An open letter to Congress: Is health care at a tipping point?

Greater accountability and transparency is urgently needed.

Employers’ health-care costs are about to get another huge hit that could destabilize the health care power structure, driving massive change. New inflationary pressures are intensifying the already exorbitant costs that have plagued purchasers for decades. The impacts can be seen in 2021 hospital costs that, according to National Health Expenditure data, consumed 44% of total U.S. health-care spending. 

Most hospitals are still trying to manage pent-up, post-COVID demand for services. A recent report from the American Hospital Association (AHA) and Syntellis shows that, in the three years since the pandemic’s onset in 2019, total hospital expenses per patient rose 22.5%, primarily due to a 25% growth in labor expenses per discharge. Hospitals rely on contract staffing firms to manage labor shortages, and total contract labor expenses exploded by 258% during this period. Hospital expenses per patient skyrocketed as well in every major supply category, including prescription drugs and supplies. The AHA declared that the report “builds on growing evidence of the unprecedented input cost growth facing hospitals and health systems.”  

Pandemic cost increases have been exacerbated by the health-care sector’s aggressive low-rate borrowing to fund deals and capital projects over the last decade. Recently, interest rates have risen steeply, and many organizations are hard-pressed to repay those loans. The Financial Times reported that “The [health-care] industry’s heavy representation among the riskiest US corporate borrowers has sparked warnings from ratings companies that some firms’ debts are becoming ‘unsustainable.’” 

And the combination of higher interest and the health-care sector’s deteriorating financial stability have made refinancing more expensive and difficult to obtain. Even so, the ratings firm Moody’s said that, “Probably 80% of [health-care] companies … are fine. [But] there’s a growing number that are not, and that we’re worried about.”

To regain their financial footing, care delivery organizations will seek higher reimbursements. Medicare and Medicaid payments are relatively fixed and so don’t represent increased revenue potential. But individual and employer-sponsored coverage purchasers can expect rate increases that are even higher than usual. The question is whether this could facilitate a tipping point for American health care.

It is not hard to imagine a scenario in which many companies suddenly are unable to bear soaring health-care costs, and care providers become less likely to get reimbursed for a much larger portion of the care they deliver. 

Unexpectedly high health-plan cost increases aren’t likely to be a problem for high-margin companies, like those in technology or finance. But a significant percentage of low-margin companies, like those in retail or food service, may find these increases untenable, especially with competing priorities like supply-chain shortages, escalating labor costs, rising capital costs and intensified post-COVID health-care conditions. The impacts could cascade throughout health care and the larger economy, threatening our national economic security.

The slow boil of the health-care marketplace has gradually but steadily encouraged health-care purchasers to seek and contract with innovative vendors that offer more value-based arrangements. Large consumer-focused, tech-enabled organizations like Walmart, Walgreens, Amazon, and CVS are spending billions of dollars purchasing and showcasing capitated advanced primary-care models aimed at individuals and groups. They and other innovators are also curating high-performing, value-focused specialty health services vendors that consistently deliver better health outcomes and/or lower costs than conventional approaches in high-value niches – like management of chronic conditions, musculoskeletal care, high acuity mental health, and specialty drugs. These high-value point solution firms typically have been unable to get reception from the health plans and health systems that still earn more by performing more services than by delivering better, more efficient care.

Finally, the path to better health care has received a powerful boost from the 2021 Consolidated Appropriations Act (CAA), arguably the most consequential health-care legislation since the Employee Retirement Income Security Act in 1974. The CAA designates employers as health-plan fiduciaries, removes gag clauses from health-services contracts that have blocked data exchange, and mandates that health-care quality and pricing data become much more accessible. Employers will use this information to directly contract with high-quality, affordable primary care, specialty services, and health systems, previously available only through health plans that have fought to keep health-care data inaccessible. Employers operating under CAA must now align the needs of their members with the most appropriate and accountable health services.

Congress went down a similar path more than 20 years ago when it reformed the retirement industry with tactics like those in the CAA. Building on the CAA’s advances by further incentivizing value-based payment models and mandating increased transparency and accountability throughout health care would go a long way toward stabilizing our increasingly fragile health system.

As purchasers become able to see and compare the actual health outcomes and costs of the health-care organizations they are or could be working with, U.S. health care will be susceptible to dramatic change. If health care’s existing power structure is weakened by partially falling in on itself, as it appears to be doing now, the opportunity for change will become much more possible.

It could be a tough, tumultuous road going forward, but the resulting benefits could be far better for the U.S. than today’s health-care reality.

Brian Klepper is a nationally prominent healthcare analyst and commentator. He speaks, writes, and advises on realizing primary care's potential, on high-performance healthcare, and on managing clinical and financial risk.

John Rodis is the past president of a large hospital in New England and the president of Arista Health, LLC, a consulting company focused on quality and value in Healthcare.

Jeffrey Hogan is a health care leader focused on health services procurement, health data/analytics and optimized health outcomes.