Health Care: The Simple Solution

I have spent much of my professional life studying innovation. Twelve years ago some friends suggested that the struggles of our health-care system were essentially problems of managing innovation. Instead of studying health care to reach conclusions about health care, as others have done, they suggested examining the industry through the lens of innovation.

Along with two physicians, I recently wrote The Innovator's Prescription. My co-authors' work, and my forays into health care—I've had diabetes for 30 years, suffered a massive heart attack, and am now in chemotherapy for lymphoma—informed our perspective. Our key conclusion: The cause of runaway health costs is malpractice, but not the medical kind. Rather, we're guilty of business model malpractice on a grand scale. Most caregivers in our system bring great talent and commitment to their patients. But the systems in which they work compromise quality and push up costs.

Those who debate insurance reform in Washington and pit public against privately funded care are framing the problem incorrectly. Here's a better way to think about it: Economists are wrong in asserting that competition controls costs. Most often innovation and competition drive prices up, not down, because bringing better, higher-priced products to market is more profitable. Hospital-vs.-hospital competition causes providers to expand their scope and offer more premium-priced services. Equipment suppliers boost the capability and cost of their machines and devices. Drugmakers develop products that bring the highest prices. It's because we have such competition, not because we lack it, that health costs are rising by 10% a year.

The type of competition that brings prices down is disruptive innovation. Disruption in health care entails moving the simplest procedures now performed in expensive hospitals to outpatient clinics, retail clinics, and patients' homes. Costs will drop as more of the tasks performed only by doctors shift to nurses and physicians' assistants. Hoping that our hospitals and doctors will become cheap won't make health care more affordable and accessible, but a move toward lower-cost venues and lower-cost caregivers will.

The public-private divide shows that the debate is stuck at the wrong fork in the road. Many public health systems, like Canada's and Germany's, are departmentalized, with separate administrators handling doctors, hospitals, drugs, insurance, and so on. Although government pays the costs, such public systems are similar to the American system, where employers pay for the services of independent insurers, hospitals, doctors' practices, and drugs. In departmentalized structures, innovations that add costs in one silo in order to save money or improve performance in another cannot succeed because the overall system lacks a unified perspective. Independently managed hospitals have incentives to fill their beds; independent insurers have incentives to minimize reimbursement and access; and the ensuing gridlock prevents all but the most incremental of innovations.

In integrated systems—where the provider and insurer are the same entity—a single perspective enables providers to take actions in one place that will cut costs or lift performance in another. While hospitalization is a revenue opportunity to an independently managed hospital, in integrated systems hospitalization is seen as a failure. Integrated systems, including Kaiser Permanente in California, Geisinger Health System in Pennsylvania, the public systems in Finland and New Zealand, and the Veterans Administration in the U.S., can provide better care at 20% to 30% lower cost. Clearly, systemic problems require systemic solutions.

I desperately hope that our lawmakers in Washington fail to reach agreement on either public or private options because these are wrong answers to the wrong questions. Both will permit perpetuation of the sort of business model malpractice that forces us to pay so dearly for health care and will, in the end, strangle our economy.

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