Which innovations can lower health care costs, and why they are difficult to obtain

I’m on vacation with my family this week – it gives me a chance to read a lot of fiction (just finished The Tiger’s Wife  and The Beauty of Humanity Movement,  both of which transported me to exotic lands (Yugoslavia as it was collapsing and Vietnam of just a few years ago)   Vacation also gives me a chance to step away from the daily news a bit – and muse about health care policy.

A few thoughts on innovation today.

Bold new innovation isn’t going to solve the problem of health care costs going up.  

We read with great interest the front page story about the young man with quadriplegia who trained his brain to activate his lower extremities.   I pointed out that whatever this therapy and the associated hardware cost, it would be nearly impossible to fund this for even a small portion of quadriplegics.   Of course, we have no idea how much this would cost.  My wife pointed out that quadriplegics were at high risk of pneumonias and other complications, and this therapy could lower the costs of such complications.

Here’s why this type of innovation won’t lower the cost of health care, even if it prevents many grievous and expensive complications.   When this technology becomes more mature and is commercialized, the patent owners will do an economic study of the benefits and cost savings associated with the therapy.  That will include the benefits of this therapy to the individual, to his or her family, and to society overall, as well as any health care cost savings through prevented complications or substitution for more expensive care.  

Many of these benefits will be outside of the health care system – such as years or decades of company of a loved one, productivity at work, and ‘life years’ saved. Then, the patent owner will assign a price, grabbing a substantial portion of the value created by this new invention.  I’m not griping- that’s the way things should be under patent law.  This encourages life-saving and life-improving new inventions.  However, as long as the inventor is setting the price based on all the value created, and much of that value is not measured in saved future health care claims alone, bold new medical innovations will almost always raise, rather than lower the cost of health care.

Disruptive innovation, however, really can lower health care costs.

Disruptive innovations are a bit inferior to the current incumbent technology –but “good enough” initially for a narrow group of customers who are being overserved by the existing approach.  Disruptive innovations exert negative price pressure on incumbent technologies, and improve at rapid enough rates that they often displace the incumbent over time.

Clay Christensen of Harvard Business School has developed this theory, initially from the world of computer hardware,  and most recently applied it to health care.   His first book The Innovator’s Dilemma,  is a short, pithy, insightful business classic.  Everyone in health care policy should read it. 

What are examples of disruptive innovations in health care?

-        Retail clinics:  They can’t do nearly all that can be done in a physician’s office – at this point, 20 or so different diagnoses are the limit.  They often use nurse practitioners rather than physicians, and they don’t offer 24 hour coverage.  So, retail clinics are not as good as a physician’s office – but MUCH more accessible, and substantially less expensive.  Over time, they will increase their capabilities.

-        Low strength MRI scans and handheld ultrasound machines.  Japan has $100 MRI scans, which don’t have nearly the definition offered by 2+ Tesla machines available in the US.  Handheld ultrasounds also don’t give as good an image as currently available installed ultrasound machines.  But they’re good enough for many purposes. Right now in the US, we use MRIs that are good enough to give a roadmap for brain surgery –but the level of detail available is unnecessary for many orthopedic procedures.

-        Generic drugs.  You could argue, and I often do, that generic drugs are just as good as brand name drugs.  The FDA’s effective regulation of the generic drug manufacturers has meant that the generics are as likely as brand name medicines to have the stated potency.   But they are at least a bit inferior, because the pills are not all the same colors and shapes. This can lead to more difficulty with adherence, especially for older patients and those with cognitive difficulty.  They’re good enough, though, for many, and much less expensive.

Disruptive innovation isn’t easy to implement.   Physician advocacy groups vehemently opposed retail clinics in many states, and licensure rules meant to protect the public are often used as “guild” tools to protect those who have an existing monopoly.  You might know that the Toshiba MRI scanner that allows $100 MRI scans isn’t licensed for use in the United States.  It would be opposed by makers of the current expensive MRI scanners – much as the makers of mainframe computers weren’t thrilled about the idea of personal computers. A complex web of regulations in health care makes it almost impossible to get a license to import a scanner that is inferior (albeit much cheaper) than existing technology. Radiologists aren’t eager for a lower priced scanner, which could further erode their dominance in imaging as many other physicians purchased such scanners.  Hospitals that have invested millions in the current generation of MRIs with incredible capabilities also see how low-priced scanners could threaten their profit margins.

