0:33 Intro. [Recording date: September 12, 2019.] Russ Roberts: Today is September 12, 2019, and my guest is entrepreneur and anesthesiologist, Keith Smith, the co-founder of the Surgery Center of Oklahoma in Oklahoma City. Our topic today is that center, the potential for a true market in healthcare--not the one we have now, which is distorted in so many ways. Keith, welcome to EconTalk. Keith Smith: Thanks for having me.

00:58 Russ Roberts: I went to your website, of the Surgery Center of Oklahoma. I think some people if they come upon it, must think it is supposed to be humor, as opposed to a serious medical facility. I hope that doesn't alarm you. There is an outline of a human body. There are rollover points for your cursor of the body in all different places--shoulder, pelvis, head, neck, wrist, etc. When your cursor rolls over that, it gives you a choice of surgical procedures for those different parts of the body that are common and that you conduct at the center. And then the incredible thing is, there's a set of prices. You promise 100% transparency, so there are no surprises. It's inclusive of the facility charge, the anesthesiology; and, you only take cash. On your website, you say you are a 'free market loving, price-displaying, state-of-the-art, AAAHC [Accreditation Association for Ambulatory Health Care] accredited, doctor owned, multi-specialty surgical center, surgical facility in central Oklahoma.' Rather extraordinary. First let's hear how you got this idea. When did it start, and how's it going? Keith Smith: Well, thanks again for having me. I think the idea became pretty apparent just a short time after I'd started my anesthesia practice in a large big box hospital in the early 1990s. It was becoming increasingly clear that the patients were paying a lot of money. Many of them were surprised after the procedure to find out just exactly how much money they were going to have to pay in that the hospitals, they seemed to be pulling back on the funding that was available for clinical staff and the administrative staff was ballooning. The physical plan of the hospitals where I worked, too, was also ballooning. So, the people actually taking care of patients and doing the work, interacting with patients, were paid increasingly poorly. And this all started in the early 1990s, when the government became heavy-handed with its resource base relative value scales. Very distorting. Simultaneously, while the physicians and the nurses were being paid much less, the hospitals were raking in record profits. And so, an anesthesiologist buddy and I--we knew this was not right. It's not something we signed up for. We felt like, frankly, we were an accessory to a crime that we were aiding and abetting--really a financial homicide. Some of these patients were completely destroyed just for coming in and having what we knew was a very simple procedure that should not cost that much. In 1997, Steve Lantier and I, both anesthesiologists, walked away. And we walked away from very successful anesthesia practices and opened the Surgery Center of Oklahoma with the idea that we would always tell patients how much their procedure was going to cost, and that we would provide only the best care. That's really how we started. Within a week of opening, our dream came true. The phone rang and a patient said she needed a breast mass removed and wanted to know how much it was going to cost. I was so happy to get this phone call, but then I realized I did not know the answer to her question. I asked if she'd mind if I put her hold; and I called the surgeon and I asked him, 'How much is your fee?' He had no idea. So, I said, 'Will you suggest a fee or I'll have to answer for you.' By then, many doctors were already tiring of someone else telling them what they were worth and declaring their worth. So, this particular surgeon, he's a really nice guy, and he said, '$500.' And I thought that was cheap, but I said, "Okay." And, I knew this procedure, a breast biopsy, was going to take about 20 or 30 minutes. Anesthesiologists basically bill for our time, so I added in what I thought that amount of time mine was worth and what I knew the minimal operating room supplies required would cost. And then I was about to take her off hold, when I realized that-- Russ Roberts: Got to keep the lights on. Keith Smith: that she would want to know--she was going to want to know: Is this cancer? So, I called a pathologist friend and asked him, 'How much do you want to examine this specimen?' and, of course, he didn't know. He thought about it for a little bit, and he wanted $28. So, I added all this up and took her off hold. The whole thing took five minutes. I told her $1900 is our all-in price. She said 'That's interesting. The so-called not-for-profit hospital down the street wants $19,000 and that's just for the facility.' And, I tell that story so people know that how we come up with our prices. It happened the first week were opened. We knew we were onto something. After we crunched our numbers on our end, we realized we were profitable at that number. To this day, that's still our price. The prices on our website are the same prices we quoted over the phone in 1997 with a handful of exceptions, all of which are lower than the prices that we quoted in 1997. So, we really did want to interact directly with patients. We wanted not just to be their medical, but their financial advocate and we thought if we owned and controlled our own facility that we certainly had that opportunity and now we take that responsibility very seriously.

