Healthcare Inefficiencies and Bloated Costs: A Catalyst to Innovation

July 12, 2019
The healthcare sector has been evading competitive pricing, but will it be able to evade innovation?

Today’s consumers have the perception of a monopoly as something that increases the price of a product without offering an improvement in services. Take the example of our internet service providers (ISPs). Very few people can switch providers; most of us are stuck with no choice for an ISP. The same is true for utility companies. We do not have an option to change our electricity or gas or water providers. Utility companies and internet service providers are examples of government-approved monopolies with high prices, mediocre service and low customer satisfaction. The consumer is helpless.

Our healthcare sector does not have such monopolies. We have multiple hospitals and pharmacies, and numerous health insurance providers. So why is competition unable to reduce ever-increasing healthcare costs for consumers?  Is the current cost of healthcare the lowest we will ever see?

Top contributors to high healthcare costs are:

  • Administrative expenses: Around 25 percent of our healthcare costs are administrative. We have a multipayer system in the United States, which means multiple insurance companies pay the providers, and each of these insurance companies has different billing requirements. A hospital or a doctor’s office needs to have multiple billing specialists to meet the billing requirements of multiple insurers. Other developed countries enjoy lower administrative costs because they have a single-payer system.
  • Malpractice Insurance: The practice of suing a provider is more prevalent in the United States than it is in many other countries. To protect themselves from litigation, providers tend to have substantial malpractice insurance coverage with astronomically high premiums. Consumer healthcare costs reflect these massive premiums.
  •  Drug prices: Pharmaceutical companies, pharmacy benefit managers such as CVS and Express Scripts, and health insurers determine prescription drug prices. There is no single authority to negotiate drug prices, which is the reason we pay different prices depending on which pharmacy we go to for our prescription medications. Medicare does not have such middlemen and negotiates drug prices for Medicare members, thereby leading to lower overall pricing, but non-Medicare demographics are left out.

Lower Costs Through Consolidation

  • Such inefficiencies create opportunities for innovation. Contrary to the popular belief that monopoly is ineffective in lowering prices, I believe we need fewer players with greater authority in healthcare to keep the costs at bay.
  • In January of 2018, Amazon CEO Jeff Bezos, Berkshire Hathaway CEO Warren Buffet, and J.P. Morgan CEO Jamie Dimon announced they were teaming up to tackle rising healthcare costs.  Their goal is to provide cost savings by eliminating the middleman and achieving other synergies. Initially, their healthcare venture (called Haven) will cater to 1.2 million employees and dependents of Amazon, Berkshire Hathaway,  and JPMorgan Chase. Once successful, they plan to expand, making the healthcare costs lower with improved services.
  • The recent past has seen mega-mergers in the field of healthcare. CVS Health and Aetna merged, bringing together one of the nation’s largest pharmacy chains and one of the largest health insurers. Similarly, Cigna — one of nation’s largest health insurers — and Express Scripts — one of the largest pharmacy benefits management companies in the country — combined to transform the healthcare system.

It is time to replicate a single-payer system in our country to lower the administrative costs and to better negotiate drug prices. Such an authority is possible only through consolidation within the healthcare sector. Healthcare is a highly regulated industry; obviously government will be an important stakeholder in such an authority, which will bring stability within the system.

Innovation Through Medical Tourism

While that one change will be monumental, that is not where the opportunities stop. Many foreign countries such as India, Malaysia, Thailand and Mexico are encouraging medical tourism and are catering to American patients. The facilities in those countries are world-class with cutting edge technologies and U.S.-educated doctors. The cost of surgeries and procedures there are only a fraction of the cost in the United States.

One may think that it is only a matter of time before the healthcare insurance companies start covering all-expense paid trips to the hot medical tourism destinations to save costs, but again, the system is plagued with inefficiencies. BlueCross BlueShield of South Carolina, through its medical tourism facilitator, Companion Global Healthcare, offered North American patients paid trips abroad for lower-cost medical procedures … but then for reasons they didn’t explain, Companion Global Healthcare stopped offering BlueCross BlueShield products.

But innovation knows no boundaries. Devi Shetty, founder of Narayana Health, a top-notch hospital system in India, opened a hospital in Cayman Islands: Health City Cayman Islands (HCCI), which is close to the U.S. but outside of its borders. The HCCI is a workaround to the all-expense paid trips such as the one that was offered by the BlueCross BlueShield of South Carolina’s subsidiary. Americans not willing to travel half the world for treatment can make a short trip to Cayman Islands to save money.

In conclusion, the healthcare sector has been evading competitive pricing, but will it be able to evade innovation? The United States is a land of innovation, and markets reward innovation. The healthcare sector is currently witnessing record venture capital funding. It is only a matter of time before an innovative strategy such as Haven or the consolidation within the healthcare industry or medical tourism finds an alternative to high healthcare costs, boosting both the healthcare sector and the U.S. economy.

Aloke Sinha is a Senior Project Manager working in the Project Management Office at CVS Health

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