1. Fortress and Frontier: Different but Not Less
  2. Fortress and Frontier: A Second Conversation with Temple Grandin
  3. Fortress and Frontier: What the Data Say About COVID-19
  4. Fortress and Frontier: The Narayana System and Innovations in Healthcare
  5. Fortress and Frontier: Healthcare’s Reluctant Revolution
  6. Fortress and Frontier: Price Transparency in Healthcare

 

In this sixth installment of the Fortress and Frontier series on Discourse Magazine Podcast, Robert Graboyes, a senior research fellow at the Mercatus Center, speaks with Dr. Keith Smith about his innovative pricing strategy at the Surgery Center of Oklahoma and the economic theory behind those pricing decisions. Smith founded the Surgery Center of Oklahoma, where he works as an anesthesiologist. He is also co-founder of the Free Market Medical Association, whose mission is to promote transparency in healthcare and accelerate the speed and growth of the free market healthcare revolution.

Previous installments of the Fortress and Frontier series include two conversations between Robert Graboyes and Temple Grandin. The first can be found here, and the second can be found here. The third installment is a conversation with Pradheep Shanker on COVID-19 data. The fourth is a discussion with Devi Shetty on India’s Narayana hospital system and innovations in healthcare. The fifth talk with Eric Topol is about medicine’s slow progress and machine learning in healthcare.

ROBERT GRABOYES: Welcome to all our listeners, and a special welcome to a longtime friend and colleague of mine, Dr. Keith Smith. Keith received his medical training at the University of Oklahoma College of Medicine and later did his fellowship in anesthesiology at the University of Arkansas. He has appeared countless times on television and radio, and his words have graced a long list of newspapers, magazines and websites.

Though Keith’s day job is to put people into a sleep-like state before surgery, the innovations he instituted in his clinic have been a wake-up call for healthcare across the nation and around the world. Keith, it’s a real pleasure to have you with us today.

KEITH SMITH: I’m honored to be with you as always, Bob. Thanks for having me.

Pioneering Price Transparency

GRABOYES: Delighted. A number of years ago, I heard about this doctor out in Oklahoma City who was viewed as something of a revolutionary in the medical profession. His clinic, the Surgery Center of Oklahoma, did the unthinkable. They posted all of their prices online so that every patient would know, in advance, to the penny, what their costs would be. Their highly intuitive website allows patients to see the prices for over—correct me if I’m wrong—I think it was about 800 surgical procedures, maybe more, in an instant.

Bills, when issued to patients—if they were issued—consisted of one or two items, not the hundreds of cryptic line items we’re accustomed to seeing on medical bills. Some years back, Keith and I connected, and I even made a pilgrimage out to his surgical center in Oklahoma. In many ways, it was an eye-opener. Keith wanted to show that healthcare bills need not be confusing and opaque, or filled with the ugly after-the-fact surprises. At least in the early days, not everyone was keen on seeing people awaken to this fact.

Some in the medical profession, and in the insurance world, were not at all pleased. Then, later on, in founding the Free Market Medical Association, Keith wanted to take his little prairie fire and spread it nationwide. He and like-minded physicians have certainly made inroads in that direction, inroads that have been noticed and acted upon beyond America’s borders. Keith, welcome to the podcast, and let’s get started.

For my first question, for the benefit of the uninitiated in the audience, why don’t you describe your pricing website in a little bit more detail than I’ve done, so they’ll know what we’re talking about?

SMITH: Thanks for your kind introduction, once again. In 2009, I launched a website, as you’ve said, with all-inclusive pricing. I think one of the important things people need to know about our pricing is that it is all-inclusive. That is apparently one of the excuses that is made for why everyone doesn’t do this, is the complicated process of bundling the pricing or the charges of all of the participants in a patient care episode into one price. My friend Jay Kempton equates that with someone selling a car, but the price of the steering wheel and the tires is not included.

I always thought it was the job of the seller in this market to do the work so that the buyer actually didn’t have to search to find pricing. When I launched the website in 2009, we were suffering, for the first time, from retaliatory effort from the insurance companies and the hospitals that actually worked. Up to that point, all of the attacks against us for being a price-transparent, and also being a physician-owned, reasonably priced facility—all of those attacks backfired, everyone that tried to hurt us.

Then the hospitals’ insurance companies finally came up with a formula that would hurt us, and they did; they almost killed us. They were successful in stacking deductibles so that patients who were out-of-network who came to see us had to first meet their in-network deductible before they would receive any benefit from having a policy at all. We were out-of-network with everyone because there was an agreement, I’m sure, to make sure we were never in-network with anyone. We were out-of-network, and at that time, out-of-network not by choice.

I’m older and wiser now, and I know to seek relationships with insurance carriers is a young person’s folly. We saw our waiting room empty because when the deductibles were stacked, it didn’t make sense financially for patients to come see us as much as they had up to that point. I decided this doesn’t make sense. We’re cheaper, we’re better, and we should have a line around the block, and our waiting room is empty. I decided to post the prices for three reasons, and the website was launched with these three reasons in mind.

One was that we wanted patients that had sticker shock and buyers, like self-funded buyers that had sticker shock, we wanted them to better be able to find us, whether it was here in Oklahoma or wherever. We also wanted to start a price war. We wanted patients to be able to use this information to leverage a better deal in their local marketplace if they were not from around here. That was much more powerful, ultimately, than we had any idea.

