ALIGNING INCENTIVES FOR INNOVATION — HEALTHCARE’S CHOICES

By: New Markets Advisors
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Today’s Wall Street Journal contains a special report on innovation in healthcare, under the banner headline “The Time to Innovate is Now.” What follows is an uncontroversial call for more innovation in response to escalating healthcare costs, along with a description of several disconnected but novel programs. 
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is misalignment leads some healthcare observers to argue that the cure for healthcare’s ills isn’t bold new innovation, but rather broad adoption of innovations already trialled by brave pioneers.
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This view may be cynical and extreme, but there is truth to it. America’s healthcare cost crisis could be largely solved if high-cost states could equal the spending of lower-cost states such as Minnesota (where health outcomes also exceed those of high-cost states, even after making adjustments for prevalence of disease). This sort of opportunity can be common in disconnected systems. For example, greenhouse gas emissions from homes and buildings could be slashed 30%, at no net cost, if the building industry would adopt energy efficient technologies and methods.

So, how can healthcare align incentives? We are not about to revamp the U.S. healthcare economy (again). However some organizations, such as Medicare and Blue Cross of Massachusetts, are experimenting with “global payments” to a single entity such as a hospital to coordinate all care for a patient and align providers’ incentives accordingly. This trend, as it gains strength, at last gives the recipients of these payments the financial leverage to force other stakeholders to align behind innovations in care. For innovative companies wishing to grow through reducing healthcare’s costs, the answer is to become one of the answers that hard-pressed health systems adopt as these payors hand the systems the power that global payments create.

This strategy requires companies to generate a track record, quickly, with the sort of organizations these health systems will look to for validation of a new solution. Such “reference customers” need to be similar to the types of health systems that will be forcing through change. A reference customer like Massachusetts General Hospital or Kaiser Permanente may be too unusual — they are highly sophisticated, with advanced IT systems and thousands of physicians. Tiny medical practices are unrepresentative as well; these small groups are unlikely to receive global payments from payors and will find it increasingly difficult to survive. This leaves a reasonably small number of large group practices of around 50–200 physicians as the vanguard of change. These practices will be some of the most important recipients of global payments, and they may be far faster-moving than some of healthcare’s behemoth providers.

To build a track record, companies need to generate data, but they also need to iterate their model given the fast changes in this industry. Accordingly, they need to adopt a two-track approach with clinical trials following fixed protocols, accompanied by “commercial trials” with highly flexible approaches. The clinical protocol may well be out-of-date by the time the study concludes, but it will generate useful data nonetheless which a commercially up-to-date organization can flog relentlessly.

This two track strategy, aimed at the middle tier of the market, is applicable in fields well outside of healthcare. For instance, makers of energy efficiency technologies could follow the same approach with mid-sized architecture and building firms. The strategy lacks the sizzle of partnering with the sexiest large firms, and it costs more than a single-track approach. Yet it is the pragmatic way to tackle disconnected systems poised for rapid change. Just as in baseball, aiming for a couple of well-timed base hits can be a far more effective and reasonable goal than to swing for the fences.

Story by Steve Wunker.