The Predatory State of the Medical Industry

The following is a transcription of the speech given by Dr. G. Keith Smith at the 2022 Oklahoma Libertarian State Convention.

I have two goals tonight: to indict the predatory state as the primary cause of all that is wrong in the medical industry and additionally, to show how the application of free market principles has generated affordability and quality sufficient to justify a high degree of optimism for the future.

I’ve thought for some time that everyone is a libertarian. For themselves. It’s all those other folks who can’t be trusted with freedom. Trusted with freedom, all those other folks might make decisions with which we might not agree and we can’t have that, can we? Most people would agree that freedom is a good idea except for… what? How would you fill in this blank and how do you make this decision? How do you respond to others who fill in this blank differently from you? Since I consciously separate ideas from any violence required for their implementation, I believe freedom is a good idea… period. An astonishing number of people would say, “Freedom is a good idea except for healthcare.” As well-intentioned as this might seem, the violation of property rights necessary to implement a government-guaranteed system cannot be ignored. The story of the Surgery Center of Oklahoma illustrates, I believe, the workability of a non-violent, free market approach.

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

I’d become convinced by the early 1990’s that government had no money it had not first stolen and to accept government payment was to receive stolen property. In 1993, three years after I started my anesthesia practice, I therefore stopped accepting government money and stopped filing Medicare claims. I treated Medicare patients outside of the Medicare scheme and usually free of charge. When I began practicing in 1990, Medicare paid me about $1100 for the anesthesia services required for an open heart surgery. In 1992, this payment was cut in half. A year later that amount was cut in half. The last two payments I received from Medicare were as follows: $285 for a six hour cardiac anesthetic and $78 for a knee replacement anesthetic. These fees had been imposed through a mechanism referred to as the Resource Based Relative Value Scale, more appropriately called the Rosemary’s Baby of Health Care. According to the folks at Harvard who gave birth to this creature, every physician service had a price and they knew what those prices were. I had read enough about economics by this time to know that this imposed pricing was not personal, as punishing as it seemed. Prices are signals, after all, and Medicare was sending me a signal regarding what they thought the service I provided was worth. I felt obligated to respond with a rational signal of my own and as I’ve mentioned, I quit participating in their scheme. I still had much to learn about pricing, but I did notice that underpriced services became scarce and overpriced services became abundant.

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

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

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

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

The first week we were open, we received a call from a patient who had a breast mass she’d like removed and she wanted to know how much we would charge her, as she had no insurance. This was the call we had all hoped for, the reason we had opened and yet, I had no idea how to answer her question. I placed her on hold and called our general surgeon and asked him how much he wanted for his fee. He had no idea. I told him to pick a fee or like a Harvard professor, I’d pick one for him. He said $500. I thought this was very reasonable so I hung up on him before he had a chance to reconsider. As an anesthesiologist, I basically bill for my time and I knew this surgery would take twenty or thirty minutes. The facility supplies were minimal. I was about to take her off hold when I realized she would want to know if she had cancer. I called a pathologist friend and asked him how much he wanted to examine the specimen. He had no idea. I pressed for an answer. $28 for the pathology. I informed the patient that our price was $1900. “For what,” she asked? “For everything,” I said. She said,“that’s funny. The hospital down the street from you wanted $19,000 for the facility fee alone.” I knew we were on the right track when after the case and the supply cost was tallied, we’d made a profit. Had the pathology fees that apply to the examination of breast masses not increased, our price would be the same now as it was in 1997, but alas it is now $2365. Only five other fees have increased since we began quoting them over the phone in 1997.

Word spread and many uninsured patients came to our facility, along with patients with high deductible health plans. Most of the division one athletes had their surgery at our facility and our reputation in the community grew more solid every day. Dr. Lantier and I were both trained in pediatric anesthesia and particularly enjoyed this part of our practice. Nothing better builds the practice of an anesthesiologist than the careful anesthetic treatment of someone’s child. The area hospitals hated us because patients could buy their surgeries at our facility for less than their insurance deductible at the hospitals. Paradoxically, no insurance companies would work with us. We would not understand any of this until much later when our posted prices clarified this for us. We were very busy and very successful, early on. Within six months, I was distributing sizeable profits to the partners, monthly, while usually charging 1/10th what the hospital were charging for the same service. We added to our “quote over the phone” price list every week, so patients could have an answer to their price questions immediately.

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

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

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

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

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

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

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

The first patients to arrive after we posted prices were Canadians. This was instructive, as these patients had so-called insurance coverage. There was no access, however, to the care that many of them required. The most common story then as now for the Canadians was a patient waiting two years to see a gynecologist for a hysterectomy to stop their bleeding, bleeding usually so severe that intermittent transfusions were required. For $8,000, which covers the facility, surgeon, anesthesia, pathology and an overnight stay at the surgery center, Canadians can end their nightmare. The wait there now for a knee replacement is 3 years. The first question a Canadian asks when they call us is how long they’ll have to wait. Our answer that there is no waiting time is met with disbelief. A Canadian friend of mine has told me the old joke that no Canadian is truly content unless standing in line. You should know that there are Harriet Tubman-like brokers who help Canadians cross the border, finding for them affordable medical solutions essentially unavailable in Canada. The Canadian system is working proof that bureaucratic rationing is a murderous disaster, whatever flaws market naysayers can conjure up about market allocation of resources. Millions of Canadians have discovered that the only single payer upon which they can truly rely is themselves. The federal government has seen fit to deny unvaccinated Canadians entry into the United States, or many more of the Canadian nightmares would have ended at our facility and others who provide services to the victims of the Canadian system.

