For those not aware of what exactly second-order consequences are, it’s a model of thinking frequently referenced by Ray Dalio, founder of the very successful investment firm Bridgewater Associates. Below is a a great example of first and second order consequences
“For example, the first-order consequences of exercise (pain and time spent) are commonly considered undesirable, while the second-order consequences (better health and more attractive appearance) are desirable. Similarly, food that tastes good is often bad for you and vice versa.”
Healthcare is an industry where many participants fail to consider second order consequences. A few can be highlighted from the Affordable Care Act, like the implementation of the Medical Loss Ratio Rule and the effort to reduce paperwork and administrative costs through the implementation of standardized electronic health records.
But there are other instances impacting individuals who can exert control and avoid these types of failures. A notable example concerns the impact of selecting and navigating to healthcare providers. In the following paragraphs, a patient’s journey through the healthcare ecosystem will be reviewed, specifically the impact of the radical price variation between in-network providers for the same exact procedures.
Patient A : Single Male, 35, Insurance Coverage through Employer, enrolled in a high-deductible health plan with access to a health savings account, funded 25% of their deductible by their employer
Deductible: $5,000
Maximum out-of-pocket : $5,000
HSA contribution by employer: $1,250
Attempting to remain active and close his Apple activity rings, Patient A was hiking and while hiking, suffered a slip and fall on loose rocks, resulting in what he believed to be a torn ACL.
Office Visit with preferred Primary Care Physician: $216
Upon PCP review of Patient A’s knee and calf, evidence pointed to potential ACL tear. At this point, second order consequences must be considered. If Patient A’s PCP is with a major health system, more likely than not, Patient A will be referred to that health system for the appropriate MRI. Given Patient A’s out-of-pocket exposure, Patient A exhibits increased price sensitivity.
Path 1 – MRI Major Health System: $3,337
Path 2 – MRI Cost-effective Provider: $332
In Path 1, Patient A will have quickly consumed the HSA funds contributed by his employer, with a remaining financial obligation of over $2,000. In a recent Kaiser Family Foundation survey, it was found that a larger share of adults reported that they delayed or did not get healthcare due to cost (28%) or that they were worried about their ability to pay medical bills if they were to get sick or have an accident (45%). Given this care is needed to resume his active lifestyle, Patient A will most likely have to go into debt for his healthcare, as is common in the United States, with four in ten adults currently having debt due to medical or dental bills.
In Path 2, Patient A, with the funds available in his HSA, is able to navigate to a cost-effective in-network provider and avoid any incursion of debt.
Following the MRI, it’s finally determined that Patient A has torn his ACL and will need surgery to repair. Between the scheduled surgery date and the diagnosis, it’s suggested that Patient A undergo physical therapy to strengthen the surrounding muscles to ensure an easier recovery.
Path 1 – Physical Therapy, 8 times, Major Health System – $237 per visit * 8 = $1,896
Path 2 – Physical Therapy, 8 times, Cost-effective Provider – $34 * * = $272
In Path 1, after receiving his 8 visits, will have consumed his $5,000 deductible, with his health plan now covering the cost of his care for the remainder of the plan year if he receives care at in-network providers. On top of the existing amount he owes for the MRI, he still will have to secure $3,750 in order to meet his deductible and maximum out-of-pocket limit. It’s estimated that over 5 million people in the United States have between $2,000 and $5,000 in medical debt, and Patient A has joined their ranks.
In Path 2, Patient A still has almost $900 dollars available in his HSA to pay for these physical therapy sessions. In anticipation of this surgery and his expected out-of-pocket costs, Patient A has been contributing and growing his HSA tax-free, as he’s acutely aware that the resulting ACL repair will ensure he meets his deductible and maximum out-of-pocket limit.
With the ACL surgery quickly approaching, Patient A in Path 1 is feeling increased stress, anxiety, and depression associated with his healthcare journey. Those with medical debt experience almost two times the amount of days with mental health symptoms than those that can pay. Patient A in Path 2 is feeling anxious for his surgery, but has identified a cost-effective, high-quality provider and has contributed to HSA to ensure he can meet his deductible.
Path 1 – ACL Repair, Major Health System = $37,831
Path 2 – ACL Repair, Cost-effective Provider = $16,632
In Path 1, Patient A continues to remain within the major health system and has his surgery completed. Given he’s already met his deductible and out-of-pocket limit, the plan is covering the entire cost of the procedure. From Patient A’s perspective, this is a relief. But from his employer’s perspective, this will have a meaningful impact on the total cost of claims. If self-funded, this will be a direct expense borne by the employer. If fully-insured, this expense will not be felt until the group looks to renew their health plan, and receives double digit percent increases upon their premium rates.
In Path 2, Patient A will have to expend the remainder of his HSA funds. Given his consumer-first approach, he’s assured that the surgery center is low-cost, high-quality, in-network, and accessible. For Path 2, if Patient A’s employer is self-funded, this will have a much more favorable impact upon their total cost of claims. This type of cost-effectiveness can lend itself to hundreds of thousands, if not millions, of dollars of mitigated wasteful spending. If Patient A’s employer is fully-insured, the savings won’t be felt until the plan renews, where they will receive more favorable premiums for their employees.
The experiences Patient A could pursue are a microcosm of the healthcare system impacting employers and their employees. It becomes evident that without engaged, informed healthcare consumers, rampant wasteful spending occurs. The total cost for Patient A in Path 1 comes in at just over $43,000. For Path 2, the total cost is $17,236. This is about a 2.5x difference in total spending for the employee and plan. Extrapolate this spending difference to a group of 100 employees, and we quickly see this difference balloon to over $2.5m.
The cumulative impact of the failure to consider second order consequences within healthcare is exponentially growing, specifically, the second order consequences of pricing failure in the healthcare sector. Pricing failure can be defined as inconsistent pricing of care due to different entities paying a range of prices. It’s estimated that close to $250b of waste can be attributed to pricing failure per year. With anywhere from 40% to 50% of services and procedures shoppable, healthcare consumers can be conscious of the second order consequences of where they navigate to receive care. And when engaging in this active, engaged, informed healthcare consumer decision-making, it’s important to remember the famed healthcare economist Uwe Reinhardt’s most iconic quote regarding the healthcare spending in the United States – “It’s the prices, stupid”.