Then the third thing I hoped to accomplish, launching the site, was to better understand some of the scams that were at work that thwarted the workings of a free market in this industry. Because, like I said, we were better and we were cheaper, and no one was here, so something’s wrong. Usually, that means government is wrong. That’s always the first bet. I would argue all three goals have been achieved. We launched the website. And as you know, Bob, the first patients that arrived were Canadians. That was instructive.

They all have coverage. They just don’t have the care so many of them require. Then we saw more and more people that were uninsured. We saw people that some folks in the industry refer to as underinsured, the folks with real high deductibles or health savings accounts. Our entire bundled price was less than their deductible. Many times, I’d go into one of these in-network hospitals. I met Jay Kempton, who ran a third-party administrator. He basically handles the checkbook for self-funded employers who purchase their employees’ care out of operating revenue rather than having the insurance company take the risk.

He wanted to know if I would extend the pricing we listed online to his self-funded clients. I said, “If it feels, smells like a cash deal, then yes.” He went through to just huge effort to make sure that was the case. We then started dealing with The Kempton Group’s clients, so, self-funded buyers. They found that our all-inclusive price was less than half the PPO [Preferred Provider Organization] allowables that they were quoted by the brokers they dealt with previously. Jay didn’t keep me a secret. He could have, and he did not. He told all of his competitors about us. He wanted to share this good news.

I found myself speaking to a room full of Jay Kemptons. At one point, I was speaking at a conference, and there were 600 Jay Kemptons in the room, and many of them still buy from us today. Likewise, when my competitors began to complain that they were losing business to me—for instance, Jay Kempton would have a client who needed a surgery, and the patient would be scheduled at another facility. Jay’s team would redirect them to my facility, and very powerfully redirect them by telling the patient they would have no out-of-pocket if they came to Surgery Center of Oklahoma.

That didn’t sit very well with some other facilities that were losing this business. They screamed and yelled, and I just told them all, “I’ll help you, and I’ll help you figure out how to do this.” We’ve helped, and we continue to help, anyone that wants to join this movement and really leave the price-gouging, Death Star sort of world, and show prices and bundle them up. We will show them how to do that. I even have a clearinghouse mechanism that I’ll make available to price gougers who want to make the transition.

So, the Free Market Medical Association was born. You see more websites out there with pricing, and it kind of all started here. I’ve had to come to grips with that. I know that that’s actually true. It started in 2009 when we launched this website, and it’s so vindicating now to see the extent to which this movement has really astonishingly grown.

GRABOYES: For those in the audience, it’s really quite eye-opening. If you go to Keith’s website—and I should know it by heart. What’s the website again, Keith?

SMITH: SurgeryCenterOK.com.

GRABOYES: SurgeryCenterOK.com. If you go there and click on—it says “Prices” or “Pricing”—it’s amazing. I use it like a parlor trick to amaze people. A couple of outlines of human bodies show up with some circles on them, and you’re thinking, “Okay, I need something on my knee.” Click on the knee, and up pop a whole bunch of lists of surgical procedures related to knees. Next to each one of them is the exact price down to the penny, which is what they are going to pay, in total, after you’re done with them. I’ve shown it to any number of doctors who, their mouths fall open, and they’re, “How do you do that? I don’t even understand this concept.”

Keeping Wait Times Short

GRABOYES: Anyway, I remember reading too, also, you said Canadians were coming in. I think I read a quote from you that they were most astonished when they asked you how long the wait time would be for the surgery. Tell us about that.

SMITH: Yes, that is the most common question when a Canadian reaches out to us: “How long will I have to wait?” We tell them they don’t have to wait at all, that we could work them in tomorrow’s schedule if they can get here. It’s too good to be true for them. My friend who lives in Vancouver tells me the old joke that no Canadian is truly content unless he’s standing in line. They really have a hard time wrapping their minds around the idea that they can secure care, not just in a reasonable amount of time but immediately.

The most common complaint we still see from Canadians are women who need a hysterectomy because they’re tired of getting transfusions. They’re waiting in line two or three years to see a gynecologist. The Canadian system does not have the capacity to serve people when everything is going well. This COVID-19 mess has really turned them upside down, and the waiting lists there are worse than they’ve ever been. I think that we’re going to see a real flood of Canadians seeking care in the United States in the next 12 to 18 months.

GRABOYES: Oh, I will never forget, back in 2007, I interviewed for a professorship up in British Columbia. I’d say it was one of the prettiest places I’ve ever been. My wife and I were just drooling at the thought of living in this natural splendor. I did have to think, “I’ve been a critic of their system for a long time. Do I actually know what I’m talking about, and is it enough to actually keep me from accepting a job?” I’ll jump to the end. They didn’t offer it, but it was in contention.

I thought of one simple thing. About every 10 years, my wife—she goes for her annual mammogram, and about every 10 years or so, the doctor will say, “There are some spots on here. I don’t think they’re anything, but I don’t want to take chances. Let’s do a biopsy.” She has a sleepless night. The next morning, she gets a biopsy with the understanding that if it turns out to be something bad, probably within a few days, at most a week, she’ll have had surgery dealing with it, or whatever treatment is necessary. I asked a simple question: “What if this were happen to us in British Columbia?”

