Take a look at this well-known graph, tracking inflation across different sectors in recent decades. Healthcare prices have increased considerably, but sectors dealing in technology and consumer goods have hardly experienced inflation – or have seen tumbling prices.
The accepted explanation for this divergence, observed in many countries, is Baumol’s cost disease. Productivity gains in service sectors are more limited than those in capital-intensive industries. Reducing the cost of producing cars or televisions is easy, but suturing a wound or wrapping a bandage will always take the same amount of time, whether the year is 1950 or 2050. Unless we want an exodus of doctors and nurses, their wages must increase in line with those of more productive sectors, even as their output stays constant. Therefore, healthcare prices inexorably rise over time.
Some have long suspected that this conclusion is too fatalistic about the prospects for innovation in healthcare. After all, it’s one of the most tightly-regulated sectors, typically financed and run by the government.
Dr Nima Sanandaji agrees in his new book, The Henry Fords of Healthcare… Lessons the West Can Learn from the East, published this week by the Institute of Economic Affairs. In this pithy monograph, Dr Sanandaji explores how private firms in emerging economies have seemingly reduced healthcare costs to a fraction of those in the developed world.
Such entrepreneurs have developed hyper-specialised mega-hospitals which benefit from economies of scale. Their colossal size gives them negotiating power that exerts downward pressure on supply costs. This enables doctors to complete a large number of identical operations at rock-bottom cost.
Surgeons specialise in particular procedures within operations. They only enter the operating theatre for their most complex parts. Nurses complete easier tasks while the surgeons move from theatre to theatre. Furthermore, patients’ families are exam-trained in aftercare from home, minimising hospital stays. Patients often complete initial consultations online.
Using the profits that they generate from discretionary spending by wealthier clients, many of these firms cover the expenses of those who otherwise could not afford their prices. They also reinvest their profits to build more hospitals.
Take Narayana Health, which operates twenty-four hospitals in India, including a “health city” in Bangalore of nine differently-specialised medical centres. A Narayana heart bypass costs $2,000, a third of its average cost in the country and less than 2 per cent of its cost in America.
Allegedly, Narayana’s prices compromise neither quality nor access. Its outcomes are believed to rival, if not beat, those attained by western hospitals. Already helped by generous micro-insurance and flexible payment schemes, most of its patients reportedly receive free or subsidised care. Compassion seems to run through the firm’s leadership.
In 2009, The Wall Street Journal praised Narayana’s founder, Dr Devi Shetty, as the “Henry Ford of heart surgery”. Ford specialised manufacturing to mass-produce automobiles for America’s middle class in the early 19th century. Now Dr Shetty is specialising healthcare to provide high-quality, low-cost treatments for India’s poor.
As Dr Sanandaji explains, pioneers like Dr Shetty appear to have repeated similar successes in China, the Americas and the Middle East. Their common thread is the inspiration from productive processes in industries like fast food and manufacturing.
This healthcare model is worlds away from the west’s, which champions conventional practices and general hospitals. Yet Britain ranks next to eastern European countries for healthcare outcomes. Its sick are stuck on long waiting lists for even mundane appointments. Innovations are few and far between. Political incentives render throwing money at healthcare more expedient than finding ways to make that money travel further. Scarred by previous botched attempts, the system resists disruptive technologies and reorganisations.
So Dr Sanandaji argues that the apparent success of the entrepreneurs in the east is worth investigating.
He suggests that the NHS could offer to pay patients to complete procedures abroad through JCI-accredited hospitals of comparable quality and patient safety. This would save the taxpayer money and shorten the waiting lists for those who would prefer to wait in Britain. More hospitals specialised in non-urgent procedures for patients able to travel, like Moorfields Eye Hospital in London, could complement better-defined assembly lines of patient care, reducing costs and speeding up treatment times. Just as Narayana has established a subsidiary low-cost health city in the Cayman Islands, an hour’s flight from Miami, so too could the Crown Dependencies relieve Britain’s overburdened system.
These proposals would not compromise the NHS’s universal free coverage. But they might save lives as well as money.
Dr Sanandaji is keen to point out that the literature on healthcare innovation remains unbelievably patchy. Narayana’s story sounds almost too good to be true. Much more research and independent verification are needed before we should seriously contemplate any policy conclusions. Indeed, this is something that shines through the book’s eclectic range of sources.
Nor should we should forget the trade-offs involved in specialisation. It may be unfeasible for uncommon operations, those needing a comprehensive set of treatments and patients less able to travel. Centralisation accompanies fears of psychologically and financially excluding those living further away from hospitals. Mental health and urgent care should almost certainly be exempted. Furthermore, particular conditions faced by emerging economies, including low labour costs, may limit how far the east’s successes can be replicated in the west.
As Dr Sanandaji accepts, there is also the long shadow of political feasibility. Public Health England aside, there is no appetite for another top-down reorganisation of the NHS. And to offer patients free treatments overseas would be a humiliating admission of the shortcomings of Britain’s healthcare system.
But Dr Sanandaji’s case injects welcome optimism in a debate that sorely lacks it. The Henry Fords of Healthcare calls us to use lessons from the east to revisit our assumptions of how western healthcare is not only delivered – but also perceived.
That is Dr Sanandaji’s most testing point. His readers will be shocked to find that Narayana’s doctors receive daily texts on the profits and losses their hospital made the previous day. They are trained to think managerially and economically. As one visiting Brit remarked, that is crucial to the firm’s success in keeping costs low and both quality and quantity high.
Even the book’s audacious title – likening patients to Ford cars on the assembly line – challenges the mysticism that excuses healthcare from commercialised thinking, whatever the lessons that public healthcare could learn from successful private and not-for-profit enterprises.
If Dr Sanandaji is right, Baumol’s cost disease may not be inescapable. Instead, it might be the result of our lazy inertia, stuck with healthcare systems that neither produce nor imitate life-saving innovations. In the search for solutions, Dr Sanandaji’s book brings us right back to the founding of economics and Adam Smith’s lessons on specialisation and the division of labour.