Welcome to A Second Opinion podcast, where we are rethinking American health. I’m your host, Senator Bill Frist. To make sense of all the dynamic perspectives in healthcare, you need a trusted source engaging at the intersection of policy, medicine, and innovation. You need A Second Opinion, a podcast where it all comes together.
This our fourth and final episode of a special four part series where we share insights and predictions from our nation’s leading healthcare economist. Today, I’m joined by Dr. Craig Garthwaite, an applied microeconomist who is the Herman R. Smith research professor in hospital and health service, and director of the program on healthcare at the Kellogg School of Management. Professor Garthwaite’s research examines the effects of government policies and social phenomenon, with a focus on health and biopharmaceutical sectors. You will love his thoughts and his insights on the trade offs necessary to reduce drug prices, how US drug spending drives global innovation, and why presidential candidate Bernie Sanders’ healthcare proposal is not actually Medicare for all. Now, please join me and our guest for A Second Opinion.
Bill Frist: Medicare for all, it’s part of the political narrative now for the upcoming elections, and will be, probably, some shape or form, it’ll be part of the political narrative for the next four to five years, maybe even longer than that. It means different things to different people, but when people say Medicare for all, what does it mean to you?
Craig Garthwait…: I think you’re right. It really does mean different things to everyone. There’s this sort of a Rorschach test of what you think of for policy. In the end, it boils down to the greater use of regulated prices. That’s all we’re talking about in various forms, whether you want to be a Medicare buy in, so we’ll slowly get to everyone on Medicare, on Senator Sanders’ sort of fantasy land of, in four years, we’re going to entirely replace the private insurance system with a Medicare system for everyone. But it is, it’s just about getting a greater use of the government buyer to bid prices down in the market. So, if you want to evaluate, then I think that’s what you should be focusing on. How well do you think the government’s going to be able to balance the price/quality trade off that exists in healthcare?
Craig Garthwait…: Prices are equilibrium objects, right? They’re about a bunch of customers and a bunch of firms interacting again and again and trying to figure out what the right price is. If you move that artificially as the government, you create a new equilibrium and you have no real control about what that’s going to be. All these private firms are going to look at that price and try and figure out, “Okay, what’s the way that I can maximize profits in a world where you tell me I can only charge X for a heart surgery? I’ll change things about who I target, how I structure my hospital, what it means to have high quality services.” All of that will change.
Bill Frist: Yeah. Have price controls worked? Have they worked in the past at all in healthcare, or for short periods of time, or long periods of time? Is there ever a role for a price control?
Craig Garthwait…: It depends what “works” means, right? So, can we lower prices in the United States? Absolutely. That’s what we can do pretty quickly. What is the level of service that will come from that, and will the average American be okay with it? That’s less clear. The average American, when it comes to healthcare, wants almost unlimited choice and immediate service. That’s very expensive to do. Are there places where price controls can work? Yeah. I think that there are places where we have really clear market failures, and we need some type of government intervention. So, right now, we’re having this big fight about what’s called surprise billing, right? You go to the hospital. You go to the emergency room. You go to an in-network hospital. You’ve done everything as a consumer right, but the doctor you see there isn’t in your network, and there’s no way you could’ve known that. Even worse, your pathologist wasn’t in-network, and you really … No one shops for a pathologist. That’s just not something people do.
Craig Garthwait…: So, in that setting, I think the government coming in and saying, “Hey, listen. We should have people shopping on the totality of the service they think they are. So, if you go to the hospital, you’re shopping for a bundle, and it’s both the doctor and the hospital together.” The government coming in and not saying what that price needs to be, but saying you can’t come around later and be like, “Oh, by the way, the doctor you saw, that was actually out of network. So, you owe five times more than you thought you did.” So, [crosstalk 00:04:40]-
Bill Frist: So, is a bundled approach … Where do you fall philosophically? Is a bundling a good way of taking care of the macro problem, but letting it be micromanaged at the local level?