7:12 Russ Roberts: I want to mention, it's important to remember that the prices that those people you talked to in setting that original price--they're not real prices in the sense that you mentioned some complicated--there's an acronym for it, I'm sure, that the government did in the early 1990s, some pricing structure. There are always new ones. Those are prices that are often made up, by definition, by the government. So, what a surgeon earns or what an anesthesiologist charges or what a facility charges, they're all kind of complicated by the fact that the price universe out there is unmoored from the usual market considerations. There are some feedback loops. The insurance companies have some incentive--not enough in my view--to keep prices down in a way that keeps customers happy because there's another set of intermediaries, the employer, usually. It's a terrible, terrible system right now. But you've cut through all those Gordian knots as best you could. You've set a set of prices given that existing universe out there of fake prices--and they're fake in many ways that we'll be talking about. But, you're serious? You haven't raised them in 22 years? Keith Smith: Yeah. Yeah, so much for the spiraling cost of healthcare. And, I'd like to point out that some of the prices on our website may actually look higher than when we first started. And the reason for that is that the actual bundle of services that we are providing that initially maybe were not inside of the bundle of care, are. For instance, a patient might need physical therapy after one of the procedures on our website; and when we first posted that, that wasn't included, so the patient had that expense when they left. Now, we actually bill and collect for that, for a price less than what the patient have originally paid. So, it's a little confusing, but some of prices may actually look higher, but it's actually because there are parts of the care that are now included in the bundle that originally were not. Russ Roberts: But the part that's accruing to you--to the facility--has it changed? Keith Smith: That is correct. Our fees have not changed at all. They were just these fees over which we had no control originally, over which we now have control. We include that in our bundled, all-in, cash-out-the-door price. Russ Roberts: And, some of those prices are actually literally lower than they were 22 years ago? Keith Smith: That's correct. Not only the prices that we've listed online are lower, but what the patient's paid for the care that they received outside of the Surgery Center after they were discharged is actually lower, primarily because there was such competition from vendors to get in on this and secure our business. What's happened is, as time has gone by and we've become busier, our standing with the equipment and supply representatives that we work with has grown. And, when they decide to extend a better price to us for whatever it is that we buy to perform these surgeries, we extend that courtesy to the buyer. And that allows us to cut our prices. So, we extend that courtesy to the buyer, and that makes us more competitive in this market where there are really an astonishing number of people who really are price sensitive, who are shopping, who do care what it costs. I guess what's truly shocking is how many people complain about how much it costs, but they really don't care: it's not their money. Russ Roberts: It's intellectually offensive to them, but it doesn't hurt them. Keith Smith: Yes. Exactly. Russ Roberts: You know what-- Keith Smith: Go ahead. Russ Roberts: No, you go ahead. Keith Smith: Well, we did this for years, just quoting prices over the phone; and the phone would ring again and someone would say, 'Well, I have a breast mass and I need a breast biopsy.' My staff would call and say, 'Well, how much do we want?' I would laugh and say, 'Aren't you writing these down?' I mean, we're going to be doing this-- Russ Roberts: Or other ones-- Keith Smith: So, there was a list that was created over time; and we'd been open about 10 years--and it was 10 years ago, about right now--when I decided to launch a website and put all the prices online. When we did that 10 years ago and posted all these prices for everyone to see, the first patients that arrived were Canadians. We all thought that was very interesting and instructive. They had coverage; they just didn't have access to the care many of them needed. They are part of a group of buyers and patients in this country and outside of this country that are price sensitive and actually do care that there's a $10- or $15- or $20,000 difference between a price at our facility and wherever it is that they live if it's available. Russ Roberts: What proportion of your patients come from--say, from Oklahoma? Keith Smith: About 40% of our patients are from Oklahoma. One year ago, we crossed the 50% threshold and now, week to week, consistently, 60% or more of the patients we care for are not from and don't live in the State of Oklahoma. Russ Roberts: How many of them come from outside the United States, roughly? Keith Smith: I would say five percent. Five percent or less on any given month come from outside. We have our first patient from Pakistan coming next month, but it's not uncommon at all to see patients from Africa, Europe, Canada, several other foreign countries. Russ Roberts: Those early patients that came from Canada, they were coming, I assume, because they were in a hurry and you could do that surgery quickly. Keith Smith: Well, you can define 'in a hurry.' The most common Canadian story we still see is a woman that has painful or dysfunctional uterine bleeding and needs a hysterectomy. And they're in a three year waiting line to see a gynecologist. And they're tired of receiving transfusions or just feeling downright awful. So, for $8,000--that covers surgery and anesthesia, facility, pathology and their overnight stay--they're more than happy to pay that, many of them. So, I don't know that three years is 'in a hurry.' Russ Roberts: It's not a hurry. Keith Smith: I would say three years is unavailable. Russ Roberts: Yeah, that's true. Fair enough.

14:26 Russ Roberts: Let's talk about your surgeons. You haven't raised prices in 20 years. What do they get? Do they get the same they used to get? Does that surgeon get $500 for that biopsy or is it changed? Keith Smith: No, it's changed. The surgeons make more, net, on a surgery they perform at our place than they do anywhere else and regardless who is paying them. So, what we did is we basically took the profit component that a facility would receive and padded the surgeon's fee with a large part of what that profit margin would be. So that the Surgery Center of Oklahoma runs almost as a not-for-profit, but with just a slight marginal profit. So, we've disintermediated the system, basically, and taken the institutional profitability and minimized that to a large extent, but giving part of that to the surgeon who is actually performing the procedure. What that means is, when a patient contacts Surgery Center of Oklahoma and says, 'I need a hernia repair' or 'I need my cruciate ligament reconstruction' or whatever it is they need, when I call the surgeon and say, 'Hey, you know, this patient's looking for you, why don't you give them a call?' that patient goes to the head of the class. That is their favorite patient. That's the business they want--for a couple reasons. One is: they're paid handsomely. The other reason, though, and this is actually more important: these are the most grateful, informed people we've ever come across. These people that are paying their own bills-- Russ Roberts: Yeah. Novel. Keith Smith: shockingly--they've done their homework. And they realize that they're traveling to a facility that's honest, and we're going to charge them $3,000 for their hernia repair; and the next best price they had might've been $18,000. So, they're grateful when they arrive. The surgeons are paid very well. They're very well informed. They've done their homework. Everybody has smiles on their faces. It's a wonderful environment. Russ Roberts: Are those surgeons on staff or do they freelance at your facility? Keith Smith: They are on our medical staff, but none of them are employed. They operate at multiple facilities in this area. Some-- Russ Roberts: Well, that's-- Keith Smith: at even outside-- Russ Roberts: 'But, Keith--that's horrible. They're, they're like, they're part of the gig economy. They don't have any--' Well, they have other jobs, so I shouldn't be making fun of this argument. But the point is, is that they're not on--they don't draw a salary from you. Keith Smith: No. Russ Roberts: They're paid in piecework, the equivalent of, like, a commission. Keith Smith: Well, they're paid fee-for-service. I mean, if they perform a surgery, they get paid for that. End of story. Russ Roberts: Amazing. Keith Smith: One thing I'll say is--it doesn't happen very often because we do our homework before people travel here, but it's very--I'll say it's not rare for a patient to arrive with a diagnosis that is surgical and a diagnosis that's been attached to this patient as surgical by another surgeon or a physician. And, one of our physicians sees them and says, 'Well, actually you don't need your rotator cuff repaired. It's not even torn. You just have a bad case of bursitis.' They get an injection and pay $200 and go home. And, this has come about because the surgeons that work at our place--they're honest. And they know--we don't have a single insurance contract. So, all of the business that we receive comes through the door because people choose us. And they want to be there. They're not told by Blue Cross, United, Cigna, Aetna that 'This is in the network. This is where you must go.' Patients come to us because they want to be there; and we know our reputation's everything. We live and die by our reputation. So, there's just an accountability that goes along with that, that many times manifests by a surgeon just looking at somebody in the eye and honestly saying, 'You know, you actually don't need surgery.' That's not a terribly uncommon occurrence. Russ Roberts: Just to be clear: You take no insurance; you take no Medicare; you take no Medicaid. And, I actually--I find this--a part of me really likes this. You don't take credit cards, really. You take cashiers' checks and cash. That's it. Keith Smith: Well, actually we do take credit cards. I don't know if there's something on our website that says otherwise. We take Bitcoin. We had a patient-- Russ Roberts: Yeah--right now--go ahead. Keith Smith: We had a patient pay--a guy who lived off the grid, who wanted to pay in gold coins and Bitcoin. And we've had a second patient pay in Bitcoin. Actually, he paid in a different cryptocurrency. Russ Roberts: I think the website discourages credit cards. It says 'cashier's checks and cash are preferred,' so you might want to just-- Keith Smith: They're preferred. Russ Roberts: You might want to check that. But my point is you take zero insurance, so it's not like you have a small staff to deal with that red tape. You have no staff to deal with that red tape. Keith Smith: That's correct. Of course, you have to keep in mind: The insurance companies, they started this. Back in the early days when we opened, I didn't know. I actually thought it would be a good idea to have insurance contracts. But none of the insurance companies wanted to deal with us. And it took me a while to figure out: You know, they don't want to deal with us. And, over the course of the years, I think we've had two insurance contracts. But it's primarily because in our formative years the insurance companies did not want anything to do with us. So, we have decided--basically, they did us a favor and we're returning that favor now--we really don't want anything to do with them. I think if an insurance carrier contacted me and wanted to work with us at this point it would be very difficult for me to overcome my skepticism.

