Why Aren’t There More Free Market Surgery Centers and Clinics?

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G. Keith Smith, MD – June 24, 2021

[This is a transcript of a talk given June 17, 2021, at the Mises Institute’s Medical Freedom Summit in Salem, New Hampshire.]

On behalf of everyone at the Surgery Center of Oklahoma and the Free Market Medical Association, thank you for the opportunity to speak to you today.

Just over twenty-four years ago the operation of the Surgery Center of Oklahoma began with a simple mission: deliver the highest quality of care at a reasonable and disclosed price. We fancied ourselves free marketeers, not aware of how far we had yet to go to accurately claim this title. Our mission was the opposite mission of the hospitals where we had previously worked. Then, as now, hospitals are focused almost exclusively on revenue, many times inflicting surprise and bankrupting bills on their victims. As physicians working in these hospital systems, we were unwitting accessories to these crimes. We intended to operate our facility differently, intending to serve as both medical and financial advocates for our patients. The Surgery Center of Oklahoma is now viewed as a model of medical services delivered free market style partly because of this simple mission, but more recently due to posting all-inclusive pricing online and the effects this move has imposed on the medical and surgical market. I’d like to begin by describing the state of the industry at the time we decided to walk away from it.

I’d become convinced by the early 1990s that government had no money it had not first stolen and to accept government payment was to receive stolen property. In 1993, three years after I started my anesthesia practice, I therefore stopped accepting government money and stopped filing Medicare claims. I treated Medicare patients outside of the Medicare scheme and usually free of charge. When I began practicing in 1990, Medicare paid me about $1,100 for the anesthesia services required for an open-heart surgery. In 1992, this payment was cut in half. A year later that amount was cut in half. The last two payments I received from Medicare were as follows: $285 for a six-hour cardiac anesthetic and $78 for the anesthesia services required for a knee replacement. These fees had been imposed through a mechanism referred to as the resource-based relative value scale, more appropriately called the Rosemary’s baby of healthcare. According to the folks at Harvard who gave birth to this creature, every physician service had a price and they knew what those prices were. I had read enough about economics by this time to know that this imposed pricing was not personal, as punishing as it seemed. Prices are signals, after all, and Medicare was sending me a signal regarding what they thought the service I provided was worth, or they meant to intentionally cull the ranks. I felt obligated to respond with a rational signal of my own and as I’ve mentioned, I quit participating in their scheme. I still had much to learn about pricing, but I did notice that underpriced services became scarce and overpriced services became abundant.

Private insurance carriers seized on the fear created by this deep slashing of physician fees, drastically reducing the amounts they paid to physicians. Hospitals, not about to allow a crisis to go to waste, cashed in on their opportunity to cheaply purchase physician practices. To legitimize their bold strategy, hospitals cranked up their propaganda machine, proclaiming loudly then as they do now that they were going broke. Hospitals flush with cash even laid off critical nursing staff to justify this narrative. I’ve always found it interesting that hospital emergency rooms, the supposed primary source of their financial woes, always seem to have a building crane out front. Who builds on to their loss leader? And yet the lack of paying patients in the emergency room was part of the poor-mouthing narrative in the early ’90s, just as it was during the debates leading up to the un-Affordable Care Act.

To further bolster this bankrupt-hospital narrative, physicians and surgeons were told there was no money to buy the equipment and supplies they needed. It was becoming increasingly obvious that it was time to get out. I had no desire to be controlled by the rising administrator class. The only choice for me was to find a way to practice outside of the hospital environment, no longer an accessory to the hospital’s financial crimes against patients.

The Golden Rule and the concept of mutually beneficial exchange is a large part of what drove me to become a physician. While the vast majority of physicians embrace honest and mutually beneficial exchange, it turns out that the vast majority of hospitals do not. Hospital commerce is the equivalent of a financial drive-by shooting, particularly commerce conducted by the not for profit systems. I believed then as I do now that a facility owned and controlled by the physicians who work there was the model most likely to ensure that patients were not financially brutalized. My great-uncle was the only physician in a small Oklahoma town for years, living in the top floor of his house, the bottom floor serving as his clinic and the town’s hospital. He was completely accountable for the entirety of what his patients were charged. He could do everything about what they were charged, including charge them nothing, and this he did regularly. Dr. Walter Bayes was a hero in the town of Chickasha and very well to do. Ownership of the facility or institution by doctors was the rule until government intervention in the 1950s and ’60s made this model more difficult. The explosion of hospital charges in the 1990s, at the same time they claimed they were going broke, created an opportunity for physicians to once again own facilities and demonstrate the superiority of the model. This disintermediated model was superior, as it allowed for the elimination of the greediest profit seeker from the equation: the not-for-profit hospital.

