Innovation and the Hospital Industry

Innovation is so dependent on the structure of an industry!  For instance, this morning I had breakfast with my friend Stu Lovett, a very talented high risk obstetrician and excellent innovative thinker.  Stu has devised a great software program (and invested a lot of his own money in developing it) that would increase the safety of deliveries by enabling clear decision making criteria for handling deliveries.  Hospitals are reluctant to adopt this innovation.  Why?

One, others haven't adopted it yet, so it would be an administrative risk for the first hospital to try it out.  Two, hospitals don't want to take the risk because there isn't that much for them to gain.  After all, they are already insured for bad deliveries, and if they made babies safer, would their business expand?  No, so why do it.  Three, most hospitals are "blame organizations" rather than "achievement organizations."  The incentive for each executive is not to get into trouble, which could cost them their job, rather than to achieve a quality breakthrough, which would not gain them much individually.

It's really a shame.  If there were real competition among hospitals, and if one hospital could eat another's lunch by showing it was safer, then someone would make the try.  But hospitals mostly just cover their territory and if they want to grow, they merge.

Another example of failure of innovation based on industry structure is in the age old health care question, how do we get Emergency Departments to be used only for emergencies, and move the non-emergency cases out of the ED?  I was asked to review an unexciting article for the Yearbook of Pediatrics, excellently edited by Michael Cabana, that showed that indeed, mirabile dictu, EDs are more expensive than other venues.  I used the article to talk about industry structure and innovation.  Here it is, and I hope you enjoy it:

Commentary on Urgent Care and Emergency Department Visits in the Pediatric Population

Montalbano et al., Pediatrics, April 2016

Reviewed for Yearbook of Pediatrics by Budd N. Shenkin, MD, MAPA

“Invent a better mousetrap and the world will beat a path to your door.” Oh, if only it were as true in healthcare as it is in consumer goods!

This article demonstrates that, to no one's surprise, Urgent Care Clinics (UC's) provide less expensive care to patients with mild and non-urgent illnesses than Emergency Departments (ED's), with no apparent loss of quality. One wonders, then, if it should be surprising is that ED's are still handling the bulk of urgent care in the United States. Is this what economists call a “market failure?” where equivalent quality and lower price fail to drive out the more expensive competitor? If so, why has this market failed?

One answer is that it is not in the economic interest of those who would set up and run UC's to do so. Who would the agents of change be? Not hospitals; they would be cutting their own throats. It is easy to set up a UC side by side with an ED, staff it with midlevels supervised by physicians, and divert urgent but non-severe cases from ED to UC at ED triage. The result is less expensive care, true, who experiences the savings? Not the hospital; the hospital experiences primarily decreased revenues, and less profit per patient to subsidize the expensive ED equipment and staffing. Instead, the savings are experienced by insurance companies and patients. Why, then, would a hospital do it?

Although the article does not explore alternative arrangements, private practices and clinics could establish UC's on their own, either by simply extending their hours to evenings and weekends, or cooperating among themselves to set up and staff a UC for out of hours care. This comes at a cost to themselves of convenience, because it means working at less attractive hours or hiring others to do so. There are CPT codes that would be applicable for extra compensation for out of hours care, but the payment is modest, and moreover, many payers choose not to honor those codes. As a result, once again, out of hours care savings redound to the benefit of government, insurance companies and patients, but not sufficiently to practices for them to answer the bell for potential profits.

Perhaps more tellingly, the article calculates that roughly $50 million a year could be saved by Medicaid were UC's to replace ED's for level 1 pediatric cases. While $50 million sounds like a lot of money, how significant would that really be? Total Medicaid spending for the United States in 2014 was about $476 billion. The projected savings to government would thus be .01%. The savings, then (like pediatric care overall in the nation's health care budget) would be “budget dust.” Saving $875 million by seeing all level 1 and level 2 cases would be a more significant .18%, still close to budget dust. By contrast, Medicaid is said to lose $29 billion to fraud, which would be 6%. No wonder government appears not to care much about the apparent ED waste.ⁱ

Moreover, one unit's “waste” is another unit's profit. By reducing the acute care income from an ED, the hospital ED would become less profitable. In effect, this extra remuneration for the ER subsidizes the cost of having ready a unit to service the true emergencies that appear there, which in themselves would not be financially worthwhile to serve. It might be true that, were UC's to proliferate, hospitals would be impelled to centralize their true emergency services to one hospital per city, but would that be optimal care? It is not clear that it would be.

Thus, the case for UC's replacing ED's for common acute care appears to be shaky. On the other hand, extending out of hours care at Pediatric Patient Centered Medical Homes appears to be a better choice. True, the savings for Medicaid would still appear to be small. The savings for private insurance might be larger, since private payments are usually higher than Medicaid payments. But even if the economic advantage were small, the improved quality of care and simplified communications conferred by better continuity might impel change. Convenience for the patient could also be enhanced, since waiting times are so much higher in ED's than in an office or many clinics. In addition, since ACOs are ever in search of even small financial advantages, they might encourage pediatric practices to become PPCMHs and to provide the out of hours care that are part of the PPCMH charter. An ACO would also be in a position to make out of hours care financially attractive for a PPCMH, rather than a sacrifice.

If there were to be more research on the economics of replacing routine acute care now performed in the ED, considering the PPCMH might be a better alternative to consider than a UC. The PPCMH is, after all, the American Academy of Pediatrics' preferred solution for transforming the organization of pediatric health care. In sum, despite the small economic advantage of diverting patients from the ED, there is still reason for hope.

iMedicaid Program Integrity:

Improved Guidance Needed to Better Support Efforts to Screen Managed Care Providers

GAO-16-402: Published: Apr 22, 2016. Publicly Released: May 6, 2016.

Accessed at http://www.gao.gov/products/GAO-16-402 on May 9, 2016.

 Budd Shenkin