Christensen, Slavitt: Reimbursement Is a Big Barrier to Innovation

In Part 2 of this two-part series, Ingenix CEO Andy Slavitt and innovation expert Clayton Christensen share their insights on reimbursement and new directions for health care in 2008. Christensen also will discuss his upcoming book, tentatively titled, “The Disruptive Cure for Health Care,” which is scheduled for publication in mid-2008. Part 1 of the series ran on Dec. 4.

Ingenix Innovations:
What role does the government play in fixing the incentive system for the health care industry? Is it as a barrier or a helper?

Clayton Christensen:
The government’s a barrier in everything. The real bad actor here is reimbursement, because the rules for what is reimbursed are really written to lubricate the operations of the existing business models. If you want to apply it in a new setting, such as in a lower-cost business model, and provide it by lower-cost caregivers, very often the reimbursement rules don’t allow that.

Andy Slavitt:
Actually, the government has the chance to be a very positive catalyst given that the Centers for Medicare & Medicaid Services (CMS) is the dominant payer and can act to catapult the market to a better way of paying for things. Today our reimbursement system really doesn’t support the right behavior. We pay doctors to perform more tasks and use more expensive equipment and even to refer to facilities they own. By and large, we still pay for glaring mistakes and for surgeries that are done improperly. We need to pay doctors who follow evidence- based guidelines better than those who don’t. And we need to pay hospitals with lower infection rates and who save more lives more than the others.

Christensen:
That’s exactly right. The reimbursement has to come together with the new business models and companies are going to have to integrate or work together – as Andy says – to wrap their hands around both the reimbursement and the business model innovation. If hospitals try to do it independent of changes in reimbursement, or if you just try to implement the reimbursement changes without implementing the business model change, you can’t get there from here.

Slavitt:
The present reimbursement model is so established that it’s hard to change the mindset. There have been and continue to be many attempts to change the reimbursement system. It’s a thorny area to tinker with – when you play with incentives you are playing with fire. There is no topic that physicians, health plans, hospitals, pharma companies or the government will get more up in arms about than how they get paid. So you tend to end up with watered down, highly compromised legislative changes around reimbursement that benefit those most adept at influencing legislation. For those who see their income go down, they find ways to make it up with increased utilization. And when the government underpays hospitals or doctors, hospitals or doctors charge more to employers and patients. Until reimbursement gets addressed, many of the problems in the system today will still remain. 

Innovations:
How can technology help in the reimbursement area?

Slavitt:
Technology can be an enabler and technology can also get in the way. For most health care companies, technology is their scarcest resource. Technology projects tend to be any CEO’s least favorite topic—there are nasty legacy systems to deal with, often long-delayed implementations, and often not much return on capital. Facilities have other obligations – such as capital investments in infrastructure – that can interfere with investments in technology. And those who benefit from technology are often not the same people who have the capital to invest. As a result of all of this, the money that remains to invest in productive technology becomes a very small portion of what’s needed relative to other industries.

The seemingly endless pursuit of an electronic patient record or a complex data warehouse that has marginal returns to the company really seems to be a journey without end.

On the other hand, there are high-return investments that most companies can implement immediately that improve the quality of care and will help save tens of millions of dollars and help organizations grow and further their missions.

For example, there are technologies that can improve health care underwriting, improve the reimbursement process so that appropriate claims get paid and that inappropriate ones don’t, and that improve how fraud and errors are detected. There are sophisticated technologies to verify the drugs being taken by the patient and that move money, data and information back and forth between the health plan and the provider. What these technologies have in common is that they leverage existing data in a smart way. And all of these can be applied without significant outlays of capital.  

Christensen:
Somebody has to grab hold of this system – and in some cases the employer has to integrate backwards and say, We’re going to throw Blue Cross out of the system here and we’re going to employ the personal care physicians and we’re going to negotiate prices directly with value chain hospitals and value shop hospitals and kind of make the change happen, because they control everything.

Integration is the key issue here. Entities like Intermountain Health Care or the Veterans Administration that bridge across reimbursement and ownership of the hospitals perhaps can make it happen. But if you’re not integrated, then you can only improve your little piece of the system.

Slavitt:
There have been continued attempts to change the reimbursement system, but very sophisticated lobbying from self-interested parties to make sure that their piece of the pie is worked out appropriately has been a barrier. I had a conversation recently with the Governor of Pennsylvania, Ed Rendell, who is trying to reform health care in his state.

He said that everyone has told him that his legislation would go a long way toward fixing many of the problems in health care, except for the 5 percent of the legislation that affects them. Unfortunately, people will lay down their lives for that 5 percent, because everyone wants the gain, but no one wants to share the pain.

