Clearly, there is no silver bullet that can cure what ails health care. As depicted in Figure I.1, the cure involves three enablers: technology, a business model, and a commercial ecosystem that we call a value network. Putting them together can best be done by integrated companies. But with enablers come constraints. Even the most integrated and powerful entities in the industry will find their progress impeded unless additional innovations that attack these infrastructural constraints are put into place. These were depicted as the middle triangle in Figure I.1, and we will explore them in Chapters 7,8,9,10,11. Together with the enablers, these comprise the best map we can draw of the terrain of reform ahead.
Reforming the Reimbursement System
Most discussions about reforming our health-care system hit a dead end when the participants realize that the reimbursement system will simply not allow it. The prices at which reimbursement occurs determine which products and services are profitable, and which are not. Because people will predictably do more of what is profitable and less of what isn't, the system of reimbursement in the United States constitutes one of the most powerful and pervasive schemes of macro- and microlevel regulation that humanity has ever devised.
Health insurance emerged in the 1920s—alongside fire, life, disability, and auto insurance—as a self-purchased product to protect against the unlikely possibility of a disastrously expensive health problem. After legislation in 1943 made health benefits a tax-free form of compensation, employers increasingly used health insurance as a tool for attracting and retaining the best possible employees.24 Through the 1960s and 1970s, employer-provided insurance against catastrophic events evolved into comprehensive coverage that paid for all health-care costs, large and small. We show in Chapter 7 that the "job" for which employers use health insurance is to attract and retain the best employees possible. Although employers complain about the costs of health care and make noises about wishing to unshackle themselves from that burden, few would probably ever choose to do so—because health coverage is a key weapon required to win the war for talent. That's the good news.
The bad news is that the insertion of massive insurance/reimbursement firms between patients and caregivers over the last three decades has obfuscated all sense of whether the value of services offered is a good deal or a bad one. The dominant payment mechanism today remains fee for service, which defines a simple formula by which providers can prosper: the more services you provide, and the higher the price of these services, the more money you make. It encourages providers not to offer as much care as is needed, but to offer as much care as possible. It is akin to spraying jet fuel on the explosion in health care costs.
The lubricants of efficiency in free-market capitalism are prices that provide accurate, autonomous signals about where, when, and how to create and deploy value-creating innovations. But not only are these prices invisible to most patients and purchasers, most of the prices that claims processors pay are not set by market forces at all. Rather, they are administered prices calculated by Medicare and the insurance industry using pricing algorithms similar to those used in communist systems. The most deleterious effect of these pricing mechanisms is that it's difficult to implement disruptive innovations, which are the key to ushering in affordable health care.
In Chapter 7 we'll discuss a combination of two major interdependent streams of innovation—high-deductible insurance coupled with health savings accounts on the payments side, and disruptive business model innovations on the provider side—that would be a far more effective system for governments and employers to make quality health care affordable. Unless both sides of this reform are done in concert, however, both will fail, because consumers will find themselves paying out of pocket for inconvenient, expensive options that far exceed what they can afford or are willing to pay.
Reformers who focus solely on how to pay for rising health-care costs fail to address the root problems of why care is so costly to begin with. Overcoming this interdependent nature of reimbursement requires integration and the development of a congruent value network. If we don't address the inseparability of this challenge, we run the risk of setting up a system that in fact constitutes "coverage without care."25
Perhaps more important, a payment system that incorporates health savings accounts aligns consumer incentives, both financially and behaviorally, giving consumers the freedom to participate in their care or to outsource the decision making to a medical home or health advisor. Regional or national markets set up to encourage and inform consumer choices will help foster these critical decisions.26
Role of Information Technology in the Disruption of Health Care
Information technology will play two crucial roles in facilitating the emergence of disruptive business models. First, IT will be the enabling mechanism that shifts the locus of care, when this is desirable and feasible, from solution shops to facilitated networks. It will enable doctors, nurses, and patients to help each other; and it will provide the enabling fuel for primary care doctors to disrupt specialists, and for nurse practitioners to disrupt doctors. Second, the transition from medical records based on pen and paper to ones that are portable, easily accessible, and interoperable will not just substantially reduce the costly paperwork that burdens today's caregivers. It will be the primary mechanism of coordination among the providers in the disruptive value network, as depicted in Figure I.2. These will make it easier to avoid costly mistakes, and will enhance the involvement of patients in their own care.
