Oklahoma Surgery Center Resists Third Party Payer Model

Published December 27, 2012

A surgery center in Oklahoma has returned to a direct fee-for-service business model in an attempt to resist tight government controls and avoid heavy reliance on health insurance and the third-party payer system.

The Surgery Center of Oklahoma, founded by Dr. Keith Smith and Dr. Steven Lantier, has cut out the insurance middleman in its practice, telling patients in advance exactly what each service will cost. Employing roughly 40 top surgeons and anesthesiologists, the Surgery Center has grown in popularity since opening just over a decade ago. It began posting prices online in 2009.

“We decided we would have price honesty,” Smith said in a recent interview with Reason TV.

Instead of the traditional model, where hospitals charge insurers, the Surgery Center takes payment directly from patients or their employers. Tina Korbe, policy impact director for the Oklahoma Council of Public Affairs, said the OCPA is very enthusiastic about the model used by the Surgery Center.

“It seems like a very good approach and an example of the way the free market brings costs down,” Korbe said. “You have less incentive to search for the most cost-effective option if you are not the one paying the bills.”

Overuse of Insurance

Daniel J. Mitchell, a senior fellow at the Cato Institute, says there is a role for a third-party payer model. It’s just frequently overused when it comes to covering the costs of health care.

“Genuine insurance,” Mitchell said of policies that cover unexpected large costs, “is a good example. The problem is when the government imposes third-party payer on markets that are better suited to normal buyer-seller interactions.”

Mitchell says President Obama’s health care law, by contrast, will push patients even farther away from competition and price sensitivity.

“Obamacare expands third-party payer, which is bad, but I also fear some of the provisions will significantly boost the cost of private insurance, which will be used as an excuse for more direct government payment of health-care costs,” Mitchell said. Instead, he said, “we should reduce the size and scope of government health [care] programs, most notably Medicare and Medicaid. But we also should reform the tax system and get rid of the healthcare exclusion so there’s no longer an incentive for over-insurance in the private sector.”

Patients Don’t Know Costs

National Center for Policy Analysis Senior Fellow Devon Herrick agrees insurance has a legitimate role in the health market and that government policies have created a problem where customers lack information about basic purchases like nowhere else in the economy.

“Our problems began when insurance began to interfere between the buyer, the patient, and seller, the doctor or hospital,” Herrick said. “By inserting a third party between buyer and seller, price signals and feedback loops were severed and beneficial incentives were diminished. When the buyer—patient—and seller—doctor—interact one-on-one, the patient has an incentive to shop around for value, and the physician has an incentive to control costs and look for innovative ways to compete for patients’ business. As a result, prices are transparent and services competitive.”

Herrick says as long as this transparency is absent, patients have little incentive to shop in a cost-conscious way and providers will only have an incentive to combine into monopolies, driving costs even higher.

“The solution would be to reconnect patients with more of the cost of their medical care by requiring that they control more of their own health care dollars.” Herrick said. “Once doctors and hospitals find consumers unwilling to pay exorbitant fees to tolerate unreadable hospital bills, it will become harder for providers to pass off these unreadable multi-page bills to insurers as well.”

Obamacare Exacerbates Problem

Unfortunately, Herrick said, President Obama’s law “takes the opposite approach.”

“It attempts to reduce cost-sharing and increase the amount of medical bills paid for by third-party insurance. It eliminates the ability of consumers to self-insure by mandating health plans with ‘essential benefits’ and banning limited benefit plans,” Herrick said.

Korbe says approaches like that of the Surgery Center are a response to hospital systems that have grown out of control because of payments from insurers and government programs.

“Many doctors see their profession as a vocation. They didn’t become doctors to deal with mounds of paperwork,” but the compliance costs have grown as “we now have the government inserting itself into healthcare in an unprecedented way,” Korbe said.

Korbe says the third party payer error will only be compounded in a system where it is impossible to purchase true consumer driven health plans, which have become increasingly popular in recent years.

“Obviously they’re mandating that everyone purchase health insurance, but on top of that they have to now define what constitutes adequate health insurance,” Korbe said. “Government already serves as a third party payer in the case of Medicare and Medicaid, but now, even if you’re not in a government program, you have to meet whatever the Department of Health and Human Services defines as being adequate health insurance. Instead of a plan that meets your needs, you might be purchasing coverage you really don’t need, now that nebulous bureaucratic experts in Washington, DC will decide what plan complies with the mandate.”