What Cost Would You Put on the Care That Saved Your Son?

A team of doctors saved Atul Gawande's infant son. In that moment, he says, every one of them deserved a million dollars. The actual bill was $250,000. He paid $5.
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That single moment opens up one of healthcare's biggest unanswered questions: how do we actually decide what medical care is worth?
In this episode, I trace how physician pricing evolved — from ancient piecework fee schedules, to the 1980s Harvard formula that tried to put a number on "how much work" a surgery takes, to the 1929 Dallas hospital plan that quietly became the blueprint for American health insurance. I also pull in ideas from Atul Gawande's writing on performance and diligence in medicine, and close with a few open questions I'm still sitting with — including whether AI can actually be the innovation that brings costs down.
In this episode:
00:00 – Why we're asking this question
00:45 – The piecework problem
02:30 – Trying to make pricing "rational"
04:15 – Where insurance came from
05:45 – It's not just pricing — it's performance
07:30 – The war nobody wins
08:15 – Closing thoughts and open questions
If you work in healthcare, health tech, or health finance, I'd love to hear your take on the questions raised in the episode — drop a comment.
🎙️ Part of the IDAAHub Podcast — Innovation & Startups series
#Healthcare #HealthTech #MedicalCosts #HealthInsurance #AtulGawande #HealthcareInnovation #AIinHealthcare #IDAAHub

Transcript

SPEAKER_00 0:03

Dr. Atul Gawande, a famous surgeon and author, once wrote about the night his infant son was fighting for his life with heart failure. A team of doctors and nurses worked to save him. And Dr. Gawande said that in that moment, every single of them deserved a million dollars for what they did. Cost didn't matter. All that mattered was that his son lived. That's the paradox at the heart of medicine. The people footing the bill rarely get a say in the price, and the people who need care most don't care what it costs until later when someone has to pay. I've been reading Better by Adul Kavande, and it gave me insight into how medical prices evolved. I'm your host, Deepti, Adahub Podcast AI in Healthcare. I'm sharing insights into this book actually gave me insights into medical costs, how we got here, and how it all started. So today I want to unpack that where medical pricing came from, why it's so opaque, and why better medicine hasn't meant cheaper medicine. Doctors have been paid piece by piece for a long time, literally since the Code of Hammurabi, where a surgeon in ancient Babylon earned a set number of shekels per operation, piecework medicine isn't new. What's new is the scale and the complexity. By the mid-20th century, American doctors were paid on what was called usual customary and reasonable fees. Essentially, whatever they decided to charge. Cataract surgery fees were set in an era when the operation took two to three hours. When new equipment shrank that to 30 minutes, the price never moved. The one procedure alone, that one procedure alone, ended up eating 4% of Medicaid's entire budget. Meanwhile, cognitive work, where you are actually diagnosing a complicated life-threatening condition, was paid a fraction of what a quick procedure earned. An hour spent making a hard diagnosis was only just $40. And an hour spent doing a colonoscoscopy over $600. So that's not a pricing system which we wanted to stay with. So in 1985, the federal government brought in an Harvard economist, William Hasiu, and gave him an almost very absurd task, measured the exact amount of work in everything a doctor does. So he built the formula work equals a combination of four things: time spent, mental effort and judgment, technical skill, and physical effort and stress. His team then compared thousands of procedures against each other. The famous example, hysterectomy, takes about twice the time of a session of psychotherapy, nearly four times the mental effort, four and a half times the technical skill, and over four times the risk, adding up to roughly five times the total work. Multiply that kind of calculation across 600 pages of medical services, apply a dollar conversion rate, and by 1992, Medicare had a new backbone for physician payment, something called the resource-based relative value scale. Private insurers followed with their own versions shortly after. It was very rational on paper, but it was still at the end of the day a giant human guess about how to compare a hysterectomy to a therapy session. And that's guessing. And that guessing has never really stopped. Commissioners still recalibrate those values today for thousands of services in perpetuity. So where insurance comes in now? None of this happens in vacuum. It happens inside an insurance system, and that system is younger than you think. Modern American insurance effectively began in 1929 when a group of Dallas school teachers stuck a deal with Baylor University Hospital, 50 cents a month, bought 21 days of hospital care a year. That simple plan became blue cross. Insurance solved a great problem, protecting families from catastrophic bankrupting costs, but it also created a strange side effect which economists call moral hazard. When someone else is paying the bill, neither doctor nor patient has much reason to ask what anything actually costs. Dr. Gawande describes this happening with his own son's heart surgery. A $250,000 bill and his out-of-pocket cost was $5. He didn't question a single line item. Why would he? When someone else was paying the bill. Multiply that instinct across the entire country for 70 years and you start to see why prices spiraled without much resistance from the people receiving care. It's not just pricing, it's performance. Here's where Dr. Gawande's other work, his book Better, adds a different layer to this story. Better isn't really about money, it's about performance. Why some doctors, hospitals, and systems get dramatically better outcomes than others, even when they are paid the exact same way using the exact same tools. Dr. Gavande's argument is that a huge amount of medicine's cost and quality problem isn't about fancier technology or higher fees. It's about diligence, consistency, and whether people actually do the unglamorous things right every single time. Something as simple as reliably washing your hands or a fibrosis clinic in Minnesota that dramatically outperform peer clinics doing the same treatment just because they measured obsessively and refuse to settle for average results. That matters for pricing because a huge share of health spending isn't going towards innovation. It's going towards correcting for inconsistency, redone procedures, extended hospital stays, complications that better process, not better price, could have prevented Dr. Gawander's larger point is that improving medicine is often less about spending more money and more about relentless attention to getting the ordinary things right. So the price problem and the performance problem are tangled together. Bad incentives from peace work, pricing reward, doing more procedures, not doing them well, and that gap costs everyone. So that's a war nobody wins. As one finance as Dr. Gawande put it, making money in medicine isn't about being a good doctor. It's a war with insurance, with the current system, with companies, every single step of the way. So why are medical prices high? We know that now, that it's not just one villain here. It's layers stacked over almost a century. A 1929 hospital in Dallas invented prepaid insurance to survive depression. In 1980, a Harvard economist tried to turn medical work into a formula. A peacework system built on procedures, not outcomes, still rewards doing more over doing well. And underneath all of it, a system where almost nobody, doctor, patient, or insurer has full visibility into what anything actually costs or why. Here are my views and few other questions we are left with still exploring. One, why did we move away from the patient deciding the price? As Dr. Atil Kawande put it, he would have paid a million dollars for everyone who helped save his son when people outside the system decide instead we turn care into a math problem. Two, insurance was a novel way to solve a real problem during the depression. It genuinely helps. But why do we keep a system designed nearly a century ago when so much else has changed? Why do employers need to be part of this at all? 3. COVID showed us how short life can be and how much healthcare matters. Cost is also tied to how many physicians we actually have. Physician shortage is a real driver of our price. So why aren't we building more medical colleges to solve it? And one more thing to sit with technology has driven prices down in almost every other industry, but not in medicine. Will AI actually help bring costs down here? I'm looking for that AI innovation that can take on a problem as big as this medical cost. Thank you. That's it for today's episode. Thank you for listening. Hope I shared something um interesting and help you understand the problem beneath the medical costs. Uh, if you like what I'm sharing, please keep listening. Subscribe to um uh Idaho Podcast AI in healthcare. We'll keep sharing more. Thank you, everyone.