What the Government Should Do to Help Flailing Industries

I recently reread two really good pieces on different roles the government should take in helping flailing industries. One was the last chapter of Clay Christensen et al.’s The Innovator’s Prescription, and the other was Atul Gawande’s Testing, Testing. Plus, I have my own addition. (Bear in mind, this all relates to established industries, so I won’t mention the additional subsidizing roles the government could take in helping the foundation of industries.)

Christensen et al. tell multiple stories that are all pretty similar to each other, but here’s a typical one: the government sees that mainframe computers are really expensive and that IBM has a near monopoly on them, so, using the “increase competition, lower prices” dogma, it spends tons of money trying to break up IBM. Meanwhile, new innovative companies come along and meet the same computing needs of consumers with way cheaper micro-processor-based computers, lowering prices for computing way more than competition amongst a bunch of broken up IBM competitors could ever have. Moral of the story #1: instead of worrying so much about monopolies and other limitations on sustaining competition, the government should be more focused on identifying and eliminating regulatory barriers to disruptive innovators. This is when you should think about barriers such as against the building of specialty hospitals, certain prescription-writing privileges for physician extenders, and the licensing of dental health aide therapists for serving rural areas.

Gawande talks about the agricultural industry and how it was revolutionized into a much more efficient industry through a government program (that started out as just another pilot program) that eventually placed government-employed farming consultants in nearly every county. The role of the consultants was to continually provide to the local farmers information about the state-of-the-art methods for growing the best and most abundant crops. For some reason, the invisible hand of competition wasn’t enough to convince farmers to use new farming techniques. Moral of the story #2: if competitors don’t have access to information that can help them improve value, or if the implementation of such information is above their ability/willingness to try, the government can help information flow and help competitors implement that information, possibly by providing subsidies that take away the downside risk of implementation or by teaching how others are doing it.

And here’s my addition: before we can start worrying about removing regulatory barriers or helping information flow and implementation, we need to remember that the goal of all this is to improve the value of the industry, and then we need to make sure financial incentives are aligned with what we value. What I mean is, without the financial incentives to develop a cheaper version of a mainframe computer, it would have taken a lot longer to come about; without the financial incentives for farmers to use new techniques to grow and sell more crops, they would have been even more hesitant to try the new ideas out. Moral of the story #3: until financial incentives are aligned with value, anything else the government does to try to help low-value industries improve (including the first two morals of the stories) will be severely limited in efficacy. I can’t think of another privatized industry in history where financial incentives haven’t been aligned with value, so I think this point isn’t as obvious to people.

Is this list exhaustive? Honestly, I don’t know. I guess the question I need to be able to answer is, Are there other causes of competition failing? I can’t think of any others, but I’m not enough of a markets historian.

Also, this post obviously doesn’t explain exactly why I think financial incentives aren’t aligned with value in healthcare, but that’s what I’ve spent the last month writing a perspective article about (thus, the long time since my last post), and the ideas will make it to my blog hopefully soon.

How to Fix Bad Incentives in Healthcare

When talking health policy, I hear the word “incentive” a lot. “Incentives are perverse.” “We need to realign incentives.” “Let’s provide an incentive for quality through payment reform.” Bla bla bla.

Let’s drop the ambiguities and actually talk specifics for a second. I promise you’ll learn more about healthcare incentives in the next 1 minute than you’ve ever learned in your life.

I can only think of two different kinds of incentives in healthcare: cultural and financial.

Our culture has expectations of healthcare organizations to put the patient first, to find ways to reduce errors, etc. I think we’ve done a pretty good job of getting the cultural incentives right in healthcare, but they can only take us so far without . . .

Financial incentives! A financial incentive works like this: If you do ____, you’ll make more money (i.e., profit). How are we doing on financial incentives? Well, we pay providers more for doing more (especially if it’s invasive); we pay providers more for making mistakes and then fixing them; we pay providers more if they band together to increase bargaining power; we pay providers the same amount even if their quality is poor. So . . . we haven’t done so well with the financial incentives.

But here’s how to think about what financial incentives are needed in any situation:

  1. Decide what job you want the organization/industry/whatever to perform
  2. Make it profit from doing that job

I, personally, think a healthcare system’s job is to get/keep us healthy (weird, I know). So that means healthcare organizations need to profit from getting/keeping us healthy; in other words, “profit from wellness” (that’s how they say it in The Innovator’s Prescription).

If we can find ways to get healthcare organizations to profit from wellness, it would solve all kinds of problems! They would be going nuts trying to provide preventive care. They would be spending lots more time with us training us how to manage chronic diseases so we don’t have ED visits and complications. They would be counseling us on weight loss and smoking cessation. And they would be working like crazy to reduce costly errors! (Quality problem: solved.)

So the government can either (1) try to fix bad underlying financial incentives through regulating the healthcare system to death or (2) focus on finding ways to help healthcare organizations’ underlying profit motive be patients’ wellness. One is the bariatric surgery approach, the other is a real solution.

UPDATE: I’ve been thinking more about this, and I should probably mention a few caveats. First, profit from wellness doesn’t work for end-of-life care, for obvious reasons, so a different incentive is needed then. Second, profit from wellness doesn’t work if the payer has a short time horizon because it won’t reap the savings from providing preventive care now to avoid more costly care later. Third, quality problems might not be completely solved just from profiting from wellness because I don’t know if better quality is always cheaper in the long run. Honestly, why do you people let me get away with this stuff by not posting scathing comments?

UPDATE 2: I think the definition of the healthcare industry’s job to “get/keep us healthy” isn’t quite specific enough. The job should really be defined as to get/keep us healthy over the long term, since I’d like to be healthy now and in the future. Thus, profit from long-term wellness. This time horizon issue is a key piece to the foundation on which we will build our future health system.

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.)