Credit-driven Care - Prospects for a Credit-Driven Health System

There is no greater resource in an economy than “purchasing power.”But purchasing power is the creation of an innovating entrepreneur. Installment buying literally transforms economies from supply-driven to demand-driven.

Peter F. Drucker, Innovation and Entrepreneurship, Harper & Row, 1986

An Interview with Kenneth Bloem, M.S., Executive Chairman, MedDirect, LLC, Grand Rapids, Michigan

Preface: During his career, dating back to the late sixties, Kenneth Bloem has worked with the Peace Corps, the World Health Organization, and the Lahey Clinic. He has been COO of the University of Chicago Hospitals, CEO of Stanford University Hospital, CEO of Georgetown University Medical Center, CEO of the Advisory Board Company -- a for-profit strategy and research company which later spawned two highly successful IPOs (The Corporate Executive Board CEB and The Advisory Board Company ABCO), and Board member of a number of health related companies both private and public.

Since 2006, he has been executive chairman of MedDirect. LLC. MedDirect brings credit solutions to various healthcare constituents. MedDirect was founded in 2000 to provide financing for elective procedures to physicians, dentists, orthodontists, and other health care providers.

MedDirect’s founders sense a significant and growing need for credit and financing solutions for patients, health care providers, and traditional health plan subscribers as well as health plan holders with HSA, HRA, and FSAs.

Personal Background

Q: What’s your background? How did you come to be executive chairman of MedDirect?

A: I graduated from college in 1968. In the ensuing 39 years, I have spent 10 of those years in public health in national and international settings. About 15 of those years have been in group practice and hospital management, mostly in leadership positions in academic medical centers. I devoted four years in a policy position in an academic administrative setting at Boston. And I’ve spent about 10 years altogether in business and entrepreneurial activities.

After college, I did volunteer health work, two years of Peace Corps work in Malawi and another two years in the Congo as part of the smallpox eradication campaign. I did another three years working for the Peace Corps as staff. Then the World Health Organizations recruited me back to work again in the final stages of the smallpox eradication program.

Q: What year was that?

A: That was in 1975. WHO thought smallpox existed only in Bangladesh and in a few isolated places in India and in the horn of Africa (Ethiopia & Somalia). My wife and I went off to Bangladesh for another six months. We hoped we would see the last smallpox case in the world in Bangladesh, but we missed that case by about four months. As it turned out, the very last case occurred in Somalia, about six months later.

I went from Bangladesh to Boston where I did graduate studies at the Harvard School of Public Health, and then, through an internship experience found myself in a position at the Lahey Clinic. I was with Lahey for four years.

Q: That was before Lahey moved to Burlington?

A: I helped Lahey move to Burlington. Lahey relocated from Kenmore Square Boston to Burlington in 1980. They knew they wanted to own and manage their own hospital. They were strategic enough to purchase a 60 bed hospital in Brookline, Massachusetts. When I graduated, I accepted the position of CEO of little Brooks Hospital. I helped train the staff and make the transition to Burlington. We made the move over a Thanksgiving weekend in 1980.

I worked at Lahey for four years. Then I went to Boston University for four years. I was the assistant, and then an associate vice-president reporting to Dr. Richard Egdahl. Dick was vice-president for health affairs. BU had six graduate and undergraduate programs in medicine, public health, nursing, allied health, and social work.

I was responsible to help Dr.Egdahl “managing” those programs. “Managing’ is an oxymoron in a university setting. Dick created the Health Policy Institute, which focused on corporate health. We addressed cost issues of corporate health benefits.

Dick developed another program focusing on “utilization management,” a term I believe Dick coined. Dick was intensely interested in practice efficiency and variability. He served as a mentor to a number of health entrepreneurs, some of whose enterprises became highly successful.

Q: What then?

A: I was recruited to become chief operating officer and executive vice president of the University of Chicago hospitals. It was a great institution, consisting of three hospitals losing lots of money. My job was to help turn it around financially and to bring it up to quality level the University of Chicago demands of all of its programs. I did that working for Ralph Muller (CEO) with a team of highly talented colleagues for 3/12 years. Then went to Stanford for another turnaround effort.

Q: What did you find at Stanford?

A: Well, Stanford was in trouble from fulminating managed care. It was losing money and market share. Stanford had built a new hospital. It had focusedits energy on the physical facility and the technology rather than on the changing market. All the profitability and utilization numbers were going in the wrong direction. Stanford was a strategic as well as a financial turnaround.

Q: And then?

A: Then after 4/12 years at Stanford, I was recruited by David Bradley, founder of the Advisory Board Company in Washington, D.C. a for-profit research think tank, to be its CEO.

Q; What was the health environment in 1993-1994?

A: It was the era of health reform surrounding the Clinton presidency. I thought the Advisory Board might influence health policy on a larger scale and on a higher plane, than one could do while at a single university setting.