Craig Garthwait…: I think that’s the way to do it. I think what the bundle does is it … It is a very much a market based response, but it’s setting the rules of the market. So, the customer’s going to shop for a hospital service. You’ve got to sell them, as a hospital, the entirety of that service. It’s then your job as the hospital to go hire people, either by contract or actually hiring them as employees to provide that service. So, the market’s going to exist in the negotiation between the hospital and the physician. Then, the hospital’s going to negotiate with the insurer. Having the patient effectively navigate those waters, we have questions about whether patients can shop in healthcare efficiently. I’m probably, I’m more pro they have the ability to shop than other people are, but the idea that I need to shop for my pathologist or my anesthesiologist or my ER doc when I have a true emergency, that seems beyond the sort of scope of what we can expect consumers to do.
Bill Frist: Let’s go back to … just to finish off the Medicare for all. Well, here, it … So, first of all, what is Medicare? You’ve kind of defined it.
Craig Garthwait…: [crosstalk 00:05:49]-
Bill Frist: It’s not really Medicare-
Craig Garthwait…: No.
Bill Frist: … per se. You gave it a more generic definition, and so, is there … Medicare itself works pretty well today, do you think?
Craig Garthwait…: So, Medicare works generally well. There are a couple misconceptions about Medicare people don’t know. One is that if you don’t buy supplemental insurance, Medicare’s actually very bad insurance. You have unlimited liability and you’re responsible for 20% of your outpatient spending. If you’re on Medicare Part D, the way we cover prescription drugs for seniors, and you get cancer, you have almost unending liability for cancer drugs. So, that’s-
Bill Frist: If we take deductibles and co-payments up, if you take Medicare A, B, D, C, and D, it’s probably $2,500 or so.
Craig Garthwait…: Yeah.
Bill Frist: There’s no caps and there’s no vision care and there’s no dental care and there’s no long term care. So, Medicare, in and of itself, is a great program, but it’s not as comprehensive as people think.
Craig Garthwait…: Yeah. It’s an incomplete financial product, right?
Bill Frist: Yeah, yeah.
Craig Garthwait…: I mean, that’s why Senator Sanders, if you look at his bill, he’s not proposing Medicare for all. He is proposing literally the most generous health insurance plan of any developed nation for all of Americans. That’s why it costs so much money.
Bill Frist: As America is caught, the words have caught. Will America support that sort of extreme approach?
Craig Garthwait…: Well, I think it’s funny. If you look at the polling, it says, “Would you want Medicare for all?” “Yeah, I love it.” “Do you want it if it requires you to not have your private insurance?” It’s like, “Well, hold on here.”
Bill Frist: Yeah, it falls in half.
Craig Garthwait…: “I’m actually, I’m pretty happy with my private insurance.”
Bill Frist: Yeah, yeah.
Craig Garthwait…: So, that’s one thing about Medicare, is it’s not a great product financially. The other thing, though, that I think is important to know is that Medicare works well today partly because it exists in this complex ecosystem with private insurance. So, private insurance pays a lot of money for hospitals, and hospitals want to attract privately insured people. So, they give really high, or they’re willing to pay really high prices to be able to get access to those hospitals. Hospitals invest a lot in quality to attract those patients. Then, the Medicare patients sort of just come in in the backend, and they get all of the quality for a very low price. That’s not what’s going to happen if you only have Medicare rates. [crosstalk 00:07:54]-
Bill Frist: Yeah. So, I’ve heard you say Medicaid really charges or prices on the margin, and Medicare is sort of an average, and-
Craig Garthwait…: The average cost for the average hospital.
Bill Frist: Right, right. If you made average cost for the average hospital universal, there would probably be a huge dissatisfaction, if that was the only system.
Craig Garthwait…: Yeah. Well, it depends who you are, right?
Bill Frist: Yeah, yeah.
Craig Garthwait…: If you currently are going to a really nice hospital, you’re going to be pretty dissatisfied it no longer exists in the market. We have to be fair, though, and honest, and say that there’s a bunch of people who are going to below average hospitals right now. Those hospitals, those safety net hospitals who have lots of Medicaid and lots of uninsured, they could benefit from Medicare for all, because now, all of a sudden, their rates are going to get pushed up. So, there are going to be winners and losers. I just, I wish that … I know it sounds naïve to say this. I wish that politics would be just a little bit more honest about the winners and the losers here, but everything’s painted as, you’re going to get all of the access you have today, and everyone’s going to get new insurance. Quality’s not going to be affected. We get rainbows and we get ponies and there’s no trade offs. That’s just not the way health policy works. Trade offs have to be at the center of anything you’re talking about.
