Editor’s note: This post is part of a Health Affairs Blog symposium stemming from “The New Health Care Industry: Integration, Consolidation, Competition in the Wake of the Affordable Care Act,” a conference held recently at Yale Law School’s Solomon Center for Health Law and Policy. Links to all posts in the symposium will be added to Abbe Gluck’s introductory post as they appear, and you can access a full list of symposium pieces here or by clicking on the “Yale Health Care Industry Symposium” tag at the bottom of any symposium post.

The health policy world is becoming increasingly accustomed to illuminating-cum-contradictory interdisciplinary exchanges. Most begin with dour economists, who point to ominous projections of health care spending, dwindling government and family budgets, and inadequate health outcomes. (“It’s actually worse than you think” is a common refrain.)

And then we get the industry perspective. Industry leaders—representing hospital systems, insurers, device and pharmaceutical companies, benefit managers, and others—say they recognize the national crisis and are addressing it. They then report on the enormous creativity that percolates within their large companies, how we are on the cusp of transforming the delivery system, and that innovations will soon bring value to our health care dollars. (“It’s not really that bad, and it’ll soon be good” is the general idea.)

But it is increasing apparent who is not represented in these conversations: entrants. And it is becoming increasingly costly to continue excluding them.

It is indeed reassuring to hear health care leaders recognize that sustaining business-as-usual will have dire consequences. Moreover, many of their innovative programs sound genuinely promising. But it is unrealistic to think that the institutions that have overseen the health care sector’s enormous expansion have the capacity to redirect health care dollars to more valuable uses. In most other industrial sectors, dramatic gains in technology and productivity are driven by entrants — startups, entrepreneurs, and organizations that are hardwired to capitalize on new technologies and markets.

But there is an underlying dysfunction to our health care markets that undermines meaningful confidence in any proposed innovation: Unlike virtually any other market, health care markets consistently fail to reward value. The entrant with a better mousetrap rarely gains market share against incumbents with inferior products.

In fact, the history of American health care competition reveals the opposite, that the better providers rarely gain traction and divert patients from inferior or costlier competitors. One need only look at reports in Massachusetts and elsewhere, showing that prices for health care services vary closely with market power and almost not at all with quality.

The Kaiser experience offers similar lessons. In spite of Kaiser’s ability to provide health care of higher quality and lower costs than its competitors, it has had enormous trouble expanding. Its effort to enter the North Carolina market, for example, produced a revealing autopsy: It had trouble signing up doctors, finding subscribers, and was getting regularly crowded out by hospitals. But the larger message is much more important: the health care marketplace in the United States is a market where the superior product fails.

So when industry leaders introduce innovations they claim will improve the quality and cost-effectiveness of care, we lament that these initiatives are unlikely to be tested meaningfully by market forces. Their market success is more likely to be a function of the market power of the party introducing it, not the value it brings to consumers with limited budgets.

Worse, entrants see the enormous difficulty of challenging health care incumbents and that the health care marketplace rarely rewards value. Would-be entrants—start-ups, entrepreneurs, software engineers—are more likely to direct their talents at improving other markets.

Policy Responses

What is there to do when market forces fail so sweepingly?

To be sure, antitrust policy is part of the solution. Antitrust enforcement, by vigorously scrutinizing horizontal mergers among providers, can preclude more anticompetitive consolidation. It can also aim to protect existing competition in local markets by scrutinizing vertical integrations that, even if they do have some efficiencies, prevent entry and enshrine the current market structure.

Payment reform is part of the solution as well. Payments to providers, especially from the Centers for Medicare and Medicaid Services (CMS), must reward value and encourage efficient use of health care dollars. There are meaningful opportunities to think creatively about how to measure quality, bundle payments and services, and devise new payment models. But payment reform must think beyond strategies that might induce incumbents towards more efficient and effective care. It must also be sufficiently open so new providers, insurers, and intermediaries can capitalize on the incentives to create value.

Yet antitrust policy and payment reform—well-known and oft-invoked policy prescriptions—are not sufficient. The policy reform discussion must extend beyond prohibitions from regulators and prescriptions from CMS (i.e., beyond “you can’t do that” and “you have to do this”). Ultimately it requires market reforms. We have to be sure that, one way or another, the better mousetrap is the one that wins the marketplace.

Pursuing policies that reach past the traditional levers of payment reform, structural regulation, and antitrust policy means thinking from the bottom-up. It means establishing a regulatory and market structure that allows good ideas to get introduced, gain traction, and receive fair consumer scrutiny. It also means we need to think a little bit more creatively than we have been.

Here are some preliminary ideas. In regulating insurance, we need to seek ways to facilitate the introduction of new business models. To be sure, we should scrutinize network adequacy, actuarial requirements, and other regulations that preclude new entrants into insurance markets. But above all, we should ask why the transaction costs of administering payments to providers approach 30 percent (overhead consumes approximately 15 percent on the insurance side and 15 percent on the provider side), whereas the credit card industry issues payments at less than 5 percent.

In regulating providers, we need to expand our focus beyond physicians and hospitals, and even expand our focus beyond the delivery of health care towards all the inputs that contribute to good health. How can we think creatively about establishing new kinds of networks, including those that transcend local geographic markets that are often dominated by monopolists? How can we support healthy behaviors? What roles can non-medical personnel, such as social workers and educators, play in reducing health care costs?

And, given the potential of new information technologies, how can we regulate and facilitate the use of digital technologies to create new options for patients and consumers? How might information networks and handheld devices aid disease management, empower consumer decisions, track behaviors? How can big data revolutionize the way consumers evaluate providers and how insurers and other intermediaries direct patients towards efficient and effective care?

These questions extend beyond the traditional domains of the Federal Trade Commission, CMS, and state insurance regulators. They implicate FDA regulations, the broader part of our state-based professional licensure regime, our federal-state hybrid regulation of insurance, and assorted other federal and state regulatory bodies. The challenge is to view the marketplace not from the perspective of current regulators or incumbent providers, but from the perspective of the entrant.

Keeping The Door Open

It is difficult to manage a conversation with participants who have not yet identified themselves. That difficulty is magnified for conversations on health policy since so few entrants break into the market. But not-yet-identified entrants are certain to be part of any meaningful improvement to the cost-effective delivery of health care in the United States. We need to make sure that the next Bill Gates or Steve Jobs, wherever that innovator comes from, finds the health care market open to new and valuable ideas.

This commitment to entry necessarily entails sustaining a healthy skepticism of incumbents and the new initiatives that emerge from market leaders. Although it is important to recognize that many individuals in these leading institutions possess both a deep commitment to improving health care and a particular genius in pushing scientific frontiers, we also must recognize the intractable limitations of their incumbent organizations. Meaningful change will come from the outside, and the policy community must make sure those changes can flourish.