Why Providers Don’t Innovate

The last couple weeks, I’ve been writing about how innovation can solve our healthcare spending problem and why it’s not happening. Last week, I gave some thoughts on why insurers don’t innovate. This week, let’s talk about providers.

One of my favorite examples that illustrates some of the challenges providers face when they try to innovate is detailed in the book Transforming Health Care: Virginia Mason Medical Center’s Pursuit of the Perfect Patient Experience. It talks about how they noticed that a lot of patients were presenting with low back pain and were not getting optimal treatment, so they decided to do something about it. They completely redesigned their low back pain care pathway, cutting out all the unnecessary things and getting patients the beneficial things much quicker. They started getting patients back to work way sooner, and things were going great, except for one problem: by cutting out unnecessary MRIs for uncomplicated cases, they were losing a lot of profit.

This happens a lot. Providers figure out how to deliver better care for patients, and then profitability suffers.

The solution for this specific issue is known. What if people, rather than buying a whole bunch of individual services that they hope will add up to a solution to their back pain, paid for a single product? They could buy the descriptively named “back pain fix.” This back pain fix product would include whatever was necessary (all the office visits, PT appointments, etc.) to get their backs feeling better. Then, when a healthcare system innovates and cuts out unnecessary services, they are keeping extra money in their pocket, so profitability actually improves!

This would be amazing, except for another problem that would arise. If only one insurer agrees to pay Virginia Mason for this “back pain fix” and the rest keep paying the traditional way, then they’re still losing money when treating patients with traditional-pay insurers. The lesson here is that not only do we need to pay for specific definable solutions to patients’ problems (often called “bundles”), but we also need to get all insurers to agree to start doing that at the same time.

This, by the way, is a problem I see over and over with provider innovations. Think about patient-centered medical homes. The doctor’s office usually needs to hire some sort of nurse coordinator who can be reaching out to patients to make sure they’re taking their medications and such, and this nurse’s salary is paid for by the “per-member-per-month” fee that insurers pay to doctor’s offices that are running medical homes. But when you only have 40% of your patients on insurance plans that are paying this monthly fee, you’re now either providing the service for free to the other 60% of your patient panel or you’re basically running two different clinics (a traditional fee-for-service one and a medical home one) within your single clinic, both of which are designed at odds with each other.

This makes sense you say, but then you remember that hospitals are paid by the DRG (basically a lump sum for the hospitalization, and the amount is determined by how sick the patient was). And since most insurer-hospital contracts are based on DRGs, you say, doesn’t this solve those two problems listed above?

Theoretically, yes. Except that hospitals are the most complex organizations devised by man, and also they do a horrible job accounting for their costs. So, yes, hospitals could innovate in ways that lower costs a bunch and make a killer profit (#pun), but there’s just too much complexity and too many different service lines and too much uncertainty about what things actually cost for them to make much headway in cost-lowering innovations. From a business management perspective, this is a nightmare situation for attempting meaningful change.

But when you have a simpler organization, these barriers go away. And that’s why we see stellar examples of higher quality and lower costs at specialty providers. For example, Shouldice Hospital for hernia repairs (located in Ontario, Canada, of all places!) has made quite a name for itself with its world-class outcomes and low costs.

So, what is needed for providers to innovate? We need to pay for the right products, unify incentives from insurers, simplify hospitals, and get hospitals to learn how to account for their costs.

But wait, there’s more. Even after all that, innovation will still be forever limited until we can ensure that the providers who successfully create value-improving innovations can be rewarded financially, which I’ve written about already here.

This turned into a mini three-part series on healthcare innovation, so I think it’s time for some closing thoughts.

Many people believe that the only solution to our healthcare spending crisis is a government takeover to start administratively lowering prices. This is one of the major arguments for Medicare for All, because “we’ve tried the private market, and clearly it hasn’t gotten it right.” But how much of a solution could Medicare for All be? If the government administratively forces prices down, it hits a hard stop once it has lowered prices so much that profits are 0%. Even if insurers and providers have an 8% profit margin, that means the max possible savings with administrative pricing is 8%. And this does nothing to “bend the cost curve” over time.

The solution, then, needs to be (1) finding ways to prevent more care episodes and (2) lowering the actual cost of delivering care (for the care episodes that couldn’t be prevented).

Over the last 3 weeks, I have shown that, to achieve those two goals, we need to be relying on innovations by insurers and providers. The innovations we need are not happening much right now, but if we can get the incentives right, the barriers to those innovations will go away. (And remember that a single-payer system can be compatible with getting the incentives right.)

How much could these provider-led and insurer-led innovations save us? More than 8%? Based on other industries’ results when incentives are aligned properly, I have reason to believe our healthcare spending curve could flatten, and possible even eventually start angling down. The potential impact of fostering innovation has no comparison to those simplistic administrative pricing approaches that are completely ignorant of how markets work.

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