U.S. healthcare sector in need of disruptions to lower costs, improve transparency for patients

Edward Scissorhands, a porcupine, rhinoceros and the Tin Man are crowded on an inflatable boat floating down a river. A frantic passenger is screaming, “Don’t anyone move too quickly.”

That’s how Spencer Jones, founder and CEO of Lineus Medical in Fayetteville, describes the fragile healthcare sector he believes faces many critical problems. Jones, an inventor of medical devices and a registered nurse, describes healthcare as an “800-pound gorilla driving a 300-yard barge.”

The healthcare sector is three times larger than the banking industry, comprising 17.5% of the nation’s GDP. Jones said the sector has also tripled in size since 2000 and this year is on pace to top $3.6 trillion in U.S. healthcare expenditures.

Jones said the healthcare sector has returned multiples as high as 7.74 times earnings for pharmaceutical drugs. But the fastest growing subsection is in related-technology which saw 12.3% growth last year. He said the massive sector gets funded in part because of the hefty returns it generates. In the low interest rate environment, Jones said the healthcare sector has been a benefactor of investors looking for better returns. Last year $16.1 billion was poured into U.S. venture-based companies. The year before, the investment totaled $12.04 billion, according to Dow Jones VentureSource.

One of the fastest growing areas for in the healthcare sector is in digital health ventures, thanks to more than $5.8 billion in venture funding last year.

COMPLICATED AND COMPARTMENTALIZED
Jones said the healthcare sector is ripe for disruption but it remains regulated and siloed off. He said it’s also woefully behind many other industries such as airlines and finance in using technology to lower costs, increase efficiencies and provide transparency to consumers.

“Airline pilots don’t use paper charts and maps, and accountants don’t use adding machines today, but despite a majority of doctors using electronic records the system remains highly fragmented,” Jones said.

To complicate matters, Jones said healthcare is unique because it buys almost – supplies, services, IT, energy, etc. – to group purchasing organizations who promise to reduce system costs. He said the GPOs negotiate the cost of everything for their hospital clients from hospital gowns to energy. The hospital then tries to add value to those items and resells them to patients at a higher cost.

Each hospital’s costs are different and there is no consistent way to know what those costs are. He said disruptors in healthcare have a hard sell because they can’t just sell their service or device directly to the hospital. They have to first sell to the GPO, whose job is to get the lowest possible price often by bundling the buying. By nature, he said GPO’s are not necessarily interested in technology to make hospitals run efficiently, especially if that means they will need less supplies or services in the future.

Jones said when Uber and Lyft got into the taxi business they didn’t have to negotiate with Ford and Chevy to do so. The added level of GPOs makes it harder for the healthcare industry to be disrupted.

LACK OF TRANSPARENCY
The cost of treating various diseases varies widely in part because of the lack of transparency and reference pricing needed to keep costs in control, Jones said. For example, he said the cost for a CT scan was $343 in one hospital and $2,283 for the exact same test in another hospital.

“That sounds crazy right, but it’s virtually impossible for consumers to find out what their insurance companies pay doctors and hospitals for procedures, despite that 69% of consumers are in favor of knowing,” Jones said. “Also most hospitals do give cash discounts, but they don’t tell that to patients, who are seeing the highest deductibles in history.”

“Imagine if the costs of services were known by all and totally transparent. Consumers could shop around and have better control of the costs. The system simply doesn’t allow it,” he added. “If I want to watch a movie, I can use NetFlix, RedBox, Fandango or some other service but I know what each option costs. Shouldn’t we have that same opportunity with healthcare.”

The lack of price transparency and interoperability from facility to facility is a big reason why costs continue to increase at a time when other industries have been able to use technology to keep prices in check, according to Jones.

RISING COSTS
The Bureau of Economic Analysis recently released data detailing how much the U.S. spends to treat different diseases and medical conditions. The top three spending disease categories in 2013 were: symptoms, including check-ups, and some preventative services; circulatory; and musculoskeletal. These were also the top three spending categories in 2012.

The symptoms category, which also includes allergies and flu-like symptoms, topped growth in spending by increasing $13.5 billion between 2012 and 2013. That was followed by the musculoskeletal category at $7.9 billion in growth. Circulatory spending came in at $240 million.

The cost of treating digestive conditions, such as abdominal hernia and appendicitis, grew at the fastest pace in 2013, increasing at 6.9%, or 1% faster than average rate logged from 2000 to 2012. The price of treating mental illness grew at the slowest pace, rising just 0.5% in 2013, 2% slower than the average rate from 2000-2012.

The Kaiser Family Foundation recently reported health insurance premiums for consumers shopping on the ObamaCare marketplaces sites rose an average of 25% for 2017.

DISRUPTIVE TECHNOLOGY
Jones said information is power and patients need more when it comes to their healthcare. He believes transparency will come as new technologies seek to disrupt the system. He said the four biggest areas of potential disruption are:
• Artificial intelligence with hospitals using IBM Watson in certain applications;
• Immunotherapies that might use a mutated flu virus mutate it to hunt down and eradicate cancer cells;
• Genetic editing is also being explored, but primarily for agriculture use; and
• 3D printing applications for organ and tissue repair is emerging.

“Replicating an organ or system prior to surgery so that doctors can map out the procedure and perfect it is a great use of this technology. I have seen it and the 3D organs looks incredibly real in every way,” Jones said.