BLOG STARTUPS, VENTURE AND THE TECH BUSINESS

Long Live The Healthcare Entitlement Economy

[This post first appeared at blogs.forbes.com/toddhixon on December 5, 2014.]

Recently I heard a speaker  at a venture conference say that “Healthcare is changing from an entitlement economy to a market economy”. Many of us wish that would happen fast, but how real is it?

Entitlement is pervasive in healthcare. Most legal U.S. residents receive healthcare that is largely funded by someone else: private employers or government. The main thrust of the ACA (1) expands that entitlement, enlarging 100%-government-paid Medicaid and adding new subsidies for low-income people. And Medicare is growing as the Baby Boomers age in. While consumers are paying more for their healthcare out-of-pocket, the percentage of the bill that they pay has declined sharply, because total costs and payments from others have grown faster. The chart below shows the break-down of total U.S. national healthcare expenditure by payer.

Data via CMS.

Data via CMS.

At the Forbes Healthcare Summit this week I heard many speakers say that healthcare consumers now have lots of skin in the game, and behavior will change. They do have more skin in the game, but so far their skin is mostly covered. High Deductible Health Plans (HDHP) are the most-often-cited form of skin in the game. HDHPs are growing fast, but as of January 2014 they covered less than 6% of Americans (source).

Providers are equally entitled. Almost every medical provider must have a license which entitles him or her to be a provider, and bars those not licensed. Licenses are controlled by state boards, hence only local providers are entitled to provide, in many cases. Providers have strong influence over state licensing boards and institutions such as medical colleges, enabling them to limit supply. Licensing requirements and state control are not going away. In fact, qualifications required for licensing are rising in some cases, e.g., Colorado recently raised the education requirement for a Nurse Practitioner license to Ph. D. level: a nurse practitioner needs to be a “doctor” in Colorado. This tightens the supply of MD extenders at a time when primary care providers are in critically short supply and nurse practitioners, with appropriate MD support, are widely recognized to be very effective and well-received by healthcare consumers.

Even in situations where there is low or no payment entitlement, such as dentistry, providers still have a great deal control over consumers. Dentistry is a painful and invasive process. Once you get comfortable (as can be) with your dentist, you are not likely to shop around for a better price.

Hospitals are regional oligopolies for the most part, which means that the local hospitals compete on the basis of everything but price and can charge as they see fit. E.g. Boston, the 10th largest metro area in the U.S., has three big integrated health systems; most metro areas have one or two. The integrated health systems and the state government of Massachusetts, which buys healthcare for about 1/3 of the population (2), are battling over healthcare service prices.

Payers have their own form of entitlement. The insurance industry is regulated state-by-state, which makes multi-state operation expensive. As a result, the health insurance market in each state tends to be concentrated in a few hands: e.g., there are three main payers in Boston area.
So entrepreneurs seeking to unleash market forces in healthcare need to take their shots carefully. Market forces are most likely to work in businesses with these characteristics:

•  The buyer is professional and sophisticated, as is true with CastLight‘s corporate customers who seek better cost/quality information regarding their providers.

•  The service to be purchased is non-urgent, high-cost, impersonal, easy to characterize, and/or done infrequently. Hence services like MRIs and Lasik are amendable to shopping, and medical tourism/bundled procedures are getting a share of major elective procedures, especially when a big company is the payer, with companies like CarrumHealth and Medycation building the marketplace.

•  The market is business-to-business between knowledgable parties. hCentive, for example, has built a successful business enabling state healthcare exchanges in New York, Colorado, Kentucky, and Massachusetts.

•  The product is a pure commodity, like a generic drug, so consumers see little risk in switching suppliers and can focus on price and convenience.

I believe there are powerful opportunities to bring market power to healthcare, as the above examples suggest. But I doubt that healthcare will ever be a mostly free market. Entitlement is will always be a big force. Entrepreneurs need to sharpshoot the places that market forces can thrive and make a difference.

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Notes:

  1. The “Patient Protection And Affordable Care Act” of 2010, often called the “ACA” or “ObamaCare”.
  2. This is mainly Medicaid, which the state administers, plus state and local government health plans, which are run by the state in Massachusetts.
  3. NAV.VC, a venture fund manager in which I am a partner, does not have a financial interest in any of the companies mentioned in this post.

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