Generic drugs are readily available, and have been a major source of health care savings over the past half-decade. However, brand name pharmaceutical companies have used vigorous legal maneuvers to delay the introduction of generics. Big pharma companies in some instances have even paid generic manufacturers to delay generic launches to maintain their sole-source protection for extra months or years. 

So – bold new innovation can make our lives longer and better, but won’t save a lot of health care claims dollars.   Disruptive innovation can save money – but is forcefully opposed by those who profit from the current state, who are enabled by regulations meant to protect patients. 

We need to make our health care system more avid for disruptive innovation. 

Spinal Surgery as a Barometer of Health Care Cost Increase

This week’s Journal of the American Medical Association (JAMA) has a study showing that Medicare patients have had (we might say suffered) a more than 15-fold rise in spinal fusion surgery in the last eight years.   Simple laminectomies have declined slightly.  Complications are substantially higher with the more complex surgery; life-threatening complications increase from 2.3% (decompression alone) to 5.6% (complex fusions).  Rehospitalizations were higher in the complex surgery groups, and hospital charges were over $80,000 per patient (compared to under $24,000 for simple decompression laminectomies.  It’s unfortunate the authors used hospital charges, rather than actual Medicare payments.)

The authors and an accompanying editorial note that it’s unlikely the proportion of Medicare beneficiaries with the severe pathology requiring complex fusion increased over this time.  There is no evidence that the complex surgery has better outcomes for those with less severe disease; the rate of complications suggests that it is frankly worse.   

So – why did neurosurgeons do so much more complex fusion?

1)       Techniques and tools have improved – so complications are not as high as they once were

2)       Payment is higher

3)       Medical device makers see substantial profits from implanted hardware from the complicated surgery – and they market very effectively.  The major orthopedic device makers have entered into consent decrees and paid fines over recent years for their marketing to physicians

4)       Patients are not in a good position to demand the less invasive surgery when they are in agony and their surgeon suggests what he or she feels is best

What’s the answer to this?

Like most problems in health care cost, there are probably multiple answers – and no single one will magically make everything better.

è More price transparency with patients bearing incremental cost:  If patients knew they would face a $50,000 personal bill for the complex fusion, they would pressure their surgeons for less invasive therapy.  Of course, they might pressure their surgeons for less invasive surgery even in the instances where the more complex surgery is genuinely beneficial.  Further, most plans would (and should) have far lower out-of-pocket maximums 

è Better provider reporting.    What is the complication rate for each surgeon?  This could discourage surgeons from performing more risky surgery where it wasn’t absolutely necessary

è Disclosure (or frank prohibition) of medical device company payments to surgeons.  Minnesota, Vermont Massachusetts and other states have passed laws mandating this type of disclosure.  The embarrassment factor alone should change some behavior. Surgeons don’t believe that pharmaceutical or medical device company lunches, junkets, and honoraria have any impact on their clinical practice, but there is substantial evidence that this marketing expense does change provider behavior

è Decrease in the fee schedule for more complicated surgery.  Higher margin procedures generally are overutilized – so decreasing the margin for this surgery could help.  Japan  has an interesting approach – when a procedure’s utilization jumps, payment is slashed.  That’s why Japan has $100 MRIs – presumably, Japan would also have less of a reimbursement difference from simple laminectomy to complex fusion.

è Bundled payment or capitation – which would leave groups of  providers to decide whether to fund the more expensive surgery themselves.  The provider community is often not arrayed to accept these types of payment methodology – but in general bundling payment leads to much lower utilization of higher cost procedures. 

This JAMA study caused one day of headlines; we’ll see if this will lead to genuine change.

