Which innovations can lower health care costs, and why they are difficult to obtain

I’m on vacation with my family this week – it gives me a chance to read a lot of fiction (just finished The Tiger’s Wife  and The Beauty of Humanity Movement both of which transported me to exotic lands (Yugoslavia as it was collapsing and Vietnam of just a few years ago)   Vacation also gives me a chance to step away from the daily news a bit – and muse about health care policy.

A few thoughts on innovation today.

Bold new innovation isn’t going to solve the problem of health care costs going up.  

We read with great interest the front page story about the young man with quadriplegia who trained his brain to activate his lower extremities.   I pointed out that whatever this therapy and the associated hardware cost, it would be nearly impossible to fund this for even a small portion of quadriplegics.   Of course, we have no idea how much this would cost.  My wife pointed out that quadriplegics were at high risk of pneumonias and other complications, and this therapy could lower the costs of such complications.

Here’s why this type of innovation won’t lower the cost of health care, even if it prevents many grievous and expensive complications.   When this technology becomes more mature and is commercialized, the patent owners will do an economic study of the benefits and cost savings associated with the therapy.  That will include the benefits of this therapy to the individual, to his or her family, and to society overall, as well as any health care cost savings through prevented complications or substitution for more expensive care.  

Many of these benefits will be outside of the health care system – such as years or decades of company of a loved one, productivity at work, and ‘life years’ saved. Then, the patent owner will assign a price, grabbing a substantial portion of the value created by this new invention.  I’m not griping- that’s the way things should be under patent law.  This encourages life-saving and life-improving new inventions.  However, as long as the inventor is setting the price based on all the value created, and much of that value is not measured in saved future health care claims alone, bold new medical innovations will almost always raise, rather than lower the cost of health care.

Disruptive innovation, however, really can lower health care costs.

Disruptive innovations are a bit inferior to the current incumbent technology –but “good enough” initially for a narrow group of customers who are being overserved by the existing approach.  Disruptive innovations exert negative price pressure on incumbent technologies, and improve at rapid enough rates that they often displace the incumbent over time.

Clay Christensen of Harvard Business School has developed this theory, initially from the world of computer hardware,  and most recently applied it to health care.   His first book The Innovator’s Dilemma,  is a short, pithy, insightful business classic.  Everyone in health care policy should read it. 

What are examples of disruptive innovations in health care?

-        Retail clinics:  They can’t do nearly all that can be done in a physician’s office – at this point, 20 or so different diagnoses are the limit.  They often use nurse practitioners rather than physicians, and they don’t offer 24 hour coverage.  So, retail clinics are not as good as a physician’s office – but MUCH more accessible, and substantially less expensive.  Over time, they will increase their capabilities.
-        Low strength MRI scans and handheld ultrasound machines.  Japan has $100 MRI scans, which don’t have nearly the definition offered by 2+ Tesla machines available in the US.  Handheld ultrasounds also don’t give as good an image as currently available installed ultrasound machines.  But they’re good enough for many purposes. Right now in the US, we use MRIs that are good enough to give a roadmap for brain surgery –but the level of detail available is unnecessary for many orthopedic procedures.
-        Generic drugs.  You could argue, and I often do, that generic drugs are just as good as brand name drugs.  The FDA’s effective regulation of the generic drug manufacturers has meant that the generics are as likely as brand name medicines to have the stated potency.   But they are at least a bit inferior, because the pills are not all the same colors and shapes. This can lead to more difficulty with adherence, especially for older patients and those with cognitive difficulty.  They’re good enough, though, for many, and much less expensive.

Disruptive innovation isn’t easy to implement.   Physician advocacy groups vehemently opposed retail clinics in many states, and licensure rules meant to protect the public are often used as “guild” tools to protect those who have an existing monopoly.  You might know that the Toshiba MRI scanner that allows $100 MRI scans isn’t licensed for use in the United States.  It would be opposed by makers of the current expensive MRI scanners – much as the makers of mainframe computers weren’t thrilled about the idea of personal computers. A complex web of regulations in health care makes it almost impossible to get a license to import a scanner that is inferior (albeit much cheaper) than existing technology. Radiologists aren’t eager for a lower priced scanner, which could further erode their dominance in imaging as many other physicians purchased such scanners.  Hospitals that have invested millions in the current generation of MRIs with incredible capabilities also see how low-priced scanners could threaten their profit margins.

Generic drugs are readily available, and have been a major source of health care savings over the past half-decade. However, brand name pharmaceutical companies have used vigorous legal maneuvers to delay the introduction of generics. Big pharma companies in some instances have even paid generic manufacturers to delay generic launches to maintain their sole-source protection for extra months or years. 

So – bold new innovation can make our lives longer and better, but won’t save a lot of health care claims dollars.   Disruptive innovation can save money – but is forcefully opposed by those who profit from the current state, who are enabled by regulations meant to protect patients.