21:10 Russ Roberts: Well, we're going to talk in a minute about how that affects pricing in that strange, surreal Kafkaesque world of prices in a typical hospital. I want to go back to that bursitis, rotator cuff story. So--because I think it's a really interesting example of the challenges of a market-based system. So, I tore my rotator cuff about, I don't know, about three years ago. I went to a physiatrist. He's a good friend of mine. He would never say, 'Oh, I think you need surgery.' He said, 'It's a small tear.' Now, of course, he's not doing the surgery anyway, but he might refer me to a buddy of his if I weren't his buddy and say, 'Hey, I got another one for you.' They might have a formal kickback scheme or just might be a relationship that they've established over the years. He happens to be my friend. And he's not going to tell me I need surgery when I don't. He said, 'I'm going to give you a cortisone shot, steroid shot, and it'll probably be fixed; and just give it some time.' Okay? That's what happened. Now, if I'd gone to an orthopedic surgeon who is a crook or greedy, extra greedy, unnaturally greedy or hungry or needed to pay for his boat, he might've said, to himself, 'It's a borderline case, I'll tell him he needs surgery.' And he could show me on the MRI [Magnetic Resonance Imaging] where the tear was. I wouldn't know whether it was a small tear. I wouldn't know whether it's likely to repair itself over six months, three months, three years. And at the same time, his reputation matters a little bit in our messed up world of current healthcare. But not so much as it does in, say, lots of worlds where consumers are buying and assessing quality in a different way. So: Why would your guy be different? So, you say, 'Our brand name matters.' I come in to your place. I've got bursitis, but I think it's a rotator cuff because I've been misdiagnosed or lied to, and you say, 'Yeah, it's a rotator cuff.' And you make your fee and everybody goes home happy. I think I've been repaired. Why did your surgeon tell the truth? What was--what's different? And, a related question: How many did you fire? How many did you stop using? And how would you know, in this case, that it was the wrong decision, if they went and did that surgery that shouldn't have been done? Keith Smith: Well, the answer to Part One is that most physicians--and most surgeons--are honest. I mean, the vast majority of surgeons that don't work with me would do exactly what I said. There are some that are not honest, but I would argue that is a very small number. I would say this: That, over the years there have been physicians that I worked with who really were honest and really were good people and everything being dynamic as it is, that things changed. For instance, in the operating room, we would notice during a knee arthroscopy that maybe there wasn't anything wrong. And, inside the knee, you can see--even an anesthesiologist, the staff--I mean, we're kind of looking at each other, where there's nothing wrong inside of this person's knee, or there's nothing wrong inside of this person's shoulder. Or a surgeon's--the number of cases they try to schedule increases dramatically. And so those are red flags. What we do at the Surgery Center of Oklahoma is kick those people out. Because, their affiliation with our facility--even their affiliation with us is damaging to our reputation. So, a person like that, they just don't stay; and we just tell them we don't think this is working out and you can't schedule cases here any more. Russ Roberts: But who's going to know? In other words-- Keith Smith: Everyone knows. Actually everyone knows. The staff in the room. The scrub techs, the nurse, the anesthesia staff. And we've done this long enough. Scrub techs talk amongst themselves, and they go home and say, 'I'm working with this doctor who is doing all this unnecessary stuff.' I mean, so, you don't have to be a physician to know. But, once the word of someone's perhaps unethical behavior begins to make the rounds, a facility's reputation really cannot survive that. And, we even sniff that. And it's addressed. We know that, without any insurance contracts, we don't have some firehose kind of funnel kind of patient that is coming our way, whether we're any good or not or ethical or not. We have to be accountable to the preferences of the buyers. And our reputation is a huge, huge part of that. Russ Roberts: But at the other hospitals in town--and you're not alone; you're not the only place a person in Oklahoma City, forget Oklahoma, forget the United States, but even in Oklahoma City, you're not the hospital. Do they have a problem with that, you think? Do those other hospitals, are they more likely to tolerate someone who's more aggressive like that, or unethical? Keith Smith: I think so. They're not--they're not--you know, as honest as they're inclined to be, they're also additionally not matched up against the power and the discipline of the market. So, it is more likely to occur. Also, the way surgeons are paid, the way physicians are paid in big hospital systems where they're employed is very strange. They're paid based on their relative value unit production. And so-- Russ Roberts: One of those fake prices I was talking about earlier. Keith Smith: Yeah. Yeah. So, a surgeon who injects a steroid for bursitis, his RVU [Relative Value Units] production for that activity is minimal. And so--and likewise, a primary doctor who orders multiple, multiple tests, their RVU production goes way up. They can actually see fewer patients and make more money. So, I think the constraints of the market to the extent that they're absent in the other arrangements--the constraints frankly that we've embraced--I think there is a higher likelihood that you'll see over-utilization issues.

