Today’s Managing Health Care Costs Number is $25
Nicholas Kristof reported in Sunday’s New York Times on Dr Sanduk Ruit, an ophthalmologist in Nepal who has cured blindness by removing cataracts in about 120,00 Nepalis. The operation takes 5 minutes, the lens he inserts costs a mere $3 to manufacture, and the total cost of the operation is about $25. (Note that based on Purchasing Power Parity, this is the equivalent of about $117 in the US)
In the United States, it’s pretty hard to even find out how much cataract surgery would cost. Even the Centers for Medicare and Medicaid Services says
For surgeries or procedures, it's difficult to know the exact costs in advance because no one knows exactly what services you'll need.
Medicare professional fees for cataract removal are about $1000, and they have come down substantially in the recent years. Total allowable fees for cataracts done on non-Medicare beneficiaries are probably over $3000.
Cataract surgery is readily available to patients who need it in the US, because those over 65 almost always are eligible for Medicare which covers the procedure.
Why can’t we have $25 cataract surgery in the US?
1. Cost of living is higher – so all staff are better paid, and real estate in medical areas in the US is much more expensive than for Dr. Ruit’s operatory
2. We are far richer than Nepalese. Our GDP is over $53,000 per person; in Nepal this is $694. Those who are poorer are far more price sensitive – so prices must be much lower in developing countries
3. US ophthalmologists use expensive machinery and operate in facilities which are equipped for a wide range of contingencies. Some ophthalmologists in the US use even more expensive lasers that CMS doesn’t cover – and charge Medicare beneficiaries extra fees.
4. Companies that manufacture lenses for use in the US must gain FDA approval. That can cost millions – which is reflected in the price.
5. Insurance coverage decreases consumer price sensitivity, making it easier to charge higher prices.
We don’t need to have cataract surgery for just $25 – but getting excellent outcomes for far lower prices could help us tame our health care inflation. Ruit’s new (simple) procedure and his inexpensive lenses are a disruptive innovation compared to existing technology used for cataract removal – why won’t hospitals and ophthalmologists who are getting a fixed fee move to this technology?
· Ophthalmologists are doing quite well with the current system, thank you. Their average incomes are high; they see relatively few off-hour emergencies, and they are comfortable in the current ecosystem. Ophthalmologists are beloved users of ambulatory surgical facilities, and they are wooed by salespeople from laser and lens manufacturers. Their patients are grateful that they have regained the ability to see
· Patients do not demand lower prices (since someone else is paying).
· The regulatory hurdle for the cheaper lens is real - but a lens that cost $30 instead of $200 would still help make cataract surgery more affordable in the US. However, the existing companies which manufacture lenses have already built the infrastructure to gain regulatory approval, manufacture lenses, and sell and distribute them. These companies are not likely interested in introducing lenses that cost 85% less.
Incumbents virtually never embrace disruptive innovation – which is instead brought forward by new companies which operate outside of the old system. But it’s difficult to start a new entity that operates outside of the existing system. There are regulatory hurdles and patients rarely have robust information on price or outcomes that would lead them to choose a disruptive innovation. Price sensitivity helps nurture disruptive innovation – but insurance coverage limits patient price sensitivity. Capital needs to become a new entrant in health care rule out the smallest and potentially most innovative new entrants.
I believe that the environment continues to improve for disruptive innovation. The growth of high deductible health plans has increased price sensitivity, and cloud services decreases capital requirements for new entrants. Transparency on prices is improving, too. But I would not hold my breath for cataract surgery that costs under $125!