In April of 1997 Dr. Steve Lantier and I walked away from our hospital anesthesia practices and opened the facility thirty days later with ten surgeons with whom we had a good working relationship. We had no idea if we would break even, make money, or go broke trying. We had no pro forma. We had no business experience. All we knew was that hospitals were awful and inefficient places charging patients gigantic prices. The opportunity seemed obvious. Our faith in this dream and in the idea that if you are cheaper and better you will beat the competition formed the basis of our business plan. We also decided that we would never accept a dime of government money, and to this day never have.

The first week we were open, we received a call from a patient who had a breast mass she wanted removed, and she wanted to know how much we would charge her, as she had no insurance. This was the call we had all hoped for, the reason we had opened, and yet I had no idea how to answer her question. I placed her on hold and called our general surgeon and asked him how much he wanted for his fee. He had no idea. I told him to pick a fee or, like a Harvard professor, I’d pick one for him. He said $500. I thought this was very reasonable so I hung up on him before he had a chance to reconsider. As an anesthesiologist, I basically bill for my time and I knew this surgery would take twenty or thirty minutes. The facility supplies were minimal. I was about to take her off hold when I realized she would want to know if she had cancer. I called a pathologist friend and asked him how much he wanted to examine the specimen. He had no idea. I pressed for an answer. Twenty-eight dollars for the pathology. I informed the patient that our price was $1,900. “For what?” she asked. “For everything,” I said. She said, “That’s funny. The hospital down the street from you wanted $19,000 for the facility fee alone.” I knew we were on the right track when after the case and the supply cost was tallied, we’d made a profit. Had the pathology fees that apply to the examination of breast masses not increased, our price would be the same now as it was in 1997, but alas it is now $2,365. Only three other fees have increased since we began quoting them over the phone in 1997.

Word spread and many uninsured patients came to our facility, along with patients with high-deductible health plans and HSAs [health savings accounts]. Most of the Division I athletes had their surgery at our facility, and our reputation in the community grew more solid every day. Dr. Lantier and I were both trained in pediatric anesthesia and particularly enjoyed this part of our practice. Nothing better builds the practice of an anesthesiologist than the careful anesthetic treatment of someone’s child. The area hospitals hated us because patients could buy their surgeries at our facility for less than their insurance deductible at the hospitals. Paradoxically, no insurance companies would work with us. We would not understand any of this until much later, when our posted prices clarified this for us. We were very busy and very successful, early on. Within six months, I was distributing sizeable profits to the partners monthly, while usually charging one-tenth what the hospitals were charging for the same service. We added to our “quote over the phone” price list every week, so patients could have an answer to their price question immediately.

It was no surprise to us that the hospitals were the first to attack us. They attacked us directly by attempting to ban physician ownership of facilities in the state. This was done under the banner of trauma care, the hospitals falsely claiming that if surgeons owned their own facilities, they would not treat trauma patients. No one knew, including me, that when the state legislature created the state trauma task force the underlying mission was to close physician-owned facilities. A Democrat legislator who saw us as an underdog, a champion of the poor, told me with a wink and a nod that I needed to be on this task force, a business-saving favor he and I have since acknowledged. Our facility, and another that had copied our model, were the obvious targets of this task force and surprisingly there was no plan in place if representatives of either of our facilities argued our case in person. Our unexpected invitation and inclusion in this wannabe Star Chamber derailed their plans to ban our existence.

It is worth noting that in our early days Oklahoma Democrat legislators saw us as underdogs. I asked legislators to just leave us alone and to dismiss efforts to hamstring our operation. The Republicans, early champions of their crony hospital pals, now champion our approach, an approach that now receives the bipartisan neglect we desired.