28:03 Russ Roberts: Let's talk a little bit about the pricing in those other institutions, because I've been thinking about it. Most people don't know much about it until they find themselves in that world or they have a friend or family member who has surgery. A friend of mine recently had back surgery at an academic institution, a nonprofit regular hospital, a very good one with a good reputation. The surgery--not the anesthesiology, for a particular type of back surgery--the surgery was $101,000. And it was actually-- I have to get this in for my listeners, Keith. I apologize. The surgery was $101,673.77. Seriously. Now, my listeners know that macroeconomists have a sense of humor. We know they do because they use decimal points. But it turns out hospital finance offices do too. So, according to my friend, the billed amount was over $100,000 and it had those decimal points. We're both at this; I'll just call it $100,000. That is not--repeat--not--what the hospital collected from the insurance company. But that list price, that weird, enormous list price of $100,000--a little over 100,000--was on the form. The surgery facility, and I think the surgeon, but not the anesthesiologist, I understand--they didn't get $100,000. They got $13,000 from the insurer. The list price was $100, the facility actually collected $13. You charge for that same surgery, I looked it up, a little under $10. So, they're 30% more than you for what they collect and they're 10 times what you charge on the list price. My first question is why did they write down that goofy number of $100,000 on the bill, even though the insurance company only pays $13? What is that about? Keith Smith: Well, I'll back up in time. I was at a meeting where there was some hospital people and they were very angry with me because we put our prices online and-- Russ Roberts: I bet you're really popular in Oklahoma. Among the patients. Maybe not so much among the--among the hospital administrators. I would imagine that. Keith Smith: Well, I'm actually becoming more popular with the hospitals and I'll talk to you about that if you want to. But, this angry hospital administrator lost his cool. And normally the hospital administrators play things very close to their vest. But he asked me what percentage of my revenue at the Surgery Center of Oklahoma was uncompensated care. Russ Roberts: Right. That's for poor people who can't afford it. Keith Smith: Yes. And I mean, that question haunted me, because that is a very bright, very articulate person. And he does not misspeak. I thought very carefully about what he actually said. What percentage of my revenue is uncompensated care? Well-- Russ Roberts: It'd be zero-- Keith Smith: Well, when I think of uncompensated care, I think of care that I've delivered for which I receive no compensation. Russ Roberts: That's pretty clear. Keith Smith: But he asked me how much--what percentage of my revenue? Russ Roberts: Yeah. Keith Smith: So, I did some checking and indeed hospitals are paid to the extent that they claim that they were not paid. And this is a kickback-- Russ Roberts: Say that again? Say that again? Keith Smith: You heard me right. Russ Roberts: I couldn't understand. I didn't hear you right. Say it again. Keith Smith: Hospitals are paid to the extent that they claim that they were not paid. Russ Roberts: So, explain. Keith Smith: So, a $100,000 bill, the hospital collects $13,000. They claim that they lost $87,000. This $87,000 loss maintains the fiction of their not-for-profit status, but it also provides the basis for a kickback the federal government sends to this hospital in the form of what's called Disproportionate Share Hospital payments. So, when you hear uncompensated care, that is the $87,000 that your friend saw written off on the difference between hospital insurance and what insurance paid. So, the fact is, the hospital made money on that case. But they claimed that they lost $87,000. And then that fictional loss provides the basis for a kickback from the federal government, called--it's uncompensated care or DSH, Disproportionate Share Hospital payments. So, as I thought about this, I began to realize that there's a lot of people in on this scam. Including the insurance companies. I mean, why would an insurance company agree to play along with this hospital? Well, the insurance company actually wants an inflated charge because then, for employers they work with, they can show that the savings that dealing with that particular insurance company generates is very, very large. And so-- Russ Roberts: Because they negotiate at such a great price. It was $100, but they only paid--they got you that special price of $13. Keith Smith: That's right. Which most employers are unaware has been pre-negotiated. Now, what the insurers actually do is ask the hospital administrators, 'Can you do a brother a favor and actually charge $200,000 for that, so that our percentage savings actually looks larger?' Then, there's another part of this called Claims Repricing. What that means is: To the extent that an insurance company provides these huge percentage discounts, many times an employer is contractually obligated to pay a commission on the discount achieved. So, this is called Claims Repricing. And so, imagine an insurance company that manages an employer's health plan. And they'll say, 'We have this $100,000 bill. We reduced it to $13,000. We saved you $87,000; and per the terms of our arrangement, you owe us 20% of that savings.' And so, it doesn't take a mathematician to figure out that the insurance company would actually rather have received a $200,000 bill. And so, that's how that scam works. I call it the giant hospital bill scam-- Russ Roberts: But the employer knows that. The employer is aware of that. The employer is aware of that. The employer understands that the 20% thing is predicated on a fake number. They should know it, don't they? Keith Smith: They're surprisingly unaware. All they seem to embrace is this idea that this insurance company saved us all this money. 'We get better discounts.' I have a friend in Montana who's an ERISA [Employee Retirement Income Security Act] lawyer. Her name's Cori Cook and she said, 'What if she walked up to you and said I'll sell you my house for 50% off?' And the normal, rational person would ask the obvious question-- Russ Roberts: What's the base? Keith Smith: Yeah. 50% off of what? Russ Roberts: Yeah. Keith Smith: But that's how this scam works. Because not enough people ask that question, '50% off of what?'

35:55 Russ Roberts: I'm a little bit skeptical of the pure scaminess of that, but there's a lot of scaminess in this business. And one of the problems, which we unfortunately don't have a lot of time to talk about, but one of the problems is that although you do have competitors in the city of Oklahoma City, other hospitals who are not charging cash, but rather taking insurance for many of their folks, they don't have a lot of competition. Because if I want to open a hospital in Oklahoma City, in some states, I don't know if it's in Oklahoma, I have to get permission from the existing hospitals that I would be needed. And strangely enough, existing hospitals often think you're not. Keith Smith: Yeah. That's exactly right. And I-- Russ Roberts: Certificate of Need, I think it's called. Keith Smith: Yeah. That's right. I'd be remiss if I didn't point out at the end of our last discussion that that is--hopefully, the obvious reason the insurance companies do not want to work with me, is, when I say, 'Here's how much it is' their opportunity to reprice that claim and scam off that discount is foregone.

