February 24, 2014

In the Healthcare Debate, Every Day Is Groundhog Day

Robert Graboyes

Former Senior Research Fellow
Summary

In America's health care debate, every day starts like every other day. The alarm clock clicks, and the music begins. The left says, "More power over health care in Washington and less in the states. More regulation of insurance. More public sector involvement in the delivery of care." The right says, "Less power over health care in Washington and more in the states. Less regulation of insurance.

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In America's health care debate, every day starts like every other day.

The alarm clock clicks, and the music begins. The left says, "More power over health care in Washington and less in the states. More regulation of insurance. More public sector involvement in the delivery of care." The right says, "Less power over health care in Washington and more in the states. Less regulation of insurance. Less public sector involvement in the delivery of care." ... The next day, the alarm clock clicks, and the music begins. The left says ... ... Well, you get the idea.

These are stereotypical statements, but that's the gist of it and has been since World War II. The debaters' endlessly overlapping refrains focus almost entirely on the demand side of the health care market-on who pays how much to whom for what. Lost in the din is the supply side. Worse, most segments of the political spectrum actively or tacitly agreed to policies that restrict the supply of health care goods and services, effectively negating the impact of the demand side. Our laws, regulations, and institutions (both public and private) discourage the technological innovation that is the only real means of improving health and controlling costs. Redirecting the national conversation toward innovation is critical to health and wealth in the 21st century.

Fortress and Frontier

The most important distinction in health care is not federal/state, public/private, or regulated/unregulated. Rather, it is between what I call "the Fortress and the Frontier."

Joseph Schumpeter described a process he called "creative destruction"-innovation and economic growth emerging from the failure and collapse of old economic organizations, which are then replaced by newer organizations. (Montgomery Ward and Sears Roebuck give way to KMart and Wal-Mart. PanAm is gone, and Southwest is here.) More recently, Clayton Christensen described "disruptive innovation"-new modes of production and new markets replacing old ones. (KMart and Wal-Mart give way to Amazon.com. Mainframes give way to laptops and smart phones. Hand-loaded ships, trucks, and trains give way to multi-modal containers.)

So here's the distinction: The Fortress is an environment that discourages creative destruction and disruptive innovation, and the Frontier is an environment that encourages both. The Fortress is centralized, vertical, and stable. The Frontier is decentralized, horizontal, and volatile. The Fortress is run by insiders, who are protected from outside challengers. On the Frontier, insiders must defend themselves against outside challengers.

For an example of the Frontier, look in your pocket. Your smart phone was part of a process that disrupted land-line telephones, compact disks, cameras and film, the postal service and telegraphy, and a host of other markets. On the Frontier, people you've never heard (Bill Gates, Steve Jobs, Mike Laziridis, Mark Zuckerberg, Larry Page/Sergey Brin) appear from nowhere and change your world. And just as necessarily, great and time-honored businesses and products crash or fade.

Hands Across the Aisle

Without any doubt, the Affordable Care Act (ACA, or "Obamacare") comprises a tremendous rush into the Fortress. It is packed with components designed and managed by credentialed, centralized insiders: essential health benefits, individual and employer mandates, ACOs, PCORI, IPAB, reinforcement of Medicare and Medicaid, etc. The insiders' commands descend through health care system, with patients at the bottom. These structures will suffocate the capacity to innovate. But the ACA merely accelerated a trend, stretching back to World War II, in which both left and right have helped shift more of health care off of the Frontier and into the Fortress.

One can fiercely oppose the ACA and still be unwittingly complicit in the shift from Frontier to Fortress. The ACA opponent can support or tolerate state-erected Fortress structures (certificate of need requirements, protectionist professional licensing, benefit and/or provider mandates, scope-of-practice limitations, restricted medical school admissions, medical tort laws, corporate practice of medicine restrictions). He or she may give a pass to Medicare's reimbursement rules or excessive FDA restrictions on pharmaceuticals and medical devices. ACA opponents may be just fine with federal, state, or local subsidies for, say, medical device manufacturers in their districts.

In the Fortress, doctors and managers of hospitals, pharmaceutical companies, and medical device manufacturers sleep soundly at night, knowing they are protected from competition. On the Frontier, they lie awake wondering whether some unknown upstart is preparing to put them out of business. For now, there is plenty of innovation inside the Fortress-witness the medical miracles of recent years. But these tend to be "sustaining" innovations-insider-driven and cost-increasing. Only on the Frontier can you have your cake and eat it too-lower costs and higher quality, just as we've seen in communications, entertainment, transportation, distribution, and agriculture. But the Frontier also holds risks.

Hobbling the supply side engenders a widespread belief that in health care, alone among all industries, increasing costs are inevitable and eternal-a law of physics, so to speak. Bowing to that belief, debate turns to rationing, and the disputants settle into a dreary argument about how-not whether-we should best ration.

Opportunity Awaits

The good news in all this is that we have the capacity to shift the national health care debate into more productive directions. As University of Chicago economist John Cochrane asked: "[W]hat's the biggest thing we could do to ‘bend the cost curve,' as well as finally tackle the ridiculous inefficiency and consequent low quality of health‐care delivery? Look for every limit on supply of health care services, especially entry by new companies, and get rid of it."

Rhetorically, I'd like to go one step further and break the cost curve to bits. Shifting the debate in that innovative direction, we can finally hear the alarm clock and see that it's February 3.