The Coming Revolution in Medical Business Models

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The Coming Revolution in Medical Business Models

Whether we’re talking about the 21st century semiconductor industry or Adam Smith’s 18th century pin-making industry, there have always been four factors that are necessary to lower prices, improve quality, and satisfy customers: 

  1. Increased automation
  2. Increased specialization of labor
  3. Increased economies of scale
  4. Increased knowledge intensity

In a competitive capitalist economy, market forces allocate the resources of land, labor, and capital in the best way to maximize an industry’s value to its various stakeholders. 

Unfortunately, even in the United States, the health care industry remains the “poster child” for Stalinist central planning.  Pharmaceutical companies and medical device companies operate in a quasi-free market, but even these enterprises must deal with such obstacles as:

  • Market-distorting regulations
  • Excessive litigation
  • The presence of third-party payers, whose motivations often diverge sharply from those of physicians and patients

As any analysis of U.S. health care costs shows, this central planning mentality has led to a dramatic acceleration of costs in terms of absolute dollars, costs per capita, and percentage of GDP over the past 70 years.  The result is an implicit burden on society that is simply unsustainable over the long term.  The recent debate that led to Obamacare has exposed the problem, but done nothing to solve it.

Regardless of whether you believe in the concept of single-payer universal coverage or a self-funded cash-for-services program analogous to the restaurant industry, you’re forced to admit that we’re not going to get healthier people and better-faster-cheaper care by simply changing “who pays and how.”  President Obama stated clearly that “bending the cost-curve” is the only way to avoid a collapse of the system.

Although some people hate to admit it, the only workable solution is to allow technology and market forces to redesign health care, just as they did manufacturing.  But how will the cost-curve actually be bent?

In his book, The Innovator’s Prescription:  A Disruptive Solution for Health Care,1 Clayton Christensen defines a “disruptive innovation” as one that allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot more money, a lot more skill, or both. 

For example, consider how the development of the personal computer transformed an industry that had been dominated by mainframes and minicomputers...

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