Technology Alone Will Not Save Health Care

By Todd Hixon

Will Silicon Valley’s Confident Technologist Investors Save Healthcare? — Forbes.

The post linked above from fellow BCG alumus David Shaywitz gives the Silicon Valley view of health care reform, which, if it were an advertising slogan, might boil down to: “Longer living through better algorithms.” Actually, I’m highly respectful of what software can do: I’ve made some “big data” investments, and there are obvious areas where data analytics can help with health care. A big example: all of modern evidence-based medicine is based on data science.

MRI Scanner. (Photo via Wikipedia.)

But, in my view, there is much more to health care reform than technology. The business system of health care is profoundly inefficient, and the market is broken (or never existed). This means that resources are allocated to the wrong activities and consumers and plan sponsors pay too much for services they buy, and hence their finite money does not buy all the care they need. The result in the U.S. has historically been average outcomes at 2x the cost level of peer countries. In the future, now that money is becoming scarce and we are less able to pay twice what the other developed countries pay, the result will probably be sub-par care.

Take the example of an MRI, a common diagnostic procedure. Most MRI’s are standardized: most of the equipment comes from two manufacturers, the industry is highly regulated, and radiologists who read the scans are rigorously certified. But, the price for a given scan often varies by 2x or more within a 20 mile radius. Consumers don’t (really can’t) shop, so many pay 2x what they might have paid, and cost controls deny access to many MRIs, some of which are actually needed (I know from personal experience here) and might have been allowed if half as expensive.

Medical practitioners typically post a very high list price for their services, from which they then discount 50% or more to insurance companies and 80%+ to Medicare and Medicaid. Given that most of their business is at 20%-50% of list price, you would think they would be happy to sell their spare capacity for a price in that range. The very high list price discourages consumers from coming in and filling the slack.

A market process is the answer. Radiologists need to learn yield management as airlines have learned it: sell your capacity that is most in demand for a high price, and sell your slack capacity for what you can get. They need to put price and availability information where consumers can find it, like airlines do.

The drug industry is full of similar market disequilibriums. For generic drugs, e.g., many people with commercial insurance pay $10 (their co-pay) at the local chain drug store for a 30 day fill that can be bought for $4 at Costco or Wal-Mart and $3 online. Why? Because consumers are trained to use their insurance, thinking they are getting a benefit. In this case the “benefit” is a bit of convenience at the cost of paying 2x-3x the best price.

And then there is under-investment in primary care. There’s compelling data that shows, if you spend twice as much on primary care (15% of health care spending), you can save 40% on advanced care (50% of health care spending): spend $1, save $2.50. Seems like a good idea to me, but the whole structure of U.S. health care has driven the other way for 20 years, until recently.

Medical technology is highly valuable, and software is indeed “eating the world”, in Marc Andreessen’s words. And (not but), there is huge scope to use the tools of business model re-engineering that have been developed in the last 20 years, plus plain old business horse sense, to take a lot of waste out of health care, and hence free up resources for the care that is most needed.

[This post first appeared at on June 28, 2013.]

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