The numbers that I got from—I think the Fraser Institute’s report there—was that if you got that bad mammogram, it would be roughly, on average, four weeks before the biopsy was possible. If the biopsy turned out bad, it would be a 17-week wait, on average, before any treatment would start. I just said, “I can’t put you through that, and I can’t put me through that when it’s my turn to have a bad test.” We decided we weren’t going to take it. They didn’t offer it, and nothing has ever made me happier in my life because I didn’t actually have to turn down living in one of the prettiest places I’ve ever set foot in my life.

It’s a real problem. Again, just to make this more—we’ve talked in abstractions; let’s talk in something a little more concrete. There’s a famous example that you told me numerous times and that I’ve seen written about. It was a patient, I believe a urological patient in Georgia, who contacted you about a surgery they had. I think there was like a $40,000 quote they had gotten for it. Why don’t you tell that story? Because that brings it home better than anything I’ve ever heard.

Making the Healthcare Market More Competitive

SMITH: Not long after I launched the website, we were contacted by a patient who needed a very minor urologic procedure, the price for which was $3,600 on our website. He was reaching out to us because the local hospital where his urologist worked in Georgia quoted him $40,000 for the same procedure. When he went—I said, “Yes, that really is our price, $3,600.” He went back to his urologist and told them, “I’m traveling to Oklahoma City.”

This urologist had lost another patient to us, unbeknownst to me, a couple of months before that. He went over to the hospital administrator and just said, “Listen, you’re killing me. I’m going to lose two patients because of these ridiculous price quotes.” That hospital matched our price. Actually, they were $400 higher. They did it for $4,000 instead of $40,000. This patient reached out after he had convalesced, and he fortunately had a great experience and did well. He reached out and pointed out to me that we had saved him $36,000, and we didn’t even do the surgery. We both laughed. That really was one of our goals, was to start this price war.

I think I told him that at the time, in my Bastiat way, I like to think about what people do with the money that they did not spend to have surgery because they’ve benefited from what we’ve listed online. What is not seen, the needs and preferences of consumers that can be satisfied because they don’t just burn money at a price-gouging facility.

It’s a lot of money by now. We’ve had this website up for quite some time. Jay Kempton and I have worked together for the benefit of his self-funded clients since 2012. In that time, using this method of purchasing care, his clients have saved over $100 million, and that’s compared to PPO allowables.

GRABOYES: Wow.

SMITH: He had 12,000 lives, I think, that he was managing at his third-party administrator. I think now he has 35,000 lives. The majority of that savings came in the early days.

The idea that even if you spread that across 35,000 lives, over the time between now back to 2012, $100 million cheaper than what the PPO supposedly would have granted his clients, with their fictitious discounts, is a real number. Then you start to think about the number of people in this country that are not part and parcel to the government socialization of the industry. It’s still a very, very large number. It’s probably close to 200 million people. So, the numbers that are being spent and the numbers that could be saved using this direct-purchase approach, cutting out all the middlemen, is mind-boggling.

GRABOYES: Yes, I think the first time I heard that story about the Georgia patient, you had said the patient said something like, “I feel guilty because you saved me all this money, and you’re not getting anything out of it.” I believe you said you told him, “‘Oh, don’t worry about that, I’ll be getting a whole lot out of this story over the years.”

SMITH: [laughs] Yes, I’ve had a lot of fun with that. I’ve also had fun—UCLA copied my website. There are a lot of people that have asked me, “Can we copy your website?” Because it’s fantastic, as you said. The guys that created that, they’re just extremely talented, and people have asked me, “Can I copy your website?” I’ve said, “Sure.” But UCLA didn’t ask, and my web designers wanted me to go after them.

I said, “Oh no, no. I’ll have so much fun with this.” If you want to have some fun, if you have two computer screens, search “UCLA cash pricing,” and look at their website, and then look at mine. You’ll notice it’s word for word. They have the same avatar, they have the same dropdowns, the circles on the body. It’s actually word-for-word copied. I’ve had so much fun with that. I would never, never have had as much fun going after them as I’ve had making fun of them for doing that.

Putting Economic Theory Into Practice

GRABOYES: Yes, that’s a pretty nice piece of flattery. That’s a pretty high-quality institution to be copying you.

I imagine a lot of people listening to this will know the name Bastiat, but a lot of people won’t. I’ll just mention, Frédéric Bastiat was a French economist—19th century—one of the wittiest, most interesting names that the economics profession could ever boast. For a little personal brag, overall, it’s one of probably the proudest thing in my career was I won the Reason Foundation’s Bastiat Prize for Journalism in 2014. I just love Bastiat.

When I first—I don’t know—you first came on my radar screen, and I clicked on your website, at that time, your official picture had you standing on the tomb of Frédéric Bastiat. Why is a physician standing on an economist’s tombstone?

SMITH: The CliffsNotes version: When I was growing up, our next-door neighbor was a dentist, and at a fairly young age, he acquired a brain tumor that he succumbed to, unfortunately. He was an avid reader, and my father went next door to talk to his grieving wife and console her and just tell her our family was there for them. He’s looking at this library that Dr. Carly had that was massive. My dad said, “What do you think about me just taking one of these books to remember him by?” Then his widow said, “He would love nothing better.”

