29 July 2020

What we can learn from the Henry Fords of healthcare

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During the corona epidemic, hardworking doctors, nurses and other health staff have saved the lives of millions around the world. But at the same time, the crisis has exposed great inefficiencies – coupled with chronic productivity problems – in the health sectors of European welfare states. Without reform, the way these countries fund their healthcare means that their ageing populations are in for a shock when they look at their tax bill in the coming years.

The core issue is that centrally planned healthcare systems typically hinder cost-saving innovations. This is why healthcare is often said to suffer from Baumol’s ‘cost disease’. The phenomenon, described by economists William J. Baumol and William G. Bowen in the mid-1960s, involves salaries going up without a corresponding improvement in labour productivity. This occurs in response to rising salaries in the economy as a whole, driven by jobs that do experience labour productivity growth. Since the health sector often sees no increase in efficiency, the costs of the same services grow each year as more people require them, and the wages of those providing the services increase. Thus, as the economy grows, maintaining the same level of health services becomes more expensive.

The organisational changes needed to drive costs down and at the same time increase quality and safety – such as economies of scale and high levels of specialisation – have not been implemented to a significant degree in European welfare states. Overly strict regulations, political interference and government diktats restrict the ability to adopt radical change. The focus is on controlling healthcare costs over the short term rather than increasing quality and fostering innovation.

By contrast, developing countries are not stuck in the Western model. The greater openness of health markets in countries such as India has paved the way for the ‘Henry Fords of healthcare’. These entrepreneurs show that radical innovation is possible in the sector and they are achieving substantial cost savings and productivity gains.

A good example comes from Devi Shetty – famous for operating on Mother Teresa and then serving as her personal physician. Back in 2000, Shetty founded Narayana Health, a for-profit medical centre offering cardiac surgery, cancer treatment, eye surgery and other forms of specialised health care. By focusing on a select few (often commonplace) procedures, Narayana Health is able to operate an economy of scale in a system where health providers are free to introduce efficient work organisation. This not only means more operations can be carried out, but that the cost of quality treatments has gone down.

Shetty is not alone. Similar entrepreneurial ventures have taken off in other parts of India, Thailand, Singapore, China and the UAE. In many cases these hospitals or units cooperate with insurance companies and the public sector, meaning that for-profit healthcare is readily available to the middle classes and some poorer individuals, with some clinics offering free treatment to those that need it.

The success of these places comes as no surprise, as the Middle East, India and China have a 1000-year long history of for-profit health care. In the Middle Ages, the Persian physician Avicenna was regarded as the father of medicine, and the advanced hospitals of places such as Baghdad inspired the European medical tradition. Today there is reason to again be inspired. We see that for-profit health care, organised by the core principles of efficient workflows and purpose-built facilities, is creating a health boon for millions.

The ability to work to scale and the level of specialisation achieved by Narayana Health and similar firms is partially linked to the population size and density of countries like India and China. Transferring the model wholesale into Europe might not be as viable. Yet, many of the efficiency gains relate to work organisation, and in that respect we have much to learn. The best entrepreneurs in countries like India and Thailand have created systems where doctors and nurses specialise in carrying out the same treatments each day, rapidly becoming skilled and specialised. The result is lean health care, of high quality and relatively low cost. In comparison, UK doctors become specialised over a much longer period of time, since for much of their careers they carry out multiple different treatments each day.

Millions of Westerners travel to get cardiac surgery, cancer treatment and eye surgery from Asia’s health entrepreneurs. In addition, we are gradually seeing similar development in parts of eastern and southern Europe. British tourists to Malta often combine their travel with a visit to the dentist. Croatia and numerous other eastern and central European nations have a significant inflow of international health patients.

At the same time, the prosperous welfare states of northern and western Europe continue to struggle with Baumol’s ‘cost disease’. The over-regulated and politically controlled healthcare sectors of the welfare states have problems with long waiting times, and high levels of stress among health workers. The systems are overly-bureaucratic, with considerable time wasted on reporting the same data to multiple, overlapping systems.

For decades, political decision-makers in western and northern Europe have called for leaner, more efficient health service provisions. It is time to learn from the profit-making health entrepreneurs who have made this dream come true, based on well-known market principles of streamlined workflows and specialisation. The core lesson is that health capitalism works, as long as providers are given freedom to seek profit and adapt novel work organisation. It is time to challenge the Western notion that health must be highly regulated in order to succeed.

“The Henry Fords of Healthcare,” a new IEA publication authored by Dr Sanandaji, is available here

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Nima Sanandaji is an academic and author of "The Henry Fords of Healthcare," a new IEA publication.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.