What We Don’t Know Can Hurt Us

As the health insurance exchanges find their footing and potentially millions of Americans gain access to insurance, this may be a good time to step back and take a longer term view of the ACA. When you get down to it, expanding health insurance coverage was the easiest and least controversial part of health reform. There is no shortage of ways to expand health coverage and almost any credible health reform proposal would have done the job, provided enough money was thrown at the problem.

In designing the ACA, perhaps as a result of political pressure, President Obama opted for a combination of heavily subsidized individual insurance exchanges and generous expansions of Medicaid. Freed from political constraints, he might have instead pushed for the single payer system that many of his most ardent supporters desired. Republicans inclined to expand coverage (at least one of us is proof that unlike the unicorn these do exist) might have pushed for a pure voucher program that harnessed market forces.

All of these options would expand coverage to the degree that policymakers were willing to fund them. So while we congratulate the President for his political success (we doubt the other options could have made it through Congress), it is a simplistic mistake to evaluate the implementation of the ACA by counting the numbers of uninsured or waiting for the monthly updates on the enrollment figures from the exchanges website. Any regulator with a big enough purse can, in the fullness of time, expand access. Frankly, that’s the “easy” part of healthcare reform.

But what about the other elements of the so-called “triple aim” of health reform: cost and quality? You see, while we agree that liberal, moderate, and conservative health reforms can all improve coverage, they each will have very different effects on the other important outcomes. Consider for example the oft-discussed “Medicare for all”; i.e. a single payer system. This would increase access without the messiness of the exchanges. It would also allow the government to flex its monopsonistic muscles and quickly reduce costs – though likely at the expense of quality. In contrast, relying on markets may not reduce costs in the short run, and may not necessarily reward real quality (though it has a better short than single payer in this regard).

Evaluating health reform in the context of the “Triple Aim” is important, but even that approach is not nearly enough. There is a broad consensus among that technological change is the most important long run driver of cost and quality. It follows that the most important element of health reform is its impact on technological change.

To understand how technological change affects all of us, consider the profound impact of the top ten medical advances in the last ten years, as listed by CNN:

1. Sequencing the human genome
2. Stem cell research
3. HIV cocktails
4. Targeted cancer therapies.
5. Laparoscopic surgery

6. Smoke free laws
7. The HPV vaccine Gardasil
8. Face transplants
9. Drugs reducing or eliminating periods
10. Bionic limbs

Going forward, it is hard to imagine not enjoying the benefits of these advances. So we wonder which, if any, of these advances we would be enjoying today if a single payer system or even the ACA had been enacted 20 years ago. We can’t provide a precise answer to this question, but we have a strong intuition about the direction of the effect.

Consider these three stylized facts:

1) Considerable private sector investments were required to translate most of the ten advances from the original basic research into viable medical treatments.
2) If researchers and private firms do not expect to cover the costs of their investments, then research will dry up as capital flows towards more productive ends.
3) In health systems that regulate prices (i.e., every industrialized country except the U.S.), governments are able to use their market power to reduce prices down close to marginal costs.

The stylized facts lead inexorably to the conclusion that medical innovation depends critically on profits reaped from American consumers. From a pure equity standpoint these facts are not great for Americans, as the rest of the world free rides off our largess. However much we lament this outcome, it is hard not to think of an even worse situation. Had the United States adopted single payer health reform in the 1980s, then by now, we would have largely solved our access problems. Unfortunately, what we might also find is that we’ve made sure that everyone has access to the essentially the level of technology available to the 1980s medical consumer, and the innovations on CNN’s list would look much different, and much less innovative. Imagine having to move forward without some of these innovations. Which would you sacrifice? Targeted cancer therapies? The HPV vaccine? Here is a situation where death is an option.

By changing the rules affecting payment rates and technology adoption, health reform affects the incentives for medical innovation. Leave the status quo, and incentives remain high. While we readily acknowledge that the current “market” based system might inappropriately reward technologies that provide few benefits, witness Da Vinci surgical robots and Proton beam therapy, it also leads to innovations like the ones on CNN’s list. We wonder how many of us would give up targeted cancer therapies and bionic limbs so as to avoid paying for Proton beam therapies. Not us. On the other hand, if we implement draconian rules, then the innovation pipeline may run dry.

Twenty years from now, some future version of CNN will publish a new list of the top medical advances. The health policy decisions that we make today will shape that list, yet no one is discussing them. How will planned reductions in Medicare payments affect innovation? Will efforts to promote pricing transparency, in the absence of comparable data on outcomes, drive consumers away from providers who use more costly technologies? Will narrow network plans be followed by narrow technology plans (that limit reimbursements for expensive technologies?) How will the newly created independent payment advisory board (IPAB) weigh the role of innovation incentives when establishing payment rates for existing technologies? Will further government encroachments into health care system, perhaps by taking a step closer to a single payer model, avoid draconian cuts in payments for technology?