My dad put his hand on a book called “Political Economy” by Frédéric Bastiat. What are the odds in this probably 4,000-volume library, and that’s the book he put his hand on? He opened it up to read about the petition of the candlemakers, and also this question Bastiat asked: “How does Paris know how many tomatoes that it needs for the restaurants for the weekend? Who decides? Who is the all-knowing person?” All of these wonderful Bastiat-like rhetorical questions that he had so much fun with, and I became very intrigued with him.

My wife and I went to Italy, and I’d read that he had died in Rome. And with great difficulty, found this church where his tomb was and said, “I have to get my picture made over Bastiat’s tomb.” We found it with great difficulty. The people at the church actually did not know who he was, or that he was there. I knew he was there. They typically have lists of all of the big shots who were buried in these cathedrals. I asked, “Frédéric Bastiat?” They did not know. They did not think anyone by that name was buried there, and so we looked at every single tomb in this gigantic cathedral. Sure enough, there it was.

If you remember that picture, it’s not a small tomb; it’s significant. I thought, “I have to have my picture made here.” It was just such wonderful—“What Is Not Seen,” “The Petition of the Candlemakers” as a response to the protectionists—just wonderful stuff. And he’s hilarious. He’s one of the funniest, funniest authors you would ever read.

GRABOYES: Yes, he is. It’s very different from the usual image of the economist. I like both of us having some association. I haven’t been to his tomb. I did get to stand at Adam Smith’s tomb two years ago, which was, for an economist—we have cheap thrills, and that’s one of them. You were how old when this book came onto your radar screen?

SMITH: I was in college, and so I was 20. That book was then put away and not discussed again until I became acquainted with Lew Rockwell and the Mises Institute and some of the writers there. Then I began to explore Bastiat more fully. I don’t know that there’s much of anything of his that I have not read. If I found out there was, I would go grab it. I was aware of him.

This “What Is Seen and What Is Not Seen,” I became acquainted with again when I discovered Henry Hazlitt. He was, of course, a huge Bastiat fan. That’s how he began his book “Economics in One Lesson.” I’ve always been a fan of mutually beneficial exchange. I don’t like leverage. I don’t like it on me, and I refuse to use it. I think it’s unethical to use it on others. I see economics as a study of human behavior in the context of mutually beneficial exchange. As a physician, I embrace that. I embraced that even before I went to medical school, and I didn’t want to be part of exchanges with patients, medical or financial, that were not mutually beneficial.

My obsession with economics is really just to continue to scour myself for inconsistencies, and just make absolutely sure every interaction with a buyer is one that they enter into willingly. Reading the economists that we’ve mentioned so far has been very, very helpful to me. Also, helpful to make sure and ensure that my business is embracing, not trying to avoid, but embracing the discipline of the market.

Using the Internet

GRABOYES: You finished med school about what year?

SMITH: 1986.

GRABOYES: You finished in ’86, and then you open the center in ’97, and you put the website up in ’09. That’s quite a few years into it.

SMITH: Yes, that’s right.

GRABOYES: When you opened the center—just to put it into perspective for myself—that was one year after I bought my first internet-capable home computer. The internet, at that time—or excuse me, the World Wide Web, as we said in those dark, distant days—was a pretty primitive place. A site like yours would have been almost unthinkable. It was probably seven, eight years later that I remember being just astounded because you could go online and get the calorie counts for fast food outlets. I remember that a couple of us professors were looking at that site and just being amazed by it.

Technologically, what you have now would really not have been feasible until I don’t know when. What I’m getting at is, were you thinking about these issues all along, and it was, “I’ll wait, and when the technology comes along, I’ll be this transparent guy”? Or did the technology come along and you said, “Yo, now I can do the Bastiat thing there”? How did the two chronologies interact?

SMITH: That’s a great question. When we opened in 1997, we were aware that patients were being financially brutalized by the hospitals, and that we were accessories to those financial crimes. When we opened, our mission was, first, to never accept a dime of money from the federal government. The second mission was to ensure that patients would know, every single time, what they were going to pay us before they arrived.

Even though some patients found that troublesome, that we were actually having financial conversations with them about their surgery prior to arrival, we were determined to do that. I’ve no doubt that we ran people off with these conversations, but we felt it was incumbent upon us to reveal, ahead of time, what patients were going to pay. We quoted patients prices over the phone, and we did that starting the first week.

When we first opened, we actually filed insurance claims. Many of the prices we quoted were just what the patients’ out-of-pocket was going to be. But I quoted bundled prices for all kinds of surgeries starting way, way back. It didn’t really occur to me that I could launch a website and put those prices out there. It did occur to me to buy some advertising, and a couple of times, I bought radio ads where we advertised that if you would call this number, we will tell you the price of your surgery. That didn’t work very well. We didn’t really get any traction. We tried it on one of the local Hispanic radio stations, and they’re a population that many times has means but no insurance.

We tried some things; nothing worked. A friend of mine owns a precious metals business that was growing. I suggested to him one day, while waiting in line to talk to him, that he should launch a website and sell his wares online, not even thinking that I should do the same. I think eventually I realized how ridiculous that was, that I was giving someone that advice and I hadn’t done it myself. When I started to think about it, frankly, one of the things that caused me to pause was the retaliation that I knew our business would receive.