Bill Frist: That’s where the economist, you, versus a physician or even a typical consumer or patient, the economist will phrase everything in terms of trade offs. The trade offs … and by framing them, it does help people like me, and I think our listeners, to recognize that everything that is done does have a trade off of some sort. I think that’s the real contribution that economists have made to being able to frame these debates and allow them to occur.
Bill Frist: Let’s jump to … What you did also mention is drug pricing, because I know you’re doing a lot. You’re testifying and you’re spending time advising people and all. The drug pricing, how big of an issue is it today? If you look at the overall spending of healthcare, how big is the drug spend?
Craig Garthwait…: So, drug spending’s anywhere-
Bill Frist: But not Medicare, of all of healthcare.
Craig Garthwait…: … anywhere from 15 to 20 percent of total health expenditures. A lot of times, you’ll hear people say it’s sort of 11 or 12 percent. What they’re not accounting for there is all the drugs people use in the hospital-
Bill Frist: Yeah, that’s just the retail.
Craig Garthwait…: … and outpatient.
Bill Frist: Yeah.
Craig Garthwait…: That’s just growing, right?
Bill Frist: Yeah.
Craig Garthwait…: That’s where we’re seeing the most growth is in those drugs. So, it could be upwards of 20% of health spending overall. If you’re in some commercial plans, it could be up to 25% of your spending. So, it’s still a minority of the spending, but it attracts a ton of attention. I think the-
Bill Frist: There’s the aggregate of it, because in the aggregate, for not just specialty, in the aggregate, is the spending on drugs going up faster than the hospitals or physicians?
Craig Garthwait…: Not really, no. I mean, the problem we have here is that drug spending is pretty hard to nail down because of the complex way that we spend and we pay for drugs with rebates and all of that, but no. It’s not. I mean, everything’s going up. They’re going up at about the same clip. That amount that we spend on drugs has stayed roughly constant as a share of health expenditures. Now, note, health expenditures are going up by a lot. So, we’re still spending a lot more on drugs, but I don’t think it’s some growing, pressing problem more than, say, hospital prices, which have been going up a ton as well.
Bill Frist: So, keeping it simple, what are the main drivers of drug spending going up, or drug prices going up?
Craig Garthwait…: A lot of it is we’re just getting really great new drugs that are just amazing. If you take a step back and think about it, the one that … The Novartis gene therapy product that everyone’s very upset about, and I can understand why they’re upset, because it’s a two million dollar drug, but it’s a cure for SMA, this terrible condition that kills kids before they’re five years old. Now we can cure them of that.
Bill Frist: Yeah, for the first time ever. Yeah.
Craig Garthwait…: Yeah. They would’ve died otherwise. We have hepatitis C and Sovaldi and Gilead, the company that made it, which really started, I think, a lot of the fear about high drug pricing. That is a cure for hepatitis C. It’s a condition that we had before. Take the drug. You no longer have it. In some ways, that’s a pharmaceutical company doing exactly what we asked them to do. We always complain, “Oh, all you want to do is make chronic treatments so we can have to pay you again for the rest of our lives.” They created a cure, but that cure had a really high price tag.
Bill Frist: Now, how much do those cures from, in your opinion, or from studying, come from the fact that drug prices are high? The drug companies will say they’re putting that back into research, which they are. I don’t know what it is, 40, 50 billion dollars a year. How much of the cures are coming from that? Or how much is that just a smoke screen so the drug companies can run off a lot of problems?
Craig Garthwait…: Yeah, so it’s not … It’s similar between the two, right? So, [inaudible] … It’s very clear in the economic evidence that profits drive R&D investments. What isn’t, though, is that pharmaceutical companies are earning money and then reinvesting that money. In fact, I don’t care if they do that, right? If Gilead made, when they did, they made about 60 billion dollars in the first few years off of Sovaldi, if they discharged that all to their shareholders in stock buy backs or dividends, that’s totally fine, because what we really want to do is … It’s an incentive store.
