Bending the Cost Curve: Medtech Will Do What the ACA Cannot

In his new book America's Bitter Pill, Steven Brill tells the story of ObamaCare (ACA) as a political effort to reform U.S. healthcare, a system he compares to a jalopy that costs too much to drive. A jalopy healthcare may be, but Brill's premise that the ACA represents the right service crew to fix up the old car seems incomplete when reading about the fascinating medical technology advances that Dr. Eric Topol shares in his new book The Patient Will See You Now. Whereas Brill seems to look at healthcare reform from the 30,000 foot level of Washington policymaking, Topol simply looks at the technological advances enabling more accessible, effective medicine. These two views, both top-down, and bottom-up, must be considered in developing broadly informed opinions on improving healthcare in the U.S.


Brill's View of Healthcare

Brill repeatedly frames the dilemma of healthcare reform as a political choice between 'bending the cost curve,' and extending coverage. The story of ObamaCare amply demonstrates that materially decreasing costs through policy is too difficult to achieve politically, though ObamaCare did result in over 10 million newly insured Americans. That's the ACA's main contribution so far, and it suggests that government's role is less to fix up the jalopy than to decide how many people can ride in it.

The failure to bend the cost curve was not for lack of trying on the part of the economic team. Peter Orszag and other economists fought hard to include provisions targeted at cutting costs, but few of these passed with any teeth. In critiquing Brill's book, Orszag argues that the curve may still bend, pointing to the continued expected growth of ACOs, increasing digitization practices among providers, increasing price transparency in the market, and additional instruments like HDHPs that help patients self-regulate spending. These provisions may help decrease costs over time, but they haven't yet, and at the end of the day, the ACA was only estimated to result in savings of $30 billion per year. That's a lot of money, but it still only represents about 1% of annual healthcare spend in the U.S., and only 4% of the $750 billion of wasted annual healthcare spend estimated by McKinsey.

The shocking gap in Brill's ultimate analysis is that it elides the powerful forces of technological progress by which costs often decrease over time. He does point to 'Integrated Finance & Delivery Systems'--a special kind of ACO that attains market dominance within its region or specialty--as a potential solution for controlling costs. In fact, transforming hospitals into ACOs is a key, if difficult to enforce, part of the ACA. Even this transformation does not dramatically reduce healthcare costs per se, but only opens the door for the adoption of new delivery models by partially aligning the financial incentives of providers towards saving money while continuing to provide quality care.

In Brill's telling, we are left with a story about increased health insurance coverage, but little in the way of fixing the leaky jalopy. Hope springs instead from the world of grassroots technological innovations, a ground-level scientific view that Dr. Eric Topol knows well.


Topol's View of Healthcare

The Patient Will See You Now is a non-stop documentation of extraordinary scientific, technological, and process innovations that are enabling the democratization of healthcare. The number of new technologies he cites runs into the hundreds, but a few trends most noteworthy for our purposes here include advances in the diagnostic use of genetic sequencing; the creation of a personal Graphical Information System (GIS) containing visual data on one's physiome, anatome, genome, proteome, metabolome, microbiome, epigenome, and exposome; near-ubiquitous sensors providing multi-dimensional diagnostic data and monitoring of most major medical conditions; and the emergence of efficient medtech for low-resource settings. Of course, hundreds of startup companies have sprung up to participate in the commercialization of these technologies, many of which hold promise for lowering costs while improving outcomes.


The Innovator's View of Healthcare

It's not likely that many of the fledgling companies advancing disruptive medtech innovations were at the table during the prolonged, anguished ObamaCare discussions, and in Washington, 'If you're not at the table, you're on the menu.'  Indeed, the ACA in its current form contains both provisions that encourage and discourage disruptive innovation, according to the authors of Sieze the ACA at the Christensen Institute. Here are the most salient ones:

• Provisions Encouraging Innovation
1. Individual mandate
2. Employer mandate
3. ACOs
4. Wellness programs
5. CMS Innovation Center

• Provisions Discouraging Innovation
1. Essential Health Benefits
2. Insurance exchanges coverage requirements
3. Cost-sharing funnels buyers into Silver-level plans
4. Fixing the medical loss ratio
5. Medicaid expansion

