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The middleman dilemma in health care

Imagine this scenario.

You’re negotiating the sale of your widget. Despite your earnest efforts, you hit a deadlock. The buyer, after consulting an expert on “fair market value” for widget prices, firmly states they won’t purchase your widget for $5.

In a new tactic, you turn away from the customer, shed your white coat, don a pair of Groucho Marx glasses, and pivot back.

“I’m the CEO of WidgetCorp. Ten bucks, take it or leave it.”

“Sold!” exclaims the delighted customer.

Ridiculous, right?

Not in health care, the last stronghold for fat cat middlemen.

Replace “widget” with “physician labor,” the widget salesman with “doctor,” and “Widget Corp” with “Locums Corp” or “Telemedicine Corp.” Here, doctors as individuals are offered one price, significantly lower than when they negotiate through a corporation, forcing them to involve the Fatcat middleman for their cut.

While other industries have seen middleman margins slashed by the internet (think real estate, travel agents), health care’s fat cat middlemen are prospering, especially with the rise of itinerant physicians due to hospital consolidation.

So, why does cutting out the middleman to save money lead to a lower offer? Is there any real benefit to the FatCat’s share of the health care pie?

Is it because a billion or two for cat chow is trivial in an industry that overspends by $2 trillion?

Do health care administrators have a penchant for felines?


Paying the middleman, though indicative of a flawed system, makes sense individually. Here’s why your direct offer might be less than your middleman-included offer:

Misapplication of the Stark Law. Originally meant to prevent kickbacks for inappropriate referrals, this law now inadvertently limits physician salaries. It’s vague and conveniently used to restrict physician pay. Plus, a consulting industry has emerged to define “fair market value,” often leading to regulations benefiting corporations.

Employment law. Hiring employees involves rights and protections, while contractors have fewer. Hospitals avoid potential legal issues by using locums companies, who absorb the risk but at a high cost.

Individual doctors can’t offer the full package: Few doctors can commit to a 6-month stint in a remote location, making it challenging for clinics to find suitable candidates without locums companies.

Inertia and agency costs. Hospital administrators might not feel incentivized to put in extra effort or take risks for direct contracting, preferring the convenience of middlemen despite higher costs.

I remain optimistic. The growing popularity of freelance locums doctors and travel nurses has caused hospital labor costs to soar to unsustainable levels. Eventually, the barriers to direct contracting can be overcome.

But until then, the locums industry will continue to enjoy its share of the profits.

The author is an anonymous physician.

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