37:10 Russ Roberts: I want to go back to uncompensated care. And let's call it something else: call it poor people. There are people who can't afford or it would be very hard for them to afford a $10,000 surgery. It's less than 13, it's less than 100, but it's still 10 or 9,900, your case for that surgery in your facility. You don't--let me say it differently. At a hospital with an Emergency Room, if you show up in distress and you are taken into surgery and it turns out you are unemployed, homeless, no assets, no insurance, you're not over 65, you're not part of the Medicaid system--the hospital, I think, is legally obligated to do that surgery on you. And they eat that bill. They may just send a bill out to that person. If the person doesn't have an address, it doesn't matter. But, there are a lot of people they send bills to; they just don't pay them. And they get a bad credit rating. But they'll try to collect that money. I know that from experience, people know in the emergency room business and the hospital business that there are a lot of bills that never get paid for those folks. And you could argue--I think what your angry buddy at that meeting was suggesting--is that you don't have to deal with that. Because you only take cash and if a poor person shows up, you send them away: They can't pay. Keith Smith: Yeah; and before we get to feeling too sorry for the hospitals, all of the ones I know of claiming to go broke have a crane in front of them building onto their Emergency Room. Understand, too, that this situation is not a situation that was inflicted on the hospitals. There was an arrangement, and the arrangement was a quid pro quo. It was a mutually beneficial exchange where the government had this EMTALA [Emergency Medical Treatment and Labor Act] idea--I believe it was under Reagan--that said that the hospitals have to take care of someone who comes in the Emergency Room, regardless of ability to pay. They also can't just send them down the road to another facility that's a competitor. But the hospitals' part of this was they didn't have to pay tax. So, ya'll--you think about your life without tax. So, the hospitals basically doubled their net profit with this move in the institutionalization of this 'you have to take care of people regardless of their ability to pay.' Russ Roberts: Are you serious? Keith, there's too many moments in this episode so far, our conversation, where I'm thinking are you serious? Keith Smith: Yes. Russ Roberts: You're saying that before that requirement of treating Emergency Room patients regardless of ability to pay, that hospitals had to pay income tax, taxes on their revenue, on their profit? Keith Smith: Yes. That was part of the arrangement. So, if you do this, then you don't pay tax. I think before people feel like the hospitals have been just terribly victimized, just imagine your own life without property tax, without paying any income tax. All of a sudden, your balance sheet looks a whole lot healthier. Russ Roberts: But aren't they nonprofits, a lot of them? Don't they pay no taxes anyway, before? Keith Smith: Well, some of them pay property taxes and paid all kinds of other taxes. Russ Roberts: You mean they don't pay any taxes now? Keith Smith: No. No, they don't pay any tax at all. So, I don't know: again, the hospitals that are complaining about this, they are buying out physician practices, they're buying out competitors. They seem to have a whole lot of money. They're not suffering. Now, what they have done is used the situation you described--the legitimate non-payer--they've used that as a propaganda tool, I would argue, to develop a justification for cost shifting where they charge us all a whole lot more to make up for all the money that they're losing. But they really need a lot of this red ink to maintain the fiction of their not-for-profit status.

41:37 Russ Roberts: We'll talk at the end, I hope, about whether your facility is a model for a wider array of healthcare provision, in particular worrying about people who are poor and what they would do in a more market-oriented world. We'll come back to that, I hope. I want to come back to my friend's surgery. So, again, for listeners, I want to get the numbers in your head. The hospital billed $100. These are all going to be in thousands, roughly. They billed $100. They were reimbursed $13. And you charge $10. Now the $10 is actually--it's not an apples to apples with the $13 because your $10 includes anesthesiology; their $13 doesn't. There are probably some other things that are not included. That's for my friend, not me, just making it up. Bottom line is: Depending on what you use as your base, depending on how you phrase it, the main normal hospital charges 30% more than you do, in terms of what they actually collect; or you charge about--it's around $13, yeah, roughly--about 20% less. You're cheaper. Now, there could be a lot of reasons for that. It could be your surgeons aren't as good, your results aren't as good. It could be your land is cheap. You're in Oklahoma City where--relatively low land costs; this was in a higher metropolitan area with higher rents. But my guess is that's not the main thing. And you claim that you actually pay your surgeons a little bit more. Now, one of the disadvantages the $13 hospital has is they've got more people processing Aetna, Cigna, Blue Cross Blue Shield, Medicaid, Medicare paperwork that they got to cover. But I think it's more than that. I have a feeling there's stuff that's done all along the way that, in the case of the $13, there's nobody to say, 'Do I really need that?' It just becomes standard operating procedure. But in your facility it's like, 'I'm not sure we need this, maybe we shouldn't do it.' So, tell me if I'm right. Tell me why you think it's 30% more and maybe in another place it's actually 100% more for a lot of procedures. And, how much of that's due to saving on insurance compliance versus all the other bells and whistles that go with that surgery procedure? Some of which are needed, of course, and you don't want to cut corners, but some of which maybe aren't. Keith Smith: Yeah. And you're right. The waste at Surgery Center of Oklahoma is punished right off of our net profit. Waste in a big hospital system is actually encouraged, many times because hospitals are paid based on what they use. Many times surgery centers are paid for what we do. That is changing a little bit, but not very much. So, to the extent that the hospital uses a lot of supplies, that typically raises and increases the amount of revenue that they receive. So, the waste at a hospital is not necessarily something I would say that's discouraged. And, just the opposite is the case for the way most surgery centers are reimbursed. That's not universally true. I don't want to be too broad stroke, but it is still very different, the way hospitals versus surgery centers are paid by the various payers. But, you're exactly right. There are a lot of things that we believe are wasteful. We have not found that there's really a good reason or indication for us to use electronic medical records. Those are very expensive systems. And so, we still have paper charts. I think all the excitement about the international-operability of these systems--patients can have their records will them all the time--and almost all of these dreams of what those systems can bring have gone up in smoke. I think most physicians honestly would agree that these systems actually command more of their time and make them less efficient. Russ Roberts: I've not met-- Keith Smith: It also makes patients' records more easily stolen. Things like electronic medical records--we don't have an electronic medical records system at Surgery Center of Oklahoma. If the patient wants the records, then I put them through a scanner and put it on a thumb drive and hand it to them on their way out the door; and that costs very little. There are a lot of staff at a hospital that are necessary employees that can do nothing but fight for payments with the government and these quasi-government insurance companies. Yeah: we don't see how any of that translates to better patient care, so we just don't do any of that. Russ Roberts: I have a lot of friends who are doctors. I have not met one who thinks that the electronic medical records are a good idea. They hate them. They hate them. Actually, it's deeply demoralizing to them because it's put a barrier between--it's like they're checking their phone all the time while their patient's telling their symptoms and their story because they're taking notes on this electronic pad. We've had a lot of guests talking about the placebo effect and the role of the human touch. The electronic medical records, I think has hurt that; it's been terrible for it. I've not met a doctor who thinks it was a great innovation or it's more efficient or anything like that. They all think it stinks. They could be wrong, of course, but they don't like it.

