How to Make the Cost of Care Cheaper

I’ve been leading up to this for a long time. Lowering the cost of the actual provision of care is one of the most important things all countries with unsustainable health spending growth need. And, at the outset, I’ll say I don’t have all the answers. But here’s what I’ve got, explained in maybe a roundabout way, but hopefully it makes sense by the end.

Think about providers’ incentive to innovate. Do they have one? Hopefully your initial response is “yes,” because you’d be right (partially). Assuming this is a provider that operates as most in the country do, its prices are determined based on market power, not costs. So, with the assurance that prices will stay the same regardless of costs, providers have a great incentive to lower costs! Any cost decrease will go straight to their bottom line.

At this point, I picture in my head a little map of the United States with a vertical pin sticking out of it for each hospital, with the height of the pin representing that hospital’s costs of delivering care. The taller the pin, the higher the costs. So, the incentive for each hospital is to lower their costs as much as possible in order to maximize profits, and different hospitals succeed to varying degrees. The pins get pushed down with each successful cost-cutting initiative, some more than others.

Now let’s say there is a hospital that finds a really innovative way to deliver care, and their costs are way lower than everyone else’s. They want to get more customers in an effort to continue generating more wealth, but they’re stuck! Why are they stuck? Because even though their costs are so much lower, they don’t really get to set the prices the patients actually pay when choosing which hospital to go to for care. High-value providers can’t expand to new cities because they’d have to set their prices lower than existing providers’ prices, steal a whole bunch of the market share, and most likely force some of the lower-value incumbents out of business. But if they could, do you see what would happen to the pins? The one really low pin would start spreading, making the tallest pins get taken off the map completely with each market that it spreads to. It would be beautiful! Different kinds of cost-saving innovations would be spreading all over the country.

So, to repeat David Cutler’s question, Where are all the healthcare innovators? They’re out there, all over the country, but they’re stuck in their current markets; thus, we don’t see or even hear about most of them.

In summary, think of the two ways a company can make more money:

  1. Sell items at a higher margin
  2. Sell more items

Providers in our healthcare system can only do the first one. The second one is mostly not functioning, and thus we don’t have the harsh (and absolutely crucial) evolutionary force of putting lower-value providers out of business and lowering the cost of healthcare.

I’ll admit, the proliferation of high-deductible plans and new kinds of deals between providers and insurers are starting to overcome this. But there are probably other ways to increase the pace of the elimination of these barriers, and I would think the government should be focused on figuring out what they are if they want to solve this country’s budget problems. Or they could continue to argue over how to how to reduce volume and price while largely ignoring costs.


5 thoughts on “How to Make the Cost of Care Cheaper

  1. Thanks for your thoughtful blog. I have found that doctors can indeed “sell” more items, particularly when it comes to procedures. Much of that can be driven by the business executives urging their doctors to do more. For example, a corneal surgeon (MD/PhD) I know was at a departmental meeting when their business manager told them they weren’t doing enough procedures. He said, “If you have a patient in the office with a billable procedure, do it!”

    Finding this obviously unethical, and probably illegal, six of the ophthalmologists subsequently resigned and are happily practicing elsewhere. I doubt however that their situation is that unusual. When starting out, I was told by one group that they wanted to buy a thyroid scanner and I could be their thyroid guy, “Just think of how many procedure we could send you.”

    All clinics and hospitals are competing and selling high end expensive procedures. We’ve somehow structured our system to pay for procedures, rather than thinking and possibly avoiding harm. A possible solution is to salary doctors with incentives for quality outcomes, access, patient satisfaction, etc. Health care reform really hasn’t addressed the cost problem in any meaningful way to date.

    • You’re right–doctors can sell more items. I should have been clearer. I meant to say that they are mostly unable to expand their customer base locally and expand into different regions through offering lower prices to consumers. Consumers on traditional health insurance don’t really see the prices, so the price doesn’t factor into their decision of which provider to choose when they need something done. This limitation of providers to expand to new markets is probably (subconsciously, of course) exacerbating physicians’ decisions to perform additional and unnecessary procedures on their current patients.

      Yes, salaried physicians working in an integrated health system is one possible solution. I think another is to restructure in ways that encourage patients to choose providers based on value, which means they will need cost and quality data when they’re looking at which provider to choose. If patients do this, I’m confident physicians who over-treat or who have lower quality in general would lose business and have to change their ways. Without a thorough explanation, that’s maybe hard to believe; thus, I’m going to blog about it soon.

      This doesn’t address the prevention aspect, but it fits with other changes that need to be made to solve that as well.

      • I think you hit the nail on the head! Prices are SO hard to come by. I definitely think price and quality transparency has to be part of the solution.

  2. This post doesn’t address the spread of knowledge and processes that allow hospitals to import cost cutting ideas from other locations. While its true hospitals operate in something of a competitive environment (obviously with limitations) it also is an academic environment with think tanks and public literature.

    • You’re right–I don’t explicitly address that, and I probably should have. And my guess is that, due to the complexity of most healthcare organizations, copying others’ ideas can sometimes be way too complicated to make it worth it (can you imagine a community hospital trying to copy IHC and their sophisticated teams, statistical processes, and IT to manage variability?) so that’s where the actual provider who developed the idea will especially be able to spread to new locations with difficult-to-replicate processes.

      Hopefully, though, this will all make the delivery of healthcare simpler, so your point will become more and more salient as time goes on.

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