This discussion was recorded on December 11, 2023. This transcript has been edited for clarity.
Robert D. Glatter, MD: Welcome. I’m Dr Robert Glatter, medical advisor for Medscape Emergency Medicine. Joining me today is Dr Robert Pearl — a plastic and reconstructive surgeon, faculty at Stanford Graduate School of Business, and former CEO of the Permanente Medical Group — to discuss his recent Forbes article, “How America Skimps on Healthcare,” also known as shrinkflation.
Welcome, Robert. It’s really a pleasure to have you join us today.
Robert M. Pearl, MD: Hi, Rob. It’s a great pleasure to be here.
Shrinkflation: Exploring Its Presence in Healthcare and Corporate Industries
Glatter: The article basically deals with a concept known as shrinkflation, and I want you to define that for our audience.
Pearl: A great way to start is with an example. About a month ago, I went to the store and purchased some cereal. I wanted to have some fiber in my diet. I opened the package and it was only three quarters full. It wasn’t a manufacturing error; it was intentional. What happens is that, at times of major inflation, businesses raise their prices to earn either added profit or at least maintain their profit, despite the fact that they might have some higher supply costs.
Now, at some point, the consumer says, “I just can’t keep spending this much. I can’t keep spending $6 for a box that used to be $4.” The manufacturer can’t keep raising the price, so what do they do? They keep the price because the consumer has already indicated they can do $6 but no more, and they shrink the amount of cereal, potato chips, or soda. It doesn’t matter what the area is; it shrinks the amount in order to keep the business producing it both viable and profitable.
Glatter: How would that apply in healthcare, specifically, and how can you translate that in terms of the corporate industries of packaged goods?
Pearl: As we look to healthcare inflation, remember, it’s inflation that’s driving this entire process. With the passage of Medicare and Medicaid in the mid-1960s, as well as some other changes in healthcare coverage, you see healthcare as a percentage of gross domestic product rising — not each year, because that fluctuates, but each decade. By the time we reached 2000, it’s already about 13%-14%. By 2010, it hit 17.2%. I, along with most healthcare policy experts, thought it was going to get past 20% by the time we get to 2023. Lo and behold, it’s not.
I look at this and I ask, why did it change? Was it Obamacare? No, because we didn’t see any improvement in clinical outcomes. In fact, what we’ve seen is life expectancy decline from 78 years down to 77 years. We’ve seen other problems occur in medicine.
What I realize is that healthcare has done the same thing that the manufacturers of cereal did, which is that it used shrinkflation. By that, I mean not very many people notice the changes. I’m happy to go into each of them in detail if you’d like me to.
High-Deductible Health Plans and the Shrinkflation Dilemma in Healthcare
Glatter: I would love that. We notice these changes. I’m sure both you and I have noticed over the decades we’ve practiced. High-deductible healthcare plans — you mentioned that in your article, and I think that’s an important aspect of this shrinkflation. Maybe you could describe that a little more.
Pearl: Around 2010, insurers started offering high-deductible healthcare plans. Remember that commercial private insurance, for the most part, is bought by companies that provide it to their workers, and they said, “We just can’t provide anymore.”
You may remember that we had a recession in 2008 and 2009 in the country. Insurers said, we can keep the price that the employer pays by being able to offer these high-deductible plans, which essentially said that before your insurance kicks in, you as a patient have to pay a certain amount of money.
As that money went up from $500 to $1000 to $2000 — and now it’s as high as $5000, $6000, or $7000 for some people — care became restricted because most people can’t afford to pay it out of pocket. The average person doesn’t have $5000, $6000, or $7000 in savings. They’d have to borrow against their house or do something else that would be pretty negative. Instead, they just skip getting their care. This is the shrinkflation that we see, and it’s why shrinkflation works. It’s like the cereal you get in the box.
If you don’t have serious illness, and the majority of Americans don’t, then you don’t see that high deductible until, of course, you develop cancer, get into a car accident, or for some other reason need hospitalization. Then, all of a sudden, you have a massive bill, and as you well know, healthcare is the number-one cause of bankruptcy in the United States.