I have partners here. I don’t operate in a vacuum. I knew that, to some extent, I was placing them and their capital investment at the Surgery Center of Oklahoma at risk, by making such a move. We were reeling; our back was against the wall. When I launched the website, it was almost nothing left to lose, like a last act of defiance.

Everybody was on board, but I could have probably launched the website a couple of years earlier. I think that I might have encountered some pushback from my partners because things were going well.

Everyone agreed there was risk associated with making that move because there were, and still are, very influential, powerful, wealthy people who do not like what we’ve done. They make their living, as Jay Kempton says, off the dysfunction of the industry. They depend on that. I think that I launched it about as soon as considering all factors that I could launch the website.

Political Pushback

GRABOYES: When you say retaliation, and you’ve talked a little bit about it earlier, but what does retaliation mean? What were you really worried about that could happen?

SMITH: I wasn’t really sure. I just knew the hospitals would hate it. We have these not-for-profit hospitals that charge 10 times what we do and claim to not make a profit. I knew that would be very embarrassing for me to charge $3,740 for a knee arthroscopy. They’re charging $40,000 and claiming to not make a profit and claiming to offer all of this community benefit. I knew that was problematic for them. The insurance companies, I actually thought would love it and would buy from me. I didn’t understand until much later why they didn’t want to.

They were too chummy, basically, with the hospitals, to come over and buy from me. I didn’t think the insurance companies would hate it, but I knew the hospitals would, and the hospitals are very, very powerful. They have a lot of muscle at the state legislature. I knew that we would probably be attacked with legislative efforts. I did not anticipate being attacked by the insurance companies. I also could not lower my expectations enough to realize that our state health department could be weaponized against us by the powerful hospital lobby. And all those things happened.

We were fortunate, when we opened, that the fellow who was the head in the state House, a Democrat named Fred Stanley, had our back. He saw us as the underdog, as the champion of the poor. When the big, rich hospital cronies showed up to crush us with this or that proposed law, he made sure that stuff went nowhere. It was only later that the Republicans came on board and began to champion free markets. That was politically popular for them, but when we first opened, it was really the Democrats that had our back.

There was a fellow named Todd Hiatt, who was the speaker of the House and a Republican. He was politically, probably the most heroic of all of the legislators—he and Fred Stanley—that really stood in front of the Surgery Center of Oklahoma, and with their shield, and just said no. He was chastised by many of the Republicans who were supported financially by the hospitals, for what he did. I have to call these guys’ names out because they were not doing what was popular. They were principled people, and I know they got bruised for it.

But, yes, we were attacked with all manner of legislative attempts, from outlying physician ownership of facilities to mandating that 30% of our revenue had to come from Medicare, Medicaid or uncompensated care. There were all kinds of things that they threw at us, but again, all of it backfired until they stacked deductibles.

GRABOYES: A point that I’ve made repeatedly—I’ve tried to make my career about things that are not easily identifiable as left and right, Democratic and Republican. I remember the first conversation we had, when I visited you out in Oklahoma City, was just that: that the lines do not fall along party lines. The notion that Republicans are pro-business and Democrats not pro-business just did not hold in this realm. I remember you gave me some examples. I think you mentioned that the labor unions were rather pleased with what you were doing at the time.

SMITH: That’s exactly right. We’ve actually had patients come to the Surgery Center who have looked me in the eye and said, “Ideologically, I could not disagree with you more, but I can’t argue with cheaper and better.” Some of these people have really had to do some soul-searching to reconcile these radical free market mavericks. This approach is actually bringing affordability and accessibility to people who would otherwise not have it. We argue that this free market approach is the only approach that champions the poor and the more unfortunate.

That is difficult for some people to grapple with, who are ringing the bell and waving the flag for some sort of a total government takeover. What we’re offering could not be more diametrically opposed. That’s troublesome, and it’s caused some people to rethink and really do some soul-searching.

One legislator, who you and I would both accurately characterize as a true socialist, is now libertarian. He’s made that switch largely because of what he understands now about the free market and its application to the medical industry. To quote him, he said, “You’ve demonstrated the market applies to the medical industry, and if that’s true, to what industry does it not apply?” He’s done a 180 and it’s changed him. He was always a guy with whom you could have civil discourse, even if you disagreed. I always find that enjoyable.

GRABOYES: Me too.

SMITH: He’s really come around. He’s really come around.

Insurance Obstacles

GRABOYES: Your surprise and confusion about insurance companies is something that I’ve shared. My podcast time before last—I put it up in June—was with Dr. Devi Shetty of Narayana System in India, who also built a hospital in the Cayman Islands—mainly aimed at Americans—that in many ways resembles Surgery Center of Oklahoma, with transparent pricing and one price for the procedure, not 600 line items that even your accountant couldn’t make his way through.

A few years ago, I wrote about the Cayman hospital. I said, “Have you ever talked to American insurers and said, ‘Why don’t you come down here? Send your patients down here. Instead of $100,000 we’ll do a cardiac bypass for $30,000, and you can save $70,000, and you can give some of it to the patient.’” The guy laughed and said, “We’ve had that conversation many times.”

What happened? He said, “It goes the same way every time.” He said, “We tell them we can do it for $30,000, and they get very excited and say that’d be fantastic.” Then it reaches a point in the conversation they say, “By the way, when we do this, will you be able to give us a breakdown of the charges? How much is the surgeon and the nurses and the medication and whatever?” He said, “We said no, we’re just going to tell you it’s $30,000 for the whole thing.”

