that I’m able to stay in business and compete yet in the hospital world. And I’ll just use Minnesota as an example. I’ve heard executives here, say, you know, the market share between Allina and Fairview and HealthPartners hasn’t really changed at all in 10 years, maybe 20. So why do we bother, right? We all get the patients we’re going to get, and it’s all about the same. That, to me, sounds like not competitive. I don’t need to worry about my margin.

Thompson  

You don’t, you don’t need to worry about your margin. So you know what, so they throw out these smoke screens. Because these people…Well, I mean, I could make value statements about these people who run these large healthcare statements. I could, and I will, so I’m not going to be Minnesota nice about it. These people don’t know what they’re doing. They don’t understand basic economics. And they delude themselves into thinking that they’re helping us poor citizens to get access to better care. So they throw around words like value-based care and ACOs. They talk about price transparency, look, we don’t need no price transparency in healthcare. That is another garbage term garbage is one of my favorite words because it just really drives the point home. We don’t need price transparency. You know why we don’t need price transparency and why it’ll do nothing for healthcare? Healthcare, you don’t have a choice. Most people don’t want to die. Most people don’t want to be in pain. And most people, if there’s a way to not die, that’s 10 miles away, you’re not going to go to the place that’s 1000 miles away. So there’s not that much choice. And there’s no rejiggering of economics or firm-level fundamentals that will change the local nature of healthcare, sure, telehealth and things of that nature will kind of expand that a little bit. But some things just have to be done in your hometown, like you go out to a restaurant is somewhere in your neighborhood, right or your city. So price transparency is not needed. Can you imagine a world where consumers would go to a website, and it would say, the lowest price to not die is at this clinic today. But you don’t need to know the price. You don’t care about the price, right? If you’re going to die, and you and you cannot die by paying to not die, you just want to get it. You want to get a decent deal, a fair shake, to not die to not be in pain. So price transparency is pointless. And when you’re talking about an economic good, in which you don’t have the ability to switch, there’s not much competition. There never will be, you know, you don’t have a choice because you have this self-preservation of wanting to avoid pain and death. So really, you just want the best price or a decent price. So you don’t actually need price transparency. You just need to know where to go. So you could actually still have competition amongst local healthcare players without revealing price, but they would have to, you’d have to have the infrastructure to communicate that today, the best prices here by 10%. You know, and it could change dynamically.

Kurt   

I’ve actually pushed back a little on that because I think what I’ve seen from consumers is the desire to know what things cost before you actually engage on the service, right? Because this process of I go into the doctor, I have a service, they bill, my insurance company, and 30, 60 days later, somebody pays something, and then I get a bill for the remainder, like not knowing what it’s going to cost me before I go in doesn’t make any sense. I had an experience actually with my own son years ago, where he was experiencing somewhat he felt like a heart palpitation. And so the cardiovascular doctor prescribed a monitor that he would wear for a month, and it would record things and then it would call back home and upload, you know, tracks. And at the end of that process, we got a bill for thousands of dollars. And I talked to the physician on the phone, and I tried to understand what is it you actually measured? And he described it, and I said that sounds like what I measure on my Apple Watch for you know, running and he goes Oh, yes, the same thing. He said, If you had an Apple Watch, we wouldn’t need to do this. He said I do have one. I could have used that for free and not paid you thousands of dollars? Like that doesn’t make any sense. Why? Why wouldn’t I want to know that price upfront?