Smart innovators will be able to navigate the current regulatory environment to succeed, but they may increasingly choose to do so in other markets first. The geographical advancement of medical technology has often resulted in confluences of market conditions that seem to turn raw scientific knowledge into low-cost, effective medtech applications. One such market is India, whose often internationally-trained entrepreneurs are developing low-cost, high quality medtech at a dizzying pace. Topol mentions several in his book, such as Manu Prakash's 'origami' microscope that costs $1 to assemble, or Sangeeta Bhatia's urine test for cancer detection developed at MIT. There are many more, some of which are listed in our database. 

Regardless of the point of geographical origination for disruptive medtech, the delivery models that will emerge with these new technologies hold the potential to providing affordable, quality healthcare for everyone. Policymakers in Washington should seek to pave the way for the success of emerging medtech, an outcome that should be a central part of any discussion about refitting the jalopy of U.S. healthcare into a shiny new model for the world.

20+ Facts About Healthcare Costs in the U.S.

General Healthcare Spend*

1. The U.S. spends nearly 20% of its yearly GDP on healthcare. Other developed countries spend about half that, but the additional spend in the U.S. does not generally result in improved patient outcomes
2. The healthcare-industrial complex spends more than 3x the amount of the military-industrial complex on lobbying each year
3. Prices for U.S. prescription drugs are ~50% higher than those in other developed countries
4. McKinsey estimated an annual healthcare overspend of $750 billion in the U.S.
5. Company financials seem to indicate that if the U.S. payed for healthcare at similar levels to other developed countries, the profit margins for medtech and pharma companies would remain high enough to continue encouraging innovation

Image Courtesy of Sweetpsychic.com

Hospital Economics

1. Hospital chargemaster prices are often capricious, and reach levels 10-15x higher than Medicare reimbursement rates
2. Medicare price models are imperfect, but they are cost-based, and attempt to factor in all direct costs and allocated expenses required to provide a given product or service
3. Hospitals around the U.S. market aggressively to Medicare patients
4. The average hospital collection rate is ~35% of the total amount billed
5. Average operating profit for non-profit hospitals is ~12%
6. Medtronic sells its products at a 4x markup to COGS, and hospitals routinely sell devices to patients at a 2.5x markup to the wholesale price
7. Pharma companies commonly offer wholesale prices at 10x to COGS, and hospitals routinely sell these drugs at a 4-5x markup to the wholesale price
8. Hospitals routinely double- and triple-charge for items on the chargemaster that could reasonably be included under their general facility and room charges
9. Doctor groups with in-house IVD labs seem to order more tests than those using outside labs
10. A typical PET / CT piece of equipment will pay for itself within 1 year by carrying out 10-15 procedures per day. The equipment has an expected life span of 7-10 years

Patient Economics

1. 60% of personal bankruptcy filings in the U.S. per year are related to medical bills
2. Patients are often delivered large portions of medical bills not covered by their insurance plans
3. 'Medical billing advocates' often achieve discounts of 30-50% on medical bills just by calling in to negotiate on behalf of patients

Image Courtesy of The Atlantic

Payer Economics

1. Healthcare insurance premiums under ObamaCare will rise mainly due to 3 provisions: 
1. Prohibitions on exclusion of pre-existing conditions
2. Restrictions on co-pays for preventive care
3. End of annual or lifetime payment caps
2. The largest payers have historically negotiated reimbursement rates at 30-50% higher than Medicare rates, but increasing hospital consolidation is shifting more collective buying power back to the providers, so that the final negotiated reimbursement rates are moving closer to chargemaster prices
3. FDA-approved drugs are reimbursed by Medicare at 'average sales price' + 6%. The manufacturer calculates and provides the average sales price

*All facts in this post are from Steven Brill's article Bitter Pill: Why Medical Bills are Killing Us, and his newly published book, America's Bitter Pill: Money, Politics, Backroom Deals, and the Fight to Fix Our Broken Healthcare System . They represent only a small portion of his findings, but are among the most objective and meaningful to me.