“We’re really accustomed to having our breakdowns. We’d really like that, and could you do it?” He said, “No, we just give you one price, and you know in advance to the penny what it is, and that’s all we’re going to give you.” Then they get their frown on their face and they say, “We’re very accustomed to having our breakdowns, could you do that?” He said, “We finally tell them, ‘Yes, we can do that, but it will require us to construct a new building that will—and we’ll have to hire a bunch of accountants, coders, computer programmers and all of that to handle the breakdown, and then the bypass is going to cost $100,000. You have a choice: $100,000 with a breakdown or $30,000 without it. Which do you want?’”

He said, “They conclude by shrugging their shoulders and say, ‘We’re really used to having the breakdown.’” And he said, “Nothing ever comes of it.” That was a conversation I had maybe three or four years ago. I didn’t ask Dr. Shetty whether anything had changed. I don’t think it has. That story tells a whole lot about what you’re up against and exactly why—I guess to my knowledge—you’re still not dealing with the insurance companies there, correct?

SMITH: That’s correct, and there’s more to it. It’s just as evil as you can imagine. The insurance company wants to show a discount. They want a gigantic chargemaster price to start with, and then they apply this fictitious discount. Then the brokers who sell this trash, they go out into the world, and they market these horrible PPO policies by bragging about the discounts that they can achieve. One insurer will say, “We get 40% off bill charges,” and another will say, “Yes, but we get 50% off of bill charges.” If an employer is self-funded, they are actually charged a commission on these discounts that are supposedly achieved.

Keep in mind, all of these charges are pre-negotiated, so there actually is no discount. The hospitals are happy to discount a bill because they need all that ready to maintain the fiction of their not-for-profit status. Just to make it really clear, an insurance company will discount a bill from $100,000 to $30,000, and then they will charge an employer a commission on that $70,000 they supposedly saved.

That’s why the insurance companies do not want to deal with Dr. Shetty, who in my opinion is maybe the greatest hero alive in the industry. They also don’t want to deal with me because dealing with me or Dr. Shetty is an opportunity forgone when they can’t reprice these claims and charge someone for doing that.

Patient-Provider Relationships

GRABOYES: How does all this change your relationship with your patients? How different is it for you to be with your patient versus one of the hospitals that is not transparent and sends the long, complex bill that takes months and months to resolve? How does it actually change the personal relationships?

SMITH: It is so pleasant. It’s hard to describe. When patients get over “This is too good to be true,” and they realize that we really are not just medical advocates for them, but we’re also financial advocates for them. We’re straight with them and we’re honest with them.

The vast majority of patients who walk out of here even after a brief surgical encounter are our friends. It is impossible to describe the connection that we have with patients when they realize we’re not only not like most of the other bad guys, but we are actually on their side. But it takes a bit for people to get over the hurdle of “This is too good to be true.” There are a lot of patients who never come here because they never get over that hurdle. They really do think it’s too good to be true.

Now, I’ve actually been told that I should increase my prices so that it seems more true. I don’t plan to do that yet. We haven’t raised them since we’ve been quoting them over the phone in 1997 with, I think, five exceptions now, where my costs just changed and I had to do it.

GRABOYES: That’s pretty stunning.

SMITH: So much for the spiraling cost of healthcare. We just have left the prices the same, and we didn’t start off too high. Our relationship with patients—they have smiles on their face; they’re happy to be here. That affects my staff too. My staff realizes they’re dealing with patients who really want to be here. Our waiting room is not full of people because we’re signed up on some plan. Our waiting room is full of people who want to be here. It’s very important to know as a patient that this physician, this staff is doing something for me, not to me.

That’s how it feels here. I think patients realize we are here for them. It’s not a predator and prey relationship. It’s a wonderful environment.

GRABOYES: I think my favorite part of taking the tour of the place was you gave me a tour of your furniture [Smith laughs], which was just spectacular. For the listeners, Keith took me—he said, “Let me show you our board room.” He walked me into this room, which is their cafeteria, whatever the place where the employees take their bag lunches and eat, and there was a big plastic table. He said, “This is our board room table, when we just toss the employees out with their lunches and we meet here.”

Then you took me to your office, which had an old beat-up desk. Then you took me out into the lobby and asked me—you said, “Look at the furniture out here. Tell me what you’re thinking.” I said, “Nice furniture. It looks slightly outdated.” You got a big smile and said, “That’s exactly it.” He said, “This all came from the doctors’ houses. We weren’t going to pour money from the center into buying expensive furniture and send those costs onto our patients. When we re-outfit our houses, we bring the furniture on here. Still got the same furniture?

SMITH: No. What happened is I wound up giving so many tours, it could no longer be a point of pride. It was actually a source of embarrassment, as some of the furniture was just too long in the tooth. I have way too many meetings in my office for that old beat-up desk. We bit the bullet and after a very, very long, long time decided to re-outfit this place. I think it was about one year ago. If you come here now, you won’t recognize the furniture. A year ago, you would have.

GRABOYES: Well, then you made it with that stuff for a long time.

SMITH: Yes, we did.

Replicating the Strategy

GRABOYES: I was there quite some time ago. You founded this Free Market Medical Association. Just tell us a little bit about that. I know you’ve been spreading what you do around the country, and tell me how that’s gone and how widespread it is.

