Excess Healthcare Spending Is Undermining Innovation

3/19/13

I read Luke Timmerman’s article yesterday on ProCure with mixed emotions. My first emotion was that of deep gratitude for the men and women who commit their lives to the science of improving healthcare. I continue to be inspired by these professionals and their incredible contributions to a healthcare industry that is very slow to accept change. My second emotion was that of deep dismay because our healthcare system is on an unsustainable economic course that is desperately in need of reform. I encourage the detractors of Luke’s article on ProCure to step back and think more broadly about the economic problems of healthcare as it is one of the most important debates in our country right now. Brute force budget cuts, such as the sequester, threaten the very research programs that will provide the next great wave of medical innovations.

I believe the problem originates from healthcare’s fee-for-service model. As incomprehensible as it may seem, fee-for-service provides the incentive for high-cost, low-risk, incremental improvements we see in healthcare today. For example, suppose a hospital had a choice between two safe, effective and proven treatment options to include in their service menu. Both treatments were supported by good data and good clinical outcomes. The big difference is the cost of the treatment. Treatment one is $1,000 ($600 for the product developer and $400 in gross margin for the hospital). Treatment two is $10 ($6 for the product developer and $4 in gross margin for the hospital). The unfortunate reality for all of us is the hospital and product developers have a greater incentive to prescribe the $1,000 treatment versus the $10 treatment which would work just fine. How can we blame the healthcare providers for choosing the more expensive treatment when this is what we incent them to do?

The Affordable Care Act attempts to flip the incentives around and drive more incentives to make the $10 treatment the standard and MORE profitable for the hospital to prescribe as a medical service than the $1,000 treatment. The doctor and patient could still elect to go ahead with the $1,000 treatment, however, the cost would be covered by the hospital or the patient.

We all want the best care and best outcomes from our care providers. As consumers, we now have a responsibility to think more deeply about the overall affordability and sustainability of care delivery and how the incentives work in this industry. If we want some perceived technical benefit from the $1,000 treatment, we should be willing to pay the $990 in extra costs out of our own pockets versus expecting the government to pick up the tab.

As a consumer, I would love to see an economic model that rewards doctors and care delivery organizations that promote health and wellness as well as finding the most cost-effective treatment when care is needed. With lower healthcare costs, we can afford to reinvest in deeper and more disruptive healthcare innovations.

The U.S. remains the standard bearer for innovation. No other country comes close. If we can combine the power of true, affordable health and wellness innovations while simultaneously transitioning healthcare to a sustainable financial model, the U.S. Healthcare system could once again define the standard of care for the world.

Rob Arnold is an Entrepreneur in Residence at the University of Washington, advising emerging growth companies on business strategy, planning and investment. Follow @

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  • Whalley

    The fee-for-service model on the supply side is only part of the equation and, IMO, if we want to get to the root cause we need to examine why the demand side is there. Why are we getting preventable illnesses that require intervention, and if we become ill how do we decide what course of treatment to take?

  • http://www.facebook.com/erik.nilsson.961 Erik Nilsson

    Yes, fee-for-service is one of the roots of the problem, and we need to move away from it.

    However, part of the pressure for increased healthcare spending is that we really want the product, and the temptation to spend more will always be there.

    This is a problem or not depending on how you think about it. What can’t be fairly disputed is that we can get more for our money, and we need to get more for our money.

  • http://ducknetweb.blogspot.com/ Medicalquack

    No it’s the Affordable Complexities Act driving everyone crazy, built by corporate USA and it increases profits…models behaving badly to quote Emanuel Dermon and his book:) The data selling epidemic is also contributing to a lot of adverse affects, as banks and companies make billions in profits doing so…algorithms move the money so you end up with pseudo innovation from a lot of it. I’m not a genius at this as there’s at least one article every week in the media about how corporate USA flourishes on complexities with profits. Bloomberg had one this week:)

    http://ducknetweb.blogspot.com/2013/04/not-obamacare-that-is-failing-its.html

    The documentary called the Quants of Wall Street is also a very good video that enables the layman an opportunity to see how models and math works and the amount of fiction that goes in to them. Insurers employ tons of quants…

    http://ducknetweb.blogspot.hk/2012/09/quants-alchemists-of-wall-street-video.html

  • Ida

    The cost and complexity of compliance knows no bounds and will overwhelm efficiency and innovation for decades.