by Vijay Govindarajan and Ravi Ramamurti | 9:00 AM October 29, 2013
Article link
Technological improvements in health care have given us the quality of life we enjoy today. But chronic conditions, end-of-life care, and an aging society will bankrupt the United States if it doesn’t make dramatic changes to its health care system. America — and many other countries — need an audacious goal to get off the unsustainable path.
What if the United States set itself the goal of cutting healthcare costs in half — without sacrificing quality, and in about a decade?
Sound undoable? In “Delivering World-Class Health Care, Affordably,” we argued that some Indian hospitals are delivering high-quality care at 5% to 10% of U.S. prices. Of course, the United States is not India, so its costs will always be higher. But even with all the constraints, cutting U.S. healthcare costs in half is not preposterous. After all, it’s been done in other industries, sometimes in less time (think computers or consumer electronics).
Or take the example of autos. When Karl Benz introduced the Mercedes Benz in 1876, each car was handmade from start to finish. Every customer was assumed to be unique and so was every car. Making autos was a craft, and very few people were skilled enough to put one together. Buyers visited the Benz factory and stayed for a week to test drive the car and fix any bugs before taking delivery. The net result: The craft approach produced only a few automobiles at extremely high cost for the very rich.
Enter Henry Ford, who revolutionized the industry with his manufacturing innovations, lowering the price of cars from $2,000 in 1908 to just $260 by 1925 — an 87% reduction! He didn’t do it by making cars shoddier or offshoring production to low-wage countries. His secret was mass production in a “focused factory,” using interchangeable parts, specialization, and the assembly line. (See this HBR article on attempts to apply the focused factory concept to health care.) By making only one type of car (Model T) in volume, he cut unit costs dramatically. Ford shifted the auto industry from craft to mass production, and the Japanese later took it a step further to lean production. At each step, costs fell sharply yet quality improved.
If we go back a hundred years, medicine had to be practiced in a craft mode since each patient was unique and our ability to diagnose diseases and treat them was rather limited. Knowledge and technology have advanced at a such a rapid pace that today that quite a number of medical conditions can be treated using a “process” approach. Yet, too much of U.S. health care is stuck in the craft mode. It is producing a Rolls Royce for each patient! Why can’t U.S. health care go vastly farther in streamlining operations, standardizing protocols, and rationalizing facilities to create focused hospitals for heart surgery, hernia repairs, cataract surgery, hip and knee replacements, organ transplants, or even cancer treatment — anything that’s not an emergency procedure and can be scheduled in advance?
Many U.S. health care providers are going down this road (see “Fixing Health Care on the Frontlines”). But the most innovative Indian hospitals are doing much more. Narayana Health in Bangalore, India, uses the focused-factory approach to perform open-heart surgeries for $3,000, versus $75,000 to $150,000 in the United States. The total number of open-heart surgeries performed in the United States is about 550,000 — six times India’s — but this volume is spread across too many hospitals. The same can be said of other procedures that might lend themselves to mass or lean production.
Aravind Eye Care in Madurai, India, performs cataract surgery in assembly-line fashion. Doctors focus their time on diagnosis and the most intricate aspects of surgery, while less-skilled paramedics take care of everything else. Care Hospitals in Hyderabad performs angioplasties with remarkable efficiency and efficacy. Lifespring focuses on uncomplicated maternity care for the urban poor. HCG Oncology performs advanced diagnoses and procedures in its Bangalore “center of excellence,” while its spoke facilities provide radiation and chemotherapy treatments. Onco-pathologists and medical physicists, who are scarce in India, sit in Bangalore and provide services remotely, using telecommunication links to patients at spoke hospitals. (See this HBR article on how to redesign knowledge work, including health care.)
Changing U.S. health care to achieve a 50% cost reduction will require patients, providers, insurers, and others to make major adjustments. But such changes happen routinely in other industries. With costs spiraling out of control, the day has come when the same must happen in health care.
Follow the Leading Health Care Innovation insight center on Twitter @HBRhealth. E-mail us at healtheditors@hbr.org, and sign up to receive updates here.
Vijay Govindarajan
Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth. He is coauthor of Reverse Innovation (HBR Press, April 2012).
Ravi Ramamurti
Ravi Ramamurti is D’Amore-McKim Distinguished Professor of International Business and Strategy, and Director of the Center for Emerging Markets at Northeastern University
healthcarereimagined 