Disclaimer: I am far from an expert in the healthcare system. Rather, it is a key issue that I wanted to learn more about. Much like signing up for a race to use as motivation to start running, the best motivation for me to learn more about this topic was to write about it.
…maybe the secret is inside this comic book.
Healthcare in the U.S. is a puzzling anomaly, an example of a system unable to sustain the momentum generated by strong scientific, medical, and engineering research, exceptional medical technology, and some of the best physicians in the world. One thing is certain; the problem is not the result of inadequate spending. In 2011, it was estimated that the US spent over 17% of its gross domestic product (GDP) on healthcare, a figure that’s rising and expected to approach 20% by 2017. Compared to the rest of the world (see below), the U.S. sticks out like a sore thumb, both in how much we currently spend and the rate that the percentage is projected to increase. More importantly, this highlights inefficiencies and major flaws in our healthcare structure.
Okay, I got this from Wikipedia, but they probably got it from a reputable source.
What’s the problem?
The problems in our healthcare system are not the result of a lack of capacity or ability. Though many proposed solutions try to solve the problem by government subsidies and making insurance more affordable, the issue and root of the problems are much more fundamental.
The U.S. healthcare system is a multi-billion dollar industry consisting of both private and public (VA, “free” clinics, gov’t programs) providers. Like other industries, our healthcare system is driven by competition between these providers and 3rd party middlemen (ex. preferred provider organizations – PPOs; health management organizations – HMOs) fighting over our (the consumer’s) business. Despite this, the healthcare industry does not conform to the same economic principles that regulate all other competitive industries.
ECON 101 – What drives competition?
Conventionally, competition in a free-market implies that businesses aim to provide the best services while investing in ways to improve and innovate to keep costs down and improve quality. Profits equal revenue minus costs, and success is based on providing value. Companies with positive profits stay while those unable to remain competitive go out of business. This type of healthy competition enables successful companies to be profitable while forcing them to develop better products to stay ahead of others, ultimately benefiting the consumers. Each competitor is kept honest by a constant threat of existing competitors and new entrants to the market (value-based competition).
The U.S. healthcare industry is characterized by a radically different form of competition. Costs and prices continue to rise while minimal increases in value is translated to the consumer. Despite large-scale proposals highlighted by the recent enactment of Obamacare (Patient Protection and Affordability Care Act – PPACA), few of the main points in the PPACA address the dysfunctional and misaligned state of healthcare competition. Rather than creating value and incentivizing value as the driving force, our health care system is driven by constant shifts of costs from one group to another where one side’s gain is another side’s loss. In game theory, this is called zero-sum, a term which has applied to our healthcare system (zero-sum competition).
Specifically, what still needs to be addressed? (If you’re still with me, thank you.)
While many exist, I’ve narrowed it down to 5 main areas:
1) Lack of power of the consumer/patient
2) Misalignment in the value chain
3) Limited options and visibility
4) Current focus in medicine research (bucking the current focus on treatment applied to a population compared to preventative medicine or personalized medicine)
5) Reimbursement strategies
Looking at these differences, they almost present a compelling-enough argument why the PPACA is unlikely to achieve its goal because it does not address a majority of these issues. Specifically, these areas of concern may spawn additional problems and even exacerbate the status quo by attempting to insure more people and cut funding while doing little to increase the amount of value or quality.
Lack of power of the consumer/patient
Not the value chain and highly oversimplified, but it does show the parties generally involved.
How much influence do we, as consumers, have on decisions made by healthcare providers and 3rd parties? Due to the complexity of the health care system, the amount is very little. Generally if one is employed, the insurance provider is already picked out (in the current job state, few of us have the luxury of deciding where to work much less the insurance provider the employer chooses). Additionally, healthcare has very low elasticity of demand (a necessary good with no substitutes) which ultimately results in a lack of competitive incentives where increasing value does not result in much more profit (see reimbursement strategies below).
What does this mean?
Looking at the value chain, this means that 2 of the 3 main segments of the healthcare value chain (minus ourselves) is predetermined for us. This brings us to the next point…
Misalignment in the value chain
In a business, the value chain describes the steps required to turn raw materials into finished goods and includes all parties, activities, and intermediates involved. While optimizing each segment is important, the overall goal is not the optimization of a single or portion of segments within the value chain but rather the overall optimization or profitability of the business itself (more from this interesting article by Hau Lee).
As it stands, the current healthcare value chain is extremely misaligned:
For consumers – the goal is value, here defined as quality of care and effectiveness of treatment.
For the employers – finding the cheapest plan while still maintaining obligatory company standards and ethics.
For HMOs, PPOs, and other 3rd parties – maximizing profits (i.e. the difference between received premiums and money paid to providers).
For healthcare providers – maximizing volume of service and profits (as much as we want to convince ourselves otherwise, most hospitals and clinics are still businesses).
Since there is very little consumer power, the result is a heavy emphasis on profits leaving little room for creating additional value for patients.
Limited options and visibility
HMOs and PPOs provide, at best, a specific network of doctors to choose from, which limits patients from considering all doctors in a region. With HMOs, patients must also go through their primary care physician (PCP) every time regardless of illness, which increases costs and inefficiency. The limited selection and strict rules contribute to an overall decrease in visibility for patients to make educated and best-fit decisions based on their needs. This practice also hinders competition between providers since HMOs and PPOs determine the network of doctors primarily based on costs and their own profitability, which discounts the best interest of patients.
Also contributing towards the lack of visibility is the lack of a method to measure and compare quality of providers within a network (how do you know which doctor to choose?).
Current focus of medicine research
Currently, much of our research and clinical care protocol is still focused on treatment which is more expensive than prevention and less effective than personalized medicine. Costs can be reduced and efficacy of therapy can be increased if more focus is put on awareness and preventative measures rather than treatment when the disease has already manifested visible signs in the patient.
Reimbursement strategies
Lastly, reimbursement from HMOs/PPOs to hospitals and providers is currently based on procedure performed and not outcome achieved. Thus, it would be beneficial for patients if reimbursement is switched to a value-based system where the percentage of patients cured becomes the metric for determining reimbursement amount.
The final word
The driving force and backbone of the US economy is competition. Competition between businesses is what guides innovation, research, and most importantly, improvements in value for a product or service. The most important step towards fixing the healthcare system is restoring that sense of competition between healthcare providers. What future legislation should first address is the healthcare system itself instead of trying to cover more people with something that doesn’t work. Blindly throwing money through government programs, diagnosing problems in the system based on overly generalized or inconclusive data, and increasing the number of people who are insured will still not result in an improvement in quality.
Dream big. Work hard. And think for yourself. 