In the absence of a debate about these issues, we worry that the federal government will take the politically expedient view by saving money today while sacrificing innovation in the future. After all, we will all reward politicians for the cost savings, but how can punish them for innovations that are never realized? If we implement the wrong policies, then Americans (and the rest of the world) might find themselves in a perverse version of Waiting for Godot, waiting in vain for medical advances that can only be dreamed of, because the innovators lack the financial incentives to turn dreams into reality.

As we continue to evaluate the launch of the exchanges, let us remember that expanding access is the easy part of health reform. Getting right the dynamics of technological change is much harder, and, we believe, much more important. Let’s start having that conversation before it is too late.

David Dranove, PhD is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.”

Craig Garthwaite, PhD is an assistant professor of management and strategy at Northwestern University’s Kellogg Graduate School of Management.

Dranove and Garthwaite are the authors of the blog, Code Red, where this post originally appeared.


32 replies »

  1. The CNN list is easy to pick on, but here I go. What has sequencing the human genome accomplished, exactly? I was under the impression that doing so had posed more questions than it answered.

    While I certainly agree with HIV cocktails, Laparoscopic surgery (I’m a surgery resident) and the HPV vaccines, I question the actual value realized to date by stem cell research, proton beam therapy, and face transplants. I don’t mean to sound anti-basic-science, just that many basic science models don’t pan out.

    I would instead promote less sexy but more widely adapted advances such as the advent of 1:1 blood replacement in trauma, advanced ventilation modes in the ICU that minimize ARDS, and the endovascular surgery revolution that has cut the mortality of common aortic surgery in two thirds.

  2. You all need to talk a lot about the IPAB, and the way the legislation has it set up to rule. And that is the operative word there for the IPAB, “rule”.

    They will have no accountability, no supervision, no one to answer to.

    Another perk to passing the bill and then reading about it later.

    Nancy Pelosi, you should have been the Prime Minister of England in 1939 and negotiated with Germany, what a shining moment that would have been for freedom and prosperity. “Let’s agree to let the Nazis do what they want and we will learn about their agenda later”.

    It is incredible what the average person tolerates in “leadership” these days. As I say, we get the electorate we deserve!

  3. Maybe you can outline my evil “deceptions” and how they had such great persuasive powers.

  4. Pretensions to moral authority are particularly unseemly when made by those who have practiced the deceptions necessary to the passage of Obamacare.

  5. Good point, we can learn from them so we don’t make the same mistakes.

    I wonder why we aren’t learning from our own heath care horrors – maybe you like them more, after all they only happen to the “other” people?

  6. The horrors in the UK are real, but I do not think they come from price controls.

    They seem to come from lazy unionized work forces and lazy administrators in government owned hospitals.

    This was a problem in France also during their killer heat wave in 2004.

    Nothing like this seems to happen in the nations I mentioned.

  7. Price controls on health care seem to work OK in Germany, Japan, Sweden, France, Israel, Swtizerland and probably some other places I have not thought of.

    By “work” I mean that all citizens get decent care (if not always superb care),
    and health care costs do not drain all federal and state and personal budgets.

    Price controls do have downsides. But I made the point earlier in this exchange that the good effects may outweigh the downsides.

  8. “Many providers would comply with maximum prices if they knew that their billings could be legally reduced later.”

    Didn’t we already learn over 40 years ago that price controls simply do not work?

  9. The more prudent among us planned our careers around the availability of quality health insurance, foregoing many a promising opportunity lacking that benefit. Now those who took the paths less traveled tell us they have a “right” to the same quality of care as ourselves, at our expense. This is not only unreasonable, but impudent.

    We are given to understand that there is no middle ground between letting people expire on the streets and “equality of access.” Duh.

  10. Bob:

    Thx for clarification. Perhaps not such a bad idea. Important to keep big players honest.

  11. Note to BC: my Health Courts would be quite large. I can see a need for at least 500 courts throughout the country. The federal government would pay all court costs, so a patient could access the courts without a lawyer and at no charge. Probably a $500 million expense for the government.

    The goal of the courts would be to put fear into the providers who engage in medical price gouging. Many providers would comply with maximum prices if they knew that their billings could be legally reduced later.

  12. Bob:

    How big would such a health court system have to be? It seems to me this would only increase costs and complexity.

    Is it possible just to pass laws that limit outrageous bills or am I missing something?