SMITH: After Jay Kempton and I started working together, his competitors were asking him, “How in the world can you deal with a maverick surgery center like this?” My competitors were asking me, “How are you providing this pricing? Because we’re tired of losing business to you.” It was Jay Kempton’s idea. Jay said, “I think we should form an association and see how it goes and see if anyone shows up.”

The first year we decided to have a meeting, Jay and I agreed that if 50 people came, that we would scratch our heads and decide if we were going to continue. If 75 people came, then we would continue even if he and I had to ride it, get our checkbook out and continue operation. The first year we met, we almost had an issue with the fire marshal. There were 130 people that came from all over the country for our first meeting. This organization has grown every single year.

The last time we met, Ron Paul was our keynote. This year, our conference is next month—for anyone that’s interested, August 5 through 7. I don’t know when this is going to air, but Steve Forbes has graciously agreed to keynote this year’s conference in Plano, Texas.

The organization I think has 30 state chapters now. We network, and we are resources to each other. I help other members get launched with a facility or ideas about pricing. The organization is now big enough that I confess to having learned much from my fellow members. I’m now on the receiving end of the benefits of this organization.

Our mission was simple: It was to grow this movement and grow these ideas. Jay Kempton is very mission-driven, as am I. Neither one of us has a sole focus to generate revenue. We really are mission-oriented and want to grow these ideas and see the market discipline spread and really disrupt things, because the American people are the victims of a heist, whether they know it or not. The only way to make things better is a dose of the market. The government will never, never fix this.

I tell people that they’re not interested in solving the caper because they are driving the getaway car. They are part of all of these shenanigans, and they’ve auctioned off all of these favors to their crony pals. They’re never going to be a solution, whether it’s the left or the right side of the aisle. Jay and I are on the same page about this, and we celebrate the relationship between the buyer and the seller. Intermediaries in that exchange are welcome only if they facilitate that exchange.

Those are basically the pillars of our organization. And people also that provide services, whether they’re sellers or their intermediaries, need to be very transparent and clear about “Here’s what I do, and here’s what I charge for it, and here’s what it looks like.” It’s a wonderful organization that’s full of stop-loss carriers, underwriters, third-party administrators, ERISA lawyers, self-funded buyers, physicians. Direct primary care has a huge presence in FMMA. It’s a wonderful organization.

Should Price Transparency Be Mandatory?

GRABOYES: One other issue here: Price transparency has become something of a buzzword in legislative circles in Congress, in state legislatures. There are all sorts of initiatives at the state level and the federal level to mandate that this guy out in Oklahoma has got transparency; everybody should be transparent. President Trump issued a mandate—an executive order requiring hospitals to publish—each hospital would have to publish hundreds, maybe even thousands of different individual prices. And it’s likely going to continue under the current administration.

I’ve been doing writing on it for a while, and I’m one of the skeptics. I rankle a lot of the people who are usually good friends of mine on this because I really tend to think these are terrible ideas. What do you think of the idea? Should the federal government say everyone ought to be like Keith Smith and publish your prices out there?

SMITH: You and I have talked about this before, and we’re on the same page. I like to tell people the government is that entity whose ideas are so wonderful, they have to be mandatory. Once you mandate something like this, everything changes. The first thing that changes if you mandate an issue, you afford the unscrupulous legislators—which is all of them, basically—to sell indulgences or sell exemptions. That’s what’s been going on. Hospitals have decided they would just pay the fine rather than comply.

The more damaging consequence of a mandate is it allows the industry price gougers to redefine the phrase “price transparency,” and they’ve been successful in doing that. Price transparency in the Beltway now is considered what is the patient’s out-of-pocket, not actually what does this procedure or service cost. They’ve been very successful, the industry players, in transitioning that definition.

The ideal situation would have been for Trump to issue an executive order and not enforce it. It actually has done some good because it’s changed the narrative. I no longer have the tinfoil hat on my head that I had when I first launched these prices. Now the scrutiny is on those who will not reveal prices, where it should be. But the market has to solve these problems. The government mandates are never a good idea. I don’t believe in forcing anyone to do anything. Typically, they’ll buy their way out.

My biggest fear of the Biden administration piling on and making the penalties $2 million, $3 million, is it could force further consolidation of the industry. There will be smaller hospitals that cannot comply with this. That’ll just wind up like all the other little ones before them, selling out to the big-box hospitals; $2 million or $3 million is a rounding error for many of these big-box hospitals. That’s not big money to them. Just like the minimum loss ratio caused a consolidation of the insurance industry, this transparency price mandate could cause a further consolidation because the big boxes are just going to pay the fine, and the little ones that can’t afford it are just going to be absorbed.

All of this mandate price transparency, it has changed the narrative. The expectations have changed. I think that’s a positive thing. But you and I are on the same page about making people do stuff. That’s a problem, and all the unintended consequences of these mandates—that’s giving them the benefit of the doubt, saying that these consequences are unintended. I think that they’re nefarious enough. I wouldn’t be surprised if these latest price transparency failure-to-comply regulations were actually written by the big-box hospitals with this in mind.

GRABOYES: That’s certainly the usual rule, that the regulated industries have a sizeable role in how the regulations on them are written. Who knows enough about hospital pricing to actually say how you should do it?

