07 Oct 2013   |   Viewpoint

Time to rethink the value of innovation in health

The traditional view holds that if a healthcare innovation provides any benefit - however small - it should be adopted. This approach is not sustainable, health economist Uwe Reinhardt told the European Health Forum at Bad Hofgastein, Austria

Traditional thinking on the value of innovation needs to change: The standard view is that as long as an innovative medical procedure, or other innovation, yields positive benefits to patients however small, it should be adopted. But, says health economist Uwe Reinhardt of Princeton University, “We can no longer afford this approach.” 

The world needs to move to an alternative model which says that even if there are clear benefits from an intervention, the intervention should only be done, “If the value of those benefits covers their opportunity costs,” Reinhardt said in his keynote address to the 16th European Health Forum in Bad Hofgastein, Austria.

Reinhardt proposed an equation to determine the net social value: take the gross value added by healthcare to patients, but deduct the opportunity costs of the “care of society” – in other words, what it costs if you neglect the education of the young, or fail to invest in basic science and R&D, or public infrastructure.

This is not an approach that goes down well in the US where Reinhardt has been vilified for endorsing cost-benefit analysis of healthcare innovation. “You guys [in Europe] have been way ahead of us in thinking about healthcare,” Reinhardt told delegates meeting to consider measures for building, ‘Resilient and Innovative Health Systems for Europe’. 

Administration innovation

Recession and sluggish economic growth are leading to growing income inequality, which is imperilling solidarity in healthcare. Now, in common with the position in China, “The elite in the US no longer cares about the bottom 30 per cent,” Reinhart claimed.

While the cost impact of technological innovation in healthcare needs to be subject to greater scrutiny, there is huge opportunity to add value through process innovation that improves the administration of health systems. Many expensive technological innovations would become affordable, “If we eliminated health spending now wasted on needlessly cumbersome administrative and regulatory processes and outdated organisation forms in healthcare,” Reinhardt said.

There may be inefficiencies in Europe’s healthcare systems, but Reinhardt reserved his main fire for the US medical system, which according to estimates published by the Institute of Health of the National Academies wastes 31 per cent of its total annual budget of $2.5 trillion. 

The $190 billion wasted in excess administrative costs alone would be enough to provide health insurance cover for all those Americans who are currently uninsured. “We need evidence-based administrative practices in the same way as we need evidence-based medicine,” Reinhardt said. Americans have much to learn from Europeans, “You have far smarter administrative practices than we do,” he added.

What is needed is more efficient, “industrial” organisational processes, that are fully-integrated and IT-driven. “Obamacare explicitly encourages that [approach], very much so,” said Reinhardt. “The bad part is that no one understands it – particularly the critics.”

Uwe Reinhardt is Professor of Political Economy, Professor of Economics and Public Affairs, Woodrow Wilson School of Public and International Affairs, at Princeton University 

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