Innovations:  Do you think politics comes into play here? Is it going to take political will or can the private industry move this forward?

Christensen:
If you look at the platforms of all the presidential candidates, all of the dialogue is around How are we going to afford health care? Little of the dialogue is around How do we make health care affordable?

In many ways, the only way we can afford health care is if we make it affordable. The politicians just seem to accept that health care costs what it costs, rather than saying Boy, there’s a process of transformation that has just proven itself in industry after industry and we just need to unleash that process in health care. But they don’t frame it that way. So I think that’s part of the mission that I’m feeling for myself. I’m hoping to give them a language so they can understand that it can be made affordable. We just need to do it.

Slavitt:
I am very grateful that Clayton and people like him are shining a light on this to help move things forward. As we’ve both said, you have to get at the root causes. If we agree as a country to spend $100 billion a year to cover the uninsured, we need to be honest enough to say that without root cause change, that $100 billion will create windfalls and add to the inflationary momentum that plagues health care. That will bankrupt Medicare earlier and shift costs directly to the commercial market. We must get at root cause cost drivers: labor, capital, poor quality and the reimbursement system.

Innovations:
What are the big issues that need to be addressed?

Christensen:
Politicians do sense in a very valid way – Hillary Clinton in particular – that there is a need to become integrated to make all of these interdependent changes happen at once. They can’t be done in isolation.

Since the Veterans Administration became integrated, its health care system is actually one of the most innovative, efficient and effective systems in the country. The private sector really needs to step up and wrap their arms around the whole system.

Innovations:
What part of the industry do you see as the biggest opponent of reimbursement change? Is it the insurance companies? Which player do you think will be the most detrimentally affected and therefore the most resistant?

Christensen:
I would put the insurance companies in more of a passive resistance role; they’re just kind of in the middle and they’ve got all of these rules in place to try to make the system the best it can be. So their rules are very cumbersome and inappropriate, but they are not actively resisting. You do see the American Medical Association actively resisting the concept of turning over rules-based care to nurses, and you see the general hospitals with huge overhead costs fighting a focused hospital coming into their neighborhood.

Just like when Toyota was disrupting General Motors and Ford, the Detroit automakers went to Washington and got Congress to impose an import quota to prevent the Japanese from gaining more market share in the United States, ostensibly for the good of our economy. Ultimately Toyota and Nissan said, What the heck? Let’s just build our plants in the United States, and it’s been a great blessing to everybody except the Detroit auto companies.

So the hospitals got Washington to put a moratorium on the construction of new, value chain-focused hospitals, and that moratorium’s been in place for about three years. Anything that is disruptive to profit models is bound to be resisted.

Innovations:
Clayton, can you tell us more about your upcoming book, tentatively titled, “The Disruptive Cure for Health Care”?

Christensen:
What the book tries to do is stand on the outside of the health care industry. Instead of trying to recommend how to fix the problems by studying the inside of the industry, we’ve studied the general principles of how to effectively manage innovation standing outside the industry, looking through the lenses of our research to see what we can see.

So it’s a very different perspective on health care than normally gets published. In order to do it right, you have to look at the technological enablers: What technological advances change the rules of the game? How does the hospital business model have to change? And how does the physician’s practice business model have to change?

Part of the nature of how technology has changed disease is that many diseases that in the past were fatal now have become chronic diseases. The business model for treating a chronic disease is still primarily the physician’s practice, but it wasn’t designed to treat chronic disease. So these horrible costly diseases, like obesity, type 2 diabetes and cardiovascular disease, fester and grow and create enormous cost. In many ways that is because we’re trying to treat them through business models that weren’t at all designed to do that.

We’re trying to take a very comprehensive look at some key questions: Why does this happen? What kind of business models need to be created to solve the problem? What jobs are each of the stakeholders trying to accomplish? After you know what to do, then other big questions emerge: How do you make that happen? What are the mechanisms by which actors in the industry can wrap their hands around the whole integrated system and simultaneously and interdependently make these changes? 

Innovations:
Clayton, since you have taken a look at other industries, what might you say is one of the big differences in the health care industry versus some of the other industries you’ve examined?

Christensen:
Every industry thinks it’s completely unique, but I actually don’t think it’s nearly as unique as most people think. Yes, it’s regulated, but transportation was heavily regulated, telecommunications is heavily regulated, financial services were, and yet each of those has been disrupted to a very significant degree over the past 40 years with the result that the products are better or the services are better. They’re much cheaper and much more broadly available. Some people say, Yeah, but in health care lives are at stake. It’s true. But in transportation lives are at stake as well.

