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Healthcare's Second NATO
November 28, 2022
Read Time - 10 minutes
Written by

David Goldhill, founder and CEO of Sesame, on America's evolving place in health care

I greatly appreciate the Washington Post’s publishing my op-ed today entitled “In health care, America is the world’s indispensable nation” It is intended to be a very different perspective on the U.S. health care system and how it compares to other nations’. Because the op-ed format by definition is limited to only the most important ideas, I thought I’d supplement it by fleshing out some of the key points here.

1. In my lifetime, I observed what may have been the greatest natural experiment on the relative value of central planning. The Communist nation of East Germany lasted for barely two generations. By the end of that short period every single East German industry – even the simplest -– was far behind its West German counterpart in technology, productivity and competitiveness.

Britain’s fully nationalized National Health Service has already existed twice as long as East Germany. Supply, demand, price and capital expenditures are all controlled by the British government. The NHS has its critics but few would argue that its standard of care isn’t world-class. How has the NHS escaped the East German quality/technology trap? And not just for a year or two, but over seven decades of state control. And not in some simple, straightforward industry, but in the single most complex human service, involving literally tens of thousands of individual services, driven by constantly changing scientific and technological advance?

To paraphrase the old joke: sure the NHS works in practice, but how can it work in theory?

2. The primary reason U.S. spending is so large is that Americans pay much higher prices for everything: often more than double for drugs, diagnostic machines and surgical devices. Almost all experts believe these high prices are the result of poor policy choices: shouldn’t we pay as little as others do for the exact same things?

As with so much in health care, conventional wisdom is suffocating. In any other field, we would ask an obvious question: what is the impact on the service itself of the largest market also paying the highest prices for decades? In health care, that impact is fundamental: the entire world health care economy bends to the opportunities presented by the U.S. market.

Or, in other words, the key bug in the U.S. health economy is now the key feature of the world health care economy.

3. Our thinking about health care innovation is centered on products – the new drugs, tools and devices often resulting from years of research and millions of investments. But health care is sold to consumers as a service, not as discrete products. In the U.S., there are six thousand hospitals, one million doctors, tens of thousands of clinics and four million nurses. How does something new replace something familiar in the workflow of this massive, decentralized complex? How do we encourage all these players to take the tools and drugs invented by tech companies and translate them into actual treatments and services for patients?

Many experts seem to approach this issue of commercialization with little more than the “better mousetrap” theory; if an innovator offers something that will improve health care, a health system will adopt it organically or with government encouragement. But that model is too influenced by the Gleevecs: breakthrough products with straightforward uses. Most innovation is more of the heart valve replacement. Medical professionals often lead the charge, experimenting with new techniques, identifying points of failure and risk, repurposing older technology, requesting specific design changes and technical improvements. In the roughly 60 years of heart valve replacement surgery, it is estimated that 70 different designs of mechanical valves alone have been used – more than one new design per year!

How do we incent our service providers – doctors, nurses, hospitals – to commercialize innovation? Money.

As a result, America’s doctors, clinics and hospitals play an essential entrepreneurial role in innovation; they choose which new drugs, devices, diagnostics, techniques and software to try before success is clear. Our hospitals and doctors are free to invest in new equipment, and to charge whatever they can get away with. A hospital or doctors that buys an expensive piece of new equipment is taking a major risk, but one that waits to invest may lose patients to a competitor.

In tech terms, health care is the ultimate B:B:C industry. It is through the very expensive maintenance of that highly competitive middle “B” – the profit-driven doctor and hospitals that are the initial customers for new technologies and the treatments they enable – that America drives health innovation worldwide.

4. In this light, the supposed strengths of other countries systems’ – their control of prices and professional costs – are viable only because the massive American health care economy performs the commercialization role. Foreign doctors and hospitals adopt only the innovations approved, purchased by or budgeted by their nations’ central authorities. Their health care service sector takes no capital risks and therefore requires none of the entrepreneurial rewards inherent in American hospital prices or doctors’ compensation.

Policy experts love the complex value assessment processes that other nations use to price innovation “fairly” and govern the incorporation of new techniques into their systems. But from the perspective of driving improvement, these approaches are little more than betting on a horse after the race has been run. Bureaucratic assessment of the value of a new technology can work only on innovations that have already been developed and often already commercialized. Which means, someone else (i.e., the U.S.) has already absorbed the massive costs of innovation – risk of failure, the costs of commercialization, high enough prices to produce a return on capital. There’s a reason no country uses similar assessment processes for innovation in any other segment of their economy: because nothing new would ever be developed.