I’m actually writing work on this now, and when I’m done, I’d love to pass it by you just for your thoughts. I worry about regulatory capture. I also worry about even if they are absolutely innocent and well-intentioned, you got to define what price transparency is.

The problem is once you begin doing that, you force people into inappropriate business models. I’ve seen some good writers whose work I generally like, from centrist to right-of-center, maybe some left-of-center think tanks and such. They’re saying, “Okay, first of all, to do this mandatory price transparency, we’re going to have to tell them how they have to bundle their pricing.” Once you begin to tell them, “Now we’re not going to let you break out the prices,” you’re going to have to pack it together. You create a giant engine for cross-subsidies, for hidden prices, for ways to—just all sorts of suboptimal business models.

You really can’t mandate price transparency unless you tell them how to do all of these minute operations within the businesses. Everyone has to price the same. One of my favorite writers, who I’ll be interviewing two months from now on this series, is David Goldhill, who wrote “Catastrophic Care.” David wrote that book years ago. What’s unique about healthcare isn’t fee-for-service pricing. All industries have some measure of fee-for-service. The other industries aren’t all bundling. He said, “The only thing that’s unique about healthcare is the expectation that everybody’s got to structure their pricing system exactly the same way.”

David came out of the communications industry. And he said a great deal of his time was spent coming up with novel pricing strategies. If everybody’s got to do it the same way, you lose that whole element of competition.

Coda

GRABOYES: We’re coming toward the end. I did want to mention one of the other commonalities you and I—I like to humanize my interviewees a little bit. As listeners of my podcast know, I’m a fairly serious amateur musician, and I believe you still are as well. I was always interested in that aspect, that you took a pretty good serious look at music early on. Tell me a little bit about that.

SMITH: Well, I grew up in a musical home. My mom and dad were both accomplished vocalist singers. My dad was actually a celebrated choir director in the old Vietnam War days. The USO would have these gatherings. Those were my dad’s choirs many times that were singing at those gatherings. I grew up in a musical home and started playing the piano by ear when I was about four. I became pretty good. When I turned 10 years old, I began studying with a fellow named William Fletcher, who studied with the Lhévinnes in Michigan, and they were Van Cliburn’s instructors, for anyone that doesn’t know that.

That was the lineage of my instruction. He, I think, recognized that I had some talent and worked very hard. I came in runner-up with the Baldwin Junior Keyboard Achievement when I was 13. That was a national recognition, and I received scholarship offers from big names to be a concert pianist, and I played well. I thought about it. I had an opportunity to do that. There was something about performing, though, as a musician that, for me, fell short of the mutually beneficial exchange that I think I wanted to have in my career.

My brother had gone to medical school, and so that was on my radar. It was a hard decision. I had a letter in each hand. I had a letter. I was accepted to a huge name to come study piano with this institute, every graduate of which ends up in Carnegie Hall. And my other letter was acceptance to medical school. It broke my teacher’s heart, but I decided to go to medical school.

I enjoy playing. I don’t play a lot anymore just because of time. In order to play the things I really enjoyed playing when I was younger, you really have to practice a lot. I can’t just sit down and pick up and play Liszt or a Chopin étude like I used to. I have a real appreciation for classical music and jazz, as you do. I love to hear talented musicians play almost any music as long as they’re talented. That’s my background.

GRABOYES: Well, I had somewhat similar thinking processes. Somewhere someone offered me, informally, a full scholarship to do music. I was a terribly, in many ways, impractical young man, but somehow practicality seized the moment and said, “I don’t think I want to try making a living that way. It’s a little too risky for my tastes.” You have to be awfully good to make that work. I like to be in a profession where there are a whole lot of people who can make a good living, and you don’t have to be at the top of the world to do it. I think—

SMITH: It’s also a hard life. I actually got to play for Van Cliburn on two different occasions, and he encouraged me. I played for Gary Graffman, I played for Lorin Hollander, and they encouraged me. But I surprised Cliburn when I asked him, “If you had to do it over again, would you do the same thing?” and he said, “No.”

GRABOYES: Well, he did step away from it.

SMITH: He did. But he was on the road all the time, and it was a hard life. I think when I asked him that question, he was probably at a low place. Of course, the guy could play anything. He’s just truly one of the most gifted technicians ever. I remember him saying no and thinking, “Well, maybe I wouldn’t want to be on the road all the time, either.”

GRABOYES: Well, I’m glad you ended up being a doctor, and I’m glad I ended up being an economist because otherwise, we wouldn’t be sitting here today having this wonderful conversation.

SMITH: Agreed.

GRABOYES: Keith, anything else you want to say before we go?

SMITH: Oh, I just appreciate all that you are doing, and Mercatus. You guys have worked so hard to make sure that this Surgery Center of Oklahoma tree that fell in the forest was noticed. I can’t tell you how much I appreciate that. There are countless people whose financial futures have been preserved from efforts like yours. I would encourage you to see that maybe as “what is not seen.” I tell everyone that is courageous enough to conduct an interview like this, that they really are a part of someone’s financial future that is not bleak because of your effort. I just want to say thank you.

GRABOYES: Delighted, delighted. Keep it up, and we’ll talk soon again.

SMITH: Thank you. Thank you, Bob.

GRABOYES: Thanks, Keith.

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