Craig Garthwait…: Most drug development happens now early stage, funded by venture capital. What does venture capital want? They want money. Let’s be clear. They are mercenary in that sense. So, the greater the potential returns, the more they will invest in early stage spending. So, when you see a cure for hepatitis C, it can get sold for 90 grand a pop and 60 billion dollars. Well, what if I cured pancreatic cancer? What if I cured Alzheimer’s? Think how much money I could get from that. So, I’ll put more money into early stage biotech than I otherwise would. If you decrease the returns, venture capital will just flow out of the sector, right, because that money will … It’s very liquid. They can just go to a different fund. It goes to tech or social media.
Bill Frist: So, is there any limit on that? I buy exactly what you’re saying, because I do venture capital. I do private equity, and that attraction of capital making money, obviously, is going to encourage investment, as long as that investment is put back into the innovation. So, in this podcast, the whole thesis of the podcast that we do a second opinion is to take health. What you’ve said is that through better drugs, there is better health and there’s better healthcare being given. We like to intersect that with innovation. We’ve talked about that. Innovation is the fantastic research and development that the private sector and the public sector do together. Then, that third area of policy, and we’re looking at the intersection of those in our podcast, are there certain policies that do need to be changed because of this high spending, maybe not too high, but this high spending on drugs?
Craig Garthwait…: This gets a bit to what an economist can do for you. So, what you said, what we’re good at is we identify trade offs. So, basically, drug pricing is the clearest example of a trade off we have in policy. We trade off access to products today to get new products in the future. So, high prices will decrease access today. In return, we’ll get more profits generated and, therefore, more products in the future.
Craig Garthwait…: So, what we’re searching for as a society is the sort of the place on that continuum that we want to be. How much do we decrease access today in order to get more drugs in the future? So, I can give you a sense of that trade off, but society has to decide which of those they value more. Is it the access today or is the access in the future? Why I become … So, I talk so much about drug pricing, and a lot of people think I’m very sort of pro-pharma. Partly, they don’t quite listen to what I’m saying at times because just … I’m saying there is a trade off. Society needs to pick where it is, and maybe we’re, for some products, we’re sort of prioritizing innovation over access.
Bill Frist: Does society do that through walking with their feet or who they elect in terms of policy and Congress?
Craig Garthwait…: It’s through policy, mainly. Policy, I think, reflects our willingness to say no to products, right? So, why do we spend so much in the US? We spend so much in the US because we will not say no to a product. The other thing about that Novartis product, right? People got really upset with me because I was one of the people who said to, when UnitedHealthcare said they wouldn’t pay for that product off label for people who didn’t fit the exact FDA label, I said, “That’s great. That’s what United should do because that’s what drug price negotiation looks like.” It says 2.1 million dollars is too high for this group of people, and I won’t pay for it.
Craig Garthwait…: The hard part is American society saw a sick kid that didn’t get access to the drug, right? That, we don’t tolerate that as a society. We’re unwilling to do that. For United, the headline risk, for lack of a better term, of the picture of the sick kid with United’s logo next to it was just too much, and frankly, they caved. They’ll pay for the drug now. As a society, we have to be willing to walk away from drugs, or at least know that when we choose to constrain profits, we are effectively walking away from drugs. They just haven’t been developed yet. In some ways, that’s why I think the regulated pharma prices are so politically popular. It’s because there’s a lack of salience about those products that don’t exist yet. I’m asking you to think about a product that doesn’t exist as opposed to a kid who is sick today.
Bill Frist: There’s no immediacy to that.
Craig Garthwait…: Yeah.
Bill Frist: You don’t really know what those new products are going to be.
Craig Garthwait…: No, I can’t point. I can’t point.
Bill Frist: Yeah, but you … yeah.
