Here’s a simple key to parsing the future economics of healthcare. We have been trying for over 30 years to control healthcare costs. And there is little evidence that any of these efforts have had much effect. For decades the rise in healthcare costs has been consistently several times higher than the general inflation level.
There have been dozens of schemes used in various parts of the industry — inpatient, ambulatory, devices, pharmaceuticals — and by different payers. But all of them, at each level in the industry, have had the same DNA: they have been based on controlling the unit costs, the price a doctor can charge for an office visit, a pharmaceutical company for a drug, a hospital for a night in a room. The few that have attempted to control system costs, such as “certificate of need” processes to control hospital expansion, have been indirect and ineffectual, and often have served only to control one part of the system (such as hospitals) while other parts expanded unchecked (such as independent surgery centers and labs).
Imagine that a business is constrained by the market, or some regulation, in how much it can charge for a product, such as televisions. What does it do to try to continue making a profit? Two ways. The first is volume. It does its best to sell more units. The second is upsell. Instead of selling simple TVs, now it wants to sell home entertainment systems with 50-inch screens and massive speaker systems.
Does this sound a bit like what the healthcare system has done over these decades? The system does vastly more for us than it did a few decades ago. There is vastly more that it can do. There is no doubt that much of this “more” is also “better,” wonderful and useful, helping us to live longer with less suffering. But much of this “more” is not better, it’s just more — surgeries of marginal usefulness, drugs to solve lifestyle problems, ER crises that could have been avoided by smarter, earlier intervention.
Now that the real cost and capacity crisis is beginning to hit us, and much of the health plans’ traditional cost-avoidance business model has been kicked out from under them, we are beginning to see “green shoots” of a new style of thinking arising across the industry, mostly from large employers and a few health plans, focused not on unit cost but system cost, asking not how they can “bend the cost curve,” lowering medical inflation by a few percentage points, but how they can actually send it negative, actually lower the real system costs of healthcare, not by denying people care, but by making them healthier. Because most of the cost of healthcare arises from chronic disease, most of which derives from behavior and can be prevented, and most of which can be medically controlled, the opportunities for reducing cost are huge. The models are there, have been proven, and can be copied. The business case for both employers and health plans is strong. So watch this trend: Ignore continuing attempts to control unit cost, and pay attention to emerging programs, partnerships, and business models that reduce system cost. That’s the future.