Q: What exactly did the Advisory Board do?

A: I was recruited to help put infrastructure in the company David Bradley had created. He wanted it to grow big and do an IPO. We needed systems, infrastructure, staff, procedures, how we wrote the studies, how we addressed legal questions – all of this needed to be done.

My task was to recruit people and put systems into place so the Advisory Board could operate as a business, not just as an “Ivy League sweatshop” for ambitious and smart young lawyers, doctors, and aspiring executives.

We became very good at recruiting from the finest undergraduate colleges. The typical recruits spent only 18 to 20 months with us. They were preparing themselves to go onto graduate schools in medicine, business, economics, and finance. We gave them access to our members, one side of which were the 1000 or so of the world’s largest banks and finance institutions, the other side was 1200 to 1300 of the country’s largest hospitals and health systems.

At the top of the organization, we recruited the brightest people we could find from leading consulting organizations and law firms. Many were bored with transactional duties of their jobs. They were thinkers and wanted to be part of the larger scheme of things. We had a small cadre of very bright people, focusing on changes and trends.

Highly successful in any case, the company grew substantially during that time. Unfortunately I left prior to two IPO’s. The first company to IPO was called Corporate Executive Board. And then a year or so later, the health care side did an IPO. They are called the Advisory Board Company. Both organizations today are Fortune 1000 companies.

During that time, I joined the Georgetown University board. I commented to the University President that the medical side was losing more money than the board recognized. In a couple of months, he talked me into becoming the CEO of the medical center.

The hospital and clinical enterprise were losing $40 to $45 million year. I took on the assignment from 1997 to 1999 to turn these losses around. It soon became obvious to me the Georgetown board didn’t want to invest the money that it would take to make Georgetown a major academic medical player.

Q: You were going head-to-head with Hopkins and other players, weren’t you?

A: With Hopkins and also Washington Hospital Center and with the Inova Healthcare System in Virginia. The medical center had been making lots of money, but the university used it to bankroll non-medical parts of the university. When the medical side started losing money, support of the medical enterprise proved too thin.

I sought someone to buy the clinical part of the enterprise, and the Washington Hospital Center was interested so we consummated a deal. From late 1998, the MedStar System, led by the Washington Hospital Center, absorbed the Georgetown clinical system and hospital, and they’ve had it ever since. It took them about six years to completely break even.

Lessons Learned

Q: So what have you learned through this tortuous passage through academia, devoted to bringing rationality to health institutions caught in market storms?

A: I’ve learned a lot of things. It’s been a fascinating time to be involved in American, and to a lesser extent, in world medicine. Among other things I’ve learned that truth and discovery isn’t limited exclusively to academic institutions. At the Advisory Board I found an intense thirst for elucidating what was going on in the health care field, much more so than what I had seen in the academic centers. I came to recognize the power of market forces across the globe, not just in our country.

I learned how difficult it was for some organizations, not just universities, to orient themselves to market forces. Universities are organized to protect themselves against societal changes market forces bring. In academia I was at the crossroad between the principles of academic freedom and requirements of social accountability demanded of a university and its faculty when they run a large (commercial) clinical enterprise.

I also learned that universities can change in response to market forces. It’s possible to “get the elephant to dance” -- with good governance, a responsible university president, credible medical center management – and consistent communication with the faculty.

Q: In the last 1980s, I was in Minneapolis, and I saw first hand how managed care devastated the University of Minnesota medical center which was trying to support a newly built hospital. The academic center was slow to recognize potency of market forces. Indeed, they thought of HMOs and the market as vulgar, commercial, and too much below them even to think of HMOs as rivals.

A: The universities, particularly the great universities, put up walls to protect faculty. That’s fine, even wonderful, in sequestered fields of inquiry. But not in medicine. Medicine requires a social contract with society, professionals, the public, and government. There has to be accountability. Dealing with market forces requires management, professional responsibility, accountability dynamics that are quite foreign to usual faculty responses.

Q: In the book, Two Cheers for Capitalism, Irving Kristol makes the point those academics considering themselves high-minded -- a cut above mankind. They feel they ought to be untouched by marketplace pressures.

A; For universities, hospitals and the faculty clinical practice organization are often regarded as an economic nuisance. The universities prefer humanities, sciences and departments of the arts. The business of organizing and delivering care, and being held accountable for the business results of the medical center are unclaimed, unexplored, and unwanted territories.

Some great universities, Hopkins and the Harvard hospitals, recognized the market threat early enough to deal with market pressures. But a lot of universities were well behind the curve. Great faculties and great science are not enough in dealing with the marketplace. At Stanford, Chicago, and Georgetown I was involved in turnarounds.

Q; I’m interested in the Stanford case. After all, Alain Enthoven and Victor Fuchs, at the business school and on the economic faculty, had international followings as health care gurus. Couldn’t they have given the signal to the Stanford medical center that all wasn’t well?

