Thursday, July 28, 2011

Are Healthcare Services and Products Merely Commodities?

I had a discussion with someone who brought up an interesting point about insurers/payers who treat healthcare services (tests and procedures) products (medications, lab work, medical devices, etc.) to be commodities that are by paid piecework. This model is in sharp contrast to the Pay-for-Value/Value-Pricing model I've been proposing.

The idea that healthcare services and products as commodities is based on faulty reasoning. In reality, the services rendered by different providers, and the products produced by different manufacturers, are often not equally (a) effective in terms of safety and quality (degree of risk and benefit to the patient); (b) efficient in terms of speed and resource consumption; and (c) affordable in terms of overall cost. In other words, they are not equally cost-effective. As such, it is irrational to pay the same amount across the board for a particular type of healthcare service and product. A more sane approach would be to use a value-based model of pricing that pays more for the services and products that deliver greater value to the patient/consumer by being more cost-effective.

There are many reasons why American healthcare does not have such a value-based model. An excellent article recently published in NEJM (at this link) addresses this issue directly: The $640 Billion Question—Why Does Cost-Effective Care Diffuse So Slowly? Bottom line: There is little financial incentive, and great disincentive, to promoting cost-effectiveness in the current US healthcare system. Here’s a brief quote:

“To avoid financial crises in federal and state governments and turmoil for health care stakeholders, U.S. health care must become more cost-effective. The United States spends much more per capita on health care than do other developed countries, with broad outcomes no better than those of its peers...There are, however, individual U.S. physicians and health care organizations that deliver high-quality care at a cost roughly 20% lower than the average. If the rest of the U.S. health care industry followed their example…$640 billion would [be saved. The reasons for our failure to focus on cost-effectiveness] lie in the perceptions and behaviors of the major participants in health care.”

I’ve been writing about the need for a value-based healthcare system since 2007 (see and It seems to me that fixing healthcare in the US (and our economy in general), requires (in part) that we transform our pathologically mutated model of capitalism (see into a rational model based on rewarding delivery of value to the consumer!