Why Isn’t Innovation Helping Reduce Health Care Costs?

This article first appeared on healthaffairs.org. It is co-authored with Eli M. Cahan and Roger Bohn.

National health care expenditures (NHEs) in the United States continue to grow at rates outpacing the broader economy: Inflation- and population-adjusted NHEs have increased 1.6 percent faster than the gross domestic product (GDP) between 1990 and 2018. US national health expenditure growth as a share of GDP far outpaces comparable nations in the Organization for Economic Cooperation and Development (17.2 versus 8.9 percent).

Multiple recent analyses have proposed that growth in the prices and intensity of US health care services—rather than in utilization rates or demographic characteristics—is responsible for the disproportionate increases in NHEs relative to global counterparts. The consequences of ever-rising costs amid ubiquitous underinsurance in the US include price-induced deferral of care leading to excess morbidity relative to comparable nations.

These patterns exist despite a robust innovation ecosystem in US health care—implying that novel technologies, in isolation, are insufficient to bend the health care cost curve. Indeed, studies have documented that novel technologies directly increase expenditure growth.

Why is our prolific innovation ecosystem not helping reduce costs? The core issue relates to its apparent failure to enhance net productivity—the relative output generated per unit resource required. In this post, we decompose the concept of innovation to highlight situations in which inventions may not increase net productivity. We begin by describing how this issue has taken on increased urgency amid resource constraints magnified by the COVID-19 pandemic. In turn, we describe incentives for the pervasiveness of productivity-diminishing innovations. Finally, we provide recommendations to promote opportunities for low-cost innovation.

Net Productivity During The COVID-19 Pandemic

The issue of productivity-enhancing innovation is timely, as health care systems have been overwhelmed by COVID-19. Hospitals in Italy, New York City, and elsewhere have lacked adequate capital resources to care for patients with the disease, sufficient liquidity to invest in sorely needed resources, and enough staff to perform all of the necessary tasks.

The critical constraint in these settings is not technology: In fact, the most advanced technology required to routinely treat COVID-19—the mechanical ventilator—was invented nearly 100 years ago in response to polio (the so-called iron lung). Rather, the bottleneck relates to the total financial and human resources required to use the technology—the denominator of net productivity. The clinical implementation of ventilators has been illustrative: Health care workers are still required to operate ventilators on a nearly one-to-one basis, just like in the mid-twentieth century. 

High levels of resources required for implementation of health care technologies constrain the scalability of patient care—such as during respiratory disease outbreaks such as COVID-19. Thus, research to reduce health care costs is the same kind of research we urgently require to promote health care access for patients with COVID-19.

Types Of Innovation And Their Relationship To Expenditure Growth

The widespread use of novel medical technologies has been highlighted as a central driver of NHE growth in the US. We believe that the continued expansion of health care costs is largely the result of innovation that tends to have low productivity (exhibit 1). We argue that these archetypes—novel widgets tacked on to existing workflows to reinforce traditional care models—are exactly the wrong properties to reduce NHEs at the systemic level.

Exhibit 1: Relative productivity of innovation subtypes

Source: Authors’ analysis.

Content Versus Process Innovation

Content (also called technical) innovation refers to the creation of new widgets, such as biochemical agents, diagnostic tools, or therapeutic interventions. Contemporary examples of content innovation include specialty pharmaceuticalsmolecular diagnostics, and advanced interventions and imaging.

These may be contrasted with process innovations, which address the organized sequences of activities that implement content. Classically, these include clinical pathways and protocols. They can address the delivery of care for acute conditions, such as central line infections, sepsis, or natural disasters. Alternatively, they can target chronic conditions through initiatives such as team-based management of hypertension and hospital-at-home models for geriatric care. Other processes include hiring staffdelegating labor, and supply chain management.

Performance-Enhancing Versus Cost-Reducing Innovation

Performance-enhancing innovations frequently create incremental outcome gains in diagnostic characteristics, such as sensitivity or specificity, or in therapeutic characteristics, such as biomarkers for disease status. Their performance gains often lead to higher prices compared to existing alternatives.  

Performance-enhancing innovations can be compared to “non-inferior” innovations capable of achieving outcomes approximating those of existing alternatives, but at reduced cost. Industries outside of medicine, such as the computing industry, have relied heavily on the ability to reduce costs while retaining performance.

