A role for entrepreneurs
An observation on lowering health care costs via technology innovation

Article Highlights

  • Innovations in medical technology are cited frequently as one of the drivers of increased health care costs.

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  • The benefits of medical technology can be difficult to measure in economic terms.

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  • Continued advancements in medical technology are an important part of improved health care productivity.

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Editors Note: This paper appeared in the January 2013 edition of the American Journal of Preventive Medicine.

Introduction

A role for entrepreneurs

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In many industries, entrepreneurs are asked to undergo a process called "frugal innovation." This process supports advances in technology that drive down spending and improve results or leave them static. Likewise, in the healthcare system, there is a shift occurring calling for a reduction in spending. Key to this shift will be implementation of innovative devices brought forward by entrepreneurs. Although technology may add to costs in the near-term, most of the empirical analysis shows that the aggregate benefıts vastly outweigh expenditures. However, several regulatory and perceptual challenges exist that entrepreneurs will have to overcome.

Background

Innovations in medical technology are cited frequently as one of the drivers of increased healthcare costs. But less empirical attention is paid to the short- and long-term economic benefıts of these innovations. Analyses are often biased in the direction of accentuating the costs because they are realized immediately with the outlays showing up on current budgets.1 But the benefıts of a new invention can accrue over many years.

The benefıts of medical technology can be diffıcult to measure in economic terms, such as increases in life span or reductions in morbidity from a disease. Accordingly, technology can also turn procedures that were previously diffıcult to perform or had to be undertaken in high-cost settings into less-invasive, less-risky, and less-costly endeavors. Innovation has been a transformative force in enabling improvements in health. From 1980 to 2000, new diagnostic and treatment paradigms helped drive a 4% increase in life expectancy in the U.S., a 16% decrease in annual mortality rates, and a 25% decline in disability rates for the elderly.2

Still, many attribute a large share of the age-adjusted growth in per-capita medical spending in recent decades to innovation: the cost of new devices and the procedures they enable. However, the real question is whether the benefıts of innovation are increasing faster or slower than the costs.3 The clearest way to solve long-term fıscal challenges with public health programs such as Medicare and Medicaid is to improve healthcare productivity to achieve more medical benefıt for each dollar spent on healthcare programs. Consequently, continued advances in medical technology are going to be an important part of this improved productivity.

The role of entrepreneurs, healthcare technology innovations, and their perceived costs of implementation have been contested recently. On the one hand, some researchers argue that innovations in technology (coupled with weak cost-containment strategies) generally increase healthcare costs in the U.S. because they are adopted more readily because of the payment system in place and a lack of regulatory constraints. Others disagree, citing the diffıculty for entrepreneurs to make headway with their inventions because powerful institutions (regulators, medical specialists, insurance companies, and hospitals) fıght against simpler, cheaper alternatives that threaten their livelihoods. Instead, these researchers believe the healthcare industry needs to open its doors to market forces and embrace disruptive technologies and business models that, in the short term, may threaten the status quo but in the long term will improve the quality of health care.

Exemplifying a common argument, Bodenheimer4 argues that, by comparison with other countries, greater availability of new technologies in the U.S. is associated with greater per-capita use and higher spending. He submits that new technologies diffuse faster in the U.S. because of easier acceptance by the medical profession largely because of the generous fee-for-service payment system (which does not exist in other countries) and the lack of regulatory constraints. Consequently, this situation makes new technologies prone to over- (unnecessary) use, which, therefore, contributes to greater costs. Associated costs can be contained if some limits are placed on diffusion of the technology, particularly through HMOs and through the two mechanisms of Medicare expenditure caps and global budgets (in which expenditures for services are predetermined, and the costs for those services may not exceed the budgeted amount).

In a counter-argument, Christensen and colleagues5 discuss how the process of innovation (disruption) works: It starts with an innovation sneaking in unnoticed while dominant players in the market, intent on improving their products or services beyond most consumers' needs, are not paying attention. In time, the innovations improve to the point where they meet the needs of the majority of users and become adopted. This natural process of disruption will enable building a new healthcare system characterized by lower costs, higher quality, and greater convenience. The mostpowerful disruptions across industries have enabled larger populations of less-skilled people to do something in a more-convenient, less-expensive setting. Examples include the personal computer, the camera, the telephone, and the photocopy machine. The same thing can happen in the healthcare system: Less-expensive professionals in less-expensive settings can be enabled to do progressively more sophisticated things.

Both arguments have validity. However, further research is needed to determine the long-term value of healthcare innovations and barriers to their implementation. This analysis discusses each argument in depth.

To read the full paper, download the PDF.

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