January 27th, 2022
Innovative East – Regulated West
Centralized command and control healthcare will have a role but it's going to shift towards health entrepreneurship.
Currently, health policy is at the focus of everybody because of this terrible global pandemic. However, equally important if you will have a long-term view coming out of this horrible pandemic is that for decades studies have shown that various western countries have significant problems in healthcare delivery within their welfare state. Simply put, it is not sustainable; the long-term costs are not under control. Real progress is happening elsewhere. The Henry Fords of healthcare are not found in the western countries, they’re not found in Sweden, they’re not found in the US. We don’t see them even in the Netherlands which has a very good balance in the healthcare model. Instead, we see them in India, Thailand, China, Brazil, Singapore, South Korea, countries that don’t have a western-style health care system.
The healthcare systems in western countries are plagued by inefficiency and more importantly low productivity growth, which over time is creating more and more problems. Health expenditures have increased over time; also early care expenditures have increased as a share of GDP. The major issue with efficiency that is important to understand is Baumol’s cost disease. Baumol’s cost disease happens when you have a health delivery model (or any public sector delivery model) that doesn’t change. As the economy as a whole becomes more productive, the wages are increased to reflect that. When all the wages go up, so do the healthcare wages so that people go and work in healthcare. But if there is no productivity growth, the cost is increasing but not the efficiency. With the same efficiency, the wages go up, increasing the costs so high that it is higher than the rate of economic growth. Even though societies become richer and more prosperous every year, the cost of healthcare goes up so that it becomes more and more difficult to support healthcare for which more taxes are needed.
Brief historic context
The history of the enterprise did not start in the West but the East. In the same way that enterprise has a very long history, so does healthcare. At least a thousand years ago, if we go to the Middle East during the golden market renaissance period we see the development of what we could maybe call the first modern hospitals. Although there was public funding involved to support healthcare for people who couldn’t afford it themselves, the hospitals and pharmacies (which again, have a very long history in the Middle East, China, India) have been run privately. The idea of publicly planning the healthcare system is a relatively modern concept with shortcomings.
There is a role for the state in healthcare not least during a pandemic, but the idea that the public sector should run the hospitals is causing massive problems for the European countries over time. Organizational changes such as the economics of scale and high levels of specialization, which are adopted in the rest of the economy are not penetrating the healthcare system. That is creating the situation where costs are not under control and gradually every year it becomes more and more difficult to finance healthcare, while the quality isn’t going up either as much as it could. However, this is a Western problem. India, China, the Middle East, Singapore, and so on have given way to the Henry Ford’s of healthcare.
The Henry Ford’s of healthcare
The Henry Ford’s of healthcare are the entrepreneurs who have changed healthcare delivery. I’m only going to talk about Devi Shetty here, one of these examples of the Henry Ford’s of healthcare (you can find more examples in my book The Henry Fords of Healthcare at the Institute for Economic Affairs). Shetty grew up in India and when he was in school he heard about the first cardiac surgery in South Africa. As a child, he said when he grew up he wanted to become a heart surgeon. Long story short he grows up and studies in India, he studies abroad and becomes a very good heart surgeon (among others, he was the heart surgeon of Mother Teresa), but realizes that in India the problem is so bad that many people who are poor (and many are poor in India, particularly a couple of decades ago) when they hear that they were going to die because of their heart they wouldn’t even ask if they could get heart surgery. They would just say “no” because it is too expensive. Even with government support, it was too expensive.
But Shetty realized that the cost has radically decreased so that even Indians who are poor can also get heart surgery. Then he went to his family looking for startup capital and saying that he wanted to run a very specialized hospital. He got the money and set up his first hospital (which is very much like Henry Ford). Each room has a purpose, each room has a staff. You come in, you meet some people, you get pre-treated, you go get the heart surgery, you go to recovery, and you get out. In Sweden, for example, the doctors spend a lot of their time in their office filling in government papers, public bureaucracy… At Shetty’s hospital, doctors don’t do that. They don’t either shift between tasks. They just do one thing again and again. The result is high productivity and interestingly good results.
