Where Are the Innovators in Health Care Delivery?

Almost everyone believes there is an enormous amount of waste and inefficiency in health care. But why is that? In a normal market, wherever there is waste, entrepreneurs are likely to be in hot pursuit — figuring out ways to profit from its elimination through cost-reducing, quality-enhancing innovations. Why isn’t this happening in health care?

As I explained in a Kaiser Health News column the other day, there is a lot of innovation in health care. But all too often, it’s the wrong kind.

With respect to the organization and financing of care, innovation is rampant. And wherever health insurers are paying the bills (almost 90% of the market) innovation has been of two forms: (1) helping the supply side of the market maximize against third-party reimbursement formulas or (2) helping the third-party payers minimize what they pay out. Of course, these developments have only a tangential relationship to the quality of care patients receive or its efficient delivery.

Exploring the Unknown

The tiny sliver of the market (less than 10%) where patients pay out of pocket has also been teeming with entrepreneurial activity.  In this area, however, entrepreneurs have been lowering costs and raising quality — what most of us wish would happen everywhere else.

  • There are more than 1,000 walk-in clinics spread across the country today — posting transparent prices and delivering high-quality, low-cost services.
  • New businesses have been created to provide people with telephone and e-mail consultations because third-party payers wouldn’t pay for them.
  • Mail-order pharmaceuticals is a huge and growing market — one which emerged to offer price competition to consumers who buy their drugs out-of-pocket.
  • Wal-mart didn’t introduce the $4-a-month package price for generic drugs in order to do a favor for Blue Cross. It is catering to customers who pay their own way.
  • Concierge doctors are also providing patients with innovative services — services that health insurers don’t cover.

With respect to medical care itself, the technological response has been much the same. Wherever there is third-party payment, the goal of innovation is to produce more products that qualify for reimbursement, even if the effects on patient outcomes are only marginal. Wherever there is no third-party reimbursement, innovators are focused on ways to lower costs and raise quality.

Take cosmetic surgery. Over the past two decades there has been an enormous amount of innovation in the field — all of the cost-lowering, quality-raising variety. That explains why the volume of cosmetic surgeries grew six-fold over the past 20 years, while the real price declined by more than one-third. Similarly, there has been remarkable innovation in LASIK surgery — another area where third-party payers are absent. Yet the real price of LASIK surgery has declined by 25% over the past decade.

The same principle can be seen at work in the international marketplace. For example, India has a potentially huge market for medical care. But 80% of health care spending in that country is private and there is very little health insurance. So some of the companies that make expensive technology for the developed world are now finding ways to produce the same services for a fraction of the price.

GE Healthcare, for example, has introduced a portable electrocardiogram machine into the Indian market that will do the test for 20 cents (compared to a normal price of $50). Siemens (another maker of high-end, expensive equipment) has built mobile diagnostics units for the Indian market with X-ray, ultrasound and pathology systems.

As Sujay Shetty, leader of the pharmaceuticals practice at PricewaterhouseCoopers in India, explained, “In India we want first-world technology at third-world prices…India can also be a springboard for Africa and Latin America, which have similar needs.”

Bottom line: If we want more of the right kind of innovation we must encourage health savings accounts, health reimbursement arrangements and other methods of giving patients more control of health care dollars.

Comments (32)

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  1. Joe S. says:

    Excellent post. In a bureacratic system, replete with perverse incentives, innovation will be directed at satisfying those perverse incentives. How could it be otherwise?

  2. Vicki says:

    Nice Youtube pairing. I’ve always liked the theme music from Cosmos.

  3. Stephen C. says:

    Bottom line: innovation solves problems where third party payers aren’t mucking up the incentives of all the actors in the system.

  4. Neil H. says:

    Brilliant.

  5. Ken says:

    There has been so much nonsense written lately about innovation in health care, this post is a refreshing and welcome clearing of the air.