Health Care Reform will Change Innovation - Not Decrease It

I’ll be part of a panel at the Harvard Business School this weekend on the potential impact of health care reform on innovation and investment of private equity in health care.   I’ve heard a lot of concern and hand-wringing over whether managing health care costs would decrease life-saving innovation that nourishes the ‘knowledge economy’ of the US.  The worry is especially intense in Massachusetts, with our economy deeply dependent upon health care delivery, and pharmaceutical, medical device and basic science research.

While it seems that the brakes are on health care reform right now, I wanted to share my perspective on how health care reform and meaningful cost control could impact innovation.

First of all – the need to lower the rate of inflation in health care cost is real.  Medicare is a giant deficit-generating machine for the federal government. The Medicare trust fund will have a negative balance in just a few years, and states cannot afford rapid rates of increase in Medicaid costs. US manufacturers send their work overseas in part because of high US health care costs.  Many Americans are uninsured, and more are underinsured.   Americans have effectively gotten no real wage increases since 1988 while productivity has soared; this extra wealth has been used for health care expenses.

Things that are unsustainable don’t continue forever, and medical costs can’t continue to rise at a rate far higher than inflation.  If they do, they crowd out other meaningful uses for our resources.   A dollar wasted in health care could have been better deployed in education or in infrastructure investment – and either of these is likely to spur more innovation.

In the US, there have been examples of big disruptions in health care revenue – and these have not led to a decrease in innovation. Rather they have led to a change in innovation.

The transition of Medicare inpatient payments from a “cost plus” basis to a ‘diagnosis related group’ (DRG) payment method in the early 1980s led to dramatic changes and innovations in health care.  Under the “cost plus” system, hospitals were rewarded for capital investment that increased the cost basis – and there were cranes all over the country building new medical meccas to be funded by Medicare.   Under the DRG system, hospitals were paid a fixed fee for each hospitalization, and so they innovated to decrease lengths of stay.  The fruits of this transformation in hospital payment included minimally invasive surgery, ambulatory surgery centers, and home intravenous therapy for infections and other maladies that once required a hospitalization.  So – a decrease in health care payments led to system changes, and an opportunity to innovate that was different (but not less) than under the previous system.

Many other countries impose strict, even ominous, controls on prices.   This has many consequences – and sometimes leads to shortages. However, even draconian price control can lead to increased, not decreased, innovation.   In Japan, the government mandates prices, and lowers prices for services where volume increases sharply.  Japan has an even higher rate of MRI use than the US, and as a result, the “list price” of an MRI is under $100.  Have MRI manufacturers stopped innovating?  Hardly.  Toshiba has developed an MRI unit that is lower powered (less magnetic strength, lower resolution, less computing power) that can be purchased for under $200,000 – compared to multimillion dollar price tags for the most technologically advanced MRIs available in the US.  So  - the low prices didn’t lead to a decrease in innovation – but rather a change in innovation.

Here’s a graphic demonstrating four quadrants of “value” (cost vs. quality).   The upper right always increases value – costs are lower and quality is higher.  Public health interventions usually are in this quadrant, as are pediatric vaccines.   Not much else, I’m afraid – the medical delivery system was designed to improve lives, not to save money.  We can all agree that we want more innovations in the upper right quadrant. 

The lower left quadrant shows unequivocal value destruction – we spend more and get less quality. In retrospect, Vioxx is a good example of this – a medicine just as effective as Ibuprofen, dramatically more expensive, and associated with a substantial increased risk of heart attack.  We can all agree that we want to eliminate spending in the lower left quadrant.

The challenge is the other two quadrants.  Folotyn, a new chemotherapy medicine that costs $30,000 a month and shrinks tumors a bit over a quarter of the time but doesn’t increase life expectancy, is in the lower right quadrant (small increment in quality but large increase in cost).  That’s where innovation has focused in recent years – and that has not made the US health care system “higher value.”