A; Enthoven, of course, was a giant in shaping the managed care world and in the consulting he did with Kaiser as well as his activities as a business professor. But his influence over the Stanford medical center was unfortunately small. As far as concerns Victor Fuchs, he was a beloved faculty member. But neither Alain nor Victor (to the best of my knowledge) was ever on the board of the medical center. Both had international followings as business and economic leaders, but their influence in their own university medical center was minimal.

Q: You left Georgetown about the year 2000. Where did you go from there?

A: I was tired of working for large organizations. I decided to develop my own consulting enterprise focusing on board-related work and health enterprises. I did consulting with largely medium sized health related businesses, in some cases universities or academic centers.

One of the consulting assignments that came out of the blue was from a law firm representing the royal family of Qatar and its foundation, the Qatar Foundation. The wife of the Emir of Qatar was interested in exploring whether that country could establish an internationally recognized academic medical center and a biomedical research institution.

I consulted with them starting in 2002. I did that off and on for about four years. Then they asked me to serve for a year as the interim CEO putting together the initial management team, the clinical plans, select the architect etc, so that’s what I did for the year 2005 in residence in Doha. My wife joined me for most of that time. Qatar had already developed a relationship with Cornell University Medical Center, which resulted in the building of a fabulous new medical school in Doha. The nation’s rulers wanted to also develop a teaching hospital and biomedical research center to be staffed by Cornell, but to be managed and governed independently by the Qatar Foundation

Q: When your Qatar relationship ended, you returned to the U.S. in 2006?

A: Yes, I had been an advisor since 1998 to Greg VandenBosch. Greg is CEO and founder of MedDirect, the company I’m now chairman of in. We are from the same town, Grand Rapids, Michigan. Greg had been President of the parent company of MedDirect, ES Financial, a financial service company in the resort and hospitality industry. That sector was experiencing great consolidation, and he was looking for business opportunities outside of ESF’s hospitality sector.

In the late 1990s, he asked me if I thought there was an opportunity to establish a health related finance business. In 2000, he co-founded the company MedDirect along with Scott Addison MD, a family physician, to provide financing for patients or orthodontists and dentists.

I have long believed in the inevitability of increasing consumer financial involvement in health care and in the need for increased individual consumer financing and consumer decision-making. From the beginning, I strongly supported Greg moving into that particular arena.

At the time there was evidence that the consumer health movement would evolve. If you looked at all the parties who had tried to address the perennial problem of cost escalation in healthcare, all of them had failed.

Government regulation failed. Corporation regulation (in the form of managed care) failed. Industry self-regulation failed. It seemed to me the only two sources left to try to help rationalize the cost problem were either to have patients do it or to have a nationalized health system.

I didn’t think a nationalized approach would be advisable in our culture after looking at the State-driven European systems who were trying to superimpose a market approach to rein in their costs.

Q: Your response surprises me. You come out of academia, stereotyped as being liberal and favoring a single-payer system. Yet you’re very cautious about nationalized systems.

A: I have come to believe health care is more a reflection of a country’s culture than it is a matter of economics. (In other words, I don’t believe the old adage “It’s the economy, stupid!” applies to healthcare.) And I don’t believe American culture would accept a nationalized, or even a single-payer system. Our culture places too high a premium on individual choice, on instantaneous service, on personalized care. Simultaneously, our society has deep respect, in the main, for entrepreneurism and a distrust of government.

There are a host of more practical reasons why I’m dubious about government run health systems: rationing queues/waiting lists/”brain drain” loss of innovation,--for starters. Look at any state-run health system and you will find a “shadow” parallel market system – which exists because of the defects of the official health system.

The Consumer Movement and MedDirect

Q: So you believed theconsumer-driven movement might be upon us?

A: I wouldn’t say it was “upon us.” But I knew it would grow, and in short order, be upon us. So I joined MedDirect in early 2006 upon returning from Qatar, and have been working full-time every since. MedDirect is a confluence of multiple factors.

First is this notion individuals have a major responsibility in financing and managing their behavior in health care, not just in this country but internationally. Price Waterhouse did a recent survey of 400 health officials, many from single-payer countries, and there was a strong consensus financing of health is a shared responsibility- employers, individuals, and government.

Second, Medicare and Medicaid data show that $250 billion was spent out of pocket in the U.S. (2005) Analysts are now predicting a trillion dollar market in personal health accounts. Market forces here are powerful. Better to bet with market forces than against market forces.

And in this market, credit is very, very important. Credit is a market facilitator. Sixty five percent of the U.S. economy is facilitated by the use of credit. But in the health care sector, now over $2 trillion, that number is dramatically smaller. Greg and I have believed for a long time individual financing of healthcare was and is a growth opportunity.

