WASHINGTON - The biotechnology industry, among others, haschampioned free markets rather than government regulation tocontrol health care costs. Yet the rising costs of health care in theU.S. suggest that competition has failed. Why?A three-year study of the competitive dynamics of American healthcare recently completed by researchers at Harvard Business Schoolattempts to answer that question. The researchers concluded that theAmerican health care system has a severe case of "dysfunctionalcompetition."Flying in the face of basic economic theory, the U.S., with the mostcompetitive health care system in the industrialized world, also hasthe highest costs."Historically, competition and even technological innovation in thehealth care sector have driven costs up," said Elizabeth Teisberg,one of the study's authors and an assistant professor at Harvard."Competition driving costs up - that's a big paradox for people."But Teisberg argued that legislators and others have come to thewrong conclusion in deciding that competition doesn't work.Instead, she said, people should seek to understand why competitionhas failed to bring costs down in this sector. The reason has to dowith a complex, multilayered system of skewed incentives that hasencouraged innovations that improve quality without regard to cost.The Harvard study concludes that incentives have been so skewed byregulation, insurance practices, limited information about qualityand price, and the natural price insensitivity of ill patients that thenormal economic rules have not applied in the health care market.y Consumers of health care are generally weak (ultra-fragmented),ill-informed (ignorant about medicine and lacking in access tooutcomes data that would allow a direct comparison of doctors,hospitals, procedures and drugs) and price-insensitive (life-and-death decisions aren't made on a cost basis).y Prices remain high in the face of excess capacity because untilrecently, prices were set to cover full costs rather than meetcompetition.y Technologies remain expensive even when widely diffused becausereimbursement has been based on customary charges, not costs.y Hospitals and physicians who charge higher prices or fail toprovide quality service are not forced out of business because qualityis poorly understood and local hospitals have been preserved despiteinefficiencies and underutilization. Instead, providers and payerscompete on proficiency at "gaming" the system by cost-shifting, self-referral, "balance billing" of patients above insurers' agreed rates,and creative denial of insurance claims.y Excess supply has not driven costs down as it would in a normalmarket because physicians can increase demand and have financialincentives to do so.As a result of these fundamental structural problems, costs haveskyrocketed, bringing the entire system under the scrutiny ofpoliticians who want to make it more equitable by extendingcoverage and more economical by lowering costs. But Teisberg saidthat none of the health care legislation currently on the table willyield the desired results."They (health care reform bills pending before Congress) all fail toaddress the central importance of innovation in reducing health carecosts," she told legislators at a recent congressional hearing.Teisberg said that the Clinton administration's plan tries to cut costsby simplifying paperwork, increasing the bargaining power of newpurchasing alliances and putting caps on prices - all essentiallyshort-term fixes aimed at delivering today's health care technologymore efficiently. But the Clinton plan and others neglect the healthcare technology of the future.According to Teisberg and co-authors professor Michael Porter andanalyst Greg Brown of Vector Securities International Inc. (who wasa student at Harvard Business School when the study was initiated),innovation is the only way to substantially lower costs in any sectorof the economy. The Harvard study is titled "Innovation,Information and Competition: A Lasting Cure for American HealthCare."The study cites numerous examples of technological innovation. Theprice of an average long-distance phone call dropped by more than50 percent between 1984 and 1992 while quality soared. Computersthat cost $50,000 and filled an entire room 20 years ago were farslower than today's $1,500 laptops. The laparoscope, a high-techsurgical tool, reduced the bill for gall bladder surgery from $21,000to $6,400 and turned a six-day hospital stay into an outpatientprocedure. Likewise, new drugs to prevent post-surgical infectionscan reduce hospital stays by as much as 10 days.Teisberg and her colleagues concluded that the only health carereform plan that will work is one that realigns the skewed costincentives of the system while preserving and protecting incentivesfor innovation. Instead of focusing myopically on cutting fat andeliminating waste in the current system, Teisberg said, legislatorsshould ponder how to fuel the engine of long-term savings:innovation.The Harvard study also highlights outcomes research, a fledglingscience promoted by the biotechnology industry as the mostequitable way to gauge the cost-effectiveness of drugs, as the key toeducating health care consumers. "The power of competition will befully unleashed only when decisions by providers, doctors, payersand patients are based on relevant and comparable informationabout price and quality," the report states. It recommends that thedevelopment of "germane and accessible outcome measures" shouldbecome one of the highest research priorities in health care.But the Harvard study rejects the notion that the government shouldbe in charge of collecting and disseminating outcomes research data.Instead, it suggests that the information be distributed in every stateby competing non-profit organizations.

-- Lisa Piercey Washington Editor

(c) 1997 American Health Consultants. All rights reserved.