The issues, concerns, and variables involved in finding solutions to the healthcare crisis are too numerous to list. Joe has been involved with healthcare issues for a number of years and in 2007 he was asked by the U.S. Chamber of Commerce to testify before the U.S. Senate finance committee on the subject of healthcare.
Here, we’d like to begin to consider how a business might think about possible solutions. There are two frames that we think are interesting to consider. The first is how innovation and costs are typically related.
In most industries as innovations occur costs come down dramatically. For example, in the personal computer industry, costs have gone down year after year as technology has improved. Innovation is driven by a variety of factors, such as improved speed and functionality. But it is also driven by a desire on the part of consumers and businesses to reduce costs. The consumer reaps the benefit of a less expensive product, which then becomes more accessible. And the business can improve its profit, increase its market share, and offer a more affordable product.
In healthcare, innovation also is driven by a variety of factors, especially the desire to increase our ability to diagnose and treat disease, improving the quality of life — clearly an important driver. However, innovation could also be driven by a desire to reduce costs. But in healthcare, it typically isn’t. New treatments and improved procedures can be more expensive, not less. Why? In part because the consumer (the patient) isn’t paying for the services. So, the consumer, who is choosing to “buy” the service, doesn’t consider the price of the service. All he may pay is his co-pay. So, he may think, “Why not? It doesn’t matter how much it costs.” So the innovators in healthcare aren’t rewarded for lowering costs because that is not the variable that people demand. People demand a better test, a better treatment and so on. But if consumers also knew the costs, and they had to “pay” for it (more on that in a bit), then there would be a demand for innovation to reduce costs, along with improving care.
The second frame we’d like to consider is how insurance typically works in other industries.
Let’s look at both auto and homeowner’s insurance. We purchase that insurance to protect us from catastrophic risks. The insurance company underwrites the risk and we pay a premium for their protection. When we experience a serious loss to our home (fire) or auto (collision) the insurance steps in to cover our losses. We ourselves, though, pay to maintain our cars and homes. Maintenance costs are not covered by insurance. The market handles the cost and pricing on maintenance and up-keep on our homes, and auto and homeowners’ insurance covers us when unusual crises come along.
Medical insurance covers both maintenance and catastrophic health issues. And, because medical costs aren’t fully borne by the consumer (except for a co-pay that isn’t related to the market price of the service) we as consumers can’t gauge whether the service is worth the cost or even demand that innovation bring the cost down. We don’t spend time managing it. And that means we very well might overuse the service, because we don’t really have to pay for it. The result is that the price of services isn’t market based (think supply and demand, costs, etc.) Insurers end up raising premiums to cover higher costs and usage.
Joe is an owner of Setpoint Systems Inc., a business based in Utah. Setpoint has struggled with the issue of health insurance costs for years. It had some employees or their families with severe health problems, and its health insurance premiums skyrocketed. In 2004, when Health Savings Accounts or HSAs, were introduced, Setpoint immediately signed up. They provided the company with a way to intelligently manage healthcare costs, allowing Setpoint to save dramatically on premiums and also saving employees thousands of dollars. Setpoint was even able to contribute substantially to its employees HSA accounts because of the premium savings.
HSAs also have features that drive cost innovation and mimic other types of insurance — consumer involvement in costs and payment of maintenance services.
In a future blog we’ll look in more in detail at Setpoint’s experience with its HSA plan and the pros and cons of HSAs.
Originally published on Harvard Business Review Blog.