In health care though, this pattern of innovation is rare. Since passage of the 2010 “Biosimilars” Act aimed at stimulating non-inferior innovation and competition in therapeutics markets, only 17 agents have been approved, and only seven have made it to market. More than three-quarters of all drugs receiving new patents between 2005 and 2015 were “reissues,” meaning they had already been approved, and the new patent reflected changes to the previously approved formula. Meanwhile, the costs of approved drugs have increased over time, at rates between 4 percent and 7 percent annually.

Moreover, the preponderance of performance-enhancing diagnostic and therapeutic innovations tend to address narrow patient cohorts (such as rare diseases or cancer subtypes), with limited clear clinical utility in broader populations. For example, the recently approved eculizimab is a monoclonal antibody approved for paroxysmal nocturnal hemoglobinuria—which effects 1 in 10 million individuals. At the time of its launch, eculizimab was priced at more than $400,000 per year, making it the most expensive drug in modern history. For clinical populations with no available alternatives, drugs such as eculizimab may be cost-effective, pending society’s willingness to pay, and morally desirable, given a society’s values. But such drugs are certainly not cost-reducing.

Additive Versus Substitutive Innovation

Additive innovations are those that append to preexisting workflows, while substitutive innovations reconfigure preexisting workflows. In this way, additive innovations increase the use of precedent services, whereas substitutive innovations decrease precedent service use.

For example, previous analyses have found that novel imaging modalities are additive innovations, as they tend not to diminish use of preexisting modalities. Similarly, novel procedures tend to incompletely replace traditional procedures. In the case of therapeutics and devices, off-label uses in disease groups outside of the approved indication(s) can prompt innovation that is additive. This is especially true, given that off-label prescriptions classically occur after approved methods are exhausted.

Eculizimab once again provides an illustrative example. As of February 2019, the drug had been used for 39 indications (it had been approved for three of those, by that time), 69 percent of which lacked any form of evidence of real-world effectiveness. Meanwhile, the drug generated nearly $4 billion in sales in 2019. Again, these expenditures may be something for which society chooses to pay—but they are nonetheless additive, rather than substitutive.

Sustaining Versus Disruptive Innovation

Competitive market theory suggests that incumbents and disruptors innovate differently. Incumbents seek sustaining innovations capable of perpetuating their dominance, whereas disruptors pursue innovations capable of redefining traditional business models.

In health care, while disruptive innovations hold the potential to reduce overall health expenditures, often they run counter to the capabilities of market incumbents. For example, telemedicine can deliver care asynchronously, remotely, and virtually, but large-scale brick-and-mortar medical facilities invest enormous capital in the delivery of synchronous, in-house, in-person care (incentivized by facility fees).

The connection between incumbent business models and the innovation pipeline is particularly relevant given that 58 percent of total funding for biomedical research in the US is now derived from private entities, compared with 46 percent a decade prior. It follows that the growing influence of eminent private organizations may favor innovations supporting their market dominance—rather than innovations that are societally optimal.

Incentives And Repercussions Of High-Cost Innovation

Taken together, these observations suggest that innovation in health care is preferentially designed for revenue expansion rather than for cost reduction. While offering incremental improvements in patient outcomes, therefore creating theoretical value for society, these innovations rarely deliver incremental reductions in short- or long-term costs at the health system level.

For example, content-based, performance-enhancing, additive, sustaining innovations tend to add layers of complexity to the health care system—which in turn require additional administration to manage. The net result is employment growth in excess of outcome improvement, leading to productivity losses. This gap leads to continuously increasing overall expenditures in turn passed along to payers and consumers.

Nonetheless, high-cost innovations are incentivized across health care stakeholders (exhibit 2). From the supply side of innovation, for academic researchers, “breakthrough” and “groundbreaking” innovations constitute the basis for career advancement via funding and tenure. This is despite stakeholders’ frequent inability to generalize early successes to become cost-effective in the clinical setting. As previously discussed, the increasing influence of private entities in setting the medical research agenda is also likely to stimulate innovation benefitting single stakeholders rather than the system.

