NCPA - National Center for Policy Analysis

A Role for Entrepreneurs

November 29, 2012

In many industries operating in the private sphere, the concept of "frugal innovation" is touted as a necessary means through which businesses can cut down on costs. However, could this phenomenon be imported into the health care industry, ask Scott Gottlieb and Josh Makower of the American Enterprise Institute.

  • Frugal innovation supports advances in technology that drive down spending and improve results or leave them static.
  • Although technology (innovation) may add to costs in the near-term, empirical analysis reflects that the benefıts outweigh expenditures over time.
  • Nonetheless, several regulatory and perceptual challenges exist that entrepreneurs will have to overcome in order to execute similar effects in health care.

Not everyone is embracing innovation as a necessary tool for solving health care complexities.

  • A common claim is that greater availability of new technologies in the United States is associated with greater per capita use and higher spending.
  • New technologies diffuse faster in the United States because of easier acceptance by the medical profession, largely because of the generous fee-for-service payment system and the lack of regulatory constraints.
  • Consequently, new technologies become prone to excessive exploitation, which contributes to greater costs.
  • Accordingly, the way to curb costs is by limiting technology diffusion.

A better way to look at investment in technology is as a long-term venture.

  • In time, innovations improve to the point where they meet the needs of the majority of users and become adopted.
  • This natural process of disruption will enable building a new health care system characterized by lower costs, higher quality and greater convenience.
  • The most powerful disruptions have enabled larger populations of less-skilled people to do something in a more-convenient, less-expensive setting; this is evidenced with the personal computer, the camera, the telephone and the photocopy machine.
  • Similar effects can be witnessed within the health care system: Less-expensive professionals in less-expensive settings can be enabled to do progressively more sophisticated things.

Source: Scott Gottlieb and Josh Makower, "A Role for Entrepreneurs," American Enterprise Institute, November 19, 2012.


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