Thompson  

Well, so two things here. So the first thing is everything I’m saying? I’m saying it assuming we’re operating in a system where we fix things, right? You know, so if you’re in this competitive market, where you can actually grow market share grow profitability by providing the best service at the best price in an easy way, you’re not going to charge Kurt $1,000 for an ECG that his Apple watch could do, right? Like in that environment, you would have no need to do that. That only exists because of where we’re at today. But if you had the system working the way it was supposed to, that would not happen. Because everybody would know everybody would. I mean, it would be clear as day that you’re going to get ripped off. And furthermore, just for consumers today. The second thing is, if someone told you look, I can’t tell you how much it’s going to cost. But it’ll be 20% and less than any other price you can find. And I can guarantee the same quality. Do it right now. You would do it like assuming the trust was there. The trust in the system. You know, right now, we do not trust health care. So it’s difficult to talk even when I talk to people like I’m always talking about it from a standpoint where we’ve changed things, and there’s trust, like we know things work, right, you don’t go into Target and haggle. You know, if the price tag, how many times have you picked something off the shelf and the price tag isn’t there, but you want it, you know, you take it to the register, you find out they’re at the register sometimes you’re like, Oh my gosh, I can’t believe this. But I mean, most of the time you buy it, you know, or the price is different. You know, you’re not talking about $10,000 purchase. So I mean when you have trust, when you have fair prices and key, you really need the good. The price matters less. It matters less than just knowing you’re getting a good price.

Kurt

Well, on some level, though, we use price in different markets to signal quality. Right and so, if I’m looking at price so my I had a marketing professor in graduate school who called this the gas station sushi problem. He said you wouldn’t go to a gas station and buy discount sushi, right? You’d be worried that you’re gonna end up in the ER with a stomach problem. And I think a lot of healthcare is the same way where I don’t actually want the discount appendectomy. I want to know that I’m going to get the good one, right?

Thompson

Yep, yep. And again, in a world where we’ve actually solve for healthcare, you will know that like you go on Google reviews, you go on whatever. And you see 2.5 stars, you start reading the comments, I got a $10,000 bill and other comment, I got a $10,000 bill. Guess what, you’re not going to go to that place, you know, but right now, like, none of that exists, because we don’t have a choice because it’s all just, it’s all controlled by regulation in the healthcare industry wonkery, right? Like, you didn’t really have a choice where you’re going to go, if you’re in a narrow network, right, you don’t really have a choice, we’re going to go even if you’re on a high deductible plan, because you can find the price anyways. So you end up defaulting to like, the places in network that hopefully you’ve gotten some reference from somebody about, but it’s not like you could comb through 10, 20, 30 comments and feedback, you know, and see what people’s experiences were. Because, again, there’s no incentive for healthcare organizations today to do what a restaurant does. You know, like on Google, like Google, you see the dollar signs, like there’s $1, two, or three or four, the symbols there to tell you how expensive the restaurant is, or the hotel, you know, like that, that’s like the first that’s the proxy, you know, maybe eventually you get to the price, but I don’t know you don’t if you don’t know if like the sushi at this restaurant is $10.50, and the sushi at that restaurant is $12. You know, I mean, but if you see a one-star symbol or a 10-star symbol, you know, at two different sushi places, and you read some good comments, and you know, they’re charging fair prices, you based on what you want, you will go to the place you want. But those restaurants today had an incentive to do that. But healthcare organizations today do not have the incentive to create that first layer for us to determine where we want to go. 

Kurt

So, one common response to that, that I hear for in the healthcare industry is sort of relates to health, healthcare literacy, and the fact that consumers don’t necessarily have the level of training or the ability to judge quality. So when they get to those ratings on Yelp of doctors, it’s really did I like the person, was there a good interaction, or we use proxies, like, the hospital had good food, or there was a marble waterfall in the lobby because I can’t actually judge the quality of the hip surgery, right, as an individual. And in fact, even trying to do that, you know, I remember going through with my brother a procedure that he needed to have a fairly complicated one. And he asked a reasonable question, right? Here’s an individual who’s a principal of a middle school and highly educated, but when it comes to healthcare, he said, I have absolutely no way to judge, is this physician and surgeon better than this other surgeon? How do I know that? And so helping him dig into the quality data I found, even for somebody who’s steeped in data, like, I’m at Carrot Health, it’s really hard to find good data, let alone to interpret it and understand what does it mean.