5. How do other countries get away with it? Internationally, health care is a rare “non-zero-sum” game; innovations commercialized in the American market are freely available for all nations to enjoy. Leading doctors are happy to write journal articles describing their breakthroughs. U.S. hospitals don’t care how much foreign hospitals pay for the same equipment. U.S. oncologists don’t care what French ones pay for the latest chemotherapy. Simply put, U.S. doctors and hospitals can’t compete for French patients.

Centrally controlled health systems haven’t truly escaped the rules of the market. Their success depends entirely on the messiness of competition, profit-motive, cutthroat tactics and free market chaos to drive quality and innovation. They just subcontract this essential role entirely to the massive U.S. health economy and enjoy the free knowledge transfer.

6. There really isn’t another industry to which health care compares. My former industry – entertainment – provides a little context with its separation of production and distribution. We can view national health care systems as water-tight local distribution monopolies and the American health economy as the center of an international production industry. It’s a very imperfect analogy. And of course no expert, ever concluded that the Belgian movie industry is superior to the American one because a Belgian could watch the identical Marvel Universe spectacular in an equally comfortable movie theater as an American – without Belgium having to waste all those billions on production and marketing.

7. The reality of international health care as a second NATO fits uneasily into a political climate in which everything about health care is treated as a consequence of good or bad policy. America’s utter dominance of world health care is an accident – the unintended evolution of our industry remaining profit-driven while other nations utilized this umbrella to pursue egalitarian goals. Nevertheless, this reality is now an inescapable constraint on our freedom of action. America cannot simply copy what other countries do, because their systems depend on American health care remaining American health care.

8. The illusory success of foreign systems encourages a static thinking about the challenge of funding health care. Conventional wisdom is that there’s a fundamental and fixed amount of health care need in a population and that the challenge is to figure out how to pay for it.

The American reality is closer to, well, reality. The amount of health care “need” (aka demand) is heavily influenced by how we pay for it. Our nation’s willingness to fund or subsidize health care treatment naturally pushes up demand for it, and supply willingly follows with new services and higher prices.

Perhaps the clearest example is the explosion of diagnoses of and treatments for chronic conditions; much of this is an ability to identify risk factors early and address them medically before illness sets in. The investments in the necessary diagnostics would not have been made without the investment in the associated treatments (heavily pharmaceutical); and neither would have been possible without the societal commitment to funding ever more health care.

There’s no inherent reason that health care innovation should add to cost; health advances use similar materials and information technologies that improved quality and cost in food production, consumer electronics, transportation, communication, hardware, energy…you name it. The fundamental difference in health care is that the third party payment system tamps down the normal benefit of introducing genuine cost-saving innovation – the ability to grab higher market share. In a world of different – more normal – business incentives, we would expect health care innovations to be as robust in cost-reduction as the same use of similar technologies in other industries.

Every major legislated US health care “reform” – Medicare and Medicaid, CHIPs, Part D, Obamacare – is an effort to address the funding shortfall created by the growing health care “need” driven by the previous “reform” and those now priced out of access to the full range of services. In itself, there can be no end to this cycle because there is no natural limit to the amount of care we can “need”; the capacity of medicine to improve life has no limit.

Once we abandon the static idea that some fixed amount of health care needs exists, we need a mechanism of trade-off between the benefits of additional health care versus the benefits lost from being able to spend on things other than health care.

9. The illusory success of foreign systems has also led us to strengthen our own centralized payers – insurers and Medicare – with disastrous results. They have proven utterly ineffective in creating the incentives for innovations that lower cost. It is naïve to expect anything different: these institutions all grow more powerful and/or more profitable with greater spending on health care.

There is no centralized force that can discipline the health care economy on cost if we also want the economic freedom essential for the thousands of daily experiments, adjustments, upgrades, updates and refinements that underlie the life-enhancing and life-saving innovations to come. A real health care economy – just like the simplest industry in the former East Germany – is just too complex to be managed centrally. We utilize the requirement to sell to individual consumers to discipline every other industry because it is the only effective mechanism over time for managing dynamism and complexity.

David Goldhill

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