To Your Health: Who Benefits? Who Pays? and Who Decides?

Second of a Four-Part Interview with Dr. Alfred Knight

From Winter 2006 Quarterly

In the second of a four-part series, “To Your Health,” Scott & White’s president and CEO, Dr. Alfred B. Knight, focuses on some of the more vexing issues in healthcare today and explains how Scott & White is responding to them. Fortunately, many of the issues Dr. Knight addresses are essentially invisible to the typical patient receiving medical assistance. And that’s how it should be.

One might compare then, healthcare in America to the “perfect storm”: majestic, calm and serene thunderclouds of beauty from afar, all the while harboring potentially dangerous consequences.

Welcome to the perfect storm of modern medicine.

"The cost of healthcare is a very complex issue...How do we control costs? First, by keeping people healthy so that they do not create cost. Second, by providing the most timely care possible, thereby maximizing recovery. And third, by providing the most appropriate, cost-efficient and effective therapies when patients need help."   - Dr. Alfred B. Knight, President and CEO, Scott & White

Dr. Knight, in our previous interview, you identified several trends and challenges facing American healthcare. Let’s hit the hot spots first. The cost of virtually any treatment—from simple office visits to lab work and tests, let alone hospitalization—seems outrageously and indefensibly expensive. What are you doing about that?
Knight: The cost of healthcare is a very complex issue. Many payers dictate what they will pay, regardless of cost. Many individuals do not pay because they can’t or won’t, which increases costs for the other payers.

Most hospital systems in this country are nonprofit, which means that any returns are reinvested in the system. When a patient cannot pay, another must overpay for us to be able to provide those services. That is called cost shifting. Our complex system has many transfers of this kind. Even some very good payers will not pay the cost of a specific service, whereas they pay more than the cost for another service. The institution can then “cost shift” monies from one service to another to make them whole. Cost shifting occurs at every level in the industry.

How do we control costs? First, by keeping people healthy so that they do not create cost. Second, by providing the most timely care possible, thereby maximizing recovery. And third, by providing the most appropriate, cost-efficient and effective therapies when patients need help. None of these are easy to do.

The issue of who pays for service has become contentious. When insurance companies and individuals and governments refuse to pay the real costs, doesn’t that put Scott & White in a financial bind?

Reimbursement for healthcare comes from three primary sources: governmental agencies (the largest being Medicare), third-party insurance and individuals. The commercial insurance market bears the greatest burden, not because of the total money involved, but because it pays for what the government doesn’t cover and the individual cannot afford. It is a double burden.

Like all healthcare organizations, Scott & White is challenged by small changes in reimbursement. For example, the federal government was scheduled to decrease physician payments for Medicare patients by 4.4 percent on Jan. 1. And similar cuts are planned over the next five years. Should it not be reversed by Congress, these cuts will place an increasing burden on all healthcare providers to see Medicare patients. The cost to provide their care will be greater than the reimbursement for that care. Scott & White would like to continue to treat Medicare and Medicaid patients, but we will be increasingly challenged if the reimbursement continues to decrease while our costs increase markedly. It is a train wreck waiting to happen.

Citizen demands seem to drive healthcare responses. Scott & White is expanding dramatically in facilities, specialties and research capabilities. Are these investments market driven?
Knight: The major expansions that you see coming out of the ground at Scott & White reflect a commitment to specialty care, a commitment to replace 50-year-old facilities, and a commitment to expanding our academic mission. More patients will seek Scott & White, perhaps from greater distances, because of the care we provide. Is that a response to the market? Yes, our vision is predicated on bringing new patients to our system.

A commitment to specialty care will not replace Scott & White’s historic dedication to primary patient care, will it?
Knight: No, growth in specialty care complements our local and regional primary care efforts. Society must come to terms with the realities of healthcare. Comprehensive healthcare for all is laudable but as practiced today would create a financial burden far beyond what the federal government could pay. And there is inadequate political or societal will to change the system.

Right now, there are no limits to what patients desire and expect from the system. The United States spends 50 percent more [on healthcare] per capita than any other nation in the world, yet tens of millions of citizens have little or no care. This dichotomy is very hard to understand. Our society thinks there is a pill or surgery for every ill. We have decided collectively that self responsibility and accountability are not necessary because modern medicine can address all our aches and pains.That’s just wrong. We need to make wellness and health—personal responsibility and accountability—the basis for society’s healthcare system.