IT and Facilitated Networks
There are two levels in many disruptive transformations of industries. In most disruptions, companies with lower-cost business models emerge at the bottom of a market in simple applications and gradually move up-market to disrupt the established competitors. Toyota did this to General Motors. Canon did it to Xerox. Sun Microsystems did it to Digital Equipment. Disruptions such as these transform markets with expensive, complicated products that could be used only by a few people with a lot of money and a lot of skill, into markets where far more people with less money and skill can own and use the products. In this stage of disruption, however, the type of business model remains the same. In these examples, the disruptees and the disruptors both made their cars, photocopiers, and computers in value-adding process business models.
A second level of disruptive transformation comes when not just buying and using the product become affordable and simple, but developing the product becomes inexpensive and simple as well. When this happens, the type of business model shifts from a solution shop or value-adding process business to a facilitated network business. For example, it used to be very complicated to produce and sell albums in the music recording industry. Production and distribution were value-adding process businesses in which only a limited number of companies participated. MP3 technology, however, made it so simple to record and distribute music that any band with a basement or garage can do it. YouTube led to a similar change in the development and distribution of video: anyone armed with a webcam can do it.27 In both these industries, networks have emerged so that the participants can exchange content and items of value with each other.
The Internet is enabling the emergence of facilitated networks in health care as well. As mentioned previously, Web sites like dLife.com and Crohns.org enable patients to teach each other how to live with their diseases. Professional networks enable physicians to share insights from patient case studies with each other, without enduring the cumbersome rules and delays entailed in conventional academic publishing. And through expert systems, content and judgment previously available only to specialist physicians become easily accessible to generalist physicians, their assistants, and their patients. As these networks grow, the center of gravity for the care of many chronic diseases will increasingly shift from solution shop business models to facilitated networks.
Evolution of Patient Health Records
The second role for IT in transforming the cost and quality of health care is through the enhancement of medical records. In its most basic form, an electronic medical record (EMR) is simply the electronically stored version of what has always been recorded with pen and paper. However, as the EMR movement gains ground, a medical record known as the personal electronic health record (EHR) has come to the fore. The ability to customize and focus the EHR on consumer involvement may allow it to overcome many of the hurdles that have slowed the adoption of EMRs.28
In some countries, such as Denmark, EMRs are pervasively kept in a standard format so any physician in any facility can instantly access the medical records of any patient. We suggest in Chapter 4 that, for good reason, we can expect the major integrated health-care organizations in the United States only to create and employ proprietary EMR systems. The reason is that when software is implemented in complex, established health systems, the power of the existing organizational structures and processes will force the records system to conform itself to them, rather than vice versa. Standard-format EMRs will flourish, however, in a new system of disruptive business models, because the processes and structures of those businesses are in flux and can therefore conform to the architecture of the EMRs.
A more flexible format may have already arrived in the form of the above-mentioned EHRs, whose growth mirrors the exponential growth rate of adoption that characterizes all disruptive innovations. Rather than using data provided and controlled by independent hospitals and physician practices as its foundation, the EHR collects data from all providers and shifts control of the medical record to patients. In bypassing the integrated structure of the existing value network and storing the data in open-source formats, the EHR facilitates connections among the new business models that will comprise the new disruptive value network in health care.
New EHR tools have recently been launched by Microsoft and Google, and innovators like Docvia have enabled patients anywhere in the world to manage their health using the Internet or their mobile phones for less than 10 cents per encounter. The potential changes that consumer involvement can bring are striking. For example, this technology has contributed to a substantial reduction in mother-to-child HIV transmission in large areas of sub-Saharan Africa. Most significantly, this technology appeals to all levels of society, both the very rich and very poor, paving the way for the much anticipated and long overdue transformation of medical records.
The Future of the Pharmaceutical and Medical Devices Industries
Five significant changes loom in the future of the pharmaceutical industry.