Uninsured Americans responded to our website pricing shortly after the Canadians, many traveling from faraway places like Wisconsin and Alaska. While there are many examples of money saved uninsured individuals, one that sticks out is the patient from Georgia who required a urologic procedure, and who had received a quote of $40,000, just for the facility charge. A friend had told him about our facility and after he confirmed that our all-inclusive price was $4,000, he informed his urologist he was traveling to Oklahoma City. Having lost another patient to us the previously, the urologist contacted the hospital and told them something had to be done, as their price quotes were causing him to lose patients. The hospital matched our price and the patient stayed in Georgia. The patient later told me that we had saved him $36,000 and we hadn’t even performed his surgery. I like to think about what patients do with the money they didn’t unnecessarily spend on an overpriced surgery. Self-funded companies discovered our facility, and fast forwarding to today, about 300 employers from all fifty states now pay 100% of the employee’s bill and travel expense to undergo surgery at our facility.

I had decided to accept payments for our services into a company that served like a clearinghouse, one to which patients could make one payment and then this clearinghouse, which is called Atlas Billing Company, could pay the surgeon, anesthesia group and facility. That way the patient made just one simple payment, not several separate ones. Not long after the Canadians and uninsured found our facility, they began asking for hospital services we did not provide, like heart surgery, for instance. I had been contacted by a hospital administrator who wanted to get involved and when I told her there were patients looking for services provided at her facility she made one thing clear: she was happy to participate as long as I collected all the funds. She made it clear that there could be contract issues with the major insurance carriers without a cloaked payment method like Atlas provided. Atlas Billing Company now buys a tremendous volume of medical services from current and former price gougers who are changing their ways so not to lose out on this business. This clearinghouse concept, which I predict will be widely copied, is the bridge that will allow pricing to fall to market levels, as the corrupting influence of the major insurance carriers is mitigated.

The uninsured and a few Canadians had found us and the Atlas payment mechanism was in place. But business was slow after first launching the website in 2009. Why didn’t everyone want to buy cheaper and better? Why wouldn’t insurance companies want to buy from us? What was this business about uncompensated care? If uncompensated care was a revenue item how was this calculated? It turns out that hospitals need all the red ink they can find to justify the fiction of their not for profit status. If a hospital charges $100,000 and only collects $20,000, their books show that they lost $80,000. This fictitious loss performs two functions. First, it helps maintain their not for profit fiction, providing the justification needed to eliminate their tax burden. Second, this loss number forms the basis for a kickback the hospitals are paid by Uncle Sam to the extent they claim these losses. To be clear, hospitals receive federal payments based on the charged amounts they claim to not collect. This is the revenue of uncompensated care, also known as disproportionate share hospital payments. The more they charge and don’t collect, the more they make, basically. This is why there is a crane building on to every emergency room in the country. This also explains how hospitals can claim they are going broke on paper while purchasing television ads during the Super Bowl and buying out their competitors and physician practices.

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

While big hospitals and insurance companies and big pharma and many others deserve all the thumping they get, it is important to acknowledge that none of their theft is possible without the favors auctioned to them in Washington and that Uncle Sam always drives the getaway car. High prices and sporadic quality have been the result, not of the failure of the free market, but due to the absence of the free market. To quote Hans Hoppe, “markets deliver goods and governments deliver bads.” Nowhere is this more evident than in the medical industry. Everything people in this country hate about the medical industry are the “bads” that government has delivered. Some “bads” are those which under the banner of patient safety or consumer protection, regulate the smaller innovators out of business, usually in the form of requirements or conditions which only the most gigantic cronies can endure. The medical loss ratio, part of the Unaffordable Care Act is an example. While a requirement that no more than 30% of an insurance company’s revenue can be spent on administrative duties is a requirement with which the giant insurance companies could comply, the smaller companies were annihilated. It is no mistake that there are now just 4 or 5 medical insurance carriers.

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

You know now why I laugh when I’m asked “why isn’t this free market movement in your industry more widespread?” It’s astonishing that it exists, at all. Its growth is even more remarkable. If you have no insurance, think of yourself as self-funded. You should know that entire companies self-fund for the medical needs of their employees, paying their bills out of operational revenue. They serve as proxy buyers for their employees. They are responsible for 80% of medical bills not paid by government and are therefore large enough in size to make demands that even the dysfunctional cartel can’t ignore. The free market movement’s growth can be attributed largely to the increasing number of these self-funded buyers expecting market discipline from organizations like mine. Cost-sharing ministries are also large enough to effect the marketplace.

Uninsured patients have found visible pricing. A price war has begun. The cronies and their government pals are increasingly exposed. As the co-founder of the Free Market Medical Association, I am filled with optimism, watching the growth and acceptance of market discipline in the industry. Fox’s Lisa Kennedy Montgomery will keynote the annual conference of the Free Market Medical Association this year, following Steve Forbes last year and Ron Paul the year before, an indication of how vibrant and even mainstream this movement has become. As growth in the number of sticker-shocked buyers continues, entrepreneurs, aware that the industry is finally prepared to reward the more efficient, will work even harder to satisfy demand in this new and honest fashion. What is government’s role? To begin the repeal of all the favors they’ve granted and simply get out of the way. This will jump start the transformation to a more market-based environment, a transformation that started here in Oklahoma City and in spite of government efforts to prevent it.

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Free the People publishes opinion-based articles from contributing writers. The opinions and ideas expressed do not always reflect the opinions and ideas that Free the People endorses. We believe in free speech, and in providing a platform for open dialog. Feel free to leave a comment!

Dr. G. Keith Smith

Anesthesiologist Dr. G. Keith Smith serves as the medical director, CEO and managing partner of a “free market” outpatient surgery center in Oklahoma City, while also maintaining an active private practice.

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