I blogged recently about the incredible claim of Eli Lehrer, that compensation of medical personnel, physicians in particular, was responsible for the high cost of health care.  You can read my blog here, which contains a link to Lehrer’s article written for “The Weekly Standard.”

I’ve had time to re-think his article and in a way I’ve decided that he’s actually correct.  He comes to the right conclusion but for all the wrong reasons.  

Yesterday I was invited to participate in a conference call attended by people interested in transparent pricing.  One of the participants was an experienced benefits administrator who confirmed what I call “the 10% rule:”  doctors get 10% of the health care dollar and hospitals and administrative folks get the rest.  He actually used the phrase “institutional” risk.”  The health plans he administers are never in jeopardy of running out of money due to physician charges, you see.  What he worries about and would like to see addressed are “institutional” charges and fees.  You can imagine what he thinks about our fees and approach to pricing!

By now you are wondering why I feel compelled to apologize to Mr. Lehrer.  I’ll ask you now to put yourself into the shoes of the giant insurance company’s CEO and you’ll see why Mr. Lehrer has a point.  You as the CEO of Giant Ins. Co. (GIC) collect premiums every month from millions of people.  Most of the claims are for physician services, office calls, surgeries, diagnostic procedures, that sort of thing.  While the number of claims from physicians dwarfs that of the hospital claims, the amount of money you spend on the physician claims is 10% or less of your total premium collection.  

The investors of GIC are anxious to see a 10% return on their stock this year and you don’t feel like you can raise premiums any more due to competitive pressures and the fact that everyone knows your company made 11 billion last year. You decide to cut the physician’s pay.  But wait!  The serious savings in payouts would come from cutting “institutional” compensation, wouldn’t it?  Simply put, reducing physician compensation to an amount below the market-clearing price for their services (while simultaneously increasing the hassles for obtaining this payment) will result in a relative shortage of physicians willing to see patients “covered” by GIC.  Without access to the physician’s office, access to hospitals or MRI units or surgery centers (“institutions”) is severely restricted, the equivalent of what I call “soft rationing.”  If the doctor won’t see the patients, the patients never get past the gate to access the wonders of modern medicine!  Presto!  Your investor’s stock just went up 12% and you are due a performance bonus!

The beauty of this move on your part is that the doctor looks like the bad guy.  Where in the world did you as GIC CEO get this idea?  If you said “Medicare” you go to the head of the class.  When Medicare cut physician pay in the early ’90s, physicians didn’t react this way at first, rather they hired physician assistants (wonder why there weren’t many physician assistants around until the mid 90’s?) and increased their volume of work to make up for the cuts in pay.  Medicare’s “mistake” was that they didn’t cut hard enough.  So they did it again.  Medicare bureaucrats also found it useful to always have future cuts on the horizon, this strategy simultaneously providing access problems for Medicare beneficiaries at the doctor’s office and guaranteeing political contributions from doctors to keep the next cut from happening.  Don’t you love top-down, central planning?

Aren’t you glad you have health insurance now that you’ve read this?  You can now see that the goal of the recipient of your insurance premium is to make darn sure that few physicians want to see you, as this reduces their exposure to “institutional” costs.  Are you seeing this through the Obamacare lens yet?  Maybe Mr. Lehrer “gets it” after all.  

Greedy doctors!

G. Keith Smith, M.D.