I’d submit that meaningful health care reform (which will come sooner or later, because we can’t afford not to) will move interest and private equity investment into the upper left quadrant.  That’s the “disruptive innovation” quadrant – where we accept innovations like generic drugs and the Toshiba MRI machine that is decrementally cost-effective -  i.e. we get less quality, but the cost savings are dramatic.

In the US, we’re historically not very interested in ‘decrementally cost effective’ innovations.  I think that controlling health care cost inflation is likely to lead to more innovation like the lower quality MRI machine, and less innovation like a new $36,000 a year chemotherapy agent that is not associated with extending life.

I’m at peace with the upper left quadrant.

The Senate Bill: Better for Cost Control than the Status Quo

Cost Control Implications 

There has been substantial buzz about whether the proposed health care reform does enough to address the problem of health care inflation.

There is almost universal agreement that it does not do as much as we’d like it to do control costs, especially when we compare the health care reform in the Senate bill to each of our “ideal” version of health care reform.  Compared to the status quo – the Senate bill does much more that might lower health care costs.   This includes

- Medicare independent commission

- Substantial cuts in Medicare fee increases going forward

- Tax incentives to avoid overcoverage (Cadillac tax)

- Many pilots – each of which might show us the way to lower costs substantially.  Here is Atul Gawande’s take on the importance  of experimentation in controlling health care costs.

We have to start somewhere.

Nate Silver of fivethirtyeight.com http://www.fivethirtyeight.com/2009/12/insidious-myth-of-reconciliation.html has a good graphic showing his point of view about how preferable different health care reform proposals would be in his mind. I’ve taken his graphic approach – and applied the lens of “cost control” – so I am not giving “extra credit” for the dramatic decrease in the uninsured projected under health care reform.

There are a few things I would rank differently. I added “price controls,” since there is good evidence that price controls DO lower prices, although they often have unexpected consequences.  Here’s an interesting take by Uwe Reinhardt, pointing out that if we import drugs from Canada, we are ‘outsourcing’ price control to the Canadian government. Remember, Japan is the home of the $98 MRI because the government price book says that’s the price.

I also ranked a ‘weak’ public option as worse than the current Senate bill in terms of cost control. I continue to be worried that a weak public option merely fragments  the payer market further – and could lead to higher unit prices.

By the way, the market says the health plans “win” in the Senate bill, and their stocks are up sharply today.  

Japanese Have A Better Idea for SGR (Sustainable Growth Rate) Fee Cuts

The House of Representatives voted last week to give another reprieve to physicians, who faced a 21% Medicare fee cut because of a provision called SGR – or Sustainable Growth Rate.   The SGR mandates cuts in fees for all Medicare services if the total number of services increases. Essentially, if too much service is delivered, each unit of service is reimbursed at a lower rate. This helps keep the Medicare budget “in balance.”

National Public Radio and others  characterize the SGR provision as a “glitch.”  Indeed it really feels like a mistake, since each year Congress overturns the SGR and reinstates small fee schedule increases or flat fee schedules. Each year, Congress has only kicked the can forward to the next year. When SGR would have required a 5% fee cut one year, it requires a cut of over 10% the next year, and you can see where this is going.

It was never intellectually honest to overturn the SGR on a year by year basis –because if a 5% pay cut is untenable, a 21% pay cut is unimaginable.   Still, the cost to the federal budget deficit of eliminating SGR altogether would be over $200 billion (over 10 years). The Congressional Budget Office recently reminded us that eliminating this fee cut will also cost Medicare beneficiaries almost $50 billion in increased out of pocket expense over the next ten years.

The SGR was not a “glitch,” but it was a poorly designed way of trying to prevent overutilization.  The problem is that the benefit of increased revenue to individual providers overwhelms the risk of a pay cut due to overall higher than expected utilization.  This is a classic “tragedy of the commons”  problem – where it pays for each individual provider to do more procedures, knowing that her contribution to the “overgrazing” will be overwhelmed by the practices of the general population.

