The passage of health reform hugely impacts almost every sector of the American healthcare industry. We should expect to see a substantially changed environment for innovation.
Directly, the law only modestly impacts incentives for innovation. It sets up a Center for Innovation to sponsor new forms of care delivery, creates an institute to assess the comparative effectiveness of treatments, funds a telemedicine pilot for a small number of the very sick, establishes a range of pilot programs to support quality efforts in healthcare institutions, and promises a national strategy for healthcare quality improvement by the start of 2011. These are all laudable initiatives but will do little to impact the overall innovation climate.
Indirectly, the law substantially impacts healthcare firms’ innovation agendas. The pharma industry is a clear winner, with extended protection for biologic drugs spurring investment in “personalized medicine” that creates high-value tailored therapies for relatively small sets of people (a sea-change from the blockbuster-oriented business model of the past). Other sectors may be most impacted by how the act affects incentives for health insurance firms (payers), hospitals, and physicians.
While payers could have come out far worse in this process, the law still requires a fundamental re-think of strategy and an embrace of disruptive innovations. Subsidies to bring the uninsured into the system will create a temporary uplift, but after 2014 it will be quite difficult for payers to differentiate their offerings, leading to severe pricing pressure in an industry that is already fairly commoditized. Payers will be required to accept all applicants for coverage, they will have less ability to vary prices, and their plans will have to meet certain minimum standards to qualify for inclusion on health insurance exchanges. To make good profits, payers will need to differentiate through working closely with care providers to improve healthcare outcomes, enhance the patient experience, and engineer costs out of the system. There is vast room for improvement along these dimensions, but change has been hindered by the Balkanization of American healthcare among fragmented payers, a profusion of hospitals and physician practices, and myriads of healthcare professionals who dislike having change dictated by insurance firms. No more.
The law will encourage payers to act much more aggressively toward healthcare providers, forcing them to accept changes if they are to stay in a payer’s network of institutions where patients can receive care at the best rates.
Previously payers had feared giving their competitors an advantage through taking the lead in pushing change, in case the size of their networks shrank due to care providers resisting these initiatives. Now, payers know that their strategic environment will radically shift in a short time-frame; they must act soon. Even in fiercely competitive environments, firms can act in concert if the writing is on the wall — witness the simultaneous reduction in capacity that airlines have enacted since fuel prices spiked in 2008.
Big payers — Blue Cross plans, Aetna, etc. — will ally with providers that can make change happen, whether these are home monitoring systems for the chronically ill, disease management programs that tightly integrate with physician or pharmacist counseling, improved coordination among specialists, or novel surgical approaches that reduce hospital readmissions. They will also work with employers to improve workplace health offerings, reducing the need for expensive doctor visits. Small payers may have less leverage, given that the extent of their networks will have to meet minimum thresholds to qualify for inclusion on the insurance exchanges, but they have always lacked the scale to create systematic change; we may see substantial consolidation among these smaller firms.
Hospitals will benefit through being reimbursed for care of patients who were previously uninsured, but they will also face new pressures from potential changes in how Medicare pays (e.g. single “global payments” for a visit, rather than for a host of separate charges). Medicare will also stop paying for readmissions of patients, and for the consequences of certain errors. Hospitals will need to exert new pressure on physicians to change ingrained habits, improve coordination among doctors caring for a patient, and work with outside entities to ensure effective post-surgical follow-up. Hospitals should welcome payer plans to launch these kinds of innovations.
Physicians will feel the heat from all these efforts. However they will also experience new demand from 32 million previously uninsured patients; if you thought it was hard to get time with your primary care physician, just wait until this law is fully implemented. Physicians should eagerly adopt innovations that enhance their efficiency.
There is certain to be friction along this path, and tense negotiations among payers, hospitals, and physicians are assured. Yet these difficult discussions have been necessary for some time. The technology exists to substantially improve healthcare outcomes and costs; now the industry has overwhelming incentive to embrace change.
Story by Steve Wunker.
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