Glatter: You mentioned in your article that about 50% of Americans have medical debt, and that’s a real issue. In terms of preventive healthcare, including colonoscopies, cervical cancer screening, and mammograms, that care should be covered, and that traditionally has been covered in health plans.
Pearl: Some of that is covered. As you well know, if you’re having “a purely diagnostic colonoscopy,” it’s covered. If you happen to have polyps, then that’s not covered. We have situations in which patients have to pay money to get care that you and I would think about as being preventive.
You may have a chronic disease and need to have a variety of tests and interventions done in order to avoid very expensive and serious life-threatening complications like heart attacks, strokes, and cancer from a combination of diabetes, hypertension, obesity, or asthma. These are the kinds of situations that we, as clinicians, think of as being prevention, but from the patient’s standpoint, it’s an out-of-pocket expense; it’s in the deductible. And they just say, “I simply can’t do those things.”
Glatter: Getting back to your point, I guess this extends also to trying to deny care through efforts such as prior authorization. There are hoops to jump through. Patients can’t get the care, and physicians are really exasperated trying to reach out to peers at healthcare insurance companies to get this care for their patients. It leads to a vicious cycle of exhaustion and exasperation, and then patients give up and outcomes worsen.
Pearl: You’re raising a couple of very important points. Often the clinician will say, “Well, I’m not going to order this; it’s just too much hassle to be able to get the MRI or the CT that’s necessary, that lowers cost.” If it’s an indicated procedure, it also compromises outcomes and may lead to some medical errors.
I see it being in two areas. One, that you mentioned, is prior authorization, which we know is growing in intensity and is certainly the number-one way that the insurer tries to keep costs down. Two, we see it in Medicaid. Most listeners and viewers may not recognize that 90 million Americans are on Medicaid. That’s more than 1 in 4 Americans in the program designed for individuals at a poverty level.
Patients who have Medicaid coverage may look like they have full insurance. They just can’t get a doctor. There are no primary care physicians in the area where I’m living right now who are willing to take on patients with Medicaid, and when they need to have an expensive procedure or test, there are many facilities that either will not do it or will delay it.
If you happen not to be poor, you don’t notice that Medicaid is doing this. If you don’t need an expensive procedure, then you also don’t notice it. I like the term “shrinkflation” here because it’s reduced quality, it’s reduced access, it’s less of a high-value product, but the majority of people don’t see it in any given year and so the companies can get away with doing it — and doing it more and more frequently.
Healthcare Outcomes Amid Shrinkflation
Glatter: This all translates to healthcare outcomes, which is really the end result of these processes you describe. Looking at maternal mortality, longevity, and rates of colon cancer and lung cancer, what are we seeing now as a result of this experiment — these acts of limiting and denying care?
Pearl: Well, as you point out, the outcomes in the United States are quite problematic when you compare the United States with the other 12 most industrialized and wealthy countries of the world, including England, France, Australia, and Canada. We have a cost that is nearly double most of these countries’. It’s certainly by far the highest in the world, and we are the last in outcomes, as you say; we’re last in longevity. We’re now nearly 6 years behind the leading countries and our mortality has gone down.
We did see a major drop prior to COVID-19. We saw a slight recovery last year, but the United States was the slowest country to recover. We lost over 2 years during the pandemic and we recovered maybe 1 year. Other countries either lost a fraction of 1 year or stayed level or increased, comparing now with 2-3 years into the past.
Maternal mortality in the United States is not only the highest among these peer nations of the world, but we’re the only country in which it’s increasing, not going down. In fact, our maternal mortality is twice as high as that of the second most problematic nation, which is France, and 10 times as high as that of countries in Scandinavia. These are all aspects of shrinkflation. Patients are simply not getting the care they need to reduce maternal mortality rates.
By the way, we’re also the worst in infant mortality. Much of it has to do with prenatal care, which in the United States is often skipped; or postnatal care, which is the early care for the mom following delivery, which is also something that is quite problematic. When you come to the overall longevity, we can look at chronic disease and complications from it. There are so many opportunities that exist, and yet our nation doesn’t achieve them. I fear that we’re actually getting worse, not better.