Craig Garthwait…: I could say, “Someone in this group is going to get benefitted, someone who doesn’t have a treatment today.” We lost my mother in law about a year and a half ago to cancer now, and we would’ve paid anything for her not to pass away, right? We’ve got young kids. We would love to have Bubbe around for that, but there was no price that we could pay for that. That’s our lack of access in that sense, right? My family’s been very fortunate. We have resources. We could pay a lot for drugs, but there’s nothing you could’ve paid. I just think that’s the other side of drug pricing we need to think about when it comes to innovation. That doesn’t mean that there’s sort of … there’s no trade off. [inaudible 00:17:23]. At some point, we need to say, “Okay, we have enough innovation, but no one’s getting access to the drugs.” I don’t think we’re there right now.
Bill Frist: How does that get reflected? I spent 12 years in the Senate, and you hear it. You hear it probably too much through the lobbyist and not enough from communities. That’s not being critical of the system overall. It’s just the system itself. So, how do you titrate that responsiveness that the policy really can change? Because you say there are trade offs being made and prices actually do that in effect and if you would regulate those prices, but how does that get reflected up in the policy? Is it images? Is it letters to the editor? Is it leadership of a articulate United States senator changing it?
Craig Garthwait…: No, I do think it’s informed policy makers being willing to have a debate and think about the evidence. I don’t think lobbyists on either side do a lot to help this process. I understand what they’re trying to do. I’ve done some lobbying a long time ago in my life. You’re trying to solve your client’s problem. I understand that, but it is about having an honest conversation about what we know about the evidence, what we know about the economics driving this, and how it’s going to work.
Craig Garthwait…: Then it comes down to very explicit policies, right? So, we passed Medicare Part D, which is a great program that provided pharmaceutical coverage to seniors when they did not have it before. In that, though, we were so worried about everyone not getting access to every drug that we made insurance companies have to cover effectively every product, and in some categories, literally every product, like oncology. Now, we pay for every oncology product. Regardless of its efficacy, it’s got to be on formulary. Because of that, unsurprisingly, venture money I think disproportionately flows there, right?
Craig Garthwait…: So, we’ve got to think about that in the way in which government sets the rules in that way, but frankly, some of that just reflects what society is willing to tolerate. Are policy makers willing to see someone not get access to a drug and say, “That’s unfortunate that you’re not”? Other countries, they’re fine with that. They might not like it, but they’re fine. The UK, right, they through their committee, NICE, this NICE, Orwellian phrase for how they distribute drugs, they’re fighting with a company called Vertex in the US, which has two products that are very effective treatments for cystic fibrosis, but costs about $300,000 a year, annual. Not a cure. 300 a year, right? England said they won’t pay for it. Vertex said, “Fine, we won’t give it to you.”
Bill Frist: The people of England are okay with that?
Craig Garthwait…: Yes, that’s a-
Bill Frist: There’s the solidarity there. So, the cultural … and culture can be changed, but it’s hard to change culture. While we’re talking about other countries, so I’ll better understand, because it is always curious to me about why other countries can charge so much less than we do, and this distribution of us doing the research for the world out of the United States. Should that be changed at all from the economist standpoint?
Craig Garthwait…: Well, should’s an interesting term. I think you’re right. So, profits in the United States drive innovation around the world. Now, be clear when I say … because sometimes people mistaken that for a much more jingoistic statement than I mean. It’s not like American scientists are somehow better than everyone else.
Bill Frist: No, no.
Craig Garthwait…: French, Israeli, Chinese scientists now in Hong Kong has a great biotech industry. They’re all doing open drugs for one thing: to sell it to rich America. That’s their goal. I think that is unfair and unfortunate. I would like the UK and the Netherlands and other places, France, to contribute more to the development of drugs than they currently do. I’m just not sure how we do that. I will say that the administration’s plan to create a reference price where we will pay what the Europeans are paying, one, doesn’t solve the problem, and two, I think is, for lack of a better term, a cowardly policy by our country. If we want to have a debate about drug pricing in the United States, the people that I elect to Congress and to the administration, they should be having that debate. We should decide what America wants to pay for, not outsource it to the UK and France. So, I’m very disappointed in that policy because I do think we need to have a debate about what America wants to pay for.
