Future of Healthcare in the USA: how it could be the growth engine

13 May

By Kishore Jethanandani

Kondratieff cycles, which span thirty to fifty years, are marked by breakthroughs in technology and reform of institutions that drive expansion and a downturn sets in as technologies mature and unnoticed dysfunction in institutions surfaces. This was true for information technologies over the last cycle. Computers were a curiosity as long as the use of behemoth mainframes was confined to some large enterprises. The turning point was the introduction of mini-computers and then personal computers in the 1980s which became, with the advent of the Windows user interface, as much a part of everyday life as the washing machine and the refrigerator over the 1990s.

Concurrently, regulatory reform of the telecommunications industry dismantled the AT&T monopoly; the costs of communications plummeted and paved the way for a pervasive Internet.  Business solutions became the buzzword of the last decade as information technologies found new uses in a broad range of industries.  For the consumer, the home computer and the associated software became as essential as the furniture in their home. The mobile Internet has growing number of applications that make the wireless phone as indispensable as a wallet. The momentum in the growth of wireless phones is expected to be maintained till 2014 partially offsetting the slowdown in the rest of the information technology industry.

The high growth rates that were propelled by innovation in information technologies in the 1990s began to slow down over the last decade. A recent study completed by well-known economist, Dale W Jorgenson of the Harvard University and his colleagues, confirms that growth rates decelerated over the last decade.  The average growth of value added in the industrial economy over the period 1960 to 2007 was 3.45%, with a peak of 4.52% between 1995 and 2000, which slowed down to 2.78% between 2000 and 2007.  The corresponding growth of the IT producing industries was an average of 15.92% over 1960 and 2007, peaked at 27.35% between 1995 and 2000, and slowed down to 10.19% between 2000 and 2007. IT using industries had an average growth of 3.47%, peaked at 4.39% and slowed down to 2.39%.

IT industry has ceased to be a growth engine for the economy and its place can be taken by a revitalized health industry.  For one, there is the enormous demand to extend life and ease the pain of debilitating and uncommon illnesses that are growing with longer life spans. On the supply side, a welter of new technologies for drugs, medical equipment, sensors and information technologies are revitalizing the industry. While technologies for extending life and improving its quality raise costs, some of them can also be used to drastically lower cost in an environment that encourages competition. Thus the twin goals of lower costs and better quality accessible to everyone are possible if the industry is restructured to be driven by market forces.

Meanwhile, healthcare industry’s existing paradigm of medicinal chemistry has run its course. Much of the therapies for an ageing population are effectively palliative which alleviate chronic illnesses, like diabetes, Alzheimer’s and heart disease, without providing a definitive cure. As a result, the costs of health care are ballooning. Chronic illnesses account for a major share of the costs–75% of the total of $2.2 trillion spent on health care in 2007[i]–with 45% of Americans suffering from at least one chronic illness. At this point, the industry is a money sink—really a gorge—unable to meet the needs of the mass market for health. Consumers don’t get care worth their money.

At this point, there is very little effort at prevention of diseases to keep costs low despite the proliferation of devices to forewarn patients and take preemptive action. The onset of stroke, for example, can be detected early with sensing devices and the more damaging consequences such as brain damage can be preempted.

The costs of hospital stays are high and their costs are lowered with remote treatment of patients at home. Hospital readmissions are common among chronically ill patients and happen when patients are not monitored when they return home. A New England Health Institute study found that hospital readmissions can be reduced by 60% with remote monitoring compared to standard care and 50% when programs that include disease management with an estimated savings of $6.4 billion a year.

The inefficiencies in the industry are easily noticeable. Paperwork abounds which is conspicuous by its absence in other industries. Only 10% of the payments to vendors in the health sector are by electronic means which could save an estimated $30 billion. Electronic records can drastically lower administrative costs and help to create databases that can be analyzed to improve the quality of care.

The productivity of the medical personnel is low as a result of excessive paperwork. Nurses, for example, expend only 40% of their time attending to patients while the rest of the time is spent on paperwork[ii]. Radiologists spend 70% of their time in the analysis of images while the rest is reserved for paperwork[iii]. Regulatory compliance compulsions bog down skilled staff in paperwork and alternatives are hard to find when the law is inflexible.

Patients have to take time off from their work, suffer long and wasteful wait times to receive care for even minor conditions in this age of multi-media communications. It gets worse for rural folks who have to trudge to urban hospitals.  Care of dangerous criminals is hazardous when they have to be moved from prisons to hospitals. When emergencies are involved, patients have to be moved from one hospital to another when the required specialized personnel are not available. An estimated 2.2 million trips between emergency rooms happen for this reason. Entrepreneurs could very well help to bring care to patients with remote care technologies and video conferencing. The estimated savings from video assisted consultations replacing transportation from one emergency room to another are $537 million per annum.

Today, technology is available to substitute for doctor’s skills and hospitalization while maintaining the quality of care without forcing down doctor’s salaries by fiat. An example is Angioplasty which replaces expensive surgery for the treatment of coronary disease[iv]. The entire procedure can be completed by a skilled technician or a nurse at a much lower cost than a specialist in heart disease. Innovations of this nature can expand the health market by tapping into the latent mass market for health care.

Therapies are not customized for each patient and often many different options are tried in several hospitals to no avail. The problem is the inability of doctors to pinpoint the root cause of the disease.  Normal radiological methods don’t necessarily help to diagnose a condition. Lately, DNA sequencing methods, such as those offered by Illumina, helped to diagnose the causes of an inflamed bowel of a six year old child after a hundred surgeries failed.  The DNA sequencing data can also be mined to glean insights about the most effective treatments.