Glatter: I agree. My thought is that maybe some of this large healthcare system consolidation that’s been happening over the past several decades is part of the reason. Within cities and urban areas, you’ve got now maybe two or three major healthcare systems.
Pearl: This is part of the formation of monopolies for market control. We see it among insurers, we see it among hospitals, we’re seeing it increasingly with private equity, and we certainly see it in the drug industry. What we’re seeing is that every part of healthcare, rather than moving forward to transform care, to achieve higher quality and better service as the driver of affordability — and I’ll also say as a means to lower burnout — we’re seeing us go in the opposite direction. Yes, this is quite the problem that our nation is facing and we’re getting worse, not better.
Challenges and Solutions in Healthcare System Consolidation
Glatter: How do we decouple this consolidation, so to speak? How do we, in other words, undo what may be part of the issue but not all of the issue? Is there any solution to that?
Pearl: I can offer my own view, which is that the fundamental problem is the fee-for-service system of payment in the United States today. Charlie Munger, who died a couple of weeks ago, used to say, “Tell me your incentives and I’ll tell you the outcomes you’re going to get.”
If we can move the delivery system — not the insurance level — to a capitated form, I have tremendous confidence in our clinicians, doctors, and nurses that we can find the best ways to provide that care. As soon as you’re capitated, you align the incentives of the people providing the care and the ones receiving it.
Preventing disease and avoiding chronic disease in the first place lowers costs and improves health outcomes. Better treating chronic disease avoids the complications that exist. Being able to be capitated, you do better with higher patient safety, fewer medical errors, reduced misdiagnoses, better investments in the technology that actually extends patients’ lives, and a commitment to lifestyle medicine. The list goes on and on.
I fear that if we don’t find a way to be able to shift the reimbursement methodology, despite all of the talk about value-based care and all of us knowing the right outcome and the best way to provide care, it’s not going to happen.
Glatter: I agree. How do you disrupt the large insurance industry as the elephant in the room?
Pearl: Well, you and I both lament that the individual patient has little control over this. One source of possible change are the payers, the employers who provide the commercial care, either self-funded — which is half of commercial insurance — or a more comprehensive traditional insurance program.
They could demand that these companies provide a capitated form, a prepaid form for a population of patients based upon the risk that the individuals have, and they have the ability to accomplish that, particularly the self-funded businesses that exist. The government could certainly lead the way and force this to happen, to make it a required alternative to the traditional fee-for-service model.
I fear that neither is going to do it, either because the employer doesn’t have the courage in the face of a very tight labor market, or for the government, for the political reasons that exist. As you know, I’ve written extensively about this, and someone from outside the industry, Clayton Christensen, has talked about this. Disruptive change rarely comes from inside. Kodak had the filmless camera, but they refused to implement it for many self-serving reasons, and so Apple and others came along and replaced Kodak, which barely exists today.
The retail giants — Amazon, CVS, and Walmart — are moving into healthcare and poised to make this happen. If you look at what they’re doing, their biggest focus right now is on Medicare Advantage, the one capitated form of healthcare in the United States today. They already have primary care. One Medical is part of Amazon, Oak Street is part of CVS, and Walmart is about to acquire ChenMed.
We’re looking at a variety of ways in which they’re then going to be able to take over healthcare and disrupt and eliminate some of these other large forces. We think of the insurers as being so big, but we’re talking about three of the nation’s six largest businesses rapidly moving into healthcare. I think they’re not going to try to augment and supplement or complement it; they’re actually going to completely replace it.
Glatter: Your points are all well taken. You mentioned Medicare Advantage, and. That’s been a lucrative business for the insurers, and certainly the recent Cigna-Humana proposed merger had other issues behind it. I suspect that the small number of Medicare Advantage persons enrolled in Cigna might have been a factor in the collapse of at least some of that merger. United has a huge amount of Medicare Advantage, as does Humana, and Cigna doesn’t. I’m interested in your take on that.
