Believe It or Not, the Government Is Driving Healthcare Innovation


Xconomy Seattle — 

Editor’s note: Jay Sultan, principal strategy advisor at Edifecs, a global health information technology solutions company, has another take on what’s driving innovation in healthcare, following our earlier Xconomist Forum post by former Providence Health and Services CEO John Koster arguing that healthcare is transforming regardless of the Affordable Care Act

Largely missing from the political debate about Obamacare is the rather startling fact that the federal government is now the principal source of innovation in healthcare.

As an ultra-conservative, free-market thinker, it is obvious—and shocking—to me that the federal government (which purchases more healthcare than anyone) has both the greatest ability and greatest urgency to employ innovative methods to improve value in healthcare—and is aggressively doing so.

I believe the government’s innovations will have a far larger impact on the quality and cost of healthcare in the future than the intensely debated issues about the individual mandate and the federal health insurance exchange created by the Affordable Care Act.

I am not referring to medical research or the development of new drugs. Instead, I am referring to innovations in the administration and organization of how healthcare is delivered.

For much of the country, healthcare is delivered via a process known as fee-for-service. When a healthcare provider, such as a doctor or a hospital, provides some healthcare service, from a routine checkup to heart bypass surgery, they submit a claim to the payer (typically an insurance company or Medicare or another entity who pays for the care patients receive). The payer looks up the price for that service owed to that provider (based on the contract between the payer and provider) and pays it. Thus, the provider receives a fee for the service delivered.

The healthcare industry has known for many years that fee-for-service is a flawed basis for allocating and valuing healthcare. Critics, myself included, refer to it as fee-for-volume, because it creates perverse incentives to maximize services delivery volume, especially for the most profitable services. More importantly, it fails to compensate healthcare providers for delivering what our society values in healthcare: wellness, disease and illness prevention, quality of care, and the coordination of care among the multiple providers who care for us. Healthcare providers are not avaricious or evil; quite the opposite. But, they are rational actors who respond to how the fee-for-service system works.

Stated another way, today’s healthcare system works perfectly as designed—it compensates for the volume of services delivered. If we want to change it, we need to change the design, allowing us to get more value from the dollars we spend. If we change how we organize and pay for healthcare, we can dramatically increase the quality and reduce the cost of care.

But how to change such a large and pervasively entrenched process?

Most working Americans have an insurance plan, run by a company that processes and pays for their care, sometimes on behalf of their employer. There are hundreds of insurance companies in the U.S., but the largest of them (UnitedHealthcare and WellPoint) only cover a small percentage of Americans. Combined, all the insurance companies only provide about a third of the insurance in the U.S. No one company is big enough to drive systemic change.

On the other hand, the U.S. government is the largest payer in the world. Combining Medicare, healthcare for federal employees and military, and other federal programs, the federal government is the direct or indirect payer for over half of the insurance in the U.S. For most of the hospitals and physicians in the U.S., over half of their revenue comes from one federal program (Medicare) alone.

It is a problem of inertia. A large insurance company with a mere million members cannot by itself change the system. The federal government is the only entity with the size and market power to make a change.

The Center for Medicare and Medicaid Services (CMS) is the government agency that administers much of this federal insurance. CMS has sponsored small “demonstration projects” for decades. They were exactly what you would expect when the government tries to innovate: heavy in bureaucracy, regulation, and control; limited in focus and impact; and ultimately unable to alter healthcare.

I trust the crucible described by Adam Smith, where the free market innovates and the best ideas emerge. But if commercial payers are too small to transform the whole system and the government is too moribund and egalitarian, how can the system be transformed?

A largely uncontroversial part of Obamacare was a mandate to create an innovation function within CMS. Broadly mandated and adequately funded, the CMS Innovation Center has done a remarkable job in a very short time, thrusting the government into the leading role for innovation in healthcare. Before the Innovation Center, there were only two to three narrow demonstration projects with fewer than 100 providers participating. Today, there are over 8,000 providers participating in over 20 new initiatives.

These initiatives are varied in scope, but all focus on moving from fee-for-volume to fee-for-value. They change the way providers are organized and paid for delivering healthcare. They foster the creation of innovative approaches, such as Accountable Care Organizations (ACOs, where a group of providers manage the overall care of a patient or group of patients); Bundled Payments (where a group of providers are paid based on their performance for treating a specific condition); and interventions improving care for newborn babies.

Most importantly, the providers engaging in these innovations are changing the way they do business. They are making changes to the standard routines they use to treat patients, to their organizations, to their provision of healthcare and its measurement.

There will be many failures by the 8,000-plus providers participating, but that’s part of the innovation process. For example, some providers in one type of ACO program are switching to a different ACO program and others are giving up. Many providers will not see much true improvement.

However, the overall effect of having the biggest payer require healthcare providers experiment and improve the way they obtain half of their revenue is causing a significant change in healthcare that is occurring now.

Congress even had the wisdom to trust the innovators more than themselves. Perhaps the most vital aspect of the Innovation Center’s enabling legislation allows CMS to decide that an innovation has worked and to promulgate it through the system as new policy, without having to go back to Congress. In this way, one of the primary barriers to real change—getting the government to act—is eliminated.

These innovations will not solve all problems in healthcare. However, payment reform by government is a powerful tool to make big changes in the real world, one that commercial insurance companies eagerly want to implement as well. Dozens of commercial insurance companies and hospital systems are innovating as well, both leading and learning from the Innovation Center. For example, CMS posited two ways to create ACOs, and now commercial plans have dozens of new models.

The best of these innovations will reduce waste and improve quality. They will address under-utilization, over-utilization, and mis-utilization of healthcare, all of which are inherent problems in fee-for-service. Those on the political Right can be pleased that free market approaches of experimentation, innovation, and financial incentive are being used to improve healthcare. Those on the Left can be pleased that one part of Obamacare is working as intended and can improve the access, quality, and affordability of healthcare.