Thompson  

Mm-hmm. And the reason for that is because there’s no incentive for it to exist. I’m like a politician. I’m gonna say the same thing over and over again. Right. You know, there’s no incentive for firms in healthcare right now. To make it easy for people to determine who they shouldn’t go to. Because can you imagine, if there’s incentive, then, of course, you want it to be as simple as possible, and you will find a way? I mean, think about computers. Do people know what RAM really is? Do they know the difference between disk space and memory? People don’t know the difference. Most people don’t know. I mean, like, I mean, there are people that know, you know, I mean, so I mean, people don’t know. I mean, a Tesla is a very complicated machine. It’s way different than having a volcano sitting between your legs, propelling you down the freeway, you know, but people get it, they’re learning. There’s people talking about batteries, and lithium, I mean, and mining that knew nothing about it a year ago. Why? Because Tesla has an incentive to ensure that customers can a) understand the technology and prove that they’re the best at it. You know, so where there’s incentive, there’s a way I mean, people, usually, there’s a will no incentive, and in this case, incentive is money. You know, so if you could actually make money by people being able to determine if you’re the best, and you could increase market share. That’s the key. Again, if you could increase market share, increase profitability, you would find it so again, everything people in healthcare say that can’t be done or shouldn’t be done should be looked at sideways, we should be skeptical because you have to ask, what is their incentive? You know, do they benefit from this thing being difficult to do, and let’s just ask those simple questions. 

Kurt

That incentive is a really powerful concept. And in fact, going back to that, that experience with my brother, you know, he found a surgeon in Seattle who was practicing at an academic medical institution, and after were meeting with him a couple of times, The surgeon said, well, but I think I could probably do the surgery better if you went to my outpatient clinic in Las Vegas. And when you dig into the data to understand why well he’s a part owner in that clinic in Las Vegas, he doesn’t have to pay the academic medical center for the surgery for use of the OR. And the incentive for him because the profit he would earn was more than double in Las Vegas than it was in Seattle. He tried to steer the patient to go somewhere else, just line his own pocket. That’s where the incentive is.

Thompson

Yep, exactly. So patient steerage. That’s how you do patients steerage. Okay? I mean, of course, we have Stark laws and all these kind of things, you know, but if you really want to get patients steerage, to the right place, you have to align the incentives, that’s the only way. And when you have misaligned incentives, that’s when you get bad results, somebody loses in this fixed pie, and today it’s the patient. And to a certain extent, it’s a clinician as well. They’re losing. Some clinicians should be making more money. You know some should be making less, they shouldn’t have piles of debt. Some of them should. I mean, everything is just misaligned. But again, over and over again, I could tie anything you say, anything you throw at me, I could tie it back to the misaligned incentives that are primarily driven by these demand-supply issues and the economic model of healthcare today.

Kurt

You’re right on the salaries, particularly around specialties. You know, 20 years ago, the salaries were much more in line between different practices, and certain specialties have skyrocketed over the last two decades in terms of cost. And that’s obviously part of that alignment. Thompson talked to me a little bit more about brick and mortar and how that plays into the equation here. You know, clearly, you’ve built an entity without a reliance on that brick and mortar for primary care. What does the cost structure around having to deal with those legacy hospitals? What does that do to the overall cost structure?

Thompson

Wow, I wrote an article for a magazine on this. And there’s two components to the bricks and mortar issue. Let’s talk about the bad one first. The bad one is too much bricks and mortar. So I mean, there needs to be bricks and mortar, as much as I rail against it in my day job, you know, but there’s such a thing as too much. And you look at the balance sheets of hospitals and schools for that matter. They’re like in the same boat here. They’re overbuilding by a lot. Like if you don’t care about your gross margin, and no matter what, you can cover your bloated fixed costs. If those two things are true, then one thing comes out of that you’re going to build stuff like you’re going to build a lot of stuff because you can, right? Because you’ll be looking at your financials, like, Oh, we have, like, you know, we’re gonna have like 100 million dollars, you know, let’s, let’s let’s take out some cheap debt because we can because we have the cash flow, you know, but the way our financial system is set up let’s finance the building of these things, oh, you know, let’s build a building over there. Is there a bunch of patients there? It doesn’t matter. Like they’ll come to us. You know, I mean, these conversations, I just can’t imagine these conversations. So the buildings are bloating, inflating the fixed costs, which then just requires more contribution margin, but the contribution margin percentage is so skinny that you have to increase the price. You know, so it’s just, it just flows right back up the beginning of our conversation, we talked about revenue, contribution, margin, fixed costs, now we’re talking about starting at the bottom, and the things that drive it the other way that exacerbate this broken, firm-level economics of healthcare.

