Or rather, it’s quite a few businesses.
“It’s a bit of a misnomer. There is no such thing as a “health care business”. There are many business models that exist in health care in the United States,” he says Craig Garthwaiteprofessor of strategy at Kellogg and its director Health Program at Kellogg.
After all, the business model of a hospital, with high patient volumes but low profit margins, looks quite different from that of a pharmaceutical company, with much higher margins—and risk.
But increasingly, the barriers separating these different businesses and models are being redesigned or broken down entirely. Consider UnitedHealth Group, which today operates as an insurer, pharmacy benefit manager, specialty pharmacy operator and even a health care provider, employing more than 50,000 physicians. Or consider CVS Health’s recent acquisition of Aetna or Humana’s acquisition of home care giant Kindred at Home.
“Companies are really trying to organize a bunch of different activities into the same company,” explains Garthwaite. Garthwaite, a prominent health economist, was speaking during a recent The Insightful Leader Live webinar.
But why are companies organized this way now? And what will it mean for different parts of the healthcare ecosystem—including patients?
Why now?
To understand the increased integration of various levels of the healthcare system, look no further than Vitrakvi, a drug designed to treat a cancer caused by a rare genetic defect.
In an earlier era, a promising new drug might simply have been released on the market and the right patients would have found it. But Vitrakvi, a harbinger of a new era of precision medicine, faces some unique challenges. In particular, the drug can probably help fewer than 10,000 total patients in the country. For this limited number of patients, the drug is a blessing. But finding these patients requires a lot of genetic testing — tests so expensive they may not be covered by insurance.
“So how do you identify these patients?” Garthwaite asks. How do you get coverage for this DNA test other than your product coverage? And then how do you motivate doctors to want to test for it?
Pharmaceutical companies are not alone in facing a mismatch between what would best serve patients and the incentive structures that exist today. Get an MRI. Hospitals charge much more for an MRI than non-hospital providers. However, most MRIs are done in hospitals. Why; Physician referrals. Doctors have no real incentive to refer patients to less expensive providers, so they don’t, unnecessarily increasing health care costs for everyone.
“The incentive has to be with the provider,” says Garthwaite.
Completion Wave
However, the right incentives are difficult to design, particularly as healthcare becomes more complex, meaning no one is sure which incentives will create how much value at which level of the system. After all, no insurer or hospital wants to incentivize providers to behave one way, only to have all the benefits of those incentives go to some other company. This is why companies are increasingly trying to fill as many roles as possible.
“I think that’s why you’ve seen this increasing amount of vertical integration in the market,” says Garthwaite. He also points to startups like Oak Street Health, which is an at-risk primary care practice, meaning they assume responsibility for all healthcare costs for patients in hopes of saving money on their care and making a profit. the difference. Ultimately, the goal is for providers to be responsible not only for service but also for value.
“We want to pay for health, as opposed to … consuming health care services,” says Garthwaite.
He notes that other types of health care systems, such as a single-payer system, do a better job of incentivizing health as a result. In the UK, for example, the NHS has every incentive to invest in preventive medicine for five-year-olds, knowing that these investments will pay off over time, as the system will still be insuring them when they are 80.
“We don’t get that in the United States. we have this mixed public and private system where people move between insurers, so there are some ways that value can be created, but it can be difficult to capture as a company if you’re not the national single payer,” he says.
Single payer is not a panacea
That’s not to say Garthwaite sees single-payer as a panacea—especially since, if accompanied by downward pressure on pricing, it could lead to lower quality care. He points to some of his own research with several colleagues (including Kellogg’s Amanda Stark) that finds a relationship between the number of privately insured patients available in a geographic area and the quality of a hospital’s offerings along several dimensions. Essentially, the researchers find, hospitals are upping their game in order to compete for more profitable patients.
“They offer more quality in search of more profit,” he says.
In fact, Garthwaite rejects the very idea that it’s abundantly clear that the US is paying too much for health care. The US is a rich country, after all: What better way to spend that wealth than on the health of our citizens?
The bigger problem, in his view, is not purely what we spend, but whether we get value for our money: “Are we getting the most efficient health care system we want for the dollars we spend?”
Garthwaite is optimistic that better-aligned incentives, vertical integration and other experimental business models can, if not actually lower health care costs, at least give us more value for our money.
“This is the business trying to get it right,” he says of the current moment. If companies fall short, he says, Americans may finally decide, “the juice isn’t worth squeezing here anymore: we’re going to Medicare for All.”
