Barriers to Innovation in US Healthcare

This week I’m at #WOIC2015 (World Open Innovation Conference 2015) in Santa Clara. I am program chair for this the second annual conference, which was organized by the Garwood Center at the Haas School of Business at UC Berkeley.

This morning, the opening panel for the second day was on open innovation in healthcare within (and across) ecosystems.

• Sangita Reddy, Co-Managing Director, Apollo Hospitals Group
• Amir Dan Rubin, President and CEO, Stanford Healthcare
• William Bonfield, CMO, OptumHealth division of UnitedHealthcare
• Pramod John, CEO and Co-Founder of Oration

Pramod John, William Bonfield, Amir Rubin, Sangita Reddy

The session opened with a keynote by Reddy, daughter of cardiologist Prathap Reddy (who founded the chain in 1983). The company has 57 hospitals (7 with US accreditation), 2,500 pharmacies and numerous doctors and outpatient clinics.

She talked about how the company used frugal innovation to provide solutions both to India’s middle class and poor. For example, the company has created a national telemedicine program that has touched 36 million patients. To support that, it’s created a device for remote testing of vital signs, and is working on a device for diagnosing malaria (and other parasite) infections.

Perhaps the best example was open heart surgery. Apollo has done 150,000 surgeries with a 99.3% success rate — and an average cost of $4,000. Yes, compared to the US it has lower labor and pharma costs. However, the clinicians pioneered a process (and clamp) to allow 89% of the surgeries be done as beating heart surgery — saving the machine that oxygenates the heart, the process (and risk) of starting/stopping the heart, and the longer recovery period.

Several speakers noted that the U.S. is still the gold standard for the newest, most advanced, most complicated cases. As Reddy said, “Advanced healthcare in the United States guides advanced healthcare in the rest of the world,” and speakers expressed concern about any changes that would eliminate the spillover values that provides for global medicine.

The U.S. problems are both in the incentives and the inefficiencies (including rent-seeking) in the current system. (Rubin faces specific challenges of real estate and labor costs in Silicon Valley, with nurses drawing $160k/year vs. $50k nationwide). As Bonfield remarked, the success of the system keeping people alive longer means there are more patients living with (expensive) chronic conditions.

On the inefficiencies, John argues that the biggest opportunity is in pharmaceutical distribution. Drug prices are rising while medical procedures are relatively flat. He estimated that 20% of the $400b annual pharma costs are wasted in the distribution channels, through pharmacy benefit manager (PBMs) and retailers. Using the website GoodRx.com, he offered examples of the same (generic) statin drug having more than a 5x range of retail pricing in a specific local neighborhood.

Not surprisingly, John has a tool to facilitate search for lower drug prices. Although it could be used by the uninsured or those with high deductible plans, their target is medium-sized firms that self-insure their pharmaceutical expenditures.

As the person who (successfully) pushed for KGI’s healthcare economics and drug pricing classes, I asked about the incentives. It’s great if I can save drug costs, but if it doesn’t budget my monthly premiums, I’m not going to bother. As one speaker notes, Singapore spends less than almost any developed country on healthcare (4.6% in 2013) through high deductibles and incentives for consumers to reduce their own costs (as you would on any other good).

Still, it was good to see suggestions of bottom-up innovation that have a real chance to bend the cost curve in a way that top down mandates cannot.