Kurt

Yeah, that’s interesting. So I mean, getting back to the incentives, because the cost of capital to build a building is so low for a health system, what we’re saying is we’ve removed that barrier. And as a result, we’re overbuilding, right, so we build too many of those buildings. And then that just drives up the overall cost structure, which means we have to negotiate a better rate with the payer to get higher revenue per visit, to be able to fund all of the buildings that we’ve just created. It seems like a spiral without end.

Thompson

That’s exactly the right word. It’s a death spiral, you know, and someone is spinning it from the top, and someone is accelerating the spinning from the bottom. At the same time. I mean, that constant capital is so cheap, but yet you have the medical inflation rate is significantly higher than then regular inflation. So how can that be? I mean, by honestly, like, if inflation is inflation rate, and the bulk of healthcare services, we’re not quite the services side of healthcare right now. And the bulk of healthcare services is the cost of the service. You know, in terms of the COGS, the cost of goods sold, then those salaries should not be increasing any faster than general inflation. If so, like where the heck is that money going? Like where? Who’s getting that money, it’s going somewhere, it’s going into bricks and marble, you know, for one. And it’s just been siphoned off in various ways, consultants and things of that nature, you know, projects without end.

Kurt

That siphoning off, I’ve heard it described, you know, as the cost of healthcare has continued to climb, we’re essentially just picking the pockets of the middle class, and taking any sort of wage or efficiency gains that they might have had over really over the last, you know, 20-30 years, and transitioning that, funding that into insurance costs and healthcare costs. And so, as a result, wages, true wages within the middle-class population have remained essentially flat for many years.

Thompson  

Yes, this is exactly right. And there’s a lot of data out there to show that, and that people working in the healthcare system right now, the leaders especially, I just don’t know how you go to bed at night, I’m just going, to be honest, I’m not going to mince any words here. Enough is enough. How do you go to bed? How do you look at your family in the eyes, you know, knowing this to be true? I know how they do it. They delude themselves into thinking that they’re saving us with these fancy words, and phrases, and initiatives and partnerships. But everything is the same. The last 50 years, nothing has changed.

Kurt

Well, let me challenge you on something you said earlier. So you know, as we’re talking about, clearly, we’ve gone down the incentive path and the cost path. But you said, this isn’t about making people healthier. Yet on the flip side, if we look at the data, and we look at the change in behavior over the last 50 years, we’ve seen this massive increase in chronic diseases and cancers and conditions that require significant medical intervention. Wouldn’t it be cheaper to spend to prevent those illnesses than it would be to wait until they get sick and patch them up? Wouldn’t that be another way to bring down the overall costs?

