How to afford health care is the wrong question


Jul 1, 2013

PwC’s Health Research Institute recently predicted medical costs will increase between 4.5-6.5%[1] in 2014. This information was cited and celebrated as evidence that the health care cost curve is beginning to bend. While I acknowledge the hard work of brilliant professionals to reduce the cost of health care, celebrating this news seems to indicate that we should try to figure out how to afford the health care system we currently have. I would submit that this the wrong question. The right question should be how we change the system to make health care affordable, not how we can afford our current health care system.

The current US health care system was built in the 19th century to combat the plagues of infectious disease and acute illness at a time when transportation was expensive, medical expertise was relatively cheap, and advanced technology was scarce and usable only by highly-trained experts. In such circumstances, the appropriate and logical thing to do was centralize the people and technology in large buildings called hospitals. Everything else in the health system was configured to leverage the scarce resources and amortize the fixed costs centralized in the hospital.

Much has changed since this system was conceived. Medical science has made dramatic strides in diagnosing and curing infectious diseases with great precision. As such, many diseases that were debilitating or fatal in the 19th century are now either curable or manageable as chronic conditions. Advanced and expensive diagnostic technology that used to be operable only by experts is now available in the palm of your hand on your smart phone.  Transportation is now relatively cheap and medical professionals are very expensive. Unfortunately, the hospital-centric business model of health care has not kept pace with the changes in information technology and medical science.

Until companies are willing to forego attractive margins, highly-trained experts are willing to forego attractive salaries, and hospitals are willing to forego the business model of being all things to all patients, we will never be able to afford a hospital-centric business model of health care delivery. The likelihood of any of those things happening is miniscule!

So how do we make health care fundamentally affordable? Fortunately, health care is not the first industry to wrestle with the challenge of how to make expensive, complex products and services affordable and accessible to the masses. A wide variety of industries have wrestled with similar challenges as they have developed, including computers, automobiles, steel, and tax accounting. The theories of disruptive innovation explain the mechanism by which expensive, complex products became affordable and accessible. Building on these theories, The Innovator’s Prescription by Clayton Christensen, et. al. offers a framework for how an affordable and accessible patient-centric health care model could evolve:

  1. Simplifying technology can make things that used to be complex and expensive simple and affordable for the masses. One example of such simplifying technology is advances in medical science that have transformed once-mystical diseases like polio and HIV from virtual death sentences to conditions that can be diagnosed precisely at the root cause and treated or managed using targeted therapies and /or vaccines.  Another example is medical imaging—techniques that used to require an expensive X-ray machine operated by a highly trained technician in a hospital can now be done with a much cheaper but good enough hand-held ultrasound machine by a less-credentialed clinician in a clinic or even in the field.
  2. Disruptive business models must take simplifying technologies and apply them in lower cost venues of care utilizing less-credentialed clinicians to make what was once expensive and complex treatment accessible and affordable. Retail clinics such as Minute Clinic and take care are great examples of this—many treatments that used to require an appointment with an MD can now be diagnosed and administered by a nurse practitioner with very high quality results at a much lower cost. And, importantly, many of these businesses realize higher profit margins than more expensive physician offices and hospitals.
  3. A coherent value network where health care players make more money when patients are healthy than when they are sick is essential for disruptive innovation to take hold. In reality, a patient with high blood pressure doesn’t want to buy pills and appointments; she wants to buy controlled blood pressure. Unfortunately the current value network makes much more money from selling pills and appointments than it does from achieving controlled blood pressure. However, an integrated care network with an insurance component such as Kaiser or Intermountain can make more money from healthy patients and empty hospitals than it can from sick patients in hospital beds. Other completely new models are emerging as well that will be discussed in future posts.

The promise of affordable health care can be a reality, with higher quality care at lower cost. The theories of disruptive innovation reveal many clues for how that can come about. Just don’t expect it to materialize in a traditional hospital-centric model.