The first is that the advent of precision medicine heralds product-line fragmentation in pharmaceuticals. Volumes per therapeutic compound will drop significantly, as the number of therapeutic compounds expands. Blockbuster drugs will become rare. This will necessitate a reshaping of the business model of today's major pharmaceutical companies because—to borrow words from oil exploration—in the future there will be fewer big gushers to cover the costs of drilling a lot of dry holes.29
The second of the significant changes we foresee is that the trend already apparent on television, in which drug companies market their products directly to patients rather than through doctors and hospital formularies, is likely to become more widespread. Provided also with sophisticated information and decision-making tools, empowered patients will make self-diagnosis an increasingly common point of entry into the health-care system.
The third and fourth changes are related. In contrast to the past, when diagnostic products were regarded as unattractive stepchildren, in the future diagnostics will become quite profitable relative to therapeutics. In other solution shop businesses, customers are willing to pay high prices to firms like McKinsey & Company for precise diagnoses of their problems—because the value of defining and solving the right problem is immense. The modest profitability of diagnostic products and services has been an artifact of today's reimbursement system. This will change as the disruptions described above are implemented.
The fourth change is that because it appears to be a profit-maximizing move based upon data from the past, most of today's leading pharmaceutical companies are dis-integrating—choosing to outsource, step by step, drug discovery and development, the management of clinical trials, and the manufacture of their products. What drives this "shedding" of activity after activity is that revenues are unaffected by this outsourcing, while profits seem to improve. We show in Chapter 8 however, that where, in the past, sales and marketing muscle was the unassailable strength of major pharmaceutical companies, this is rapidly becoming commoditized by massive distribution and pharmacy benefit management companies like Medco. And what was a complex cost center to pharmaceutical executives in the past—the management of clinical trials and the concomitant development of precision diagnostics—is likely to become the core of profit generation in the future. The major companies, in summary, are exiting the wrong part of the business.
Fifth, and finally, generics competitors are disrupting companies that develop, manufacture, and market patented drugs. It's well known that generics manufacturers move in the day after the patent protection of drugs expires. Often, the price of these drugs will drop by as much as 80 percent, literally overnight. What is not widely appreciated, however, is that several major generics manufacturers, primarily in Israel and India, are moving up-market, developing their own proprietary products as they pursue greater profitability.
The reason they can do this is that the U.S. government allows our pharmaceutical companies to price their proprietary products high enough not just to recoup the cost of developing those specific drugs, but the cost of developing and testing all of the drugs that failed to make it to market as well. Most other governments—including that of Canada—have few pharmaceutical companies they must assist in this way. As a result, their national health systems negotiate much lower prices for patented drugs than those that are allowed in America. This constitutes a very real tax that American consumers pay to subsidize pharmaceutical research for the world. There is some evidence that this practice of subsidizing pharmaceutical companies' R&D costs in fact has allowed their work to become relatively inefficient. Disruptive, formerly generic competitors whose governments do not offer these subsidies of research costs seem able to develop new proprietary drugs at a cost 40 percent lower, on average, than that of U.S. companies.
Medical Devices and Diagnostic Equipment
We show in Chapter 9 that the use of devices and diagnostic equipment will decentralize—playing out a typical pattern of innovation. At the beginning stages of most modern industries, the initial products are so complicated and expensive that things become centralized: we take the problems to the solution.
By way of illustration, in the formative years of the telecommunications and photocopying industries, we took our messages to the Western Union telegraph office and our originals to the corporate photocopy center. Activity in the industry subsequently became centralized to economize on the high fixed costs of the equipment and the operators. While the vendors of those expensive, centralized products work to make them even better, disruptive innovators, by making the products simpler and more affordable, drive a decentralization of the industry—bringing the solution ever closer to the problem or the need.
For example, in telecommunications, the telephone made it possible for people to communicate over long distances from their homes rather than the telegraph office. With mobile phones, we don't have to be home; we can communicate from our pockets and purses. Canon brought photocopying to the closet around the corner; and the Hewlett-Packard ink-jet printer put it on our desktops. A new company, Zink, is now bringing photocopying to our briefcases. This pattern of centralization-decentralization characterizes the history of innovation in most industries.