  6. LAURENCE BRODY, MD says:

    Yes, John HSA’s will give the doctor patient relationship a boost and create efficiencies, but if you want to destroy that and take economic control of healthcare, HSA’s are a good one to destroy as soon as possible.

    Obamacare is an economic takeover of healthcare, and so it needs to eliminate non-governmental control of money flow and relationships. Put government in the path of every part of the health care chain.

  7. Ralph says:

    John,

    Why is it that innovation from small companies is it ignored? Kaiser does not have a chokehold on innovation.

  8. John R. Graham says:

    I don’t know if one would be able to model a counterfactual evolution of health spending if the U.S. government had not discriminated against individual ownership of health dollars instead of 4th-party ownership. (I write “4th party” because your employer also stands between you and your health insurer, which is the 3rd party.)

    However, I suspect that if the government had just given everyone a refundable tax credit or voucher in the 1940s, there would be little demand for health insurance today. Medical procedures would be so inexpensive that very few people would find them too expensive to pay for directly, out of pocket.

  9. Devon Herrick says:

    I’ve often wondered why Indian physicians and nurses have not been tapped to assist U.S. patients managing chronic diseases. These are tasks U.S. physicians have little time for because they are reimbursed poorly. Patients (and insurers) could theoretically hire an Indian disease management firm to monitor diabetes in cooperation with domestic providers. Cash-based health care systems in countries where costs are lower could prod U.S. providers to become more competitive.

  10. Jim Morrison says:

    Hmmm. John, one might conclude from your post that health INSURANCE is the problem.

  11. Erik Ramirez says:

    It seems to me that by advocating a HSA style of reimbursement, doctors are simply attempting to keep cash flowing from their clients pocket to their own. It will not have any effect on doctors providing more testing to “CYA” against lawsuits. It simply means that the consumer pays “up front” instead of the insurance company, who you pay a premium to every month; and in a recession it means people will go without treatment if they cannot afford the $2,000-$5,000 deductible associated with HSA’s.

    The best way to price health care is based on outcomes using best practices (to eliminate lawsuits) and bundled payments.

    Why should I, as a consumer, have to pay a physician twice for a cancer treatment that is unsuccessful? Or why should I be charged by a hospital for days I spend there due to catching a secondary infection the hospital is responsible for?

    Outcomes, best practices, and bundled payments would answer these questions

  12. Desmond Joiner says:

    So True! Innovation lacking in Third Party Payer system. I noticed reports of decrease in Doctor visits and surgeries…PLUS, report of increase in usage of Internet.

    I wondered if a module could be developed permitting local doctors to enter the Online Physician Care…I was told no one wants to develop it…Carriers do not pay for it. One example of innovation found wanting in the Healthcare Industry.

  13. steve says:

    Cosmetic surgery is an interaction where both parties can walk away. It is completely elective. It fits a market method well. This does not describe most of the medical decision making where we spend the most.

    Steve

  14. Greg says:

    Steve, I disagree. The vast majority of all health care is elective. People have time to make choices and to think about the consequesnces of those choices.

    Consider that by some estimates 70% of the money is spent on chronic illness. And chronic care is almost by definition elective (or at least postponable) care.

  15. Erik Ramirez says:

    Greg,
    So you are saying someone with COPD is by definition using elective care? How do you postpone treatment for COPD? When someone with COPD ends up in the ER is there time to call your accountant or check your benefit summary to see if this is the best way to spend medical dollars?

  16. Chris Ewin, MD says:

    Great post John. And I have always agreed on your thoughts about HSA’s. Devon has good examples of “Concierge medicine” in his article. Innovative primary care practices for the insured and uninsured are steadily increasing to cut out the tremendous waste in HC. It is happening…
    Last week, I found an open MRI for my cash paying/high deductible patients for only $350 with and without contrast. Next door at the hospital, it’s $2,000…
    Long live the marketplace..

