Clay Christensen, Jerome Grossman and Jason Hwang on the Agenda for the Transformation of Health Care

As I said in my post “Saint Clay," I plan to feature the work of Clay Christensen and his coauthors in a slow, thoroughgoing, methodical way, much as I have featured John Stuart Mill's On Liberty. Because of its urgency in the policy debate, I will start with Clay Christensen, Jerome Grossman and Jason Hwang’s book, "The Innovator’s Prescription.” Here is how they lay out their agenda in the introduction to the book:

  1. The growth in health-care spending in the United States regularly outpaces the growth of the overall economy. Over the last 35 years, while the nation’s spending on all goods and services has risen at an average annual rate of 7.2 percent, the amount spent on health care has grown at a rate of 9.8 percent.1 As a consequence, an increasing proportion of Americans simply cannot afford adequate care. Many efforts to contain overall costs have the effect of making care inaccessible on a convenient and timely basis for all of us—even for those who can pay for it.
  2. Second, if federal government spending remains a relatively constant percentage of GDP, the rising cost of Medicare within that budget will crowd out all other spending except defense within 20 years.
  3. The third factor that engenders fear is that the burden of covering the costs of health care for employees, retirees, and their families is forcing some of America’s most economically important companies to become uncompetitive in world markets. Health-care costs add over $1,500 to the cost of every car our automakers sell, for example.
  4. The fourth frightening factor, about which few people are aware, is that if governments were forced to report on their financial statements the liabilities they face resulting from contractual commitments to provide health care for retired employees, nearly every city and town in the United States would be bankrupt. There is no way for them to pay for what they are obligated to pay, except by denying funding for schools, roads, and public safety, or by raising taxes to extreme levels.

What can be done? It isn’t easy:

Those fighting for reform have few weapons for systemic change. Most can only work on improving the cost and efficacy of their piece of the system. There are very few system architects among these forces that have the scope and power of a commanding general to reconfigure the elements of the system.
Perhaps most discouraging of all, however, is that there is no credible map of the terrain ahead that reformers agree upon and trust. They are armed with data about the past, and they have become accustomed to reaching consensus for action when the data are conclusive. But because there are no data about the future, there is no map available to convincingly show these reformers which of the pathways ahead of them lead to a dead end and which constitute a promising road to reform. And few have a sense for the interconnectedness of these pathways. As the prophet of Proverbs said, “Where there is no vision, the people perish.”
So why this book? There is little dispute that we need a system that is competitive, responsive, and consumer-driven, with clear metrics of value per dollar being spent.9 Our hope is that The Innovator’s Prescription can provide a road map for those seeking innovation and reform—an accurate description of the terrain ahead, about which data are not yet available. Much of today’s political dialogue on health-care reform centers on how to pay for the cost of health care in the future. This book offers the other half of the equation: how to innovate to reduce costs and improve the quality and accessibility of care. We don’t simply ask how we can afford health care. We show how to make it affordable—less costly and of better quality.

To preview the main message, the number one policy in order to foster progress in most any area is to make sure that new entrants, who may initially do things worse in some dimensions, but more cheaply or more conveniently than the established incumbents, have a chance to gain a foothold in the market. Then what the new entrants do has a chance to improve in quality until in the end they bring down prices even at high quality, just as personal computers, which initially were not very good, became more powerful–as well as less expensive and more convenient–than the mainframes of old (only to be challenged in turn by smartphones and tablets).

One possible reaction to this would be to object to the idea of having anyone get medical care that is cheaper and more convenient, but is otherwise of somewhat worse quality. But the result of acting as if cost does not matter is the startling fact discussed in "Another Quality Control Failure on the Wall Street Journal Editorial Page?“ that real after-tax, after-transfer income for the poorest 20% of the population has increased by 49% since 1979. As the title of my post suggests, I thought this was a mistake. But it is not. What the Congressional Budget Office did to come up with this number was to count as part of after-tax, after-transfer income the full cost of both medical care paid for by employers and medical care paid for by the government (much of it through Medicaid). If you don’t feel that the poorest 20% of the population is as much better off since 1979 as a 49% increase in income would suggest, it is an indication that all of that money spent on medical care has not gotten the value that one would think it should have been able to purchase.

Our current medical system has too few good paths for finding ways to do things more cheaply and conveniently. If we block all paths that lead even temporarily through a region of lower cost at lower quality and greater convenience, the next 35 years may see another 49% increase in the after-tax, after-transfer income of the bottom 20% of the population that hardly feels like an improvement in living standards at all, as we head toward more and more expensive medicine that is only marginally better in quality. Alternatively, we can allow disruptive innovation that will get much better quality, much lower cost and much greater convenience 35 years from now if we avoid crushing in their infancy ways of doing things that right now are much cheaper and more convenient, but slightly lower in other dimensions of quality.

Right now, many people would gladly choose lower expense and greater convenience for some types of medical care even at slightly lower quality in other dimensions, if they were allowed (by any of half of dozen different possible mechanisms) to get a true signal about the actual tradeoffs that society faces in this regard. Too often, discussion about these tradeoffs only points out the static welfare gains from helping people to incorporate the cost of various types of health care into their decisions. I am persuaded by Clay, Jerome and Jason’s arguments that the dynamic gains are much more important.