Month: June 2011

One Way New Medical Knowledge and Technology Will Make Healthcare Cheaper

Here’s my way of explaining one cool way that healthcare will get cheaper. Picture a stack of papers. It’s maybe a few feet tall, and each paper represents some kind of healthcare-related service that could be delivered. For example, one of those sheets represents a triple bypass. Another represents a consultation about asthma. Another represents an MRI imaging. There are tons of them! Now picture that they are arranged in order of simplest procedure (at the bottom of the stack) to the most complex procedure (at the top of the stack). So we’ve got administering someone with a vaccine and stuff like that at the bottom of the stack, all the way up to, say, some crazy brain surgery at the very top of the stack.

Obviously only the most super-specialized physicians can do brain surgeries and other similarly complex services, while probably a technician or medical assistant could administer vaccines. Thus, we could draw lines on that stack of papers that look like this:

A physician could do anything in his section of papers, and he could probably also do (maybe with a little practice) anything that a nurse or technician could do. But he isn’t trained to do anything above his line–only specialists can do those things.

Now on to how healthcare will become cheaper. As our medical knowledge and technology increase, things that used to require great training become simpler. For example, hip replacements used to be so complex that only the most highly trained specialists could do them. Now, thanks to better man-made sockets and such, they are much simpler to perform, and probably any orthopedic surgeon could perform one and get outcomes that are better than in 1980. In short, the lines move up as technology and knowledge progresses.

This saves money mostly because a technician’s time is less costly than a nurse’s time, a nurse’s time is less costly than a physician’s time, and so forth.

And, I should probably mention two other things. First, there is another, lower cost, caregiver emerging: the patient himself. These days, who do you think primarily takes care of diabetic patients? The diabetic himself! Second, I don’t know if specialists will become extinct any time soon, since there are always papers being added to the stack as we find out we can do more and more things to heal people.

And one last thing: I said all this will make healthcare cheaper–meaning the actual cost of the provision of care will decrease for a lot of diseases–I didn’t say this will reduce our total spending on healthcare. Why not? Because as we learn how to do new, crazy surgeries and stuff, we’ll probably start spending lots of money on those, and that will likely more than outweigh the spending reductions we’ll get as a result of what I described above.

The Only Two Ways to Reduce Healthcare Spending

If you’ve graduated from elementary school, you have probably learned this formula:

Money Spent = Number of Units * Price per Unit

If we’re talking healthcare (and we are), the “Money Spent” part would be the approximately 18 percent of our GDP that goes to healthcare. The number of units would be the number of doctor visits, ER visits, x-rays, cardiac catheterizations, pills, MRIs, etc. that we buy each year. And the price per unit would be the actual cost of the provision of care plus some amount of profit.

So, if we are to solve our healthcare spending crisis, we need to either reduce the number of units we buy or the price per unit. Those are the only two ways.

It’s been interesting lately as I read/hear about healthcare reform ideas with this in mind. I’m not sure any of them have actually proposed something that will directly reduce the actual cost of the provision of care, which, in my mind, is what we need to be worrying about. Think about it: We can reduce the number of units by doing more preventive care and rationing; we can reduce healthcare organizations’ profits by having the government set prices lower; but healthcare will still cost a lot of money! The real money-saving potential lies in reducing the actual cost of the provision of care.

Is that possible? YES.

How? Evolution of the healthcare industry through better information, business model innovation, and technology. (See The Innovator’s Prescription by Christensen, Grossman, and Hwang, which doesn’t have all the answers, and the ones provided are disputed, but I think they’re on the right track.)

Stupid Assumptions I Often See Healthcare Experts Make

Brief preface: Our healthcare system is a mixture of government-run stuff (e.g., Medicare, the VA system) and non-government-run stuff (e.g., the private insurance market, private hospitals).

Often I will read something written by a healthcare expert that says, “Turning healthcare completely over to the free market can’t fix our healthcare cost problems because spending in the private aspects of our healthcare system has been growing at an unsustainable rate.” That statement is often accompanied by its corollary, “And there is also no data that a completely government-run system can solve our increasing cost problem because Medicare hasn’t done so already.”

I’d just like to make explicit the major assumptions contained within those two faulty assertions:

  • Major assumption #1: The free-market aspects of our current system have no influence on the success of the government-run aspects of our system.
  • Major assumption #2: The government-run aspects of our current system have no influence on the success of the free-market aspects of our system.

An example: Our free-market system’s pricing is mostly based on the government-administered prices Medicare uses. This definitely hinders the free market’s ability to price things according to their real value to the market, which, in turn, affects what medical device companies and pharmaceutical companies choose to invest in.

Another example: Medicare is limited in how much it can reduce compensation to providers because they will just start rejecting Medicare patients in favor of seeing only private-insurance patients. This definitely hinders Medicare’s ability to price things according to what they view as sustainable.

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