Scott & White occupies a distinctive position because it is a teaching hospital for Texas A&M College of Medicine, its physicians are professors and researchers, it is in the midst of building cutting-edge medicine, and yet patient care and treatment are what we are most known for. Do patients pay for all of that?
Knight: As an academic medical center, we provide the education resources for medical students, nursing students and graduate medical-education programs. This educational commitment alone costs tens of millions of dollars. Some reimbursement is provided by the College of Medicine, by Medicare, Medicaid, Champus and the State of Texas. Even so, operating dollars are needed to offset the cost of providing comprehensive education. The same is true in research. Although our researchers receive many grants, contracts and stipends, collectively reimbursements for research rarely pay for themselves, particularly early on in a young researcher’s career. Supplemental funds come from operations and from endowments established by many wonderful people who know the importance of creating new knowledge.

There seems to be more competition among healthcare organizations now than ever before. Why is this, and how does it affect Scott & White and healthcare generally?
Knight: Competition is generally good for most industries, but the healthcare system, as structured, is not competitive in the same way as other industries. For most of our services we are told what we will be paid, we have little negotiation or leverage power, and we must make it work. We also cannot turn patients away for critical emergent services.

Most Americans feel access to healthcare is a right for all citizens. We are very different from computer services, banks and Wal-Mart. For the health industry to compete effectively and provide better services at lower costs, there must be a fundamental realignment of society’s expectations, quality outcome metrics and reimbursement for services.

If competition would drive down the cost of healthcare, it could be positive. However, it has yet to be shown whether institution-to-institution competition will make a fundamental difference.

One hears a lot about “for-profit” and “not-for-profit” healthcare organizations. What is the difference? Which should one choose?
Knight: Most hospitals in the United States, about 85 percent, are not-for-profit, which means that excess revenues are poured back into the operation to benefit the community. This might mean expanding facilities, making renovations or acquiring new technologies, and it nearly always means spending a great deal on charity and unreimbursed care. Because they commit to the community and not to investors, not-for-profit organizations pay no property or income taxes.

For-profit hospitals, on the other hand, must commit to make a profit for their investors, whether public or private. The quality of care provided at any institution is not tied to its for-profit or non-profit status. Patients typically choose an institution based on a number of factors, mostly based on convenient locations, insurance requirements or physician recommendations.

Your location sets you apart from the typical academic medical center. Are there challenges unique to those of you in less metropolitan areas?
Knight: For more than a hundred years, Scott & White has been in Central Texas in a relatively small town. Temple has a population of about 50,000 but supports a very large healthcare center in Scott & White, the fourth largest VA in the country, and a well-respected community hospital, King’s Daughters. Our healthcare institutions draw patients from all over the country.

For us to grow our nationally prominent academic medical center, however, we must expand our geographic service area. Our latest announced growth will be in the Georgetown and Round Rock areas. We will open a medical office building within the next year and a 75-bed hospital within six months after that.

Small towns offer tremendous opportunities and challenges. For those of us who grew up in a small town, having sophisticated technology and services here in Temple, with its small-town quality of life, is truly a wonderful gift. Nonetheless, most people grow up and train in highly sophisticated urban centers, so we recruit aggressively by showing them the advantages of small-town living.

America’s best hospitals seem to be following a model of fiscal responsibility and efficient operations. What effect will the recent changes at Scott & White have on patient care?
Knight: Our recent focus on cost and efficiencies has challenged our 100-year-old open and generous culture. The goal, of course, is to enhance our financial position in order to continue to meet our mission. The challenges of increasing costs and lower reimbursements are not going to change, so we have to be efficient and effective without sacrificing quality. We simply must do it.

Being efficient and effective seems to conflict slightly with our strategic growth plans. For more than a quarter century, Scott & White has focused its growth on our very successful Scott & White Health Plan. But as we have grown both academically and clinically with specialized care, we have been able to serve additional numbers. We want any patient to be able to come to us, particularly in our rural and local areas, because we are the healthcare organization of choice. As we move regionally, certain specialties will attract a wider range of patients. Nationally, we hope to compete for unique patients in specialized areas as we continue to develop into a nationally prominent academic medical center. So our strategies for growth are multifocal in terms of geography and access. But efficiency and effectiveness will become part of our culture in every area.

Insurance deductibles appear to be rising every year. Are we staring at “negotiated fee services”?
Knight: As employers try to deal with increasing premiums necessary for the accelerating cost of care, many have chosen to increase co-pays and deductibles as a means of moderating their premium costs. That means more cash comes out of patient pockets. Many patients can afford neither the co-pays nor the deductibles and choose to forego healthcare visits. Although the percent of family income committed to healthcare is less now than 30 years ago, we have become accustomed to minimal or no-cost services. That cannot continue. Scott & White works with every family, every patient, to encourage appropriate care and provide the breadth of services necessary.

Other "To Your Health" Interviews

Part 1 - The State of American Healthcare
Part 3 - Finding a Perfect Balance

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