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July 18, 2012

How Can We Spur Organizational Innovation to Fix US Health Care?

By

The American health system is among the most innovative in the world. We are at the leading edge in developing breakthrough drugs, inventing effective and less invasive surgeries, and tackling cancer. But we seem to fall down flat in one area—achieving the kind of organizational innovation in the health care industry that we take for granted in virtually every other field. Why is it so hard to improve the delivery system or to reform the outdated structure of Medicare?

In large part it’s because of the way we have chosen to solve the challenge of getting a vibrant private-sector market to achieve social goals, such as providing insurance for many essentially uninsurable people or delivering a basic package of care to people who don’t have the money to pay for it. To address this challenge, we’ve primarily been using a central planning strategy. And it is fundamentally flawed.

By “central planning,” I mean the approach of managing or manipulating a market to try to get it to operate in the way that you think is best to achieve an objective. It was the philosophy behind Bill Clinton bringing in 400 or so health and systems experts back in 1993 in an effort to redesign our health system. Or the sweeping insurance rules in the Affordable Care Act (ACA). Or, for that matter, the new Center for Medicare and Medicaid Innovation—smart people who are supposed to figure out better ways to organize care for the elderly and the poor and then propose new regulations or financial inducements to make it happen.

 
The Issue of Scale
But there are good reasons why this approach is unlikely to achieve sustained organizational innovation in the health system. For starters, there is the issue of scale. Annual health care spending in the United States is now more than $2.5 trillion, roughly the size of the economy of France. A relatively small group of people trying to guess the best way of organizing our system is no more likely to be successful than a group of experts trying to remake the entire French economy.

Then there is the problem of lobbying. When we try to bring about conscious change through laws and regulations, it’s no surprise that organizations and industries with much on the line seek to influence the result for their own purposes. That can lead to good ideas being stymied by those who prefer current arrangements or to the creation of statutes and rules that seem to reflect specific interests rather than the best ideas. Moreover, the sheer political effort involved in achieving major change discourages everyone from trying to do it often—that’s why the central planning strategy always seems to be playing catch-up.

It is in this context of spurring innovation that we should judge another approach to spurring organizational creativity—setting goals, allowing as much flexibility as possible to reach those goals, and using financial incentives rather than regulation to encourage innovation. A key to understanding this approach, in contrast to the central planning, is that there is not a central presumption about what the best organizational approach is or will be. It’s really hard to figure out what the future should look like and make it happen. Instead, the aim of this alternative strategy is to foster many approaches and allow “natural selection” to sort out the best.

We can see this evolutionary strategy shaping up as the alternative paradigm to the planning vision that pervades the ACA. The contrast between these paradigms is at the heart of many of today’s health reform debates.

Take the idea of premium support in Medicare, for instance, in which the federal government would provide a fixed (though indexed) contribution, or subsidy, toward coverage. True, it is intended as a budget control measure. But the deeper aim is to provide seniors with a far greater incentive to seek the best value for money. The thinking is that this incentive will be far more successful in helping Medicare move beyond traditional fee-for-service systems or in getting the health industry to try better delivery arrangements than will any amount of financial inducements or regulations from Washington to set up such innovation flavors-of-the-month as accountable care organizations.

The evolution paradigm also shows up in the struggle between those who view the states as paramount and those who view the federal government as the proper power center in the government’s role in innovation. The argument for converting much of Medicaid into block grants to states, for instance, is also more than a budget control strategy. Combined with far greater flexibility for states in finding ways to cover low-income people, it is intended to encourage states to become “laboratories of democracy” and remake health care for less-affluent Americans.

It’s the same story with the debate over who should really be in charge of health exchanges—or indeed whether states should be given wide latitude to experiment with alternatives to the ACA’s exchange model for how insurance and health plans should be organized.

 
Infrastructure Needed
To be sure, this alternative to the central planning paradigm is not laissez-faire. If the evolutionary strategy is to function, to achieve our social goals, and to uphold our national values, there must still be an infrastructure for innovation. The evolutionary approach needs information so that individuals and states can be aware of successes and failures and drive change. But the flow of information needs to be horizontal, and often subjective and viral, not the bottom-to-top and structured information flow that the central planning paradigm requires. The evolutionary approach also needs vigilant protection for those vulnerable Americans whose access to health care we want to ensure.

We have learned the hard way from the history of Medicare that it is not enough just to reorganize part or all of the health system. You have to build in a process that will cause the health system to improve continuously—or else the system will increasingly become out of date. That’s why the clash of visions about how to spur organizational innovation is no sideshow in the debate over the ACA. It is central to the ability of any reform to be a long-term success.

Stuart M. Butler, PhD, is Director of the Center for Policy Innovation at the Heritage Foundation in Washington, DC, where he focuses on developing new policy ideas. Previously he served as Vice President for Domestic and Economic Policy Studies. He is also an Adjunct Professor at Georgetown University’s Graduate School.

First appeared in the Journal of the American Medical Association.

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