Why Doesn’t the Healthcare Industry Evolve Like Other Industries?

If you think about almost any industry and how it changes over time, you can see an obvious shift from high cost, low quality to lower cost, higher quality (and, thus, greater access to the product/service). Think about computers, or portable music players, or cars, or flat-screen TVs, or indoor plumbing, or airline flights. . . .

Average yearly productivity growth of industries is estimated to be about 2.4%. But healthcare is different–it receives negative estimates year after year. So what’s the cause of this? Why doesn’t healthcare evolve toward higher productivity over time? If we can figure this out, then maybe we’ll know what we should work on changing with how the industry is structured. And then we’ll be able to permanently solve this crazy trend of healthcare spending, which has been increasing at a rate of 2 – 4% faster than the rest of our economy for a long, long time.

People often blame the lack of evolution (toward lower cost, at least) on healthcare providers not having an incentive to compete on price. Patients don’t price shop, so why would they compete on price? And patients don’t price shop because insurance just covers everything for them, even the small, routine things.  We’re all contributing to this because, no matter which doctor we choose, we still have a $15 co-pay, so why would we waste our time finding out which provider will send the cheapest bill to our insurer? It’s reasonable, this argument, which says that the insurance structure is the reason healthcare providers don’t have to compete on price, and that that is causing the industry not to evolve like it should.

Are there any solutions to this?

The most commonly proposed solution is high-deductible insurance plans. It makes sense. If nothing is covered until you surpass a $1,000 or $2,000 or $5,000 deductible, price starts to really matter unless you’ve already surpassed that deductible for the year (which would be unusual for healthy people). The hard part about this is actually being able to find out prices from providers, but we’ll ignore that with the assumption that if enough people start requesting prices, providers will start making them more readily available. So the result would be that providers finally have to compete on price, they now have an incentive to find ways to reduce prices, and problem solved!

Not so fast.

Did anyone ever consider that providers already do compete on price? No, they don’t compete on prices for patients, but they do compete on price to win insurance contracts. How do you think insurance companies choose which doctors will be in their network? By price! Yes, providers definitely compete on price already. They do it to win insurance contracts, which then guarantees them a steady flow of patients and revenue.

But why doesn’t price competition for insurer contracts provide enough of an incentive for providers to find ways to cut costs and help the healthcare industry to evolve like almost every other industry?

I don’t know. But here’s my guess:

Management is in charge of negotiations to win insurance contracts, so they feel the pressure to find ways to lower costs, but that pressure isn’t conveyed strongly down to the people who have the knowledge required to actually recommend cost-cutting changes: doctors and nurses. If management isn’t working with the current business model’s routines and processes day in and day out, they aren’t going to see the inefficiencies in how things run. Doctors and nurses need to do that, so maybe most healthcare organizations aren’t giving doctors and nurses enough/any incentives to do that.

But, management’s specialty is figuring out completely new processes, routines, and business models that can achieve the same job for the patient but at a way lower cost. So why aren’t healthcare management people figuring out and experimenting with those in an effort to secure more insurance contracts (and, thus, market share and higher profitability)? You’d think the price competition for insurance contracts would at least motivate those kinds of experiments.

The answer may lie in the fact that healthcare provider organizations are known as some of the most complex organizations conceived by man. Possibly this complexity deters innovations like that. They’d be so hard to predict financial outcomes and market response! And with fewer ideas being tested, the evolution of healthcare will necessarily be slower than most industries. I’d love to see some research comparing the complexity of organizations with their speed of productivity growth. And I’m also interested to see the results of all sorts of government-funded “pilot programs” that allow providers to test new ideas out.

So, those are my conjectures, that price competition for insurance contracts isn’t enough because doctors and nurses aren’t given enough incentives to root out inefficiencies and because healthcare organizations are so complex that they deter business model innovations. Maybe I’m way off. Ideas?

UPDATE: I’m wrong. Providers don’t compete on price to convince insurers to add them to their networks. I’ve since learned that prices between insurers and providers are pretty much decided by Medicare prices as an anchor and adjusted up or down depending on bargaining power. This means prices will stay the same even if providers find lower-cost ways to deliver care. So, the question remains: Why aren’t providers finding all sorts of ways to lower costs if any cost reduction would not be followed by price reductions and, therefore, go straight to their bottom line? I still haven’t figured this one out, but Clay Christensen seems to think providers need to encompass the whole value chain to be successful at it, so maybe that has something to do with it.

What Healthcare Delivery Reform Proposals Are Getting Wrong

Let’s pretend I own a primary care clinic. There are quite a few doctors who work in my clinic (primary-care and specialists), and everything’s going great–we have plenty of patients, have a good reputation in the area, and are fairly profitable.

And then I am told I have to start doing this “patient-centered medical home” thing, which means I will now be responsible for all aspects of my patients’ care plans. If my patients go to other doctors, I need someone to talk to those outside physicians and find out what they did. I need to have someone available to answer questions and solve problems at all hours of the day and night so my patients will have continual guidance on how to make good decisions if something goes wrong. I need to hire a “care manager” to keep a close eye on all my high-maintenance patients (e.g., ones with multiple chronic diseases or social disabilities), calling them to make sure they’re taking their medications, teaching them how to follow their care plan the best, and all sorts of babysitting-type things like that. I also need to invest in a more comprehensive electronic health record system so I can keep track of all of this stuff. And I should probably also periodically pay someone to perform a data analysis on how efficiently the doctors in my clinic are performing so that I can find ways to further improve patient health and reduce the cost to my patients. And, as an incentive for my physicians to go along with all of this, I should probably find a way to adjust compensation to reward them for improving their patients’ health and lowering costs. . . . You get the picture.