Pearl: One of the drivers was the fact that, as you know, Humana is a leader in Medicare Advantage. Cigna is a leader in commercial. Bringing the two entities together from a theoretical basis gives them a broader population to serve, and of course, the doctors would provide the care to both populations. It simplifies the negotiating process and adds leverage.
I think the bigger reason that they wanted to do it was to compete with companies like United, which are so much larger than they are and they control so much of the current marketplace. I don’t know why they decided to end it, but I think the fear of regulatory oversight was probably a major piece.
I want to stress that Medicare Advantage today, outside of a few organizations, is not a capitated program. It’s capitated the insurance level, but it’s still paid, for the most part, at the delivery system level on a fee-for-service basis. Yes, there’s a small number of incentives for doing more screening or some other small change, but it’s a minuscule part and it doesn’t really impact the performance that sits in place.
I am not talking about capitation of the insurance level. It has all the problems. Why? Because the insurer can’t change healthcare delivery. What the insurer does is use restrictive prior authorization requirements. We have seen how the expanded use of generative AI is able to make it easier and more frequent to reject these requests for prior authorization, and the insurer doesn’t have to win in the end. All it has to do, as we pointed out, is create a barrier. Doctors and patients will slowly diminish the amount of expensive, often life-saving care that they want to pursue.
I’m talking about at the delivery system level. I hope that physicians are going to lead the way, putting together the kinds of groups capable of accepting capitation and working together around collaboration, cooperation, finding the right technology, and not buying operative robots that increase the cost, take longer to perform a procedure, and fail to have any significant improvement in outcomes.
I’m talking about using technology, whether it’s telemedicine, ChatGPT and generative AI, or all the other tools that we could use if we work together as one rather than on a fragmented basis or, unfortunately, what’s happening today, as more employees of for-profit entities simply find the ways to raise prices in order to maximize the bottom line.
Longevity Conundrum: The Vital Role of Primary Care and System Reform
Glatter: I think the bottom line is longevity. Comparing 2017 and 2018 longevity vs 2010, there really hasn’t been much movement.
Pearl: The best way to improve longevity is in primary care. Stanford and Harvard have done research that showed that adding 10 primary care physicians to a community increases longevity two and a half times more than adding 10 specialists, and yet our nation continues to focus on specialty care. I’m a specialist. I love specialty, don’t get me wrong; but the foundation has to be primary care.
Right now, there’s a crisis. Last year we lost 71,000 physicians from the practice of medicine, of which the largest group was in primary care. If we’re going to manage chronic disease… As a physician, you well know that in the past century, most of the problems we saw were acute. The ones you saw in the ER were trauma and maybe a heart attack. Now, what we’re seeing is chronic disease driving that all — obesity, diabetes, and hypertension. You and I both know that we could lower the incidence of those problems.
In fact, research published by Kaiser Permanente has shown that a 30% lower frequency of life-threatening myocardial infarctions and a 30% improvement in lives saved is possible if you’re able to invest in prevention and chronic disease management. Hypertension, the number-one cause of strokes in the United States and the second leading cause of kidney failure, needs to be treated, and can be treated, effectively. When I was the CEO at Kaiser Permanente, we had over 90% successful management of hypertension. The rest of the world was 50% or 60%.
It’s not that we don’t know what to do. It’s not that it’s not something we can do, and it’s not because doctors don’t work incredibly hard. They work too hard. It’s that the system and the incentives are broken in ways that make it impossible. I think the 60% burnout rate simply reflects the imbalance between the demands and the time.
A research study once showed that it would take 27 hours a day to do all the things that would improve the health of patients. We need to look to new tools — generative AI, ChatGPT — and other ways to be able to take the load off of clinicians. If not, I just don’t see a very positive future, and I know what happens when you don’t have a good alternative. Shrinkflation is a great example, or even overt rationing.
Exploring the Role of Unionization and Negotiation
Glatter: Do you think unionization of physicians in any way would help shift the balance or move the needle, so to speak, about power? Is that going to have any bearing?
Pearl: That is a great question. Unionization is certainly a way to gain power, but if you’re not willing to use that power, then not only is it worthless, it’s actually negative. If you’re going to unionize, you’ve got to be willing to strike and you have to be willing to hurt patients. I don’t think doctors will do that.