Innovations:
Can you both give us your view of what the industry should focus on in 2008 to help improve health care?

Christensen:
I would suggest that the states that do not now allow retail clinics should change their regulations so that retail clinics could be available. This would do more to solve the problem of the uninsured poor than any other proposition on the table. People would have a place to go when they have simple, easily treated medical problems and they wouldn’t have to show up at the emergency room of the general hospital to have an earache looked at.

Slavitt:
In 2008, we’d be well served to focus on the key goals, and there is no goal that matters more than the ability of the system to deliver very consistent, high-quality care no matter where you access it – be it in a rural, urban or Park Avenue setting – at an affordable cost. High-quality, evidence-based medicine will fix many problems. Affordability and accessibility can be improved with the practice of medicine over distances and the dissemination of the right science.

One innovation that hasn’t yet hit is the ability to remotely access the best health care providers. For example, if treating physicians could arrange a real-time telemedicine conference with remote specialists, these doctors could review digital images over a secure Web site and could collaborate to determine the best course of treatment.

Sticking with that theme, we need to develop a serious and deep focus on clinical quality. In so doing, we can advance the practices around how hospitals treat patients with heart attacks. If we could get large numbers of practitioners to follow the existing best practices about treating heart attacks in the emergency room or about treating breast cancer, we would make tremendous advances. Right now we can check the DNA of a breast cancer patient before determining whether chemotherapy, radiation or surgery – or some combination of these – would be best for this particular individual.  

Christensen:
That’s exactly right. Cancer has been diagnosed in the past geographically and now we know that that’s not right. There are different types of tumors in each given location. If you know the type of tumor, then you can have a precise therapy for it.

Innovations:
What is driving that precision? Molecular medicine?

Christensen:
Through the 1990s, the marvelous success of the human genome project kind of gave us the technical foundation for doing this work. Then academic researchers as well as the researchers in pharmaceutical companies try to peel the layers off the onion. So in a clinical trial, for example, you’re giving a population of patients a therapy and the result may be that only 35 percent of the patients in the trial responded to this therapy.

In the past, we’d just say, Well, it’s hit or miss and so we’ll just put on the insert for the drug that you could expect that only 35 percent will respond to this drug. The message to the doctor was, For those who don’t respond, then just try something else. And if they don’t respond to that, try something else.

Now we know that if you see that 35 percent of the patients respond and the others don’t, then you say, Well, those 35 percent must have a different disease than the ones who don’t respond. And so let’s crawl inside of the genetic structure of those who do respond and see what’s different about the structure of the patients who don’t respond. That investigation helps them figure out that, Gosh, we thought they all had the same disease. It turns out that they don’t. That process, then, allows you to develop a precise diagnosis of the underlying disorder because the tumor isn’t a disease. It’s a symptom of a deeper causal disorder.

Slavitt:
Genotyping and phenotyping can allow doctors to prescribe personalized medicines and biologics. Because new diagnostic techniques can identify genetic markers, making it possible for physicians to know which drugs are safest and most effective for which patients, the Food and Drug Administration (FDA) should be able to approve more effective therapies while minimizing safety risks. Ideally, the FDA should consider collapsing the drug development process into two phases – learn and confirm – which would help bring down the exorbitant cost of bringing new drugs to the market.

Innovations:
Is there any particular lesson perhaps from another industry that you think that the health care industry should pay attention to?

Christensen:
The most important lesson is that once you’ve got the technological enabler, you’ve only solved half of the problem. Then you’ve got to allow new, low-cost business models to emerge and take it into the market in an affordable way. Without the new business model, you can’t reap the benefit of significant investments in technology.

Editor’s Note: Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at the Harvard Business School, with a joint appointment in the Technology & Operations Management and General Management faculty groups. His research and teaching interests center on managing innovation and creating new growth markets. A seasoned entrepreneur, Christensen has founded three successful companies: CPS Corp., Innosight and Innosight Capital. He was a White House Fellow in 1982 and became a faculty member at the Harvard Business School in 1992. He is author or co-author of five books: The Innovator’s Dilemma (1997), which received the Global Business Book Award for the best business book published in 1997; The Innovator's Solution (2003), also a New York Times best seller; and Seeing What’s Next (2004). In addition, he has edited two case books on innovation: Innovation and the General Manager (1999) and Strategic Management of Technology and Innovation, 4th edition (2004). He presently is completing two books that examine the problems of our health care and public education systems through the lenses of his theories.

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