Clayton Christensen on how public-private partnerships can fix the healthcare system.

Topic: Healthcare Solutions: Past, Present and Future.

Clayton Christensen: About half of the healthcare that is provided in America is really unnecessary. 

I’m Clayton Christensen.  The Robert and Jane Cizik, Professor of business administration at the Harvard Business School.

Question: Why are healthcare costs so out of control?

Clayton Christensen: It’s difficult to measure the extent to which the healthcare cost or out of control because in some markets the prices are controlled.  In the United States, where they are not, prices are increasing at 10 to 12 % per year, roughly triple the rate of inflation. 

In other countries where they have a nationalized healthcare systems, you have the same sort of inflationary pressures, but a cap on costs based on the government’s budgets.  As a consequence they control costs by offering less and less healthcare.  But that mismatch between what healthcare costs and what people think they can afford is a plague that affects everyone in the world.

Question: What drives the cost of healthcare in the United States?

Clayton Christensen:    A major driver of the cost of healthcare in the United States is a compromise that was reached with the American Medical Association in the 1960s when Medicare was first established. 

In order to buy off the doctors, the government agreed to compensate doctors on a fee-for-service basis, and what that means is the more services doctors provide, the more income they make. And the more complicated and expensive the services that they provide are, the more income they make.

The fee-for-service system essentially pours gasoline on the fire of healthcare cost inflation because when we guarantee that we will reimburse them for whatever they do and whatever it costs, they are just incentivized to offer more and more and more.

Question: What are the free-market solutions?

Clayton Christensen: There is a tremendous benefit in enabling lower cost venues of care, such as homes or retail clinics with devices that enable them to do more and more sophisticated things. 

For example, the cost of end-stage renal care for patients with kidney failure is enormous.  At the beginning, those patients had to go to a dialysis unit in a hospital and then free standing dialysis clinics have been created. But now the ability to dialyze your blood has been transferred to the home in the form of machines that are about the size of a bread maker. And every night, patients can plug themselves into this home dialysis equipment and scrub their blood clean so that they don’t have to go to the higher cost venues of care. 

Retail clinics are able to care for about 36 disorders now at very low cost and minimal inconvenience; where a nurse practitioner is able to just follow the rules of when you have a precisely diagnosable disease, what the therapy needs to be.  These are high quality interactions. 

When you make something simple and rules-based, you take the judgment out of the care. Whereas you would think that a retail clinic’s staffed only by a nurse practitioner would be more subject to malpractice lawsuits; it’s not the case.  No retail clinic has ever yet been sued for malpractice because everything they do is rules-based and as long as you follow the rules, there’s no basis for malpractice lawsuits. 

Those lawsuits are all focused on the misinterpretation of data or making the wrong intuitive bets or the right answer wasn’t yet known. That’s where lawsuits arise and they're focused on the doctors, not on retail clinics or in home care.

And so it’s a little bit counter intuitive but as we distribute care by using technology to drive the disruptive decentralization, we actually improved the quality of care in terms of the certainty of its efficacy and we improve the cost of care by enabling lower cost places and lower cost caregivers to become more capable.

Question: How can the government play a role?

Clayton Christensen: Change in regulation is going to play a big role in the disruption of the healthcare industry.  Let me describe what kind of changes need to be made by describing three phases through which the care of any disease must pass. 

At the beginning because the disease isn’t well understood and it’s hard to precisely diagnose the disease by its cause and therefore you can’t have any rules based therapies—we call that the practice of intuitive medicine and their efficacy really depends upon the ability of the physician’s themselves to draw upon their training and expertise and intuition to formulate a pathway of care for each individual patient and each individual disease. 

In that world, the government should regulate the qualifications of the caregivers.  In most of many the regulations in the United States today have that character because they were put into place when medicine was really intuitive medicine. But as we learn more and more about diseases, the care of those diseases moves into what we call empirical medicine.  That is, there are real patterns in things and there are no cook books to tell you what to do step by step to guarantee the result but their patterns are clear enough that you can express the outcomes probabilistically. 

If you follow this procedure, the probability of the cancer going into remission or the probability of recurrence of this disorder was going to be this, whereas if you follow this procedure the probability of these problems will be that. And because you can express outcomes probabilistically, you need to control at that point not the qualifications of a caregiver but the extent to which the providers follow the best practice, and that should be the focus of regulation, when regulation is in a pattern recognition or empirical medicine rule. And then as diseases become very well understood so that they can be precisely diagnosed by their cause which then enables you to develop a predicatively effective therapy you regulate by outcome because anybody with minimal training is able to diagnose the disease, recommend the solution and so no longer do you need to regulate the qualifications of the provider or the process that is followed because that is so rules based that you just need to focus on ensuring that the outcome is delivered time after time. 

So we need a much more flexible regulatory scheme in intuitive medicine you regulate the qualifications of the providers, in empirical medicine, you regulate the processes that are followed and in precision medicine or rules based medicine you regulate the outcomes, holding all the providers to the standards that is achievable. 

Question: How important are public-private partnerships?

Clayton Christensen: I really do think that government funding, used in the right partnership way, can help drive the system where it needs to go disruptively, but it really does require that the government to distribute this funding in the right way. 

Funding that is focused on the ability to diagnose diseases precisely will just have inestimable value because that’s the gate through which precision medicine has to go.  Unless you can diagnose the disease precisely, care has to remain in the hands of expensive institutions and expensive caregivers.  So that’s one good focus for government funding. 

Another focus for government funding is on the kinds of devices that are disruptive that enable lower cost caregivers and lower cost venues of care to do progressively more sophisticated things.  Government funding targeted at those technologies that enable disruptions is another good target, But generally, if government funding is used to subsidize existing institutions or to fund sustaining growth, it’s not productive in terms of the direction at the healthcare industry has to go.