  13. Peter:

    For starters, I’d say start-up management based on experience can be far from cohesive. This said I agree with your point though I’d say some repubs like Ryan did try to offer a plan and he was rebuffed.

    You are correct in that the majority of repubs wanted to do nothing to fix HC and now are salivating at the thought of ACA failing.

    The Dems on the other hand have an attitude of my way or the highway and are fatally wed to the idea that big government must do it all. So is the Dem goal health care for all, but only if it happens via big govt.?

    So how can you get enough repubs off of torpedo mode if they feel they won’t be listened to anyway if they do come up with something?

    The way I see it the repubs aren’t offering much and what the dems have offered is not workable and as a result our health care problems do not get fixed.

    As per employer subsidized plans they will have to see the hit as it’s the only way one can finance those getting subsidies unless it’s debt financed. And the employer subsidized plans are going to get hit and this is the explicit reason it was delayed until after the midterms.

  14. I believe I will attempt to crowdfund the grant writing proposal for a government sponsored investment for a solar powered MRI machine. Sure, no one could get an MRI at night, and a few people in Seattle will have to fly to Arizona to get a scan, but at least in won’t be profitable. How does SoWhatLyndra sound?

  15. Perhaps the government could stimulate innovation of solar powered laser technology.


    I guess I posit that while bio-medical technology has been nothing short of miraculous that the most important issues that we are facing now have little to do with more advances in bio-medical technology.

    They have MUCH more to do with morality, justice and ethics.

    The single most important issue around which our former profession on Medicine and for that matter our culture can mature is the death and dying issue in my opinion

    Also this important link has little to do with technology?

  17. Yes 41, red-baiting is the preferred tool of the power elite that attempts to prevent advance of human rights.

  18. “the failure of “management” to realize or address this will result in the dreaded slow fail.”

    BC, the “management” is both parties, not some cohesive corporate structure. The Republican side wants a failure. How can any management team succeed if 1/2 torpedo any “adjustment” other than killing it.

    Don’t forget the ACA is meant to address a small portion of the total in/uninsured market. Unless the employer subsidized group starts to see unacceptable cost increases/benefits erosion there will not be enough political power to fix this. We will be left to rot.

  19. “Nationalized healthcare is the arch of the socialist state.”
    Vladimir Lenin

    “Basically,” confided Pajama Boy, “I just wanna feel good about myself. Health care oughtta be be like packets of Nestle hot chocolate mix: uniform, standardized, general issue. Who’s this Vlad dude, anyway?”

  20. What we don’t know or most don’t know is that ACA is a start-up albeit a very large one.

    Geoffrey Moore wrote an article in the October 1999 issue of Red Herring magazine discussing why and how start-ups fail. One of the reasons given was the slow fail, which is when start-up management will not budge from their initial business plan even though market conditions dictate that they must.

    This is exactly the problem facing ACA. It is not workable in its current form, requires a great deal of adjustment and the failure of “management” to realize or address this will result in the dreaded slow fail.

    The great coup of ACA is not the bill itself, which ironically is the Achilles’ heel towards health care for all. The coup is twofold. Firstly, the long-term lack of financial sustainability of our previous system has been forced directly into the limelight, which hopefully results in its being addressed. Secondly, a very rough platform now legally exists, which if molded properly will achieve healthcare for all and affordably so.

    If not molded properly ACA will become the greatest Pyrrhic victory in recent memory. I think it’s fair to say that genesis of ACA somewhat springs out of ideology and emotion, but such ideology and emotion must now be replaced by pragmatism.

    Such pragmatism must entail making very hard changes to vastly modify it so it will work and this means moving to the center politically so that the moderate arms of both parties can affect the right fixes together.

    Given polarization not so easy to do, but it is doable.

  21. We have a friend who is practicing as a radiologist in Canada. She actually favors the system so far. There is one payer, the workload is reasonable, and I am assuming there are not a slew of regulations to deal with from her standpoint.
    The patients do not have access to an MRI on every corner (which is really not unreasonable), and care seems to be more focused on routine than a lot of ER care, because our friend is not unduly busy during call nights.
    I think in some ways, American physicians would be open to single payer, if they would have the ability to spend the majority of time in patient care, not filling out endless forms for nonmeaningful statistics.
    How do we define quality? Tough question. For some patients, having a physician who listens to them and helps navigate through the system and deal with their illness is enough. Not all patients are motivated, nor do they have the outside support to follow through with medication and diet regimens. These people need help, but they are not going to provide us with stellar statistics for “quality”. There is a danger that using statistical guidelines will deter physicians from wanting to care for difficult patients, or those with poor socio-economic status.
    Prevention, well, no one needs a full medical degree to counsel and coach patients on prevention. This frees up the physicians to deal with illnesses and injuries.