In another direct attack, the big hospitals attempted to pass what became known as the 30 percent law. If passed, a facility had to receive at least 30 percent of its revenue from Medicare, Medicaid, or uncompensated care. Noncompliance was punished by payment of a penalty calculated to equal the degree of failure to comply. Obviously, the state government would be combing through our financial records and assessing a penalty equal to 30 percent of our gross income, since we accepted no government funds. This was aimed squarely at our facility. Once again, a Democrat, Representative Fred Stanley, used his muscle to ensure that this legislation went nowhere. This law was debated in public forums, to some of which I was invited to speak. In one heated exchange, a normally tight-lipped hospital executive asked me how much of our surgery center’s revenue was uncompensated care. I was confused by his question, meant by him to be a devastating rebuttal to my remarks, but, haunted by the insanity of his question, began to wonder if he had misspoken. Was uncompensated care a revenue item? Most people would think that uncompensated care is care delivered for which no compensation is received. Not true, it turns out.

In another attack, the state health department was weaponized by the big hospitals in an attempt to secure the medical records of all patients treated at our facility in the year 2000. After they attempted to invalidate our operating license for failure to comply, we sued them only to discover they lacked the statutory authority to seize these records. Their surrender is framed on the wall of my office.

Because patients could pay the entirety of the cost of their care for less than their deductible and copay at in-network area hospitals, the insurance companies, paying us out of network, received intense pressure from the area hospitals for this lost business. Likely threatened with retaliation in the form of higher prices billed to the insurance companies by these hospitals, the insurance groups began stacking deductibles, a process where patients going out of network had to meet their in-network deductible, then start again at “zero” to accumulate any out-of-network benefit. This deductible stacking put our facility out of financial reach of most patients who were insured who would otherwise rather pay us directly. Our waiting room was empty, and we faced closure. Up until this point we had grown so rapidly that we had built the large facility we now occupy, and fortunately paid for its construction without debt. This brand-new facility was now without patients. The timing of this deductible stacking could not have been worse.

Keep in mind that our reputation was unsurpassed. We were cheaper and we were better than any other venue. In an unfettered market, there should have been a line around the block. Why had the insurance companies been complicit in this savage attack? Wouldn’t they benefit from higher quality and lower prices?

I decided to post our prices online. We had our list of “over the phone prices,” after all. It was a matter of launching a website, ensuring the surgeons were satisfied with their fees, and posting the prices. All of our prices were determined using the following method: I asked the surgeon how much they wanted, then added a price for anesthesia service based primarily on time. The facility portion was priced as time and materials. The rest is addition, not algebra, for those who say this can’t be done. I have increased only three prices since we began quoting them over the phone in 1997 and have lowered many more. I posted these prices in 2009 with three goals in mind: make ourselves more known to those with sticker shock; start a price war; and better understand the scams at work that had emptied our waiting room. We’ve accomplished these goals and more.

The first patients to arrive after we posted prices were Canadians. This was instructive, as these patients had so-called insurance coverage. There was no access, however, to the care that many of them required. The most common story then as now for the Canadians was a patient waiting two years to see a gynecologist for a hysterectomy to stop their bleeding, bleeding usually so severe that intermittent transfusions were required. For $8,000, which covers the facility, surgeon, anesthesia, pathology, and an overnight stay at the surgery center, Canadians can end their nightmare. The first question a Canadian asks when they call us is how long they’ll have to wait. Our answer that there is no waiting time is met with disbelief. A Canadian friend of mine has told me the old joke that no Canadian is truly content unless standing in line. You should know that there are Harriet Tubman–like brokers who help Canadians cross the border, finding for them affordable medical solutions essentially unavailable in Canada. The Canadian system is working proof that bureaucratic rationing is a murderous disaster, whatever flaws market naysayers can conjure up about market allocation of resources. Millions of Canadians have discovered that the only single payer upon which they can truly rely is themselves.

