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Saturday, August 14, 2010

Disruptive innovation requires lower cost and generally lower quality options

There is a good piece published this month in the American Scientist by David Kent entitled "Just as good medicine".

The fundamental tenet of this piece is that health care is so costly because virtually all innovations in this arena add costs and this aspect of the health care industry is unique. Clayton Christensen discusses this in his book, The Innovator's Prescription and this article highlights data which buttress this claim. In a study done by Kent and co-authors they found:
 To explore this, working with colleagues at the Tufts Center for the Evaluation of Value and Risk (who maintain a comprehensive database of cost-utility studies), we enlisted Aaron Nelson, then a medical student, to help us sort through more than 2,000 cost-utility comparisons for any potential examples that might be decrementally cost-effective. We found that about three-quarters of published comparisons described new technologies or treatment strategies that increase both costs and benefits, and that most of these (about 65 to 80 percent) were cost-effective by conventional criteria (depending on which conventional threshold was used, $50,000 or $100,000 per QALY gained). Less often, published analyses described innovations that are either dominant or dominated (about 10 percent and 15 percent of the time, respectively), but only very rarely were innovations both cost- and quality-decreasing. Indeed, fewer than 2 percent of all comparisons were classified in the cost- and quality-decreasing “southwest quadrant”, and only 9 (involving 8 innovations) were found to be decrementally cost-effective (0.4 percent of the total)—that is, they saved at least $100,000 for each QALY relinquished.
In basically all walks of life we make compromises, spending resources in some realm thus making the decision to not use them in another realm. Each of these decisions results in forgoing some things or settling for lesser quality products or services. We might purchase furniture at IKEA substituting our time for our money, deciding that we can use furniture made of composite materials as opposed to hardwoods. The truly market rocking innovations in virtually all areas onside of health care have involved the widespread acceptance of much cheaper but lower quality alternatives which capture market share. Long term consumers may obtain better products at lower prices but this is virtually always the result of disruptions made possible by lower cost and lower quality products and services. 

This mechanism is not operative in health care. This is probably due to at least two factors. First, there is a regulatory environment which keeps out those who are most motivated to introduce disruptive innovations. In what appears to be a perfect example of regulatory capture, laws to control entry into the field of health care, designed to protect the public, appear to serve most those who are regulated. Second, because disruptive innovation generally does not come from organizations who are dependent upon the prevailing business models, there is basically no one who is motivated to disrupt the model which feeds their present economic machine. This is particularly the case of major health care systems which need to invest huge sums of capital to compete for lucrative high margin business. They, like the integrated steel producers described in Christensen's work, want to escape the low margin and high volume elements of the healthcare business. Why wrestle with capturing pennies on the dollar of ambulatory business when you can make money by the shovelful by doing high end scans and organ transplants. 

None of this would be possible if the payment system in health care is not what it is today. The payment system prompted physicians to treat money in health care as Monopoly money, not quite real dollars. I have practiced medicine long enough to remember that the old world of reasonable and customary fees. Those who set their fees as reasonable proved to be the chumps and it became customary to set your fees at outrageously inflated levels. The entire structure of present reimbursement schedules is historically based upon who was most effect at establishing outrageous fees early on. Those who tried to be cost effective early on have lived to regret their decision given the subsequent cost control measures have mostly worked through broad and non-targeted across the board reductions. No room for low cost disruptive innovations here. 

From the patient perspective, no one in their right mind will settle for less if it means no direct cost savings for themselves. Except for a few civic-minded altruists, most people will have the view that they have already spent their health care dollars on the insurance they have paid for. They are no going to settle for any lower tiered service. This is also recognized by David Kent:
It is beyond dispute that some mechanisms for the controlled distribution of these expensive goods and services are required. In most markets, prices play this role, and many feel that the fundamental problem in health care is that many consumers are shielded from the costs of their care. A system based largely on prices (that is, price rationing) may control costs better than our current system, but it would of course mean that those with the most money have first dibs on scarce health-care resources, and there might be little left over for those without means. (There are other reasons too why most consumers can’t be expected to comparison shop for emergency coronary angioplasty or for charged-particle radiosurgery for their glioblastoma the same way they might for gasoline, underwear and cling peaches). It is a fantasy to believe that price rationing alone can provide an acceptable mechanism for the controlled distribution of medical services, and some other means are thus also needed. Perhaps we should take it as a sign of the robustness of our democracy that this rather technical issue of the proper mix and variety of price and non-price rationing has somehow managed to plunge our national conversation about health-care reform into a Jerry Springer–style shouting match, except without the civility.

It is reassuring that there is an understanding that what we are seeing is what happens when the market pricing mechanism is displaced. Politicians, authors, and policy wonks are desperately in search of an alternative to the price allocation mechanism which will allow for efficient allocation of resources. Good luck. This is not something to be conceived by some congressional committee, presidential commission, or as a product of some single foundation grant. Resources are scarce and the price mechanism has proven to be the single most robust mechanism for putting resources in the hands of people who can deploy them in such a way to benefit the most people, most of the time. Kent uses a ploy widely deployed to tar the market system, suggesting that most health care decisions are made under duress without the opportunity to reflect and weigh options. At least he states the the price mechanism alone cannot be the solution, implying it must have some role. 

Without the role of price in health care, and I mean real prices which have real impact on those receiving services, there will be no real disruptive innovation. I would venture to guess that if the public can actual reap financial gain from low cost and lower quality options in health care, they will likely choose lower quality options. Yes, the screams will come up declaring that such options are not in their best interests and that the high cost and higher quality options are better for the public. Such logic can also be applied to higher cost options in cars, homes, and food. They can also be applied to the logic of where people choose to live. Should be afford people the option to buy a bigger house in a neighborhood with better schools if it forces them to drive a greater distance to work and thus places their lives in jeopardy? We all make trade offs and the best party to make the decisions regarding which trade offs are individuals and families. Changing the rules and incentives to make lower cost and quality options broadly available in health care is essential.

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