Glatter: What about bargaining power other than striking? Wouldn’t that collectively have a role? In other words, a show of force and bargaining through that aspect?
Pearl: Well, the power of the bargaining is the ability to strike. If you’re not willing to strike, then you’re sitting at the table for weeks and months after that. I think it’s actually more problematic than that. If you’re really going to bargain at the physician level, there’s a challenge. Let’s just say that you’re a high-performing ER physician and you can see 50% more patients than I can in a day. In a union structure, we make the same amount of money. How likely will you be to lend your weight when you know it’s going to reduce your income 25% so mine can go up by 25%?
Glatter: Point well taken.
Pearl: Unionization overall has declined, as you well know. If you look at where it’s worked, like the auto workers, what you see is the willingness to strike and to harm the companies and the customers. You also see that salary is based only on longevity, not on performance. In fact, it very much dislikes performance measures. I don’t think that’s the answer.
I think the tremendous power that we have is in negotiation, and we have it today in most communities — coming together, forming a medical group, and taking a capitated rate. Then if you want to do an MRI, you and your colleagues will look at the question and ask, “Is it the right test to do?” That’s how I think we’re going to diminish the disparities that happen between physicians.
As you well know, there’s a four-times difference in the frequency of doctors ordering CT studies for patients with headache. I don’t know the right answer. I don’t know if it should be one, two, three, or four. But I know that a fourfold variation in how often physicians order a CT for similar patients with headaches can’t be scientific. Why can’t all ED physicians come together and decide what is optimal? We’re a scientific society; why can’t we embrace science? That’s a frailty we have that I think is the bigger problem that exists.
Glatter: Medicine is an art. It’s not just cookbook, and there are variations on presentation, specifically in emergency medicine — nuance and subtleties that experience certainly speaks to. Not everything fits neatly into a box in terms of patient care.
Pearl: I agree with you completely. The question is, what’s inside the box and what’s outside the box? Can we all agree that this 75% is in the box and this 25% is outside the box? We could all agree that certain EKG tracings are very worrisome. We can also say that other ones are not. How do we keep shrinking what’s unknown? There are actually three parts: There’s what we know, what we don’t know, and the part where intuition is all we can rely on.
Glatter: The defensive aspect of medicine, and certainly with litigation, drives a large portion of cost. This is really easy to argue, certainly in emergency medicine, where you may be the last person to touch this patient, in the sense that they get no further care, and if they didn’t get that exam or screening or whatever it may be… There’s that aspect. That’s another area that has to be addressed. We know this.
Pearl: Absolutely. In those areas, we all should agree that it’s too dangerous. Even though we think it’s a 1-in-50 or 1-in-100 chance to not get a CT, we should all agree that we should do it in order to protect our overall interest. I also would add — and the ED is an area where I know it’s happening often — it’s private equity. What we saw was a massive spike in testing and procedures once private equity came in, particularly expensive ones, that were not driven by that force. They were simply driven by economics.
Glatter: These are excellent points. Thank you so much for your time, Dr Pearl. This has been quite informative.
Pearl: Thank you so much. I do believe that, together, we can once again make American medical care the best in the world. We owe it to our patients and we owe it to ourselves. I encourage everyone to step forward and take the lead.
Robert D. Glatter, MD, is an assistant professor of emergency medicine at Zucker School of Medicine at Hofstra/Northwell in Hempstead, New York. He is a medical advisor for Medscape and hosts the Hot Topics in EM series.
Robert M. Pearl, MD, is a clinical professor of plastic surgery at Stanford University School of Medicine and is on the faculty of the Stanford Graduate School of Business in California, where he teaches courses on strategy and leadership, and lectures on information technology and healthcare policy. Pearl is the former executive director and CEO of The Permanente Medical Group and former president and CEO of the Mid-Atlantic Permanente Medical Group. He is the author of Mistreated: Why We think We’re Getting Good Health Care—And Why We’re Usually Wrong, a Washington Post bestseller that offers a roadmap for transforming American healthcare.
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