Bill Frist: It is an issue, and we need to work through that and debate that and discuss it.
Craig Garthwait…: Yeah, but what I don’t want to do … We’re clearly not the first best situation, right? Economists talk about the first best. The absolute best thing could happen is that every country pays its fair share of development. We’re not there, for sure. US is overpaying. Other people are underpaying. So, the second best is probably the US paying a bit more and everyone else not paying, because what we’re going to get, if we reference price, is the third best, which is no one’s paying for innovation anymore. Everyone sort of defects from this attempt to pay for new innovation, and that’s unfortunate. I mean, why in the …
Craig Garthwait…: So, there’s this trade off of access to innovation in the future, and I tend to sort of fall on the innovation side of it more, because the long run benefits of innovation are just so high. Eventually, those drugs become generic, assuming we have … and the generic work, it has some struggles we need to fix, but that becomes generic, and we all get to benefit. If we a step back from sort of just our parochial US interests, the whole world gets the benefit. So, if you look now across Africa, all right, we now have the ability to treat HIV/AIDS there, not for products designed for Africa, because they can’t afford to pay for them in most African nations, right, but products designed for the US that we’re then going to sell there over time. That’s just a huge amount of value for the world.
Bill Frist: It’s hard to get people today to think that long term and to look into the future. That’s where leadership-
Craig Garthwait…: [crosstalk] policy makers.
Bill Frist: Interested … that’s right.
Craig Garthwait…: Yeah.
Bill Frist: That’s … and the policy makers today tend to think in two year terms because that’s where they get re-elected, but again, it comes back to a knowledgeable, educated, wise policy makers out there that I guess we all yearn for and [crosstalk 00:23:20]-
Craig Garthwait…: They exist. On both sides of the aisle, they exist. They might not be the median policy maker, but they’re there. It’s their ability to shift the debate that I think is important.
Bill Frist: Yeah. The fact that a drug prices at $100, and it probably only costs $30, and then you have all the brokers in and the PBMs and the … Will that change over time? Do you predict as there’s more transparency there, or there’s more technological innovation there, or more, better execution, that you’ll get rid of all the sort of middle men brokers that are out there today?
Craig Garthwait…: Yes and no. So, I think some of those middle men are doing good things, right? So, I think PBMs have gotten a bad rap and some of that’s because they’ve done some bad things, right? So, they’re not as bad as their reputation, nor as good as their PR people would like you to believe. They’re somewhere in between.
Craig Garthwait…: The market for PBM services, these pharmacy benefit managers, these middle men, it’s changing a lot already, all right? So now, every major insurer has bought a PBM, right? So, Express Scripts, which covered 80 million lives, is owned by Cigna. CVS and Aetna are together, and CVS has Caremark. Optum has always been part of United. So, that changes some of the incentives within those firms about how they do this. I think we’ll see some legislative action about maybe not transparency, per se, but at least understanding a bit more within the companies about the flow of funds between manufacturers and PBMs. I think there’s some things there we need to fix. I think we, as economists and people in the system, know that there is some transparency that’s needed. Too much transparency, it turns out, isn’t a good thing. So, particularly when you have a small number of buyers, the thing that sort of gets them competing with each other is that they don’t actually know if the other one’s going to try and undercut them on price. So, once you force them to publicly post their prices, they’re going to potentially tacitly collude. They don’t ever have to talk to each other, right?
Craig Garthwait…: There’s a lot of debate right now, and I know you’re close with the Senator Alexander. His staff and I go back and forth about this, about what are the benefits of transparency, but in markets where you have pretty limited entry and a small number of players, we want to be more concerned about transparency. So, for MRIs and stuff like that, we got MRIs everywhere now, right? That’s fine. For transplant surgery, for cardiac surgery, and really, for drugs, I worry a lot about tacit collusion there, right? So, for your listeners there, tacit collusion’s perfectly legal. We never talk about it. We just understand we don’t want a price war.
Bill Frist: Let me turn. Has there been a pivotal moment in your life, either in your career, as an economist, as a professor, as a teacher, where something personal … I ask this because there are a lot of people listening and they’re thinking about their futures as we go through. We all have pivotal moments. Is there one pivotal moment that you may want to discuss?