  17. artk says:

    Well, Chris, what’s the network rate that hospital charges United Health Care or Wellpoint for that MRI? I remember at one point I had United Health Care and they for some reason were sending me paperwork that included both the hospital list price for various blood tests and the United in network reimbursement rates. The in network reimbursement was sometime 5 or 10 percent of the billed price. You just may have discovered the advantage of being an insurance company.

  18. Robin says:

    In Southern California, an innovative company called HealthyPrice.com (the brainchild of 2 physicians) recently launched that offers discounted cash prices for all types of medical procedures, office visits, labs, MRIs etc for patients who pay cash through the web site. The prices are substantially less than what a cash-paying patient would pay if they just walked into a doctor’s office or radiology suite. Not only that but the prices are transparent- in healthcare, half the battle is just finding out from your insurance company what your portion is going to be. It is nearly impossible to get pricing. Healthyprice.com is rolling out throughout Southern California. This is the kind of innovation that delivers lower costs for patients and high quality care.

  19. John Goodman says:

    Robin, thanks for the reference. I’ll check them out.

  20. artk says:

    I looked at the healthyprice.com site. What it’s not is providers competing on price. Apparently, all the providers on the site agree to charge the price listed on the site, sort of like internet based price fixing.

  21. Chris Ewin, MD says:

    artk…I’m not sure of the network rate..
    Real time case:
    I’m sitting with a patient right now in my office who’s wife has multiple sclerosis and needs an MRI with contrast.
    Last year it cost him $3,500 (not $2,000). He paid (reluctantly) b/c his wife didn’t want to leave. I found him one for $450. His labs this morning for a general health screen and lipids were $33 in my office, but next door at the same lab the cost is over $300. I just saved him over $3,000
    I charge him $1600 a year for unlimited primary care 24/7. He has me on retainer for the next 2 years b/c of his savings.
    Would any of you like that ?

  22. Chris Ewin, MD says:

    I do the negotiating on their behalf b/c many are timid to ask money questions of their provider…..

  23. Erik Ramirez says:

    So it seems by the example Dr. Chris provides, it is the medical profession itself that is the driving factor of cost.

    Here is a questions; “Why is there such a huge price differential for the same service?”

  24. Chris Ewin, MD says:

    Overhead.
    The lab next door has to cover costs of salaries and rent. I get discounted prices negotiated with the lab directly and pass the savings on to my patients.

    The hospital has huge overhead costs and other radiology groups/entrepreneurs have found ways to deliver the same product (Xray/MRI) at a cheaper cost with greater profit.

    Our “concierge” business model cuts costs by needing only a few staff and a small office (1200 sf) thereby increasing profit…

    But the most important part is the quality time and care we give to our patients…With pricing at roughly $2-5/ day, they make the decision on whether it is of value to them. Is this the answer to primary care which takescare of 80-85% of patients needs?…You betcha..If the uninsured/unemployed can find $6/d for cigarettes, they can find a way to pay for primary care themselves if they want it.

    The only problem is that many PCP’s are reluctant to change their practices, 46 % are estimated to be retiring early or changing jobs and few med students are going into primary care. This is, in my mind, one of the most important collateral damges of the present fee for service/third party systems problem we have in the US.

  25. Erik Ramirez says:

    Dr Chris,
    Thank you for that answer. The gist of what you are saying is it is the medical profession itself that is driving up the cost of medical expense and instead of innovating they are leaving the profession. I was a cancer patient last year so I have experienced all sides of this argument.

    I am also hearing you say that your patients have the resources to bind you for $1,500-$1,800 annually plus medical expenses. The next obvious question is, “do those patients also have insurance for a catastrophic event or are they strictly cash and carry?” In a catastrophic event they would be wiped out financially if they did not have any major medical insurance/Medicare.

    The reason I am asking these questions is that I am an insurance broker looking for alternatives for my clients and I am not yet sold on individual HSA’s (for the average person with average income) and the concierge services as of yet, but they are interesting concepts.