47:59 Russ Roberts: Let's go back to this question of the quality of the care. Let's say I need some surgery or I think I do, and either my doctor has got a long waiting list right now or Blue Shield hasn't approved the surgery yet. Or, they've disapproved it--and I'm stuck; I need to pay cash. And, I hear about you. By the way, if I go to a hospital and I've had this experience and I say, 'Well, what's it cost for,' you know, 'I don't have insurance' or 'I can't wait for the approval,' or whatever it is. They will not quote a price, often. They just say, 'Oh, we can't. We can't do that. We don't know how.' They claim it's impossible, which I find, of course, offensive, for a lot of reasons. One of them, of course, is that this is the only part of economy--the only part of my day-to-day life--that's like this. It's like, 'You're going to take it, like it, or not like it, doesn't matter: you're stuck with it. You can't do anything about it.' But you're different. Surgery Center of Oklahoma says, 'Our doors are open. We can get you in.' I assume you have a relatively short wait list. If not, you can grab another doctor because you don't have to expand your staff. You have to find one you like. But then I'd say 'Well, you know, I'm here in Washington, D.C. area; I know a lot of fabulous surgeons, personally. I know a few. Personally. And if they are not in the area that I need surgery in, they know a buddy who they would trust and I'd rely on them. But they don't know you. Why would I ever let you open my body, cut into me, slice me up? How would I have any idea whether you're any good? Keith Smith: I've actually asked patients that have traveled to our facility. The first question I ask is: Did you shop around? What was your next best price? Then I ask them what was the tipping point--because the first thing that happens when a patient expresses interest in coming to our facility is I connect them with one of our surgeons. By the way, there's no one at our facility that I would not let operate on me or my family. That's one of our rules. And I say: 'Here's a guy from Minnesota or Wisconsin or Alaska--we see a lot of Alaskans--and he's been told that he needs this procedure. You mind giving him a call?' So, it's during that phone conversation, I think, that the patient realizes that, number one, 'My gosh. This is the surgeon that called me'-- Russ Roberts: That's different. Keith Smith: 'Wow, I'm actually talking to the guy and he sounds very bright. He's articulate, he's honest, he's obviously done this before. He's affiliated with this facility that has put all their infection rates online and is not afraid of the discipline the market will hand out.' But ultimately the answer I almost always get is: patients connect the dots. They realize that if we're honest about the price, then we're probably good at what we do. The other thing that is apparent to many patients is that, if something doesn't go well, we don't make more money. And that distinguishes us from a hospital. That is a tacit understanding that there's an accountability, once again, that we've really embraced. And so, all of those things come together; and the patients understand that. We've had some patients that actually went so far as to express the following insight and that is: that in many markets, you get what you pay for, but because healthcare is so dysfunctional and it's not a vibrant market-- Russ Roberts: It's a distorted market-- Keith Smith: that the opposite. Yeah, the opposite is actually the case. Where prices are high, there is an absence of competition. Where prices are lower, that means somebody is mixing it up and they have to compete not just on price, but on quality. If anything, the quality light is shining brighter on our facility because our prices are low. Because that's a skepticism generator. And-- Russ Roberts: But, Keith, I come in-- Keith Smith: That's the answer. Russ Roberts: But I come into your facility: I need the rotator cuff repaired, or I need hernia repair, whatever it is, and it doesn't go well. It happens; that's part of life. Not every surgery or hernia, is my understanding, is the metric for a straightforward surgical procedure. But most of these things have gray aspects to them. So, for starters, I don't always know if it went well after I wake up; and it may not have gone well and I may know that because I was supposed to have--be pain free in my knee or whatever or shoulder--and now I'm not. How often do you have to deal with that? You say you don't make money if it doesn't work, but you've already collected the fee, I assume. Keith Smith: Yeah. We just don't make more money if something goes wrong. So, it's very individualized. There is no guarantee on our website for a reason. And that's because we feel responsible for something not going wrong to the extent that we are responsible for something going wrong. And what I mean by that is if we perform a hernia repair on a patient and they have their instructions for what to do and not to do and then they go immediately back to work and are doing heavy lifting and they destroy their repair, that is a situation where we probably would ask the patient to at least pay for the supply costs. The surgeon, he may waive his fee. I may waive my anesthesia fee. That's very individualized. We had a patient from Minnesota that had a ruptured disk in his back, and he came to the Surgery Center and paid the $9,900 she[?] referenced online. Went back to Minnesota, happy. All of his lower extremity sciatica pain was gone. His cat stepped out in front of him and he slipped and fell and ruptured a disk at another level. His family got him back to the Surgery Center of Oklahoma for-- Russ Roberts: It wasn't easy. Keith Smith: an operation on this other level. The situation was just so tragic and sad and awful that the surgeon waived his fee and I waived the anesthesia fee and the Surgery Center just charged him for the cost of the supplies. So, for $1,500, he basically got his other level fixed. Russ Roberts: That's like when you drop your ice cream cone walking out of the ice cream shop and they say, 'Oh, I'll give him another one.' Keith Smith: Yes. Yeah. There are two economic models, I believe, in this industry. One is how to maximize revenue? What can I get away with? And, unfortunately, that's the prevalent--the prevailing model. I blame the federal government for the creation, through various incentives, for that model. The other model is: how do I render maximal value? And, fortunately, in the United States, that movement is growing. And so, that's our mindset with all patients, including those after surgery who have some mishap or some instance. Our focus is such that every step of the way, even if something goes wrong, the exchange remains mutually beneficial.

