How will we know if ObamaCare is successful? One way is if it keeps the country from driving off a fiscal cliff. Supporters of the law think it will, critics think it won't; time will tell. Another way to judge ObamaCare's success or failure is its effect on medical care innovation. Odds are rising it will be deadly to innovation.
The ultimate vision for ObamaCare is slowly starting to take shape as regulators write the rules to implement the law. And at the core of ObamaCare's vision for managing the nation's medical care are hospitals. I'll explain why this is a problem from an innovation standpoint in a moment.
The health care architects in the administration are promoting the development and expansion of so-called Accountable Care Organizations (ACO). These institutions are basically large groups of providers who deliver health care services under the banner of a single entity. Under ObamaCare, an ACO is "accountable" for a regional grouping of Medicare patients. Those on Medicare will get their care from the providers in the ACO network.
As my colleague Dr. Scott Gottlieb discusses in an important new paper that is making its way around Wall Street and Pennsylvania Avenue, ACOs help realize a critical goal of health care planners: "to get more leverage over providers. The geographic dispersion of doctors into small practices has made them hard for a central agency like Medicare to regulate. … Once doctors are consolidated into ACOs, it will be easier for Medicare to gain more direct leverage over their clinical decisions."
The Obama team aims to use ACOs more widely, well beyond Medicare. "Health care policymakers inside the White House and Centers for Medicare and Medicaid Services (CMS) may also be crafting new rules that would provide ACOs favorable treatment in the health insurance exchanges," Gottlieb writes. "These efforts are premised on the belief that ACOs could eventually function in place of traditional for-profit health plans in the new exchanges."
This is where hospitals come into play. ObamaCare planners envision the ACOs will be built onto the nation's existing hospital architecture. As former Obama administration official Nancy DeParle put it in a recent article, "the economic forces put in motion by [the Obama health care plan] are likely to lead to vertical organization of providers and accelerate physician employment by hospitals and aggregation into larger physician groups." This vertical organization and aggregation is central to the health care architects' plan as doctors in this system, it is argued, will have greater incentive to coordinate care and keep costs under control.
Put aside for the moment the irony that this "progressive" administration is promoting a degree of market concentration that would have given earlier progressive trust-busters hives (White House officials are even cajoling the Federal Trade Commission to rework anti-trust laws to make sure ObamaCare is unencumbered by existing statutes).
If hospitals are at the heart of ObamaCare, as they appear to be, that's a huge problem. Hospitals today are some of the last places medical innovation takes place. The reasons have to do with their structure and how they are constituted.
Clayton Christensen of the Harvard Business School and his colleagues spent a long time studying the nation's system of medical care for their eye-opening book The Innovator's Prescription. They describe hospitals as "the most managerially intractable institutions in the annals of capitalism." Strong stuff. They go on to say: "An important lesson from our studies of disruptive innovation is that the hospitals providing much of today's care cannot and therefore ought not to be relied upon to transform the cost and accessibility of health care. Instead, hospitals need to be disrupted. We need them to cede market share to disruptive business models."
Under ObamaCare you can forget about it. DeParle noted in her article, "the health care system will evolve into 1 of 2 forms: organized around hospitals or organized around physician groups." Obama's team is gaming the system to ensure hospitals are the winners-thus putting a noose around innovation.
Where does innovation in medical care come from? As Gottlieb notes, "Over the last several decades, most of the notable innovations in health care services have been developed in for-profit companies, often run by entrepreneurs and backed by venture capital." These include firms such as Surgical Care Affiliates, US Healthcare, Pediatrix, US Oncology, Integrated Healthcare, US Renal Care, Select Medical, Caremark and more.
"Many of these companies," he writes, "proved that they could simultaneously improve the delivery of medical care while lowering health care costs. Many of these innovations were first aimed at hospitals and sought to move patients treated in costly, inpatient facilities to less expensive outpatient settings. In many cases, the innovations they introduced were eventually adopted by hospitals, which started operating their own rehab facilities, long-term care hospitals, and home dialysis services. The problem is that under today's market rules, hospitals do not have the incentive to innovate and invest in improved delivery models. They lack the managerial experience and financial incentive to drive change in the delivery of health care services."
As in lots of large, unwieldy industries-such as hospitals--innovation often happens outside large, incumbent operators. ObamaCare makes competition with entrenched market actors more difficult. It will discourage experimentation with new, entrepreneurial business models in medical care. As such, ObamaCare is shaping up to be an innovation killer-something the Congress may want to consider as it mulls further changes to the nation's health care system.
Nick Schulz is a DeWitt Wallace Fellow at AEI.