Health care costs are astronomical, and they continue to rise. And everyone seems to have a different theory as to why that’s the case. Ask any health care leader and you’ll hear a variety of responses about the driver of high and rising costs.
“It’s the high cost of medications.”
“It’s the fee-for-service payment system.”
“It’s because we don’t hold consumers accountable for their health choices.”
“It’s because of the Medical Loss Ratio.”
“It’s because of overutilization.”
The problem with this line of thinking is it applies a modular perspective to an interdependent problem. In a system as complex as US health care, one component of the ecosystem can’t be responsible for all of the negative outcomes. Perhaps this is why we’ve struggled to solve the cost conundrum. Many valiant efforts to reduce costs have failed because they focus on one of the trees instead of backing up to see the forest.
Seeing the forest: The role of Modularity Theory
Modularity Theory explains that a system’s architecture determines its components and systems and defines how they must interact—fit and work together—in order to achieve desired outcomes.
The place where any two subsystems fit together is called an interface. A system’s architecture is interdependent at the interface if one part can’t be made independently of the other. Therefore, the way one part is designed and made depends on the way the other is designed and made. Unpredictable interdependencies require the same person, team, or organization to simultaneously develop both components for the whole system to work.
In contrast, a modular interface is one in which there are no unpredictable interdependencies between subsystems, people, teams, or organizations. Modular components and subsystems fit and work together in well-understood and highly-defined ways. A modular system architecture specifies the fit and function of all elements so completely that it doesn’t matter who makes the components or subsystems, as long as they meet specifications.
So, to the extent that interfaces are specifiable, verifiable, and predictable, they are modular. Systems that rely on modular interfaces allow people in separate teams or organizations to do their work with little to no effort spent on coordination.
Modularity in health care
This concept applies to our US health care ecosystem. We treat the various parts: care delivery, health insurance, pharmacy, etc. like modules. Unfortunately, while they function separately to a large degree, they aren’t by definition “modular” because interfaces are not fully specifiable, verifiable, and predictable.
The component parts of health care (care delivery, insurance, pharmacy, etc.) require extensive effort to coordinate the connections between each component. This doesn’t match the characteristic of a modular architecture where little to no effort is spent on coordination. Anyone who has tried to get two of their doctors who work for different organizations to share medical records understands this concept. Extensive coordination is required.
Therefore, components of the health care ecosystem are at least, to some degree, unpredictably interdependent. The way one individual’s health insurance plan will interact with their chosen pharmacy and their chosen physician is different from the way someone else’s plan will interact with their chosen pharmacy and physician. Significant coordination is required for interfaces between various components to occur. So, while there are some standards in place to make the interfaces between these components functional, they are by no means standardized in a way that would allow them to function reliably, without any unpredictable interdependencies.
As a result, our health care system is at least partially interdependent. But when it comes to solving our cost problem, we are treating it like it’s completely modular. That’s not a winning strategy.
Taking a holistic approach to solving health care cost inflation
Backing up and taking a different perspective that looks at the entirety of the health care system, as opposed to its component parts, is required to reduce and reverse health care inflation. That’s because the problem is systemic. And systemic problems require systemic solutions.
High and rising health care costs are a result of the system that perpetuates them: a four-party value network that doesn’t follow the traditional rules of supply and demand. The four parties include insurers, sponsors (i.e., employers and governments), providers, and individuals (a.k.a., consumers, patients, beneficiaries, members).
To course-correct, we need a two-part solution rooted in the system that created the cost inflation problem. We need 1) an innovative business model and 2) a new value network to support it. While the new value network wouldn’t necessarily require different players than those in today’s network, through business model innovation, the way they interact and interface with one another would become more standardized, predictable, and verifiable.
In our upcoming report, Zero-inflation health care: A national strategy for unlocking and scaling insurance innovation, we reveal a blueprint for how to make this solution a reality.