Thompson

Two things. So I always have two things, right, for every question, because these things are not simple. It’s not black and white. So the first thing is, those items you’ve just described are not just healthcare issues, you’re talking socio-economic issues, you’re talking the food industry, you’re talking the way our cities are designed, we’re talking about how we drive too much instead of biking and walking, you know, you’re talking about our education system, you’re talking about systemic racism. So all these things play a significant role in the health of an individual. And as salty as I am at the healthcare system, I won’t put all the blame on healthcare for people’s failing and degrading health. And then that being a cause of the increase what I’m saying that there are very simple things that we can do as a country, to lower the cost of health care, which will ultimately lower the price, it won’t matter how sick people are, we can all be fat rolling down the street, I’m telling you, we can get the price of healthcare down to an affordable level, it is independent. What industry do you know of that’s like, Oh, my God, the price is too high because everybody wants to use my service? I mean, that is ridiculous. A garbage statement right there, you know, so we can’t use this, you know, the health of people as a reason and excuse for healthcare not going on and to improve the health of the population will take decades. It’ll take generations, you know, so we better get cozy with these high prices, if we think that’s a silver bullet. So that’s the first thing you know that you don’t actually to make people healthy, you know, big and you couldn’t just by working on healthcare, it’s a multifactorial problem across multiple industries and societal issues. The second issue with that is, suppose that you actually did make me, so let’s look at it from the reverse side first principles. If everybody became healthy. Today, in the current healthcare system, the question I ask people is, with a price go down with a price per unit of service, there’d be different units, different services being provided. But would the aggregate cost go down? And the answer is a resounding no. The way the government reimburses the way insurance company reimburses, if everybody had zero disease, guess how much are flu shots gonna end up costing? I mean, like, just guess, if you still have the buildings, you still have the salaries, you still have the bloated and fixed costs, you still have the razor-thin gross margin, with the ever-increasing demand for more contribution margin at the aggregate level, the cost of a flu shot, the cost of vitamin D is going to like increase by 1000 x if all diseases just stopped in our current environment today. So again, that is an argument that making people healthy is not the panacea. It’s not even. It’s not even an idea. It’s not even Pluto. And Pluto is not even a planet. Okay, you know, it’s not even Pluto in the constellation of bodies that we could use to fix healthcare. Get out of here with your healthy people. Get out of here!

Kurt

I’m still gonna stick up for Pluto because I like the planet. I, you know, I grew up with nine planets, I don’t want eight. But I think we’re kind of onto something because it seems like they’re really are two issues, and they are related but different. And one is clearly the cost, right that the price of a visit, the price of a thing is too high. And we’re not getting the economies of scale, even as consumption of that thing is going off the charts. The second is, I think you’ve hit the nail on the head, which is this societal problem, which causes ill health can’t be fixed by healthcare, we don’t have the right incentives in place, you can’t go to your doctor and say, fix poverty or fix racism or fix the fact that I don’t have a grocery store in my neighborhood and don’t know how to prepare healthy food. That makes sense to me. And I’ll grant that healthcare might be the wrong vehicle for addressing. But on the other hand, healthcare is the area where it’s impacted. And the first place that we’re recognizing the burden that society carries of all these ills. And yes, these ills have taken, you know, 40-50 years in some cases, if you look at childhood obesity, you know, if you go back to the 1950s, we had roughly zero percent childhood obesity in this country. And that’s changed dramatically. We’re starting with the introduction of corn syrup into processed food in the 70s. Right? There, there are a lot of things that are stacked on top of each other, which got us to this place where we’re approaching 30% childhood obesity. Yes, the healthcare system can’t fix it. But I would argue that the healthcare system needs to use its position in the economy to identify the issue and call for incentive changes and structural changes that allow us to solve those problems. I think you’re right that we can’t expect the hospital system to do that on their own. It’s going to take a broader community, but we need to at least have the dialogue. Because three and a half-trillion dollars a year on healthcare could be two or one if we started cutting out some of these chronic diseases.

Thompson   

My response to that would be there’s an order to things like there’s an order. And suppose you give the healthcare industry the keys to fix health across multiple societal issues and industries. Guess what? Healthcare is now $7 trillion. You know, it’s the ouroboros, it’s the snake eating its own tail. You know that the very thing we’re trying to do, which is to help the people at the bottom, quote, unquote, be healthier, which ultimately comes down to money, they actually end up with less money, because now we’re funneling all the money into this thing that just eats money, you know, and spits it out in the form of fountains and marble, you know, countertops and higher salaries, you know, for people that aren’t doing anything. So, I agree with you except there’s an order, you can’t put a bunch of good stuff, you know, in this garbage disposal, and hope that it spits out a Tesla, you know, like, that’s, that’s just not going to happen. You know, it’s not, it’s not even feasible, you have to fix the thing first, then you can start pumping wherever you want through it and hope for the best.

