Business models at forefront of health care innovation

While policymakers and Congresscritters focus on how we're going to pay for health care, those in the industry are taking a closer look at what you want to pay for. (Picture from South African Tours and Travels. It will be explained.)

The traditional fee-for-service model is basically piecework, although prices vary widely. You charge for an office visit, for an x-ray or MRI, you charge for drugs and, if they must be injected, you charge for that.

Increasingly this is seen as a broken model. It assumes patients are well, and equally compliant with care instructions. Most reformers, especially insurance carriers, seek only to standardize or bargain down the fees. Labs or hospitals who don't like the result then go after the patients a second or third time.

The two primary reforms being considered today are:

1. Packaging treatments into one price. The technical term is Diagnosis-related Groupings, or DRGs. Set a price based on what the patient is diagnosed with, and your incentive becomes lower-cost cures.
2. The extended warranty. You set a fee for the annual care of each patient, regardless of their condition. This lets you pay for check-ups, for lifestyle coaching, and for preventive measures. When someone does get sick you return to number one.

As every business person knows the business model designs the industry. A proprietary software industry has a different design -- different cost centers and different payment mechanisms -- from an open source model. Both produce software, but the industries they support are very different.

Apply this to health care and you'll see that a DRG model leads to standardized treatments and protocols, with powerful incentives to find out what usually works and try that first. That's where evidence-based medicine becomes the norm.

The warranty model is what leads you to the idea of a medical home, or what I call the coaching model. It also provides incentives for "nudging," new ways to enforce compliance with standard orders like stop smoking, eat less, and walk around a bit.

Sure, any business model can be overthrown by changing technology, but it's the business model reformers should be looking at first, not the payment mechanism.

Y'all are on the wrong end of the elephant.