  22. Archon:

    You’ve hit on a very important point, which ACA seems to have missed – human nature. A great many advances have been driven by a desire to make money on the part of the entrepreneur/company or the investors that provide the capital to commercialize a given technology. To the extent that ACA does not allow sufficient reward for innovation then medical advancements will be hurt and perhaps badly.

    The other miscalculation was on consumer behavior. There are people that are strongly for and against ACA, but then you have a great many people in the middle – swing supporters if you will and this group is particularly important for long-term viability.

    The swing supporters embraced the ACA sales pitch. Health care for all sounded great and my health care is going to be cheaper so what’s not to like?

    The swing supporters, unfortunately for ACA, suffer from a touch of nimbyism. When they fully understand that it’s coming out of their pockets support will erode something we have already seen in the individual market and will ultimately see in the small/large corporate market.

    It’s no different than an election. Lose the swing and you’re toast. Given the delay in the small/large corporate mandate I think ACA is in for a slow fail.

  23. Note to Swag:

    In my writing I advocate the creation of Health Courts, which would have the authority to reduce outrageous bills by hospitals for care which could have been done far more cheaply elsewhere.

    America can clear up a lot of its cost problems by aggressive regulation of hospital charges.

    Bob Hertz, The Health Care Crusade

  24. “Consider for example the oft-discussed “Medicare for all”; i.e. a single payer system. This would increase access without the messiness of the exchanges. It would also allow the government to flex its monopsonistic muscles and quickly reduce costs

    – though likely at the expense of quality.”

    Define “quality”.

    “There is a broad consensus among that technological change is the most important long run driver of cost and quality.”

    “Among” who? Prove to me that technology reduces cost – FOR THE PREMIUM PAYER.

    Why isn’t prevention the “most important driver”? Because it would reduce the health care take?

  25. Nice article. As a stanch “fed up with the political system as a whole and specifically with the current state of the Republican party” conservative, I see a Nationalized Single Payer System as the only true way to get us as close as possible to the highest level of all three of your main points for improving healthcare. Access would be all inclusive, costs would be nationally scrutinized and uniformly established, and quality could be monitored in a way that, coupled with all of the savings from the first two, could be executed in a way that we don’t feel sacrificing quality is the norm. Sure we will have some cases of concern, but I see the overall improvements and ongoing controls to keep things moving forward in a sustainable manner. I see this as the only path to medical sanity for America.

    In saying all of that, I greatly appreciate the questions raised by this piece. All too often a forward thinking, unintended consequences angle of much of what we do as a society is omitted from the discussion. However, and in hopes that I am not coming off as obviously ill-informed or just plain ignorant, could we not move forward in a single payer system offering financial support much like a stipend or a grant that one can acquire now for needed medical breakthroughs and other advancements? Those that are known needs could be posted, almost like a job posting website or the want ads, and other advancements or discoveries that companies accomplish can be presented to a board for additional consideration. The way I see it, the revenues that will be saved, the tax revenues that will increase from freeing up consumers from ever increasing medical expenses that will be generated, could produce a medical advancement fund of some kind that could more than make up for what is today’s justification for why we all have a different agreed upon by someone else price for all of our medical needs that almost certainly is many times above it’s actual, would be in any other industry, sticker price.

    Coming from someone that is in the process of paying $300 to a medical provider for an MRI that my $700 a moth so called insurance policy had already paid $1,800 (that was negotiated down from $4,300), I see our only hope as a nation is a system that pools all of us together to establish one fair, realistic, quality rate for all things medical, from the routine to the unexpected emergency. I could get the same procedure done right down the street for about the same as my $300 payment, except I could pocket my monthly investment and the hospital would be out the insurance company pay off. How this is considered acceptable and sustainable is baffling.

  26. Profit. Capital formation. Investment. Venture capital. Return on investment. These concepts are now viewed, not as instruments of the “greater good,” but of greed, avarice, waste, and antisocial abuse. Despite the awful example of the Soviet economy, the “You didn’t build that” mindset seems to be ascendant.

  27. A pro-European would argue that all the citizens in a single-payer country have less anxiety about paying for health care, far far fewer providers (if any) harassing them over medical bills, and next to no possibility of losing their savings or their home due to medical or long-term care expenses.

    These good results would have to be measured against the deaths and pain that do occur when new cures are not available.

    Personally I can handle the argument that the European systems deliver the greatest good for the greatest number. Of course no one in my family has had cancer, so I guess this might be too easy for me to say.

    I have always appreciated the writing from Professors Dravove and Garthwaite, but in this case I think that their piece needs my own “other side of the ledger.”

    Bob Hertz, The Health Care Crusade