Provider Payment Reform is Key to Encourage Disruptive Innovation in Health Care

There is a lot of great innovation in health care – but not nearly as much disruptive innovation as we’d expect in an industry that represents a sixth of the American economy.  Disruptive innovation can bring huge social benefit – in terms of better good or services at lower prices available to more and more people.  However, disruptive innovation can be terrible for incumbents – and it’s only nurtured in environments where those making purchasing decisions are intensely price conscious. 

So – if we want more disruptive innovation, we need more price-consciousness in health care.

And we’re getting it, too.  As Drew Altman notes in his most recent Kaiser Family Foundation column, high deductible health plans are growing rapidly in the US – and it’s been almost under the radar.  Those with high deductible health plans use far less resources – sometimes skipping valuable care as well as discretionary care. 

Higher patient exposure to health care costs is likely to lead to more fertile territory for disruptive innovation.  For instance, if all office visits cost a $15 copayment at the point of service, patients would not flock to retail clinics, with their limited menu of services.  When patients are paying the first $2,000 or more for their care, and then 20% for care beyond the deductible, they’re much more likely to “shop” for better bargains – which is great for disruptive innovation.  Hospital emergency departments offer many services that most people with earaches don’t need, and higher member cost-share discourages overuse of expensive sites of care.

But patient cost share only works to encourage more prudent purchasing behavior if
-        The health care service is elective, where the patient has a choice. 
o       It’s pretty hard to convince an ambulance driver to take you to the most cost-effective hospital if you feel an elephant sitting on your chest, are out of breath, and are drenched with sweat!
-        The patient has some idea of the cost. 
o       Most physicians have no idea what various health care services cost, and even  health plans often aren’t sure of the actual cost of a service.  This is even worse because services are not bundled in ways patients find intuitive.  Even if I knew that my physician would charge $150 for a level 4 office visit, I’m not sure that she would bill that level of office visit, and she might order laboratory tests that would increase the cost dramatically
-        There is some signal available about quality
o       No one would recommend going for the cheapest angioplasty if the cardiologist had a history of bad outcomes.
-        There is choice
o       In many rural areas, there is a single hospital and often a single group in each specialty.

The biggest problem is that a small portion of patients represent the vast majority of health care costs (10% of patients represent about 60% of all costs). I recently saw data where those in the top 50% represented 93% of total costs (averaging over $3000 per person).  These patients will almost always exceed the annual deductible, so all this extra “skin in the game” might dishearten those with severe illness, but it’s not so likely to change their behavior.  If the extra member cost-share decreased utilization among this half of the population by a factor of half, it would only lower overall health care costs by 3.5% - less than the inflation rate for a single year! Much of the care received by the low cost half of the population is preventive, so we really don’t want to decrease that anyway!

In many instances, the purchaser of health care services is frankly not the patient – but is the health care provider. For example, patients are not generally shopping for the highest value hip prosthesis.  They “shop” for an orthopedist, and the orthopedist recommends what artificial hip should be implanted.  

That’s why I believe that bundled payments and provider risk are the real keys to increasing disruptive innovation in health care. 

Bundled payments have been very effective at increasing disruptive innovation in the provider community in the past.  For instance, when Medicare switched to the diagnosis related group (DRG) payment methodology, hospital stays got dramatically shorter, and total days in the hospital plummeted.  Essentially, the physicians who demanded longer hospital stays under a “cost plus” payment system figured out how to cut hospital stays when they were asked to be prudent purchasers of hospital services.  Independent practice associations and other provider organizations taking “risk” or capitation have put in place innovative programs to diminish hospital admissions and readmissions, and dramatically increase use of generic medications. 

Disruptive innovation is nourished by value-based purchasing, and government can do two things to increase value-based purchasing.

The first is to help us know what really works, and what doesn’t.  That’s why it’s critical to increase our investment in comparative effectiveness research – whatever we want to call it. We’re not talking about rationing or death panels – we’re talking about collecting the data we need to know what’s worth paying for.   

The second thing is, can we please allow the FDA to make determinations about approvals based on value rather than just effectiveness?  As long as we approve a new medication or medical device that is ten times as expensive as existing medicines, and is merely “noninferior,” pharmaceutical and medical device companies will focus their research efforts on innovations that will increase the cost of care, rather than those that could substantially increase value, and sometimes even lower costs.  

The Managing Health Care Costs Indicator will return next week