Third, I believed in MedDirect’s proven ability to service those engaged in small financial transactions. The parent company, ES Financial, has serviced over 100,000 small mortgages and homeowner association accounts, and brought the systems and expertise to service those accounts efficiently. MedDirect has picked up those talents, and we have a call center staff that can service accounts and originate loans very efficiently.

So in sum three factors – individuals paying for health care, need for credit, and core competencies in servicing and loan origination make MedDirect a formidable company.

Q: What about another factor – the passage in December 2003 by Congress making health savings accounts widely available?

A: HSAs play a strong catalytic role. But MedDirect doesn’t to succeed. The HSA movement will grow, but not all the HSA bugs have been worked out. Future HSA models -- for the poor, the chronically ill, and the general population – will contribute enormously to market rationalization in the U.S.

But as a company, MedDirect as a company is betting on a larger proposition – that individuals desiring or needing healthcare will need a facilitator of credit to get at that care when it is desired. The HSAs, the HRAs, and the FSAs are all devices, but they aren’t the whole game. With the politicalization of health care, none of these devices are a sure bet.

Doctors and Their Culture

Q; What about doctors? How do they benefit?

A; That bring us to another factor – our understanding of health professionals and their culture.

Q: Explain that culture.

A: Well, it’s one thing to be a credit card company or a mortgage company or a collection agency. But there are precious few finance organizations who know how doctors want their patients to be treated and who see how their patients are treated financially is as an extension of their personal and professional reputation. Or, how companies think about offering health benefits to their employees.

And so our proposition is that there is an enormous market for personal health financing. And we believe that as a business that understands the medical world will have advantages that will result in better and more sensitive products. Greg’s wife is a physician, the co-founder of MedDirect, Scott Addison, is a physician, And I understand what drives physicians.

Q: MedDirect started by giving credit lines for patients of orthodontists and dentists. I gather you client-base has expanded.

A: That was our first of three products – providing credit for care to be delivered sometime in the future. We now have about 700 physicians who are offering our financing, and we have just added 1000 dentists who will be adding our financing to their practices. When we started, there were not many physicians who had credit-card terminals in their office. Now it’s far more common.

Our second product was a line of credit associated initially with health savings accounts, now expanded substantially so that health plans and health insurers can offer this to their employer customers to all employees We call this the Health Bridge program. We now have two traditional health plans that are offering this guaranteed line of credit to those with deductibles of $500 or more.

Q; So this Health Bridge is most applicable to those with high deductible plans?

A; To a certain extent, yes. But if you look at the trends, more and more patients – no matter what their deductible – will be paying out of pocket for procedures that aren’t covered. It could be a reverse vasectomy or a cosmetic dermatologic procedure. Much of the need for credit will come from our perverse reimbursement system, with changing insurance products and with new devices and new technologies coming on stream that are not covered. Gaps in coverage occur all that time, and at awkward moments when a patient needs a procedure or care.

Q: And your third product?

A: We call it the “self-pay solution”. It is designed to help physicians’ offices handle their proliferating volume of patient-pay accounts. The typical physician’s office has a billing apparatus to help them send bills to Medicare and health plans. But then they have all of these little individual patient’s bills – co-pays, deductibles, or patients who have lost their insurance or bills associated with processed problems that the insurance company has rejected.

A recent McKenzie study indicated about 15% of a physician’s total revenue is represented by these small bills. This amount will grow by 35% a year over the next three years. This total of individual out-of-pocket collections may soon grow to 35% of all revenues.

We help physicians service these accounts, in some cases provide loans, and we do it sensitively without offending the patients. Fundamentally handling these out-of-pocket expenses is a servicing business.

It’s not just sending out bills. It’s coordinating the billing process. We’re not in the collection business, and we’re not in this to chase patients. We take those little bills, averaging $210, off the physician’s hands. We have systems to arrange payment plans and offer loans to credit-worthy patients. We have 40 years of experience in managing small accounts --- an expertise banks and other financial institutions do not have and do not want to bother with.

The Future

Q: How do you see the future of the health system? What is your crystal ball telling you?

A: Regardless of what health policy changes are, like the ones you saw addressed in Bush’s State of the Union address, namely changing the tax code, or the universal coverage movement in Massachusetts and California, the need for credit will increase.

Under any scenario, states cannot afford first dollar coverage, and insurance companies cannot either. So, regardless of the shapes of policy changes and coverage experiments going on, it will become apparent individuals must play an increasing role in shouldering financial responsibility and it will take credit to meet that responsibility. Individuals will also have to be more responsible for the health behavior that contributes to health outcomes.

At a higher level, I anticipate increasing volatility in the health policy arena, leading to intense debates in 2009 over full-scale health financing reform. Regardless of what policy prescription emerges from this process I believe a consensus will evolve that future responsibility for the funding of healthcare costs must be shared between individuals, employers and government.