Many international business journals have looked at Shetty’s hospitals and said “wow.” One of them even found that even though the cost is much lower than the US heart surgeries, the survivability is similar or even higher than the US, even though the Indians being treated have much worse health, many of them are poor nor have good diets. This standardized Henry Ford-style of treatment is good, it ensures that people are specializing. What Shetty did in his first hospital he did for eye surgery and cancer surgery. The Indian government gave him a price for inventing the health city, a small city just with highly specialized hospitals. In the hospitals he started, millions and millions of people are getting treatment.
There are a bunch of other people who have done the same thing in India, Thailand, China, the Middle East, and Brazil. It’s not one person, but Shetty is the most interesting one. A couple of years ago he went to the Cayman Islands and started one of his health cities. He did that to be close to the US but not in the US, because while we think that the US is a free market country when it comes to health care it has big problems (as almost all western countries do, which have designed bad health care system models that don’t allow innovation). He went to the Cayman Islands not to be outside the regulations. He still treats patients from the US and it is going very well. It seems the concept is being exported to the West which is very encouraging west.
Optimism about the future of healthcare
When you measure optimism about anything in society people in rich countries are more optimistic because they are rich and their societies work, while people in less developed economies are less optimistic because they live in countries that have economic problems, many of the respondents in poor countries are poor… But when you ask about optimism regarding the future of healthcare you find that 10% of responders are optimistic in the UK, Spain, Italy; 15% in Germany, Canada, Sweden and, Australia; less than 25% or less in France, Japan, Belgium, and the US. But then when we look at Brazil the optimism is at 71%, India 60%, Indonesia 51%, China 47%. Something is happening here. These countries are on the top and they have the Henry Ford’s of healthcare. They are open to this kind of disruptive healthcare innovation and there is optimism.
The West needs to learn a very simple lesson from India, China, the Middle East: allow radical innovation, open up a trade of health. There is massive health tourism in Thailand, India, Singapore; people go to hotels that are like spas, they get very good treatment, they go from Europe and the US, and often for much less than they would pay in their own countries. You might say that the cost of labor is lower in Thailand. And although that is one part of it, the main part is that the economics of scale are allowed. These hospitals are so big and so successful that some of them have charities where poor people can get free health care. They still run massive profits even though they give away some of the healthcare. They are also doing a lot of world-leading research and development. The Henry Ford’s of healthcare of today have created hospitals that are more dynamic than the ones you find in the West.
Countries from Eastern and Central Europe that haven’t locked themselves in a western healthcare model shouldn’t. Look at India and China instead, they have it right. In Sweden for example, while the debt of the central government is going down and the expenditures are under control, the municipal and regional economies borrow more money every year (because the municipalities have elderly care and the regions have healthcare). The central government has to push money to them because of Baumol’s cost disease. The only way to finance regional healthcare is to reduce other government costs and shift the money to healthcare and elderly care. Although corona has changed the situation, this trend has been going on for decades.
To understand healthcare innovation it is important to understand what is a disruptive innovation and an incremental innovation (it is not a very complex thing, just some fancy wording), the razor and the electric shaver being the best examples. For example, Gillette invented the modern razor and what have they been doing to their original design is incrementally adding more blades to it. If you go back in time you wouldn’t find a Gillette with five blades. You would find four blades three blades, two blades, and so on – that is incremental innovation. The electric shaver is disruptive innovation. When it first came out, it was a new technology, a new way of shaving. It was not a better way of shaving, but a cheaper way of shaving. When you buy an electric shaver, you don’t have to change the razor blades. That was the main feature of it. What gradually happens is that a market is created for electric shavers because you can save money. Gradually they improve and some people choose them, some people don’t. Some people choose them because they work well, you don’t cut yourself, the shaving is more convenient, you don’t have to buy new blades and so on. But then, at some point, there needs to be a complete change of how you do the shaving. Even with the dropping quality of how well you shave, you get other benefits.
