A federal judge’s recent ruling that elements of the health care bill are unconstitutional has heightened the health care debate.  Republicans, feeling their oats and perceiving a mandate are threatening to repeal the Patient Protection and Affordable Care Act.

It was only after my friend and colleague Dr. Bala Chandrasekhar explained most of the information in this post to me that I first came to understand the fundamental problem.  Our medical community suffers from perverse incentives. The system does not reward results; it rewards the extension of care.

In the world’s best hospitals, such as the Mayo Clinic, physicians collaborate, in a finite space, where information is shared and decisions are made. In the overwhelming majority of cases, patients are shuttled around, from general practitioners, to specialist, and from one laboratory to the next.  Information about the patient’s medical history is rarely shared, an approach that does not support the best medical outcome for patients.

The advent of electronic medical records and new rules governing payments is the impetus to consolidation in a business so unsophisticated, that many medical files and prescriptions are managed with a piece of paper, pen and fax machine.  The institution of medicine needs to undergo radical change, and the prospects of larger organizations managing our care means that the stakes are getting higher.

Unlike professionally managed businesses, there are massive variations in best practices in medical groups.  Physicians hate oversight, and we pay the price in an estimated 100,000 people a year dying in U.S. hospitals from pure negligence (errors).

It is intuitive to all of us that raising medical care costs are unsustainable, yet the numbers are daunting.  The convergence of an aging populace and exponential health care inflation will double Medicare costs within a decade.  By 2020, Medicare and Medicaid are projected to increase from 21% to over 30% of federal spending (non-interest payments), and that doesn’t include massive spending by state and local governments. Proponents argue that we have the best medical care in the world; but at what cost? A knee replacement that costs upward of $40,000 in the U.S., costs $5,000 in Germany. We all want the best health care, but at some point common sense must prevail.

According to the bipartisan congressional report -Restoring America’s Future, “slowing the growth of health spending is realistic. Other advanced countries have substantially lower health spending as a share of GDP, while still achieving measures of access and quality that often exceed those in the United States. Although a uniquely American approach is required, these comparisons show what is achievable.” Health care reform focuses on capping costs for doctors and reforming various forms of insurance coverage (including universal coverage). It does little to reform the underlying behavioral issues that are driving up health care costs.  The fee for service model is dated and irrelevant.

If these costs are not constrained, our fiscal mess will get much worse, and our businesses and personal wealth will be drained by massive tax increases.  Small business owners, who bear the brunt of a bloated health care bureaucracy in the form of inflated health insurance premiums must advocate for more meaningful reforms.  Our economic future depends on it.

Fighting off Commoditization

The authors of a recent HBR article (How to Stop Customers from Fixating on Price by, Bertini and Wathieu) reached a rather shocking conclusion; “the best tool for getting people to see beyond price may be the price itself”. 

Most executives I run across complain about the bloodletting occurring in almost every industry.  Buyers have become skeptical that there is any distinguishable difference between the vendors who serve them in terms of quality, service and price.

The fastest way to grab the attention of the buyer is to price radically. This requires that you either have a service model that allows you to provide the lowest cost, or one that is dramatically higher. It may be counter-intuitive, but the highest price products attract the most attention.

When comparing like products, we are instantly drawn to the most expensive models (even if we do not intend to buy them) so that we can benchmark why they are better than the others.  In other words, we naturally perceive a higher price product as superior. If you were shopping for a watch and looked at one with diamonds that was $2,000; you would assume it to be a better time piece than one that is $500, even if there was no distinguishable difference in its functionality.

While we always advocate for bundling, the customer must perceive a value in the incremental features in the bundle, or they will not be willing to pay for it. If a provider is in a rush to discount, they desensitize the customer to the very benefits that they are touting.  If your service is priced 20% higher because you only used licensed or certified professionals, and you then provide them at the same cost, you have diluted the perceived value of the certification (which you probably paid handsomely for in the first place).

Perhaps the most innovative pricing response to hyper-competition is to restructure your pricing model so that it is completely alien to the market place. Bertina and Watheiu point out Norwhich Union, a U.K. insurance carrier who charges car insurance premiums by “miles driven” instead of annual premiums, providing a significant point of difference to traditional pricing models.  This is clearly more clever than appliance makers offering one model number at Costco and another at Best Buy as if we are too dumb to tell the difference. To create a new pricing model requires enough differentiation that the customer can distinguish more value in the way that they use the service. Pay as you go is a more efficient application of resources (which is the premise of cloud computing-using only the computer resources and memory you actually need). I am not saying pay as you go is better, I am saying it is different and therefore not comparable.

How can you position your pricing to be completely counter to the marketplace?