56:28 Russ Roberts: Well, that sounds nice. I think a lot of people think--I was in a Twitter war earlier today along these lines--'Yeah, but that's all business is.' That first proposition. 'It's just all about getting more revenue, getting more money. It's all about greed.' And, you're saying that in the nonprofit and for-profit hospital world, they don't have the incentives to do a good job. You do. But, I'm sitting here; I'm a skeptic and I love, let's say, a different kind of medical system. I don't like what you're doing. And I'm thinking, 'Oh, it's all marketing. You don't really believe that. Okay, one time, maybe--I don't even know if it's a true story--you gave a guy a cheap price on his repair of a second ruptured disk.' Why would I believe any of this? This is all just romance. Keith Smith: Well, I mean, we've been doing this for a long time and I think our record on supporting on free markets, the discipline that comes along with them, is established. I think that there are more Facebook reviews of patient experiences at our Surgery Center that would back up my claims, than someone wants to take time to read. So, we really do believe this and we practice it, and I think if we were dishonest in some way or trying to [?maisel?] people, you know, and deceive them, one of the things we absolutely would never have done I think is put our prices on a website and make them all-inclusive. So, again: the patients who come to our facility have connected those dots. I think they equate price honesty with quality and people who know what they're doing. Russ Roberts: Let me ask about one more example of a, say, a bad surprise. You go in and do that back surgery, and there's a small, but non-zero chance of spinal fluid leakage. And, let's say it happens. It's not a failure on the part of the surgeon. It's just a part of the practice of surgery that things that are unexpected--or an infection, which also happens in your facility, a small percentage of the time relative to the national average, but, you know, I don't know how small it is relative to "similar facilities." I have no idea. I can't evaluate that--right?--as a prospective patient. What happens in that situation though, where something doesn't come out with the happy result that one hoped for? Or worse, a tragedy? There's paralysis, there's death. These things happen in surgery, sometimes to the fault of an inept physician, but sometimes just bad luck. How do you cope with that? Keith Smith: Well, I mean, financially how does the patient cope with that, and how do we cope with that? Again, it's very individualized. Again, to the extent that we believe we are responsible--and this is not something that is argued about: it's a conversation that we have with the patient--to the extent that we feel like we have some role in a bad outcome, then we bear that cost. So, we did a bunion surgery two years ago on a patient that was very overweight and was a really bad diabetic and a heavy smoker. And so, we knew at the outset that she was at very high risk for infection. And the infection rates you see on our website include people with those type of co-morbidities. So, her employer has a self-funded health plan; so they pay 100% of all of their employees' bills if they come to my facility. We have 300 contracts like that with employers all over the United States, in fact in all 50 states, that will fly their employees to Oklahoma City to have their surgery. And if the employee agrees to that, the employer will pay the entire bill. In a conversation with the HR--Human Resource--people at this employer, I told them: I said, 'Just on the front end, just so you know, I mean, this patient is at very high risk of infection. And we're going to go ahead and do this and do everything we know to do but, you know, this one is kind of a head scratcher.' So, after surgery, the patient did--they developed a wound infection. And I called the employer, and, 'So well, here's what I propose. The surgeon and anesthesia, we're going to waive our fees and I would like for you just to pay as we go along the cost of the supplies here at the Surgery Center and for taking care of this issue.' The employer said, 'You need to have more infections.' And, 'You need to have more complications.' I said, 'What? I don't understand.' He said, 'If your goal is to deliver value,' he said, 'you could not have demonstrated it more strongly than you just did.' So, again, when something happens, the response to that on our end is very individual. It's different for different patients. If someone has something go wrong and they're really in dire straits, then we exercise our right to be charitable. And we do that. So, that--the answer is it's not a broad-stroke answer and that's why there's nothing in writing about it on our website. But we are physicians and we own and control our facility. And one of the reasons we do is so that we can be financial advocates for patients who are there. And that's what guides us. Russ Roberts: I'm talking with Keith Smith of the Surgery Center of Oklahoma. I want to thank Plantronics for providing his headset, the Blackwire 5220.

1:02:53 Russ Roberts: I want to continue by asking about one more complication. You open up somebody; you've agreed on the price, it's on the web, it's totally transparent. But, once you get inside, you realize I think we needed to use the mesh--or whatever it is, whatever. The human body is complicated. What do you do in that situation? Do you charge them? I bring this up because a lot of people think that if you're like me and you believe in a free market for healthcare and I suspect you do too, Keith, that 'Oh well, people--they'd be bleeding and they'd be taken advantage of.' So, here's the perfect case. You're under the knife. How do you deal with that? You wake the patient up, take them off the anesthesia and say, 'Hey, want to go for the higher quality one? We think you need it?' How's that work? Keith Smith: Early on, we had a situation very much like what you've described, and the surgeon, who was new to our facility and operations said, 'Well, at this point, I guess, Keith, you'll go out and visit with the family about getting more money.' I said, 'No, at this point, you and I will discuss the extent to which your surgeon's fee will be reduced for your failure to correctly diagnose the situation that we're actually in.' There is no way I would ever go back to the patient and ask for more money--the ultimate bait-and-switch. The problem you've described is the manifestation of the inexperience or the mistake of, otherwise, a good diagnostician. We've been known to reduce the surgeon's fee to the extent that buying extra supplies like that are needed, the use of which should have been anticipated by them. Also, I have complete control over to whom these referrals are sent. If a surgeon illustrates a history and a pattern of mistakes like this, then they just receive no more referrals.

