How governments can spur innovation

When historians look back on the United States’ Patient Protection and Affordable Care Act (ACA), President Barack Obama’s controversial 2010 health-care reform, we predict that they will not devote much attention to its regulations, its troubled insurance exchanges, or its website’s flawed launch. Instead, we think that they will focus on how “Obamacare” encouraged a wave of innovation that gradually tamed the spiraling costs of a dysfunctional system, even as millions of previously excluded Americans gained access to health insurance.

Innovation is probably the least discussed aspect of health-care reform. Yet it is crucial to “bending” the sector’s cost curve, because it enables the delivery of quality health care in cost-effective ways. Obamacare has provided powerful new incentives for such innovation.

From 1980 to 2010, US health-care spending grew almost twice as fast as the economy, rising from 9.2% to 17.4% of GDP. While many factors contributed to this surge, most experts agree that the single most important cause was a fee-for-service system that rewarded health-care providers for billing as many services as possible, rather than for keeping people healthy and treating their illnesses efficiently.

The ACA has been changing that, by establishing myriad new incentives to foster efficiency in health-care delivery – for example, by reducing costly and unnecessary hospital infections and readmissions, and by adopting electronic health records. Most important, the ACA is providing incentives for the creation of “affordable care organizations,” “bundled payment systems,” and other delivery innovations to encourage better coordination of care, especially for patients with numerous chronic conditions. Such patients are among the 10% who account for an estimated 64% of overall health care costs.

Around the US, providers, insurers, non-profits, and local governments are responding to the ACA’s incentives. The Centers for Medicare and Medicaid Services (which provide health insurance to pensioners and the poor) has just announced its second round of grants – $665 million to 28 states, three territories, and the District of Columbia – to encourage innovations in health-care delivery.

Of course, it is still too early to declare victory, but Obamacare seems to be working. According to a recent analysis by the Council of Economic Advisers (CEA), about ten million people gained health insurance coverage in 2014 as a result of the ACA – the largest increase in coverage in four decades. But the real surprise is that growth in health-care spending slowed dramatically from 2010 to 2013, to roughly the same pace as GDP growth. This represented a sharp break from the previous half-century; indeed, this period was characterized by the slowest growth in real per capita health-care spending on record.

To be sure, the ACA is only one factor in this promising trend; growth in health-care spending often slows in the wake of an economic downturn. But Medicare spending, which is not affected by recessions, has slowed along with private health-care spending. In a recent study, the CEA concluded that the ACA’s Medicare reforms account for a significant share of the slowdown.

The ACA is an example of how government can promote innovation to address major societal challenges by providing goals, directions, and incentives, rather than dictating solutions. The government plays a role akin to that of a venture capitalist providing seed money and financial support to foster innovation.

In this scenario, different players – Medicare and Medicaid, state and local governments, private insurers, physicians, and social entrepreneurs – collaborate to hammer out effective solutions that can be scaled with government revenues. For example, responding to the ACA’s incentives and flexibility, Arkansas and Oregon have launched bold experiments to revamp Medicaid, in part by rewarding health-care providers who deliver better outcomes and keep patients healthier.

In Camden, New Jersey, Jeffrey Brenner, a family doctor, has pioneered strategies to reduce hospital stays by “super-utilizers,” a small share of Medicaid patients who are frequently admitted for expensive acute care. Brenner mapped “hot spots” around Camden, and sought to find out why people in some areas ran up such huge bills.

The problem was not fraud. It was an absence of coordinated medical care, especially basic primary care, and a lack of attention to people’s underlying risk factors. The most expensive 1% of patients, those with a tangle of issues, accounted for 30% of Camden’s public health-care spending.

Brenner’s Camden Coalition of Healthcare Providers, founded in 2003, received its first funding from a philanthropy, the Robert Wood Johnson Foundation, and a private insurer, United Health Care. The remarkable success in Camden has prompted the foundation to fund similar experiments in Boston, Cleveland, Cincinnati, western Michigan, and Humboldt County, California. Now the government is providing additional support, with grants to similar programs in Maryland, Colorado, Pennsylvania, and North Carolina.

Oregon has entered into a pay-for-success bargain with the federal government. The state will receive $1.9 billion over five years to revamp its Medicaid services along the lines of Camden’s approach. Oregon will get the money only if its per-person Medicaid costs climb substantially more slowly than other states’. At the moment, Oregon is on track.

Arkansas has moved 20 different “episodes” of health-care delivery (including hip and knee replacements, pregnancy, colonoscopies, asthma, and congestive heart failure) from fee-for-service to paying for quality outcomes. The results so far are promising – not just by reining in costs, but also by better aligning service delivery with best practices.

The government can spur innovation by offering incentives that tap many different players’ strengths. In health care, that means taking advantage of the purchasing clout of Medicare and Medicaid, the risk-taking of social entrepreneurs and philanthropists, and the dynamism of markets and private business.

And health-care reform is just one example in which government can deliver what the public wants by setting goals, encouraging creativity, and providing the resources to scale up what works.

Twenty-five years from now, we hope that historians look back on the ACA as the start of a new era of public-private collaboration to develop innovative solutions to complex social problems – and thus to restore trust in government itself.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum. 

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Author: Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley. Lenny Mendonca is a former director of McKinsey & Company

Image: Nurse Health Practitioner Rachelle Quimpo (C) begins an ear exam on patient Shreya Sasaki as Dr. Heidi Meyer remotely views the procedure on a video screen. REUTERS/Mike Blake