Normally this blog takes a news item or pricing concept and explains it. This time we’re going to use a pricing concept to propose a “fix” to the health care system in the U.S. Be sure to read to the end to get the pricing lesson.
The price of health care is out of control. It is growing much faster than inflation. There are many reasons for this, including that the patient doesn’t pay directly for services, which confounds normal market dynamics, and doctors practice defensive medicine for fear of being sued. Another big reason is innovation. This article discusses innovation.
The cost of developing new drugs, products, or procedures is exorbitant, and companies rightly charge very high prices to maximize their profits and increase the chance they cover their development costs for both winners and losers. But who should pay for these new products? If you get sick, how much should your insurance company (or the government) have to pay to help you? What if there is a new pill that costs a trillion dollars to make, but it will save your life? Is the insurance company obligated to buy it for you? If they are, then they will go out of business instantly and won’t be able to offer insurance to anyone else.
Obviously, insurance companies (and the government with Medicare and Medicaid) only cover certain treatments. And yet, drug companies continue to develop new treatments. Partially due to the cost of development, they only develop drugs which they believe will have a huge return, to mitigate the high costs and the risks of failure. And they charge high prices because they can. They have a patent. All is right with the world of innovation, except that our health care costs keep going up.
Back to the opening question. How was your health care in 1994? The patents on every product and procedure used in 1994 is now expired. This means competitors are allowed to copy these. Competition drives down prices. It is likely that if we had 1994 health care today in 2011, with no innovations in the interim, the cost of providing that health care would have decreased dramatically by now. Think about that for a second. It would cost less to pay for insurance today than it did in 1994. Wow.
Of course we don’t want firms to stop innovating. So instead, we have companies continuing to innovate (thankfully) and finding ways to get insurance companies and governments to pay their patent protected prices for often marginally better products.
The solution – An insurance company should offer IP Free Health Insurance. IP stands for Intellectual Property and in this case really means patents. IP Free insurance only covers products and procedures where there is no patent. When there is no patent, multiple firms compete and prices go down. So IP Free insurance will likely cost significantly less than other insurance plans.
IP Free insurance would include products and services where patents have expired (everything patented 1994 and earlier), where companies release their patents to the public domain, and where companies simply choose not to patent certain capabilities.
Think about it. 17 years ago was 1994. Was health care bad back then? Sure there have been advances, and many of us are willing to pay more to have access to them, but a very low cost health insurance plan can offer affordable health care to a much larger portion of the population. This also solves the problem of deciding which treatments get covered and which ones don’t.
As the pool of people insured under IP Free insurance grow to a huge number, companies with new innovations will have more incentives to abandon their patents and make the technology available to competitors, just so they can sell to the masses.
What does this have to do with pricing? This idea popped into my head while I was thinking about price segmentation, specifically versioning. All markets have segments of people willing to pay more and others that are only willing to pay less. How can an insurance company create versions of their products to attract the most price sensitive markets?
You may like the idea, you may hate it. That’s OK. The lesson to learn relative to pricing is that by focusing on our market segments we can find new and interesting ways to segment existing markets.
Finally, please do us both a favor. Forward this to a friend. If everyone asks for IP Free insurance, we just may get it. This just seems … pragmatic.
Mark Stiving, Ph.D.