The same pattern has begun to play itself out in medical devices and diagnostic equipment. Blood and tissue testing, and most imaging services, are at present centralized industries. Great opportunities for disruptive growth are arising as companies focus on point-of-care diagnostics and on in-office imaging technologies. This is a key technological enabler that will fuel professionals to do ever more sophisticated procedures in lower-cost venues of care, and it will enable lower-cost caregivers to disrupt their higher-cost colleagues.
Developments in medical devices will change the essence of expertise in certain branches of medical practice. Interventional radiology, for example, is driven by such new diagnostic imaging technologies. Historically, the domain of radiologists was the operation of X-ray machines and interpretation of the images they generated. However, imaging technologies such as ultrasound and CT scanners have become so good that radiologists can get shockingly clear images not just of bones, but of deep tissues and organs. These imaging modalities had primarily been used diagnostically. Increasingly, however, radiologists and other nonsurgeons are using these techniques to guide minimally-invasive surgical tools. Because the doctor can clearly see the tools and target tissues on a television screen, executing a perfect procedure becomes much easier.
Already this is beginning to blur the boundaries between certain surgical specialties whose boundaries have generally been drawn around parts of the body, and it will undoubtedly change the nature of training required to perform surgery—obscuring the line between surgeons and nonsurgeons. As an example, in the past, most hysterectomies were done by gynecologists. Now, interventional radiologists, using ablation techniques to treat uterine fibroids, are more and more obviating the need to perform total hysterectomies.
Changes in Medical Education
Today's medical training reflects three realities of the early 1900s, when the basic architecture of our medical schools' curricula was put in place. The first of these realities was that medical practice in the first decades of the twentieth century was an intuitive art, not a science—meaning that the ability to deliver care was embedded in the caregivers, not in rules, processes, and equipment. Hence, medical training was organized to train doctors to work individually and intuitively. The second former reality was that students finished their work on the farm in the fall, and therefore needed to start their schooling in batches. The third was that when the architectures of today's medical school curricula were established, most diseases were acute, so the full course of many diseases could be observed within the hospitals where the doctors-in-training worked.
The future world in which today's medical students will practice will be substantially different from the world for which medical schools are preparing them. One dimension of difference is that many diseases that are in the realms of intuitive and empirical medicine today will have migrated toward the domain of precision medicine 20 years from now. As a result, many diseases will eventually be diagnosed and treated by nurse practitioners and physician assistants. Organizing and supervising the work of paraprofessionals will be a major dimension of most physicians' jobs.
Another difference is personal versus process expertise. There will always be a need for deeply experienced, intuitively expert physicians to do the work of solution shops. Many diseases will continue to defy precision medicine, and new diseases will emerge. Today's methods of preparing medical students to work as individuals are generally appropriate for those who will work in solution shops—though we will likely need fewer such physicians 30 years from now than are needed today. But most physicians in the future will work in settings where much of the ability to deliver care will be better embedded in processes and in equipment, rather than exclusively resident in individuals' capacities. No medical school that we know of has yet established a course in which students can learn how to design self-improving processes that prevent mistakes from occurring.
We note in Chapter 10 that because today's reimbursement schedules make specialist careers much more lucrative than the careers of primary care physicians, the graduates of U.S. medical schools are moving decisively "up-market," choosing training to become specialists. As a result, about half of all new primary care doctors that begin practicing in the United States today were trained in foreign medical schools—primarily in the Caribbean, Latin America, and India. Those schools are getting very good, and they are disrupting the U.S. schools, starting in the tier of the market that is economically least attractive to the incumbents.
The reason why this is a serious development for our medical training establishment is that a host of technological enablers will fuel the disruption of specialists by primary care physicians in the future. In addition, these same technological advances will enable nurse practitioners and physician assistants to disrupt primary care physicians. And yet we have a chronic shortage of nurses in the United States too—which again is filled primarily by immigrant nurses trained in places like the Philippines. A key driver of this shortage is the limited faculty capacity of U.S. nursing schools. In sum, this means that the United States is shifting its medical education resources to train more of the professionals we'll need fewer of, and training fewer of those we will need more of in the future.