Exhibit 2: Incentives promoting low-value innovation

Source: Authors’ analysis adapted from Hofmann BM. Too much technology. BMJ. 2015 Feb 16.

From the demand side of innovation (providers and health systems), a combined allure (to provide “cutting-edge” patient care), imperative (to leave “no stone unturned” in patient care), and profit-motive (to amplify fee-for-service reimbursements) spur participation in a “technological arms-race.” The status quo thus remains as Clay Christensen has written: “Our major health care institutions…together overshoot the level of care actually needed or used by the vast majority of patients.”

Christensen’s observations have been validated during the COVID-19 epidemic, as treatment of the disease requires predominantly century-old technology. By continually adopting innovation that routinely overshoots the needs of most patients, layer by layer, health care institutions are accruing costs that quickly become the burden of society writ large.

Recommendations To Reduce The Costs Of Health Care Innovation

Henry Aaron wrote in 2002 that “…the forces that have driven up costs are, if anything, intensifying. The staggering fecundity of biomedical research is increasing…[and] always raises expenditures.” With NHEs spiraling ever-higher, urgency to “bend the cost curve” is mounting. Yet, since much biomedical innovation targets the “flat of the [productivity] curve,” alternative forms of innovation are necessary.

The shortcomings in net productivity revealed by the COVID-19 pandemic highlight the urgent need for redesign of health care delivery in this country, and reevaluation of the innovation needed to support it. Specifically, efforts supporting process redesign are critical to promote cost-reducing, substitutive innovations that can inaugurate new and disruptive business models.

Process redesign rarely involves novel gizmos, so much as rejiggering the wiring of, and connections between, existing gadgets. It targets operational changes capable of streamlining workflows, rather than technical advancements that complicate them. As described above, precisely these sorts of “frugal innovations” have led to productivity improvements yielding lower costs in other high-technology industries, such as the computing industry.

Shrank and colleagues recently estimated that nearly one-third of NHEs—almost $1 trillion—were due to preventable waste. Four of the six categories of waste enumerated by the authors—failure in care delivery, failure in care coordination, low-value care, and administrative complexity—represent ripe targets for process innovation, accounting for $610 billion in waste annually, according to Shrank.

Health systems adopting process redesign methods such as continuous improvement and value-based management have exhibited outcome enhancement and expense reduction simultaneously. Internal processes addressed have included supply chain reconfiguration, operational redesign, outlier reconciliation, and resource standardization.

Despite the potential of process innovation, focus on this area (often bundled into “health services” or “quality improvement” research) occupies only a minute fraction of wallet- or mind-share in the biomedical research landscape, accounting for 0.3 percent of research dollars in medicine. This may be due to a variety of barriers beyond minimal funding. One set of barriers is academic, relating to negative perceptions around rigor and a lack of outlets in which to publish quality improvement research. To achieve health care cost containment over the long term, this dimension of innovation must be destigmatized relative to more traditional manners of innovation by the funders and institutions determining the conditions of the research ecosystem.

Another set of barriers is financial: Innovations yielding cost reduction are less “reimbursable” than are innovations fashioned for revenue expansion. This is especially the case in a fee-for-service system where reimbursement is tethered to cost, which creates perverse incentives for health care institutions to overlook cost increases. However, institutions investing in low-cost innovation will be well-positioned in a rapidly approaching future of value-based care—in which the solvency of health care institutions will rely upon their ability to provide economically efficient care.

Innovating For Cost Control Necessitates Frugality Over Novelty

Restraining US NHEs represents a critical step toward health promotion. Innovation for innovation’s sake—that is content-based, incrementally effective, additive, and sustaining—is unlikely to constrain continually expanding NHEs.

In contrast, process innovation offers opportunities to reduce costs while maintaining high standards of patient care. As COVID-19 stress-tests health care systems across the world, the importance of cost control and productivity amplification for patient care has become apparent.

As such, frugality, rather than novelty, may hold the key to health care cost containment. Redesigning the innovation agenda to stem the tide of ever-rising NHEs is an essential strategy to promote widespread access to care—as well as high-value preventive care—in this country. In the words of investors across Silicon Valley: Cost-reducing innovation is no longer a “nice-to-have,” but a “need-to-have” for the future of health and overall well-being this country.

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