Disruptive innovation allows for cost-saving. Incremental innovation increases costs (it’s more expensive to make a razor with five blades than four blades, for example). There are many examples of disruptive innovation in healthcare and even Sweden, which has a largely publicly funded healthcare, gradually increased the role for private actors and even private funding. Before corona e-health came, the public system that wouldn’t allow disruptive innovation. For years Swedish entrepreneurs fought to push it through and when it was finally ready to be adopted, corona came. Because ‘health via distance’ (due to social distancing) boomed we have robot surgery, we have hospitals being highly specialized (similar to Shetty’s example). These are just a few examples of disruptive innovation in healthcare
Policy lessons for the world
- Don’t go with the western healthcare system.
The US for example has huge problems with its healthcare system because it is so regulated, many people are suing each other over healthcare… The price for the consumer does not make any sense. Even in countries like Sweden, there is too much government ‘command and control’. Even though they are opening up for the market, they need to learn from the East where the Henry Ford’s of healthcare can transform healthcare, to push up quality while the prices are under control. We’re going to see the shift towards being inspired by India and China in this regard instead of being inspired by Western Europe and the US. We need to be inspired by the countries where people are optimistic about the future of healthcare.
- Privatization and new public management
Privatization in healthcare has been happening in Sweden (even in the UK with the NHS, albeit very slowly and limited) and it is good and it is needed. Also, new public management has been introduced in the public sector to deal with shortcomings and inefficiencies. Although that is not a guarantee, both of them can be good forces that can contribute positively. Privatization does contribute. New public management is essentially the public sector taking in the management practices from the private sector and trying to copy them. But this is not enough! If you just bring in private companies to government-controlled healthcare and suggest what to be done, you are not changing anything. In Sweden, you can start a private clinic, but then you have to follow all the government regulations. Then the doctors have to spend so much time filling in paperwork because they become government bureaucrats. New public management is about opening up for disruptive innovation. It is about opening up for another way of providing healthcare, not to have the doctors spend filling government papers half the time. That’s the first step. It is about disruptive innovation
- Allow innovation and learn from the COVID-19 experience
There are many examples of health entrepreneurs combating COVID-19 and we can learn from them. For example, in a hotel close to Stockholm’s main airport a young guy had rented two rooms, setting them up as a corona rapid testing center. Such innovation everybody appreciates because they are good for the passengers while at the same time public healthcare is alleviated. This is not something public healthcare would have done. Even if they had done it the Swedish taxpayers would have paid millions of euros for it.
While being horrible in many ways, COVID-10 has opened a bit up the gates for innovation. That is why it is good to go back and look at the innovations think about maybe embracing innovation even after this situation has been handled (through vaccinations).
- Command and control of healthcare – only sometimes yes
For times like a pandemic, for example, healthcare needs to be regulated. But throughout history, healthcare has been a business. Healthcare was not invented 100 years ago in Europe, the command and control healthcare welfare state model was invented. And it is not a well-functioning system. The West needs to relearn the true history. Health has been a business. Society and government have regulated and funded it. Health is not something for the public bureaucracy to handle. That is not how it has been and that is not how it can continue to be.
In the coming decades, something will happen. Extending a healthy lifespan is going to be the booming industry of the world. The lifespan of mice has already been extended five times and they have managed to rejuvenate mice. The work has continued on cocker spaniel’s and soon on humans. This will become a huge marketplace and what you will see are optional healthcare treatments in order to live a longer, healthier life.
Centralized command and control healthcare will have a role but it’s going to shift towards health entrepreneurship for a multitude of reasons and without health entrepreneurship, the West will stagnate. The Henry Ford’s of healthcare are revolutionizing healthcare with very basic principles of capitalist production that Henry Ford, McDonald’s, and others have implemented. Unfortunately, the western systems are not allowing this when it comes to healthcare. That is why the future of healthcare is happening in the East not in the West.
The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.
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