So now I, the clinic manager, am faced with a choice: turn my clinic into a medical home OR just leave things the way they are.

In evaluating the first choice, I think about the upsides. Most of my patients will be healthier and better taken care of. Maybe even my physicians will have greater job satisfaction, which leads to increased productivity and lower turnover.

And then I think about the downsides. I will expend a lot of energy and money doing all of those things. I stand to lose profits from those increased costs and because my doctors will probably be performing fewer high-profit procedures. This loss of profit might be mitigated by the fact that my physicians will now have more time to take on additional patients, but that assumes I will be able to strengthen my reputation so much that I can steal market share from local competitors.

In summary, I figure the main upside is that my patients will be healthier, and the main downside is that it will generate a net loss in revenue. As high-minded as I am, I am not willing to risk my business’ very viability to potentially improve my patients’ health by implementing this medical home thing, so I choose to leave things the way they are.

Now, step out of the clinic manager perspective and analyze this with me for a second. This whole conversation begs the question: If medical-home patients’ care is so much less expensive (because of fewer procedures, ER visits, and the like), who is getting all of those savings? It’s obviously not the clinic (who, interestingly, is the one being asked to make the effort to change and assume all the attendant financial risk). Have you figured it out? It’s the payer! So patients and insurance companies will reap all the benefits, while the provider will take all the risks, make all the effort, and sacrifice profitability.

If any delivery reform proposal (e.g., ACOs, medical homes, etc.) is to be widely accepted by providers, that reform idea must include a way for the providers to reap some of the financial benefits. And that’s where many of these trendy reforms go wrong.

Our Healthcare Spending Trend and Why It’s Killing Us

I wrote a post a little while back explaining that there are two types of healthcare costs: care costs and non-care costs. Well, taking a step back, those are actually both related only to our level of spending. But there is another aspect of spending that is not talked about nearly as much, and about which I am much more concerned: trend.

The U.S. Department of Labor keeps track of the U.S. inflation rate, and they say it has been under 4 percent every year since 1991. Estimates of yearly health spending growth range from 5 to 15 percent, but most come in over the 10 percent mark. If you’ve done your math correctly, you probably figured out that healthcare spending is increasing faster than inflation.

So, is this bad? Well, as a country, we’re getting wealthier, and with more wealth comes more health spending, which is a great thing. There are tons of things that people choose to get healthcare-wise when they have more money. Maybe it’s plastic surgery, maybe it’s other cosmetic surgeries, maybe it’s eye surgery, maybe it’s weight-loss surgery, maybe it’s the more expensive treatment option for longtime joint or back pain, . . . you get the picture.

So yes, some spending increases are a good sign. But that crazy spending growth can’t all be attributed to wealth increases in our country. Two other big causes of spending growth can probably be labeled as (1) medical technology and (2) chronic diseases, and both of these are causing me some concern. First, a little explanation of each.

Medical technology causes spending growth because it allows us to spend tons of money saving someone or fixing someone when we used to have to just watch from the sidelines. It also allows us to treat things more effectively and more expensively. For example, a robot for use in surgeries is super expensive, but it reduces invasiveness and increases the range of things that are considered operable. These are positive things as well.

And as for chronic diseases, this refers to kidney disease, heart disease, diabetes, those sorts of things. And some estimates say that two thirds of our healthcare expenditures are generated by them. Crazy, I know.

So there’s a basic overview of why healthcare costs are increasing faster than our economy is growing. And here is why I’m concerned about it: it’s pricing low-income Americans out of healthcare insurance and contributing to a growing national debt.

As insurance companies have to deal with more expensive beneficiaries (especially the ones with chronic diseases), they have to raise insurance rates. And as new (more expensive) treatment options become available, they have to cover many of those (or risk losing beneficiaries), which means (again) raising insurance rates. All of this raising insurance rates business means it gets too expensive for people and employers, so they just make the decision to just get rid of health insurance and hope for the best.

And then there’s the government debt. Medicare and Medicaid are not immune to all the insurance cost increases. Yeah, they get to decide how much they pay providers, but they still have to decide what to do about new expensive treatments, and they also have to fork out more dough for people with chronic diseases, especially since the over-65 population is the main chronic-disease population. It’s just getting more expensive for the government to pay for healthcare!

So there you have it. Our spending trend is causing some major problems, and it is definitely exacerbating our quality and access problems. But never fear! There are some amazingly good solutions out there for all of this, but I’ll save those for another post, same bat time, same bat channel.

The Secret Problem with Healthcare

I’ve decided it’s a good evening to wax Platonic a little bit and write in dialogue form.

Interviewer: I see you like to study health policy. What do you think are the biggest problems with our healthcare system today?

Taylor: Cost, quality, and access; we spend way too much money and still don’t have relatively great outcomes or access to care.

Interviewer: How do you think we can solve them?

Taylor: You missed a question.

Interviewer: What do you mean?

Taylor: Didn’t you mean to ask me what’s causing the problems before you asked me how to solve them?

Interviewer: *Gives me the “go on” look*

Taylor: Well, you’ve just exemplified the secret (fourth) problem of healthcare: ignorance. We skip the second question. We don’t really understand what’s causing the problems we identify. Instead, we jump right to ideas about how to solve them (i.e., answering the third question). So, go ahead and try again.

Interviewer: Thank you, but that will be all. And remember, don’t worry about calling us–we’ll call you.

This is my explanation for being so slow to form an opinion on reform proposals. I don’t really know what would help yet because I don’t really understand all the root causes of the problems. I guess one can probably never understand all of the root causes, but one can surely understand the two or three main ones to each problem. And there doesn’t seem to be a single place online or anywhere that I can go to find them clearly laid out and thoroughly explained. It’s probably because we keep skipping the second question.

Now if only I could figure out what justice is . . .