1:05:11 Russ Roberts: You talked about employers flying patients to see you. Recently a story the New York Times, where an employer flew a patient to Mexico--which would not be that exciting usually. A patient might like to go to Cancun--it's in Cancun. A patient might like to go to Cancun, but not for knee surgery. But they were reassured, it's an American facility in Mexico with an American doctor flown in from Wisconsin who was trained at the Mayo Clinic. 'Oh, and by the way if you'll do this for us and fly to Mexico to have your surgery there instead of under the American system of the not-for-profit hospital nearby, we will pay you a check. We will give you money. We're not going to make you meet your deductible. We're not going to make you pay anything out-of-pocket: we're going to give you money: $5,000.' There's that much of a distortion and, again, Kafkaesque confusion about what a price is in our current so-called market. And, for me, nothing illustrates how dysfunctional our current medical care system is than that. I'd like your reaction to that; and I see you as a--you're just a slightly different version of that. I don't pay $5,000: you pay zero to go there, for that employer. They're just still a better deal than what they have around the corner. But the point is, for this Mexican example, there's so much of a gap between the so-called price and the true cost, that it's worth it to pay the patient to leave the country and get the surgery done elsewhere. Keith Smith: Yeah. And you'll see more and more self-funded health plans do exactly that. An ERISA [Employee Retirement Income Security Act] lawyer, a good friend of mine, Adam Russo at the Phia Group in Boston, he pays his employees to travel to a venue and pays all of the medical costs. He also pays them a percentage of the fraud that they can detect on their hospital bill. So-- Russ Roberts: Oh. They get a commission? Keith Smith: Yes. Russ Roberts: They get a-- Keith Smith: You should interview Adam Russo at The Phia Group. He's a lot of fun. Russ Roberts: Explain what ERISA is, by the way. Keith Smith: Well, ERISA is a federal law that governs, among other things, health plans that the employers decide to implement basically and operate themselves. Employers of varying sizes, usually 50 or more employees, although not always, they decide they don't want to pay Blue Cross. They would rather assume the risk themselves. So, these self-funded or self-insured companies, they actually pay for their employees' medical care. Sometimes they'll have a safety net, kind of catastrophic-- Russ Roberts: Catastrophic. Yeah-- Keith Smith: stop-loss policy underneath it. Sometimes they don't. But ERISA is the federal laws that lord over and govern that arrangement. Russ Roberts: Okay. I'm sorry. I interrupted another one of your serious moments in this episode. So, these folks pay their employees a share. They give them a finder's fee for finding fraud in the bill--like, they gave them orange juice that they didn't get? What are we talking about here? Keith Smith: Yeah. I mean, who knows better than the patient when they look at the bill? 'Well, I never got that. I never got that.' Russ Roberts: Does that happen? Keith Smith: They start-- Russ Roberts: Oh, yeah. Keith Smith: They start red-lining their hospital bill and 'Well, this never happened. This person never came by to see me. And, this never happened.' Adam Russo, he'll pay them on the commission on the extent in which that fraud is uncovered. So, the ability and the willingness of self-funded health plans and the employers who provide those to really mix it up with big hospital systems is--that is a very vibrant movement, too. I believe that's the engine that ultimately will move the United States more toward a market system. The buyer that the self-funded health plans represents is more gigantic than most people know. Eighty percent of all of the medical bills paid in the United States, other than the ones government pays, are paid by this self-funded industry. Russ Roberts: Bring it on. A little more skin in the game. Keith Smith: Yeah. And you can imagine: the self-funded industry loves what the Surgery Center of Oklahoma is doing. And, the Surgery Center of Oklahoma is just one facility. A list of who is getting into this game is found at the Free Market Medical Association's website where there are prices for everyone who is a member posted. So, the self-funded industry is really grabbing on to this price-transparent, non-price-gouging movement. And so, your comment earlier that a hospital will not give you a price if you ask--increasingly, they will. Because this is very creepy to-- Russ Roberts: Market pressure on them. Keith Smith: Yeah. It's very creepy to them. There are a large number of patients that will actually print out a price list, mine or somebody else's, and they'll bring it to the hospital or to their surgeon and say, 'You guys need to match this or I'm flying to Oklahoma City.' The power that the Certificate of Need you referenced earlier that prevents new facilities from emerging in this marketplace, that power is beginning to fade. Because, a fair price--a known, guaranteed fair price--is a plane ride away for everybody in this country. And so, the ability to prevent a new facility from popping up in North Carolina or New York or New Jersey--three of the worst states in the country--and the ability to keep a facility like that from appearing on the marketplace, it's just not as powerful when someone can fly to Charlottesville, Virginia or Oklahoma City or Austin, Texas or Houston or Torrance, California or Las Vegas or any number of places where these facilities like mine exist.

1:12:02 Russ Roberts: So, one thought you might have as a listener, or might have generally, is that, 'Well, this is such a great idea--why isn't it more common?' You just listed a handful of places. It's a handful--10, 8, 15. I looked at the website. There may be 20-ish places you can get transparent pricing like you do. You're part of a movement. It's a small movement. Why isn't it bigger? Keith Smith: It's small because it's relatively new. We also have--there's a lot of inertia because the industry is so dominated by the government and the cronies. The government is--and the legislators--they don't want to jeopardize the support of their friends in the medical industrial complex. So, there's just a lot of inertia. What's astonishing to me is not how small this movement is. What's astonishing to me is how quickly it's growing in spite of all the obstacles. And I mentioned earlier, I actually have some friends in the hospital world, as shocking as that may sound because a truly honest hospital administrator knows that what's going on is not sustainable. And so, they want to understand; and they actually want to participate in this free-market movement if they can. And so, I work with several hospitals who are in the shadows. So, they are participating in this, but they're kind of behind the scenes, because they're afraid that some insurance carrier is going to be angry with them for actually quoting patients guaranteed bundled fees. So, I actually help run a payment clearing house that helps sort of shield these hospitals from anyone knowing really who they are or how much these prices are that they're quoting. So, the movement is actually much larger than it appears because there are people who are in the shadows who just kind of have their toe in the water, very afraid of what the big insurance carriers might do in response to their joining this movement. But, there's a tipping point and it's coming. I think it will come very quickly. I think, as Murray Rothbard said: These revolutions, they don't really emerge over time. They just kind of suddenly happen. And I think that's what we're going to see in this industry.