Bill Gurley of Benchmark was recently rated America’s top venture capitalist by research firm CB Insights. But he does not invest in healthcare. Not long ago, Gurley spoke at Austin’s South by Southwest festival and explained that it wasn’t because he wouldn’t like to. After all, the sheer size of the industry—about $3.4 trillion in 2016, according to the federal Centers for Medicare & Medicaid Services—is about 18 percent of U.S. GDP. “But there’s an assumption of market forces when you do a startup,” Gurley said ruefully. “You expect customers to pay for value and to not pay for bad things…and the physics are just completely mucked up in the healthcare system.” Through the years, other VCs have similarly thrown up their hands and declared the system “broken.”
Sadly, it’s really not. The American healthcare system is both complex and working exactly as designed. The complexity we all see as patients, innovators, or investors—is actually a key feature, not a bug. So don’t expect to see an Uber of healthcare anytime soon. No less than four giant systemic flaws or complexities in American healthcare make it unlikely to produce the kind of giant paydays that startup investors seek. The first one is simply a huge imbalance between supply and demand. The United States has roughly one practicing doctor for every 400 people. So we don’t have enough doctors, and the cost of the service they deliver is extremely high. To become one, it typically requires going deeply into debt—the average amount a doctor carries after medical school is $183,000. In addition, our admirable system of rigorous training generally means doctors lose about 10 years of earning power by the time they are finished. After all that hardship and personal sacrifice, of course they expect to be well compensated.
The second complexity is that healthcare isn’t a consumer product. Yes, a few small elements of healthcare, like basic primary care, can be delivered with a consumer business model (and companies like Walmart are starting to do that at scale). But the vast majority of acute and chronic healthcare is really expensive and unpredictable. Million-dollar medical bills are sadly not a rarity. This is further compounded by the fact that consumers cannot ever be expected to develop any real expertise around the nature of diagnosis and treatment for major illnesses. As patients, we rarely know what expensive healthcare we’ll need, when we’ll need it, or how much we’ll need. In many cases we arrive to expensive procedures on a gurney—unconscious. In addition, the way the American healthcare system diagnoses and treats major illnesses is highly variable and doesn’t produce uniform outcomes. No other consumer product or service brings with it such huge expense, variability, and personal risk.
As if these two challenges weren’t bad enough, they are compounded by the two ways we finance the high cost of delivering healthcare: the first is known as “selective health coverage” and the second is the for-profit “fee-for-service” approach (FFS). Selective health coverage requires a definition because we’re the only industrialized country that uses such a perverse method of health insurance. Every other industrialized country has a system that is essentially the polar opposite, and far more humane—universal health coverage. But in the United States, we sort (or select) health coverage using a complex mix of factors, including the following ones:
Age (those under 26 get family coverage and those over 65 get Medicare)
Income (if you are poor enough to qualify for Medicaid, you pay virtually nothing) Employer Sponsored Insurance (ESI)
Heritage (for example the special program called Indian Health Service)
Military Service (with the VA covering military veterans)
Uninsured (roughly 30 million Americans)
The largest single group (about 150 million) is employer-sponsored insurance, a method of healthcare insurance which is both an accident and a relic of World War II. Wages were frozen during the war and employers needed another way to compete for workers. The government allowed them to use benefits instead of wages, and employers were more than eager to take advantage of that.
So health insurance tied to employment emerged. Through the years, this system became expected and embedded, and tax incentives arose to support it. Today, federal, state and local governments forgo tax revenue of almost $600 billion a year in order to subsidize employer- sponsored insurance. This tax exclusion is effectively our country’s second largest entitlement after Medicare. We’ve come to assume that ESI works well simply because we’re so used to it, but the U.S. is the only industrialized country that uses this antiquated and paternalistic way to provide health insurance.
The second uniquely American way that we finance healthcare, and our systems’ final systemic flaw, is for profit “fee-for-service” pricing that’s tiered by coverage. The more you pay, the more coverage you get.
For many Americans this is a very painful flaw in our approach because it means that healthcare is rationed according to social class and wealth.
The complexity of this system is enormous. Fee-for-service as a model in itself doesn’t mean our system is broken. In fact it is the primary mechanism of payment in every other industrialized country as well. But our version is uniquely tiered by the amount of coverage a person gets, as a way to maximize profits. That means that more services equal more fees—and more profits for providers.
Our “system” is purpose-built to do more stuff for more profit, so that’s exactly what it does. It’s like a car that only gets two miles per gallon. If we want to get better MPG in that car, we’d have to install a whole new engine.
To restate the four fundamental flaws in the system: there is an imbalance between supply and demand; high costs are a barrier to any large-scale direct consumer business model; we tier health coverage based on ability to pay; and we price healthcare by the service, aiming to produce profits for each segment of the healthcare industry. Individually, each flaw is daunting. But collectively they add up to something worse—a kind of iron-clad immunity to healthcare disruption.
We have optimized the entire system for revenue and profits rather than safety, quality, or equality. Of the four hurdles, by far the most problematic and entrenched is our unique adoption of tiered (or selective) health coverage. No other country uses this model and it really only serves one purpose—to support tiered (or variable) pricing.
In political and policy discussion, many confuse universal coverage with “single-payer” healthcare, but that’s neither accurate nor necessary because there are other ways to pay for universal coverage. In fact, the primary benefit of universal coverage is that it eliminates variable pricing. If everyone is in one big pool of insurance coverage, then we can have standardized uniform pricing for every healthcare procedure or service. The only real choice then is how that’s paid for—either with a single-payer or multi-payer approach.
We desperately need and want new ventures that could help break down these barriers and influence our choices for systemic healthcare reform. Today, however, even if they get traction, they aren’t likely to be able to fundamentally restructure this enormous industry or generate big shareholder value. Unless we make a major national policy shift they won’t be able to have an impact on elements like tiered coverage or variable pricing. In the end, we can certainly afford any healthcare system that’s based on universal coverage. The only one we can’t afford is the one we have.
Florida Governor Rick Scott once nicely summarized American healthcare’s natural immunity to disruption: “How many businesses do you know that want to cut their revenue in half? That’s why the healthcare industry won’t reform the healthcare industry.” Real change will require fundamental innovation in government policy. That will then likely unleash America’s innovative spirit so we can figure out ways to more affordably and efficiently keep us all healthy.
Dan Munro writes about innovation, policy, and cybersecurity issues in healthcare. His book about the American system, Casino Healthcare, was published in 2016.
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