Why is healthcare so damn expensive?


Never has there been talk of innovation and yet more disappointment at the future than in the healthcare market. AngelList shows nearly a million startups just in the digital health space, also VCs invested $3.5 billion in digital health startups in only the first half of 2017 according to Rock Health’s industry evaluation. You will find dozens of wellness innovation conferences hosted in the USA annually, together with participants chattering, chattering, chattering about this or that “innovation”

All of that invention has done almost nothing though to resolve the single worst difficulty of contemporary American health care: it’s cost. Health care in the United States hasn’t been more expensive. The USA is spending roughly $3.5 trillion annually on healthcare expenses, an increase of 12,300% since 1960. In that interval, health care spending rose from 5 percent of U.S. GDP to about 17.5 percent of GDP.

It’s Juicero innovation at its finest. We’re paying more, way more, than we ever used to, and our outcomes haven’t been worse.

This is the problem called “cost disease” — the rapidly escalating costs of basic human services like healthcare, housing, education, structure, and infrastructure. Scott Alexander, who blogs at Slate Star Codex, wrote a masterful summary of the problem a year ago that is well worth reading for how this pattern appears to emerge across each of these businesses.

It is 1 thing though to identify the pattern, and it’s another to start to tease out the reasons why costs have spiraled 123x in just a couple of decades. The pithy answer is there is no pithy answer: businesses like construction and health care are simply too complicated to have a very simple response to the question of cost disorder. It’s literally all of the answers and none of them in the same moment.

There is a slowly growing understanding in policy circles that price is the basic challenge to improving America’s human infrastructure and services. The tradeoffs took place in American medicine — supplying better care or supplying more care to more individuals would simply be moot if the overall cost of health care was 9% of GDP rather than 17.5 percent — the median percent in the OECD group of industrialized countries.

Call me cynical, but having spoke with dozens of electronic health startups over the last couple of years, this basic fact so rarely seems to enroll with founders. Entrepreneurs are attempting to digitalize medical documents, or enhance operating room efficiency through improved analytics, or make a new (and costly!) Robotic medical device.

This issue is thankfully starting to be dealt with by startups head on.

I chatted with Derek Haas, who’s the founder and CEO of the business and that has spent the last few decades fully immersed in the challenges of controlling the uncontrolled price disease in American physicians.

If you are wondering what one of the chief drivers of price disease in health care is, it likely starts with the simple fact that few hospitals and suppliers really understand exactly what their prices are except for aggregated numbers. We can cue a facepalm emoji, but the reality is that it is really difficult to do this type of analysis with existing management methods.

The company’s solution is to use a technique called “activity-based costing” and apply it to the health industry. The idea is to attempt to accurately assign every expense of an organization to the exact action that generated that price. In the healthcare context, Avant-garde utilizes “time-driven” breaking to assign expenses for treatment. The goal, Haas explained, is “to know for every patient what care is delivered, who delivered that attention, and how long did it take to deliver that care.”

Therefore, for instance, every health professional that sees a surgery patient should assign exactly their time to this individual so that the real price of the surgery can be calculated and analyzed. A nurse who spends 20 minutes from the area should assign one third of their hourly fee to the individual.

However, Haas’ data in the last few years though shows that the tradeoff between quality of care and cost often doesn’t need to be produced. “What we often discover is that the largest drivers of cost and delivery of care is the volume of maintenance,” he clarified. In other words, surgeons that run more surgeries equally have significantly more experience — improving results — while also cutting the price of every operation by amortizing their income across more patients.

In addition to quantity, standardized treatment is also key.

What the hospital discovered is that different surgeons were using distinct hip components at several rates, raising the total supply cost of the operation. With improved analytics and physician education, the hospital was able to save 842 per surgery with minimal change to results.

Now, Avant-garde is centered on collecting and analyzing cost information. Its long-term goal though is to attach people prices to actual patient results so that administrators may comprehend when extra spending is helping patients, and when it does not. By getting better results data, hospitals can begin to help consumers get better remedy at lower expense.

Avant-garde isn’t a panacea to our healthcare cost disease. But it is a step in the right direction. By quantifying characteristics of the medical business that are today opaque, management has been given the resources to actually make the proper decisions on behalf of payers and patients.

In many ways is the story of price disease in each industry. What resembles a tradeoff can frequently be recast as a win-win circumstance. Lowering infrastructure costs can unexpectedly mean not choosing between three subway routes, but performing all of them. We unexpectedly do not have to choose between new technologies in classrooms and reduced class sizes. And we do not need to choose between restricting treatment and offering insurance to many people. For creators thinking about creating an impact, there is a trillion dollar idea right here.


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