Health care costs are high also due to the structure of the industry. In the health delivery segment of the industry, hospital monopolies in local areas and regions raise the cost of services. Consolidations of hospitals are believed to add $12 billion a year to costs. The value chain could be broken up and individual tasks performed with much greater efficiency. Physician owned specialized hospitals are fierce competitors of General Hospitals especially in states with lighter regulation. In the thirty two states in which they do exist, physician hospitals are the top performers in nineteen of them and among the top in thirteen[v]. Regulation prevents them from operating in the remaining twenty of them.

In the risk management component of the industry, insurance plans are not portable outside a state or a medical group. Most insurance plans are paid by employers or by the Government for the elderly. Users of insurance plans don’t have much incentive to shop for health care or realize savings by participating in wellness programs. Health Savings Accounts (HSAs) put consumers of healthcare in charge of their choices by letting them spend out of their own pocket or from savings reserved for the purpose. They are expected to drive down costs by shopping for alternatives, evaluation of the value they are receiving for the money they pay and by becoming more aware of their own health risks. The evidence about the experience with HSAs is mixed; enrollment has increased, premiums are lower compared to traditional plans[vi] and their rate of increases is lower. The differences are smaller when adjustments are made for the age and the risk of the buyers of consumer plans and the traditional plans[vii]. On the other hand, the evidence on quality of care received by buyers of HSAs is mixed as is the care they take to search for their best option and lifestyle choices to lower their healthcare costs.

Innovation will begin to drive the health care industry and become the growth engine for the economy when costs and the corresponding quality of service are transparent and comparable. Currently, costs are estimated for individual departments and not by conditions and individual patients[viii]. It’s only then that consumers will shop for the best offering and switch to the most competitive offering and entrepreneurs will know where they can find opportunities to compete with incumbents. Even by rough measures, the quality of care, for the same expense, varies enormously—by a factor of 82[ix]

The search for the most desired doctors and therapies, with the best value to offer for the price paid, is arduous. Price for medical services varies enormously and comparisons are hard to make because of a maze of discounts offered. Most consumers of health have no incentive to shop for health care as their insurance plans are paid for by their employers. Aggregation of information and electronic searching will lower the costs of finding the best doctor and therapies.  As patients search for the best option, it will also stimulate competition among vendors. The experience with high-deductible plans does show that health costs drop when users do shop around, compare before they buy healthcare.

The inefficiencies in the health industry are an enormous potential opportunity for growth which will receive another fillip when new bio-tech products move up their S-curve. For the USA, with its lead in medical innovation, there is also an opportunity to expand overseas where again health systems are largely inefficient. The key to tapping the latent opportunity is an environment that encourages technological innovation and competition. Employer paid health insurance plans or Government paid health insurance will be most effective when they encourage individuals to buy their own insurance plans and manage their own risk. For the rest, billions of consumers shopping for health care will drive down costs much faster than any group insurance or a Government department. At this point in time, the health marketplace offers very little data to make comparisons or even the flexibility to switch from one source to another. The incentive for cost reduction and to adopt new innovations will be the greatest when vendors deal with a more competitive environment.

A new paradigm in health care will be possible in such a competitive environment. Genomics, together with bio-technology, nanotechnology and medical devices, health IT, and sensors, will help to launch treatments that have for very long been elusive and affect large masses of people. Additionally, they are customized for each patient, who could be immune to standard treatments, and they have a much greater focus on prevention. These technologies are also able to shorten the duration of the illness, replace damaged organs and reverse the degenerative effects of ageing. Hypertension and high blood pressure, for example, affects 20% of Americans and the available cures generally require life-long treatments. The discovery of the relationship between genetic mutations and extremes in blood pressure[x] has improved an understanding of possible preventive treatments for high blood pressure.  Diagnostic tools, which detect changes in the protein structure, will anticipate the onset of dreaded diseases like cancer and enable advanced action before the disease becomes incurable, Early results are accurate and clinical adoption is expected to come soon[xi].

[i]  “Almanac of Chronic Disease”, 2009.

[ii] “Growth and Renewal in the USA: Retooling America’s economic engine”, McKinsey Global Institute, 2011

[iii] “Strategic Flexibility for the Health Plan Industry”, Deloitte.

[iv] “Will Disruptive Innovations Cure Health Care?” by Clayton M. Christensen, Richard Bohmer, and John Kenagy in Harvard Business Review.

[v] Consumer Reports quoted in “Why America needs more Physician hospitals”, The Senior Center for Health and Security, August 2009

[vi] “Generally, premiums for CDHPs were lower than premiums for non-CDHPs in all years except 2005, when premiums for HRA plans were higher than premiums for non-CDHPs. By 2009, annual premiums averaged $4,274 for HRA-based plans, $4,517 for HSA-eligible plans, and $4,902 for non-CDHP plans. Note that the $4,517 premium for HSA-eligible plans includes an average $688 employer contribution to the HSA

account. Hence, premiums for HSA-eligible coverage were $3,829 for employee-only coverage in 2009”, in “What Do We Really Know About Consumer-Driven Health Plans?”, by Paul Fronstin, Employee Benefit Research Institute

[vii] op cit

[viii] “Discovering—and lowering—the real costs of health care”, by Michael Porter, Harvard Business Review,

[ix]  “When and how provider competition can help improve health care delivery”, McKinsey.

[x] “The future of the biomedical industry in an era of globalization”, Kellogg School of Management, 2008

[xi]  “In this case Proteomics is being used as a diagnostic tool and early data from the projects have been very positive with the computer software managing to identify 100% of ovarian cancer samples (when compared to a healthy sample) and 96% of prostate cancer samples. With these positive results it is surely only a matter of time before diagnostic Proteomics is seen in a clinical setting”, in “Could Proteomics be the future of cancer therapy?



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