Stat counter

View My Stats

Sunday, January 22, 2012

Innovation and Medicare - Fundamentally Conflicted

The CBO just issued a report on Medicare Demonstration Projects: (

The idea behind these projects is to deliver better care for less money. It is a noble and essential goal since health care spending stands to undermine our entire economy within the next 10-20 years (and perhaps sooner). The results can be characterized as mixed at best with roughly equivalent numbers of pilots costing more money as opposed to less money. Granted the time frames had short time horizons and we have to take as a given that most innovative approaches will fail. 

My problem with the whole idea of Medicare Innovation projects is that the idea of top down driven innovation is really a non-starter and that meaningful innovation of Medicare the third party payment system it is embedded in are ones that will result in something entirely different. That will not happen if the innovations are embedded in the Medicare/Third party payment system we now use. They will co-opt any real change. 

I believe that Clayton Christensen's book the Innovators Prescription has an analysis of this problem which is spot on. He identifies various strategies which companies can use to address disruptive innovation in their industry. The disruptions almost always are related to some new product or service which comes in at the low end of the market and ultimately moves up market to disrupt the market leader. 

One example he uses was IBM, which was a leader in the mainframe computer industry. During the early 1980's, technological innovation allowed for the development of desktop computers which had a much larger market than the mainframe business. The first desktops were no match for the computing power of the mainframes.  Multiple mainframe and mini-computer companies saw the change coming but none except IBM actually adapted to their impact on the market. Companies like DEC and Wang went out of business but IBM did not. Why?

IBM leadership had the insight to understand that their attempts to grow a desktop computer business would require creation of a separate entity (IBM Entry Systems Division in Boca Raton, Florida - 1981). They understood that otherwise their innovations would be co-opted by the very business model (mainframe and mini-computer) which successful deployment of the desktop computer will displace.

From my perspective, successful innovation in health care payment and delivery means undermining third party payment systems, including Medicare. Given how Medicare is organized and administered, that will not happen. Markets allow for tremendous flexibility and do so by allowing participants to tweak from the bottom up. Medicare demonstration projects are a top down endeavor. The ideas may come from a variety of parties but they must percolate through the Medicare bureaucracy before they can be test or implemented. As it stands now, Medicare and other third party payers will always co-opt any attempts to change the system in any meaningful way and are now in positions to insure they are always in a position to co-opt any attempt using their control of the payment system.

The most constraining part of the Medicare and third party payment system is executed through the lack of the ability of health care providers and delivery systems to experiment with re-bundling of services. Medicare constrains providers through legal constraints. You either participate in Medicare with all its restrictions or you opt out. Similarly, other third party payers use the Medicare template to force providers to be either all in or not in at all.

I see the concierge movement is simply an effort to repackage and bundle services. In my estimation, it is exactly the right thing to do. It is viewed by critics as allowing the camel's  nose in the tent, the first step in disrupting a payment system which should be used to guarantee health care access to all. I also see it as a first step in disrupting a payment system which needs disruption. Once physicians and other providers of health care services are empowered to bundle services differently from what is allowed by Medicare and private insurance, innovation in those realms will explode. The public will benefit the most.

Finally, our perspective on the nature of desirable innovation needs to change. Hearkening back to Christensen's work again, the largest impact comes from innovations that enter at the low end of markets. Generally, these innovations have impact by delivering a product which is inferior to what was previously available but they do so at prices hugely less. While a mainframe computer may have costed millions of dollars or a mini-computer hundreds of thousands, the desktops cost $5-10K. They could do much less than their more expensive alternatives, but they could do infinitely more than nothing.

True innovation in health care which can save money to the degree that will be required to prevent financial calamity will require deployment of innovations which can cut costs, not in small and inconsistent  increments, but in huge chunks. The trade offs required will be modest compromise on the deliverables.  We put computers in a huge percentage of homes in 2012 not by promising million dollar mainframes but by initially deploying crappy desktop machines.

Furthermore, we succeed in deploying sophisticated technology by initially targeting the affluent few after which markets relentlessly drive costs down to make them available to the many at a fraction of the costs. High end whistles and bells in cars such as ABS braking systems and high end electronics were first available only in the top end luxury cars. They are now standard equipment at a fraction of the initial cost. Why has this not happened in health care? Non-market based, administratively controlled payment systems have served as a brake on this type of innovation. Medicare demonstration projects will not disrupt these systems and without that type of disruption, no meaningful change can occur.

I have a simple plan for innovation. Allow us to get a waiver from Medicare which allows us to continue our participation in Medicare while we experiment with alternative payment systems. We need no grant monies, just additional autonomy and the ability to bundle and price our services in novel ways.


  1. Few realize that co-optation is one of the primary mechanisms leading to increased health care costs. Co-optation by providers is equally as pervasive as that of payors. General hospitals, for instance, are notorious for absorbing potentially disruptive innovations into their high-cost systems of delivery, and subsequently transforming cheaper alternatives into expensive and profitable services.

    For example, my university hospital recently cut a deal with local CVS retail clinics. The goal was to increase referral base. But the contract includes intercalating our docs as medical directors of the clinics. That will likely serve as the kiss of death for CVS Minute Clinics as a cheaper alternative, as we co-opt them into our high-cost delivery systems.

    Moreover, my university health care system is currently co-opting medical homes and clinical integration networks in order to create the illusion of lower cost, higher quality delivery, when the real goal is to create profitability.

  2. I'm not sure what the outcomes of the medicare demonstration projects has to do with the remainder of your post. While I realize that the medicare demonstrations may not represent "disruptive innovation" that Clayton Christensen champions, the fact that they are "mixed at best with roughly equivalent numbers of pilots costing more money as opposed to less money" doesn't seem to prove their lack of value. Isn't that the purpose of the demonstration projects? i.e. determine which ones actually save money and then implement those on a medicare-wide scale, while rejecting the ones that don't save?

  3. The present approach may work for very slow incremental change. Innovation ideas need be vetted through the Medicare Innovation Site process ( and pass some variant of peer review. I need to wonder about cycle time and the whole idea that innovative ideas need to be approved by the very entity which is the target of disruption.