    What I have seen and do like is partially self-funded insurance for groups. They are HSA’s in which the employer picks up the deductible. They are dramatically less expensive in total costs for the employer and the employee feels as though they have full benefits, win, win.

  26. Chris Ewin, MD says:

    Do they have insurance??
    Not all do. Some have HDHP’s, normal insurance, Medicaid, Medicare and no insurance (or jobs for that matter). When a catastrophic event occurs, they use the county hospital or any ER that they would have anyway. I give them a yearly physical and nip their problems in the bud.
    It’s so affordable, I have patients in Las Vegas, Santa Fe, Houston, NYC, New Orleans and 3 patients in Sweden!
    Case in point: I had an 85 year old with insulin dependent diabetes on a cruise in the Indian ocean who went into diabetic ketoacidosis…an ICU manged event…I helped the Norwegian surgeon ships captain manage an IV insulin drip…When he got home he was just fine…..that’s health care for $167/month….Would you want that piece of mind for your Dad?? You betcha…
    The only problem is that Docs are afraid to jump of a cliff and that’s why I’m sharing my knowledge as past president of AAPP.
    Do you want to be my patient???? (I’m always marketing)

    PS employers pay ?how much for their employees to be gone when sick or injured. If you treat their Bronchitis before it becomes full blown pneumonia, then they AND the insurers/government save a zillion dollars.
    Comprende de vous???

  27. Chris Ewin, MD says:

    My diabetic patient sitting in front of me says his employer pays $2,000/ month for his low deductible insurance plan for his family….
    It’s not amazing to us on the front lines that solutions offered by those who aren’t on the front lines have innovative solutions for our patients and PCP’s problem with access to quality primary care at a reasonable, transparent price.
    I have an amendment I’m trying to get through Congress to have our practices recognized as “medical care”. This would open up many doors for PCP’s and patients.
    Then our services could be paid for with pre-tax dollars under HSA’s. It can be done with FSA’s because it’s done just like pre-paid dental plans.
    My patients understand this better than most and my patient is sitting here dictating to me.

  28. Rhonda says:

    this is directed at Chris Ewin, MD.

    May I ask… How is it that you treat so many people in so many places?
    Do they come to you?
    Or is this over the phone?

    How would you be able to prescribe medications to your patients in Sweden?

    How would you handle a major illness with Hospitalization?
    in another state?
    in another country?

    Where in Sweden do these people live?
    Is it that they are in more remote areas?
    Why are they unable to get a GP where they live?

    I live in Stockholm, Sweden, and to see my GP is MUCH easier than it ever was in the US.
    I walk into the clinic, hand them my Medical Card, 2 minutes later I am in my GP’s office.
    The longest I waited was 10 minutes once, and that was during Flu season.
    I have found this to be the case for everyone I have spoken with in the greater Stockholm area.

    I have many health problems and have had to use a LOT of different care. ER, X-ray, MRI, CAT Scan, Spinal Tap, Etc…
    when directed to see a specialist, it has taken no more than 3 days to get in. When I had a lump in my breast, it was only a walk to the woman’s clinic, and I was seen right away.
    again, this is the care that everyone I have met has received.

    When I was first moving to Sweden, I could not bring my prescription from the US to Sweden. I had to get a Swedish doctor to prescribe my medications.

    Being that I have lived in many American cities for my first 40 years. Than Norway, and Now Sweden. I can not understand why anyone in Sweden or Norway would need a GP in the US, unless they lived part time in the US.

    I have always received fabulous care in Sweden, and it was always above and beyond what I had in the US, and faster and very low cost.
    That is not to say that there are not good doctors in the US. However, unless you have the best health insurance, if you have a major illness, it can ruin you financially.

    Thank you upfront for any information on this.

    Cheers,

    Rhonda

  29. [...] Peter Suderman | August 9, 2010 John Goodman of The National Center for Policy Analysis makes an important point about innovation in health care: [...]

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