Uninsured Americans responded to the website shortly after the Canadians, many traveling from faraway places like Wisconsin and Alaska. While there are many examples of money saved uninsured individuals, one that sticks out is the patient from Georgia who required a urologic procedure, and who had received a quote of $40,000, just for the facility charge. A friend had told him about our facility and after he confirmed that our all-inclusive price was $4,000, he informed his urologist he was traveling to Oklahoma City. Having lost another patient to us the previous month, the urologist contacted the hospital and told them something had to be done, as their price quotes were causing him to lose patients. The hospital matched our price and the patient stayed in Georgia. The patient later told me that we had saved him $36,000 and we hadn’t even performed his surgery. I like to think about what patients do with the money they didn’t unnecessarily spend on an overpriced surgery. Self-funded companies, about which I’ll have more to say later, discovered our facility, and fast-forwarding to today, about three hundred employers from all fifty states now pay 100 percent of the employee’s bill and travel expense to undergo surgery at our facility.

Business was slow, however, after first launching the website in 2009. Why didn’t everyone want to buy cheaper and better? Why wouldn’t insurance companies want to buy from us? What was this business about uncompensated care? The answers to these questions were revealed following my introduction to Jay Kempton, the first to refer his self-funded clients to us and who later suggested we launch the FMMA [Free Market Medical Association]. If uncompensated care was a revenue item, how was this calculated? It turns out that hospitals need all the red ink they can find to justify the fiction of their not-for-profit status. If a hospital charges $100,000 and only collects $20,000, their books show that they lost $80,000. This fictitious loss performs two functions. First, it helps maintain their not-for-profit fiction, providing the justification needed to eliminate their tax burden. Second, this loss number forms the basis for a kickback the hospitals are paid by Uncle Sam to the extent they claim these losses. To be clear, hospitals receive federal payments based on the charged amounts they claim to not collect. Or as I like to say, hospitals are paid even when they aren’t paid. This is the revenue of uncompensated care, also known as disproportionate share hospital payments. The more they charge and don’t collect, the more they make, basically. This is why there is a crane building on to every emergency room in the country. This also explains how hospitals can claim they are going broke on paper while purchasing television ads during the Super Bowl and buying out their competitors and physician practices.

Why would insurance companies go along with this? Why would an insurance company play along, discounting $100,000 bills to $20,000? Insurance companies sell access to their networks based on the strength of their ability to apply discounts. The larger the discount, the more marketable selling access to the discounting network becomes. The ERISA [Employee Retirement Income Security Act] lawyer Cori Cook frequently poses the following question: “If I tell you I’ll sell you my house for 50 percent off, what should be your next question?” Everywhere but in the medical industry, the answer is obviously “50 percent off what?” “We give bigger discounts” is the phrase commonly used by brokers peddling whatever insurance plan is paying them the highest commissions. There is another reason the insurance companies love the high initial charge from the hospital and play along. “Claims repricing” is the phrase frequently used in the industry to describe this discounting of hospital charges. Think of insurance companies as claims repricers who charge for this service. It is standard for an insurance company to charge an employer health plan a percentage of the discount they achieve on a hospital bill. It is not hard to see that the higher the initial hospital charge, the more the insurance company makes repricing the claims. Unknown to most employers is the fact that hospital pricing and discounts are prenegotiated, so no discount actually exists. I’ve been told it is not uncommon for an insurance company representative to ask a hospital to charge more for a service so the repricing commission paid to the insurance company is maximized. Claims repricing represents an opportunity foregone when prices are posted for all to see, another reason the insurance companies want nothing to do with my facility.

While big hospitals and insurance companies and Big Pharma and many others deserve all the thumping they get, it is important to acknowledge that none of their theft is possible without the favors auctioned to them in Washington, and that Uncle Sam always drives the getaway car. High prices and sporadic quality have been the result not of the failure of the free market, but of the absence of the free market. To quote Hans Hoppe, “markets deliver goods and governments deliver bads.” Nowhere is this more evident than in the medical industry. Everything people in this country hate about the medical industry is the “bads” that government has delivered. Some “bads” are those which under the banner of patient safety or consumer protection regulate the smaller innovators out of business, usually in the form of requirements or conditions which only the most gigantic cronies can endure. The medical loss ratio, part of the un-Affordable Care Act, is an example. While a requirement that no more than 30 percent of an insurance company’s revenue can be spent on administrative duties is a requirement with which the giant insurance companies could comply, the smaller companies were annihilated. It is no mistake that there are now just four or five medical insurance carriers.

