Healthcare, Healthcare Economics, Innovation

Will the Healthcare Cost Curve Bend to Payment Models or Technology?

Decade after decade, in political races, news stories, and now social media, we hear about the crisis of rising costs in higher education and healthcare. Inflation in prices for healthcare has long outstripped general inflation, and healthcare is now 18 percent of GDP. As people see one category of expenditures seemingly taking over their personal budgets, it’s natural to think this is a crisis, and something must be done.

The focus over decades of government and private activity has often been over payment models. The establishment of Medicare in the 60s, the managed care drive that began in the 60s and ultimately dissipated in the 90s, and the Affordable Care Act of 2010 all focused on payment models, payer structure, and incentives. Generally these models have focused on taming consumption. Healthcare costs have continued to outpace other costs through it all.

At the same time, this decade has seen a surge in enthusiasm for technology as the force that will liberate us from the cost spiral. Whether it is telemedicine, or population health powered by data science, or personalized medicine powered by advanced genetics, technology offers the tantalizing prospect that we can achieve increased productivity in healthcare, rather than trying to hammer away at consumption.

So what does the future bring? There are several things to consider. The first is that as our society gradually becomes wealthier, it is natural for people to spend more on healthcare and education. Next, the escalation in healthcare prices to some extent reflects what is called Baumol’s Cost Disease. In short, the number of nurses and doctors needed to care for a patient in hospital has not changed in the radical way that the number of workers needed to make a car or television has. Both higher education and healthcare have remained skilled-labor-intensive. As the productivity, and thus opportunity costs, for skilled labor in other sectors has risen, the cost of skilled labor has shot up even where productivity hasn’t. So healthcare “costs more.”

The final thing to remember is Herbert Stein’s maxim: “If something cannot go on forever, it will stop.” Healthcare cannot and will not grow to 100 percent or even 40 percent of our economy. Something will give. But what exactly will that be? Either productivity will finally rise, something will rein in consumption, or some combination of the two will occur. Current attempts at curbing consumption include things like value-based purchasing and bundled payments. But these are not comprehensive solutions. Bundled payments for hip replacements can be relatively straightforward, especially in local markets with a high degree of integration. But other regions, and a large swath of other healthcare needs, will continue to be dominated by fee-for-service.

What about single-payer, which has now made it into the agendas for several likely presidential candidates? Although once politically unmentionable, we should not assume it can’t happen in the US. But would we ever bring healthcare expenditures down to the 10 percent of GDP we see in the UK? There are reasons to be skeptical. Britons are long habituated to central cost containment. Would Americans accept being on waiting lists for months or longer for hip replacements? Would they accept delays for specialist referrals, and outright denials on drugs and devices?

A close relative of mine who lives in London was put on a waiting list for several months to get his coronary arteries stented so he wouldn’t suffer chest pain walking a single block. After waiting his turn he arrived fasted and ready for the procedure, only to be told the hospital was overbooked, to go home, and that someone would be in touch to get him back on a new waiting list. When, finally, the angiogram went ahead, he was told they opened up one artery but ran out of time to do the other blockage, and he would need to come back.

People accept these things after living with the NHS for more than half a century, but I suspect any US system would start with our current expectations—and cost structure—baked in. Anything short of that will face strong political headwinds both from incumbent market providers and more crucially, from consumers.

As for market-based solutions for rationalizing consumption, there seems to be nothing on the table right now.

So put me in the camp that looks more to technology and innovation to help curb rising healthcare costs. At Hospital IQ we help hospitals and health systems see more cases and deliver more care out of every inpatient bed-day, every ER bed-hour, and every OR minute. We do this through the power of machine learning and artificial intelligence and large data set analysis that are worlds beyond anything that can be done using tools like an Excel spreadsheet. Hospitals have huge amounts of capital invested in facilities and equipment, as well as information technology, and they pay dearly for highly skilled labor. We put their data to work, and allow hospitals to produce more with every bed and every hour of labor.

Productivity gains are viral by nature. In a competitive landscape no one can ignore innovations proven to boost productivity. Unlike political efforts focused on consumption, opposition from incumbents and consumers is either absent or, in the long-term, generally ineffective.

Don’t get me wrong. Over time I am certain there will be evolutions in payment models that will meaningfully impact consumption. But consider me an optimist that we are at a historical tipping point for technology as the greater change agent.

This post originally appeared on the Hospital IQ Blog.

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