When my column “Don’t Believe Anyone Who Claims to Understand the Economics of Obamacare” appeared, Robert Graboyes sent me a link to his October 2, 2013 post in the Mercatus Center’s “McClatchy Tribune” blog also emphasizing the importance of innovation: “Paging Dr. Jobs.” (Here is a link to the article in the Dallas Morning News.) I liked it so much I asked to reprint it here. He kindly gave me permission. Here it is. One action Robert caused me to take is that I bought the Kindle edition of “The Innovator’s Prescription” by Clayton Christensen, Jerome Grossman, and Jason Hwang.
American health care has no Steve Jobs or Bill Gates. No Jeff Bezos, Elon Musk, Burt Rutan, or Henry Ford. No innovator whose genius and sweat deliver the twin lightning bolts of cost-reduction and quality improvement across the broad landscape of health care. Why not? Either we answer that question soon and uncork the genie, or we consign our health care to a prolonged, unaffordable stagnation.
America leads the world in health-care innovation — but not the innovation that sends costs plunging and unleashes previously undreamed-of quality improvements. That kind of innovation occurs only in isolated pockets of health care. In the aggregate, health care spending rises rapidly and relentlessly.
If implemented as planned, the Affordable Care Act ensures the health-care industry will never have the flexibility it needs to generate a Steve Jobs. Tightly constricted, top-down micromanagement will deprive health care of the oxygen essential to attract and incentivize cost-cutting innovators. This suffocating environment predated the ACA, but the law worsens things considerably by tightly controlling providers, patients, and employers.
Unfortunately, advocates of decentralized, market-oriented approaches have never offered the electorate convincing alternatives to centralized, bureaucratic command and control.
If the ACA crumbles, market-oriented health care reformers have one more chance to articulate a vision. A quick Internet search already churns up chatter (some gleeful, some mournful) about replacing a failed ACA with a single-payer system. Decentralizers will need to formulate and articulate — quickly — why American health care never produces a Steve Jobs and how markets could usher in cost-cutting innovation. Importantly, their narratives would need to ring true to people who are not already persuaded that markets can function in health care.
To illustrate the conceptual and rhetorical rut we are in, imagine if people in early 1964 had discussed computers the way we in 2013 discuss health care. (At that time, computers were mostly room-size mainframes costing millions in 2013 dollars, at least). Discussing computers as we today discuss health care, all the parties in 1964 would agree there is a “computer crisis” — out-of-control prices, a widening gap between haves and have-nots. Only rich companies, they fret, can afford computers.
Some would offer an array of solutions: The government could become the sole manufacturer of mainframes. Alternatively, the government could become the sole purchaser of mainframes — using its great market clout to force IBM to sell its mainframes for, say, $950,000 rather than $1 million. Or the government could tightly regulate mainframe manufacturers — prohibiting them, say, from charging more than $900,000 for a computer.
Others, conversely, would argue that the answer to the hypothetical computer crisis is a more open market. We need more stores, they say, in which to buy mainframes. Mainframe stores in every shopping mall — and a greater capacity to buy and sell mainframes across state lines.
Apolitical business end-users would seek to band together in purchasing cooperatives — demanding as one that IBM moderate its mainframe prices.
Meanwhile, the industry would still be mainframes, mainframes, mainframes all the way down. No minis, micros, laptops, or smartphones. In fact, in our allegorical world of 1964, everyone would agree to laws and regulations and institutions that virtually forbid the emergence of a Steve Jobs or Bill Gates.
Let’s return, now, to 2013 and health care. To unleash innovators, we have to recognize what leashes them in the first place. Consider some candidates: Medicare’s reimbursement formula muffles prices and distorts resource allocation in ways that impact private insurance. Tax laws effectively bind employees to their employers’ health plans. State regulations protect insiders through scope-of-practice regulations, protectionist licensing, and certificate-of-need requirements. The structure of medical education (heavily influenced by state regulations) locks obsolete management practices in place. Tort law discourages heterodox innovation. Even more challenging, fixing one of these at a time may not do the trick.
Building the case for market solutions in health care, then, demands that market advocates think large. For inspiration, they should look beyond their usual array of reading sources. Cost-cutting innovation, also known as “disruptive innovation” is brilliantly described in “The Innovator’s Prescription” by Clayton Christensen, Jerome Grossman, and Jason Hwang.
A key insight from that literature is that cost-cutting innovation almost always comes from the supply side, not the demand side. It emerges from the protean genius of previously unknown people who see our wishes and hopes before we ourselves do. Tellingly, most of today’s policy prescriptions from the left, right, and center focus on the demand-side incentives. But the problem is that consumers can’t visualize what the disruptive innovations in health care will be — any more than they could have known in 1964 how the laptop, smartphone, and internet would soon restructure their lives.
Message to market enthusiasts: The clock is ticking. One more chance to get health care right may be in the offing. There’s no time to waste. And you had best learn to persuade those who don’t already agree with you.