GUEST VIEW: The healthcare industry is sick: But can it afford to get better?

Dr. Kathleen Iacocca, professor, Villanova University School of Business

by Dr. Kathleen Iacocca

Right now, President Trump and lawmakers in Washington are wrangling over the details of a proposed healthcare law that would “repeal and replace” Obamacare. Through all of the rhetoric and political jockeying, it’s important to remember that there is a huge industry in the middle of this fight. And that industry is in crisis.

In many of the proposals being debated in Washington, little is being done to help control pricing. Prices in the healthcare industry are out of control and the system is going to crack if we cannot find a way to fix it. 

The industry faced a substantial amount of stress in the last year and 2017 doesn’t seem to be taking any pressure off.  In 2016, “the great exodus” began as a number of insurers, including Humana, Aetna, and Wellmark Blue Cross Blue Shield, pulled out of the Affordable Care Act’s exchange market.

Mylan made headlines in the fall when they drastically increased the price of their Epipen allergy medication. Valeant Pharmaceuticals and Turing Pharmaceuticals had similarly drastic price increases, leading to a federal investigation and harsh criticisms.  Finally, we heard about Americans struggling to afford the higher insurance premiums and deductibles that began with the New Year. 

The industry faces even more pressure when you consider what expectations are placed on the major players: patients want blockbuster drugs from the drug manufactures, and innovative procedures that are affordable with the help of their insurer.

The result is that we are surviving in a very unstable system where the increasing costs cannot be absorbed. Indeed, the private companies in this supply chain cannot bear the increased cost, nor can the American people, or our government. But while we should be finding a way to work collaboratively on a solution, we are busy trying to vilify various players of this industry. 

The truth is, there isn’t’ a “villain” that is responsible to the increased costs that we are now observing.  Insurers are not necessarily raising your premium and deductible to line their pockets; just look at the climate they are facing.  

We are in a time where baby boomers are aging and people are living longer. Along with that comes more health issues and more prescription drug consumption – especially specialty drugs. Insurers are now facing increased costs to cover more procedures and prescription drugs, and an increasing older population. These factors and many others contribute to rising costs.

Drug manufacturers are not all bad either, despite being criticized by some media outlets and politicians. Innovation in the drug industry continues to soar as more blockbuster drugs become available for patients. Drug manufacturers, like any other for-profit company need motivation to remain innovative and frankly, revenue is the main way to do that. With the exception of a few manufacturers who raised their prices exceptionally high (we all know who they are), most manufacturers stay within the same price increases year to year. 

The problems of our healthcare system lie in its complexity and an intentional shroud of mystery. 

Information sharing is lacking because each player’s objective is to maximize their own profits.  For example, does anyone know exactly how a drug price is set?  We’ve heard all of the claims before: prices cover the cost of failed drugs too, prices reflect competition in the market, demand, value, etc.  However, studies on prices show that most of this is not true.  

Managing the costs in the healthcare industry is possible. It will first require separate for-profit entities to collaborate and break down the shroud of secrecy that our payment system is used to. Supply chain collaboration – where individual companies act of one – have been shown to improve all players involved. 

That means that everyone can come out happy. Rather than trying to pass the costs along to someone in the system we should share information, simplify the system and work together.  This doesn’t mean Capitol Hill can or should do this. On the contrary. It means that we need all major players in the industry involved and working together.

Drug manufacturers, wholesalers, pharmacies, and insurance companies are just some of the entities that should be involved in finding a true market solution.  The industry has to change itself to avoid Washington interference and all of those impacted need to be equally involved.  

Dr. Kathleen Iacocca is a Professor of Management & Operations at Villanova University School of Business. She specializes in healthcare industry business analytics, operations management and supply chain management.