SGR is poorly designed because the group of procedures it applies to (the equivalent of the “pasture” in the tragedy of the commons) is too big – and no physician would rationally think about cutting back on utilization to prevent future fee cuts.  There is a better way.  Japan has an SGR-equivalent which is by individual service –not generic across all services. 

Prices are revised individually, adjusted for each procedure and drug, and not by an across-the-board conversion rate. In particular, the prices of procedures that show large increases in volume tend to be decreased. (Ikegami  and Campbell, Health Affairs, 2004)       Harvard Link 

As a practical matter, procedures with large increases in utilization are sometimes those where there is new evidence of efficacy, but they are likely to be procedures with an exceptionally high margin.  This method of adjusting helps diminish the excess margin associated with particular services, so there is less likelihood they will continue to be overused.

So – we should get rid of the SGR – it’s not effective at changing physician utilization, and would cause politically infeasible across-the-board cuts.  As long as we are using primarily fee for service payments, Medicare should adopt the Japanese approach to targeted fee cuts for certain procedures if the volume increases. 

(Thanks to Tori Fancher, Sophie Miller, Amy Rothkopf, and Alicia Widge of HSPH HPM235 for drawing my attention to this approach)

Cheap But "Good Enough." Can We Accept Decrementally Cost Effective Interventions?

We can all easily agree that if something increases cost and offers worse outcomes (red in diagram), we shouldn't do it. That's why prescriptions for Vioxx and similar antiinflammatories cratered after reports emerged of higher cardiac mortality for these high-priced medicines that were only as effective as Advil.   We can also all agree that if something decreases cost and increases quality - we should do it (Green in chart)

The challenge is with the blue slice of these pie --medical services that increase quality (a little) and increase price (a lot).  That's true of a majority of novel interventions tested in the literature - they displace less expensive standbys, but offer some new advantage.  It's tough to say no for higher quality.

Another challenge, that is ill-studied, is an intervention that is less expensive, and not QUITE as good -but really "good enough," at least for most people (yellow in this diagram).  These decisions are clinically (and politically) difficult.

The early November Annals of Internal Medicine has a literature review on “decremental cost effectiveness” entitled “Much Cheaper, Almost as Good.”  Authors Nelson et al from Tufts Medical Center point out that in other industries we value products and services that are “good enough,” but cost much less. Examples include personal computers (not as good as mainframes), IKEA furniture (painful to assemble, but much less expensive), and the Nano automobile from Tata Motors (sacrificing comfort and safety but costing only about $2,000).  However, in health care, we only value the highest quality  - regardless of the price.  A good example of this was an NPR report this evening about MRIs.  They often cost $2000 in the US - and we have the best machines in the world. In Japan, the government-enforced price of an MRI is $120.  Is the best image worth this price differential?

The authors in the Annals article found 2128 cost effectiveness ratios in the medical literature between 2002-2007 – and only 33 involved sacrificing any quality for price. In general, these studies involved the sacrifice of between 8 hours and 1 week of quality adjusted life (0.001 – 0.021 QALYs), and the savings were beween $122 and almost $12,000 per patient.  (Of the studies they reviewed, only 9 were of high enough quality to fully evaluate).

Of course, in the majority of instances where there was an innovation that represented increased costs and increased quality, the “usual care” before the innovation might have been “decrementally cost effective.”

This is relevant to the firestorm over the US Preventive Services Task Force finding that evidence doesn't support recommending annual mammography for women under 50 (and only supports biannual mammography from 50-69).  This recommendation was NOT made to save money - but much of the vehement disagreement is focused on whether lives would be sacrificed to save dollars.  What if the number of "quality adjusted life minutes" saved by mammograms is less than the number of minutes women would spend getting additional mammography and having followup biopsies? Listening to some of the vitriol about this finding on the radio reminded me that we don't like to make tradeoffs, especially in decisions around our health.

We are unwilling to "settle" for a decrementally cost effective treatment for ourselves and our families and friends.  Further, the highest margins are often associated with newer, discretionary technology - so the medical system often does not discourage overuse.  This is the conundrum we face that makes technology continue to ratchet up the cost of health care.