Three years ago, Dr. Keith Smith, co-founder and managing partner of the Surgery Center of Oklahoma, took an initiative that would only be considered radical in the health care industry: He posted online a list of prices for 112 common surgical procedures. The 51-year-old Smith, a self-described libertarian, and his business partner, Dr. Steve Lantier, founded the Surgery Center 15 years ago, after they became disillusioned with the way patients were treated at St. Anthony Hospital in Oklahoma City, where the two men worked as anesthesiologists. In 1997, Smith and Lantier bought the shell of a former surgical center with the aim of creating a for-profit facility that could deliver first-rate care at a fraction of what traditional hospitals charge.

The major cause of exploding U.S. heath care costs is the third-party payer system, a text-book concept in which A buys goods or services from B that are paid for by C. Because private insurance companies or the government generally pick up most of the tab for medical services, patients don't have the normal incentive to seek out value.

The Surgery Center's consumer-driven model could become increasingly common as Americans look for alternatives to the traditional health care market—an unintended consequence of Obamacare. Patients may have no choice but to look outside the traditional health care industry in the face of higher costs and reduced access to doctors and hospitals.

The Surgery Center demonstrates that it's possible to offer high quality care at low prices. "It's always been interesting to me," says Dr. Jason Sigmon, "that in any other industry, tons of attention is devoted to making systems more efficient, but in health care that's just completely lost." Sigmon, an ear, nose, and throat surgeon, regularly performs procedures at both the Surgery Center and at Oklahoma City's Integris Baptist Medical Center, which is the epitome of a traditional hospital. It's run by a not-for-profit called Integris Health, which is the largest health care provider in Oklahoma serving over 700,000 patients a year.

Sigmon says he can perform twice as many surgeries in a single day at the Surgery Center than at Integris. At the latter institution, he spends half his time waiting around while the staff struggles with the basic logistics of moving patients from preoperative care into the operating room. When the patient arrives, Sigmon will sometimes wait even longer for the equipment he needs.

Except for the clerical staff, every employee at the Surgery Center is directly involved in patient care. For example, both human resources and building maintenance are the responsibility of the head nurse. "One reason our prices are so low," says Smith, "is that we don't have administrators running around in their four or five thousand dollar suits."

In 2010, the top 18 administrative employees at Integris Health received an average of $413,000 in compensation, according to the not-for-profit's 990 tax form. There are no administrative employees at the Surgery Center.

Because bills charged by Integris are paid primarily by insurance companies or the government, the hospital gets away with gouging for its services. Reason obtained a bill for a procedure that Dr. Sigmon performed at Integris in October 2010 called a "complex bilateral sinus procedure," which helps patients with chronic nasal infections. The bill, which is strictly for the hospital itself and doesn't include Sigmon's or the anesthesiologist's fees, totaled $33,505. When Sigmon performs the same procedure at the Surgery Center, the all-inclusive price is $5,885.

The Integris bill for the same nasal procedure went to Blue Cross of Oklahoma, so the patient had no compelling reason to question its outrageous markups. They included a $360 charge for a steroid called dexamethasone, which can be purchased wholesale for just 75 cents. Or the three charges totaling $630 for a painkiller called fentanyl citrate, which all together cost the hospital about $1.50.

While patients and their insurance companies rarely pay the full price on a hospital bill, the bigger the bill, the more the hospital gets. Uninsured patients at Integris generally get a 50 percent discount, while private insurance companies pay closer to 60 percent of the full bill, which is still greater by orders of magnitude than what the Surgery Center collects.

Integris Health declined to make a spokesperson available to be interviewed for this story. But in a statement, the company defended its outrageous bills on the grounds that it needs a way to cover losses on services offered free. Whatever the merits of that argument, Integris must also cover overhead costs and bureaucratic inefficiencies that the Surgery Center has managed to abolish.

The rising cost of health insurance has been driving companies to look for ways to cope with the third-party payer system. Health maintenance organizations, or HMOs, have been one approach. Today, a growing number of firms are dumping their health insurance providers and becoming "self-funded," meaning they pay their employees' health care costs directly out of their revenues. This model was virtually nonexistent 30 years ago, and today an estimated 60 percent of Americans work for "self-funded" companies.

Self-funded companies, like individual patients, can negotiate directly with hospitals for lower prices. Recently a handful of self-funded Fortune 500 companies struck deals directly with major hospitals to care for their patients for a negotiated fee.

In Oklahoma City, there's an alternative health care market taking shape in which hospitals offers competitive flat fee prices to self-funded companies. And it's all modeled after the Surgery Center.

This was the brainchild of Jay Kempton, who is the president of The Kempton Group, which administers health care plans for self-funded companies. When Kempton met Keith Smith, he had been looking for a way to help his clients deal with their exploding health care costs. "Cutting edge procedures are justifiably expensive," Kempton concedes. "But what we also see are soaring increases in relatively garden-variety procedures, like a knee resurfacing or a carpal tunnel release. Those things should not be experiencing 10 or 15 percent inflation every year."

So Kempton and Smith came up with a cost-saving arrangement: If their employees agreed to be treated at the Surgery Center instead of a traditional hospital, they would be spared the cost of all co-pays and deductibles.

Almost immediately, Kempton was approached by other surgical centers and hospitals. There are now four health care facilities participating in his flat-fee consortium, and more are on the verge of coming onboard.

June Wietzikoski is a typical patient benefiting from this alternative health care market. She works as a loan officer for a community bank in Groesbeck, Texas, which is a client of the Kempton Group. She had carpal tunnel release procedure done at the Surgery Center for the all-inclusive price of $2,775, which was covered by her employer. Had she gone to a traditional hospital run by Integris the discounted bill would have come to about $7,452 and she would have been personally responsible for the first $5,299, since she hadn't met her deductible.

"It makes me mad that people are bankrupted by our current health care system when many times the costs are completely unjustified," says Smith.

Is Kempton's model replicable in other places? There are obstacles. Oklahoma has an unusually entrepreneurial health care sector, which stems from a 1989 decision to roll back the state's Certificate of Need (CON) laws. CON laws, which are still on the books in 35 states, require all medical facilities to get permission from a planning board before opening, which in practice provides a way for traditional hospitals to use political influence to keep new entrants out of the market.

A new provision buried in Obamacare effectively prohibits doctors from starting their own hospitals or expanding the hospitals they already own, which has been widely interpreted as a give-away to the American Hospital Association.

The Surgery Center is exempt from this statue, since it's technically not a hospital and it doesn't accept Medicaid or Medicare. So Smith and Lantier are considering expanding to accommodate their growing clientele.

Smith believes that despite the obstacles, market-driven facilities like his will thrive and proliferate as consumers catch on to costly collusion between big government and big health care.

Says Smith: "Everyone can see what the prices are at the Surgery Center, and that affordable health care is possible. So the jig is up."

————————————-

Video produced, shot, edited, and narrated by Jim Epstein.

Approximately 6.45.

Scroll down for downloadable versions and subscribe to Reason TV's YouTube Channel to receive automatic updates when new material goes live.