Kurt

So I think I think there are two pieces in there. One is, what do we want the system to look like? And then two is what’s the migratory path of how we can get there. Whether that’s incremental or radical change, there has to be a process that would allow us to evolve from today to that eventual future. But we need to know what that eventual future looks like. And, one way I described that sort of a thought experiment that I use with leaders of payers and providers is to say, imagine if we took all of the dollars in a given county, let’s just look at Hennepin County here in Minnesota, let’s take all the dollars that are currently going to payers on the insurance side and to providers on the healthcare side, and we took that away. And we gave that money to some entity, call it the county health board, call it you know, the county commissioners, whoever. And let’s set aside for the minute that they don’t necessarily have the training to know what to do with it. But let’s say that they were responsible for the health of that population. But for the next 30 years. Now, how are you going to spend that money? You’re going to spend it a lot differently than it’s spent today. And I would argue that where we would get to with that sort of thought experiment is what we want the system to look like because that keeps us the healthiest and spends the least. Now the question is if that’s the goal, how do we get there. And I think those are two different things.

Thompson

They’re two different things, and I like the idea conceptually, but I know it’ll never work. Thirty years is too long, because it’s all against incentives, that people who would be at the beginning that 30 years, they’re going to retire before you get to the end. So they’re not going to be as incented you know, to think long term. Someone who joins in year, you know, say 15, you know, so there’s structural issues, but I really like the idea. But here’s something even more simple that you could do today. I’ve said it many times, look, let’s go to every single person in the healthcare industry, that makes more than $100,000 or more a year in salary. If you make more than hundred thousand dollars a year, and you work in healthcare, especially at a health system, or an insurance company, or a brokerage, for every percentage increase annually of healthcare prices, you get a reverse, your salary goes down by the same amount every year, goes up 10% 10% reduction, next year goes down 10%, you get another 10% reduction, and it just keeps ongoing. So, of course, the guy making a million dollars is going to have a little bit more runway, you know, than someone else. But you want to talk about line incentives. To me, I would actually start there, forget all the stuff I said today, I’ll just make that a federal mandate, you can set the bar, wherever you want, say 200,000 is a cut-off, every year your salary goes down. So you’re either going to get out of the industry and go somewhere else that’s actually doing some good and not raping the American public. Or you’re going to stay there and fix that dang thing. Because you know, in two years, three years, you’re going to have to sell your house. And that that is how you align incentives without all these crazy healthcare wonk words like value-based pay and ACOs. And you don’t even need a VC or a startup to do this, right. Or maybe you have a startup that would facilitate, you know, the extraction. But anyway, that is the crux of it. And I tell you this if someone works in healthcare, and they’re not willing to do that, they’re part of the problem. I’m looking at you. Whoever’s listening to this, if you’re not willing to do that, you are part of the problem, you better lower your salary, and get out of my threshold or get to work because Enough is enough.

Kurt

I think my idea of centralizing the dollars to a county might have a little more chance of being reality than what you just described. Knowing that 20% of the nation are employed in healthcare. I know we have to wrap up here, Thompson, we could go all day on this. Any last thoughts for our listeners here?

Thompson

If you walk away with anything from this is following the logic of healthcare. Healthcare doesn’t respond to changes in supply in demand, and that’s created an issue where at the firm-level there’s no incentive to manage cost of goods sold contribution margin and fixed costs, and in fact, those things all interact with each other in a way that cause the price to accelerate in its levels — talking about healthcare services now, not talking about prescription drugs or medical devices, and there’s no incentive to increase market share by actually providing a better service at a better price. There’s zero incentive to do so. Because you don’t have to. You can just increase your prices to fund your buildings, to fund this to fund that, to cover your losses from the previous year. That’s why this idea I ended with, as radical as it sounds, reduce those salaries, and you’ll start seeing some incentive, and in the purest version of that, clinicians are not included in that. So, any non-clinician who makes more than 100,000 a year must receive a proportional decrease in salary to that of the increase in the national healthcare rate. 

Kurt

I think Thompson, the thing I take away from this conversation, is incentives. That we have incentives that are misaligned, and that’s caused a lot of structural challenges in how we pay for healthcare, and if we can get those incentives right by some mechanism or at least make incremental changes, we have a much better chance of succeeding over time. Thank you very much for joining us, this has been a wonderful experience, and I hope you’ll come back and join us again.

Thompson

Thanks for having me.

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