There are many more examples of federal “bads.” The un-Affordable Care Act gained the endorsement of the American Hospital Association only after they secured a ban on the construction or expansion of physician-owned hospitals. Here are more “bads” you may not know. Medicare pays hospitals multiples of what they pay for the very same service rendered in a surgery center. Medicare pays more for physician services when the physician is employed by a hospital. This discrimination against physicians in private practice has driven many physicians into the arms of hospitals happy to gobble up their practices. In addition, the AMA [American Medical Association], to which I do not belong, is paid by Uncle Sam to inflict the most indecipherable payment codes on physicians, and doctors unsupported by a large staff of decoders are placed at an obvious disadvantage. You can now see why hospitals and insurance companies are resistant to price transparency. Uncle Sam has played along to maintain the number of crony favors in their inventory.

You know now why I laugh when I’m asked, “Why isn’t this free market movement in your industry more widespread?” It’s astonishing that it exists at all. Its growth is even more remarkable. If you have no insurance, think of yourself as self-funded. You should know that entire companies self-fund for the medical needs of their employees, paying their bills out of operational revenue. They serve as proxy buyers for their employees, as my friend Marty Makary has said. They are responsible for 80 percent of medical bills not paid by government and are therefore large enough in size to make demands that even the dysfunctional cartel can’t ignore. The free market movement’s growth can be attributed largely to the increasing number of these self-funded buyers expecting market discipline from organizations like mine. Cost-sharing ministries are another large buyer, also expecting market-based services. Direct conversations between these buyers and sellers has opened the eyes of many doctors to more sound economic thinking. One of the goals of the Free Market Medical Association has been to promote sound economic thinking, as we believe that flawed thinking, many times by well-intentioned individuals, has led the industry down failed paths. I believe the Surgery Center of Oklahoma is open only because of our economic grounding. Our dedication to the principle of property rights has kept government money out of our facility. We have no contracts with the insurance cronies and display our all-inclusive pricing. For the exchange to be mutually beneficial, for us to earn an honest buck, we’ve had to deliver a service that consumers with a choice value. The idea that value determination is completely consumer and patient generated has been very helpful to our organization. It has, for instance, cleansed our partnership of the notion prevalent in medicine that one should be paid according to their effort, a clear outgrowth of the flawed labor theory of value. Our partnership agreement is an application of time preference, preventing aging partners from embracing the short-sightedness destructive to the firm. Our dedication to a pure free market model, a journey that is still underway, has been our mission and goal, as we knew that maximum consumer and patient benefit would be the result. Other members of the Free Market Medical Association have gained insights critical to the success of their practices by matching their strategies with sound economic principles, for which we have the Mises Institute to thank.

Uninsured patients have found visible pricing. A price war has begun. UCLA copied my website word for word, and not, I think because they embrace free market ideas. The cronies and their government pals are increasingly exposed. As the cofounder of the Free Market Medical Association, I am filled with optimism watching the growth and acceptance of market discipline in the industry. Our theme at the Free Market Medical Association this year is “are you ready for the red pill?,” a message designed to awaken those comatose self-funded buyers who continue to unnecessarily do business with the cartel. As growth in the number of these sticker-shocked buyers continues, entrepreneurs, aware that the industry is finally prepared to reward the more efficient, will work even harder to satisfy demand in this new and honest fashion. The transformation to a more market-based environment has begun and is flourishing, in spite of decades of efforts by the state to prevent this from happening.

Thank you.

Reprinted from Mises.org. Dr. G. Keith Smith is a board-certified anesthesiologist in private practice since 1990. In 1997, he cofounded the Surgery Center of Oklahoma, an outpatient surgery center in Oklahoma City. SCO is owned by over fifty of the top physicians and surgeons in central Oklahoma. Dr. Smith serves as the medical director, CEO and managing partner while maintaining an active anesthesia practice. He is also cofounder of the Free Market Medical Association.  

Image source:Surgery Center of Oklahoma

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