The Impact of Regulation on Disruption Innovation in Health Care
In the final chapter we consider the regulatory barriers to disruptive change, identify eight categories of regulations that now impede disruption and must be changed, and propose a model for how these changes can be made. As with many of the findings in this book, we show that health care honestly isn't that different from other industries: the pattern of regulation in health care matches that of many other industries in which the public interest may not be addressed through normal market mechanisms. Regulation in these industries typically goes through three stages:
Foster. Subsidize the creation of the industry.
Stabilize and assure. Strengthen the participants; ensure that all who should have access in fact do; and make sure that the products are safe and effective.
Afford. Encourage competition that will reduce prices.
A major class of government subsidies of America's health-care system occurs directly through the National Institutes of Health, and indirectly through the high prices that our government allows on patented drugs in order to fund ongoing research and development within our pharmaceutical companies. Together, these subsidies fund a large share of the research that has begun transforming medical practice from intuition to precision. This subsidy of basic and applied research, and of product development and testing, truly constitutes an extraordinary gift to the people of the world.30 We recommend one change in how this subsidy is administered. In fields in which breakthroughs are needed, research at the intersection of scientific disciplines, and not just research that deepens knowledge within disciplines, needs its separate channel of review so such projects can more readily receive funding.
As mentioned previously, by setting the rates of reimbursement for providers of products and services, the Centers for Medicare and Medicaid Services (CMS) exerts powerful regulatory control over what providers will and will not do. Furthermore, government-sponsored health plans like state Medicaid programs and the Veterans Health Administration have policies that guarantee best-in-market prices from their suppliers through a system of price ceilings and rebates. For example, most Medicaid programs stipulate that, at the end of each quarter, the prices they pay to suppliers must be written down to the lowest prices charged to any other customer. While this ostensibly ensures that Medicaid automatically pays the lowest price for everything it buys, its inadvertent effect is to make discounting extremely expensive for providers of health-care products and services. It instills extraordinary pricing "discipline" among competitors in the hospital, pharmaceutical, and medical device industries that executives in other industries—airlines, for example—can only dream about.
Much of the government's regulatory energy currently focuses on ensuring that providers and products are safe and effective. When medicine is in the intuitive realm, the best mechanism for accomplishing this is to regulate who can provide care. Regulatory focus is on the inputs or resources used in the process—primarily the training and qualifications of the doctors who provide the care. When care of a disorder has moved into the realm of empirical medicine, the emphasis of regulation needs to focus less on the qualifications of the providers and more on how they do their work—on the processes being followed. This is because following best-practice processes is the key to getting the best outcomes most consistently, when medical practice is empirical. Finally, when a disorder has advanced into the realm of precision medicine, regulation most productively focuses on what—on the outcomes—rather than on inputs or processes.
In many areas the progress of medical science now calls for the body of medical regulation to shift focus toward reducing costs. We show in Chapter 11 that economists-turned-deregulators are often guided by too simple a model when they attempt this, in that they believe that simply intensifying competition will bring about lower prices. In reality, when regulators try to intensify sustaining competition in an industry, the result typically is higher prices. Regulations that provide an incentive for general hospitals to compete more intensely against other general hospitals, for example, will send them rushing up-market toward ever more profitable services. It has been a disruptive competition that has reduced costs dramatically in literally every historical instance in which regulators have sought to reduce prices.
A key reason why regulatory change persistently lags behind the progress of medical science is that those who would be disrupted by the shift in regulatory focus have a lot to lose, and for the good of the provider they adroitly preserve regulations that initially had been adopted for the good of the patient. Our research has shown that the power of those ensconced behind the protection of these regulations almost never yields to a direct assault on the regulation. Rather, the regulations are toppled only when disruptive innovators find applications or markets beyond the reach of the regulators. They succeed in that context—and the regulation ultimately succumbs to the evidence. We give case histories in this final chapter of instances in which regulations that barred lower-cost health-care providers from entering a market were toppled through this strategy.