Craig Garthwait…: Yeah. I mean, it was … So, personally, I mean, I have two young kids. So, having children, I think, changes your view on everything. That’s sort of ubiquitous to everyone. Everyone reacts to that differently. I would say professionally, so I worked in DC for a while. Then I went to get my PhD a little bit later in life than other people. Then, so I had an economics PhD and sort of tried to figure out, “What do you want to do with your life now?” So, I decided I wanted to be a professor, but that actually … You can work at lots of different places with an economics PhD. I never intended to work at a business school. That wasn’t my goal. I got this offer at Kellogg, which has been very good to me. I’ve been there for 10 years now, but being in a business school and doing healthcare turns out to really change your view of health policy. So, I came out of an economics PhD program. I was a public finance economist. I know all the technical things about this.
Bill Frist: Were you doing healthcare then?
Craig Garthwait…: I was just in healthcare work, and my advisor, Bill Evans, Mark [Dougan 00:27:06], and Melissa [Garney 00:27:07], so three great advisors all doing work in healthcare. When I got to the business school, all of a sudden, I’m not even really teaching about healthcare. I’m teaching just the core strategy class. So, next week we start, I have 210 new MBAs coming. They’re first class I take at Kellogg, and what we’re teaching this is about how firms create and capture value. That’s fundamentally what we think about for healthcare. How do you create and capture value as a firm? [inaudible] teaches how firms create and capture value. That’s what we teach them about all parts of the industry. Then I’ll teach them healthcare strategy, and I’ll teach them in healthcare about how firms create and capture value.
Craig Garthwait…: You really then have to start to think about these private firms and what their motivations are. Then, good policy has to harness those motivations. Some of the worst policy, I think, ignores the fact that we have this private sector, that we think, “Oh, they’re just going to act on the better angels of their nature.” That’s not going to happen. They’re profit seeking enterprises, and that’s not bad because the market economy is really good about allocating resources, but you’ve got to respect that that’s what their incentives are and not fool yourself into making bad regulations that don’t think about that. So, really, being at Kellogg and really being forced to interact with new MBA new students, but also I do a lot of work with executives, people who are sort of in the trenches and thinking about these questions, that really forces you to think carefully about all of the assumptions that go into your economic models.
Bill Frist: Now, take me up just a little bit deeper. Is it that you have to stay a step ahead of them because of their curiosity, or the motivation to sort of reach them and engage with them, it really comes from what?
Craig Garthwait…: It’s both, right? So, one is that, I mean, I’m trying to make them better at their job, or that’s what we’re trying to do as Kellogg. So, in that sense, it is about sort of, what is a way I can make you understand and find a way to think about what you’re seeing in your life? Then it falls into an economic framework, all right? Because once I give you the framework, then you can go out to whatever you want to do, and you can take in new information and make a better decision. That’s really our goal, partly because we train people from all parts of healthcare. My regular sort of work at Kellogg trained people from all parts of the economy, all parts of the globe. We’re trying to give them a sort of a context agnostic tool that says, “Okay, how can I take the information I have, put it in order, and figure out what’s the decision I can do to maximize value for my firm?”
Craig Garthwait…: That’s what we have to do for the medical profession as well, and there, it’s harder because it is, right … I mean, in the end, and my students hear me say this all the time, right, medicine is buying and selling life and death. So, that’s a much more solemn kind of responsibility you have. So, you’ve got to temper these business judgments with that fact in the background, either just implicitly, because you’re employing physicians who have a higher calling in their sense. I’ve always believed they do, or explicitly, because you’re dealing with policy makers. Policy makers care about the public relations of what you do, right? It’s why drug pricing is so hard, right? Drug pricing is so hard because when you decide to raise the price, at some level, depending upon your product, you’re deciding to let some people die. That’s a whole different ballgame, right? It’s not like [crosstalk 00:30:23].
Bill Frist: Do you put, in your classroom, do you put medical or clinical people side by side with MBA students or business students, or is there a dialogue among your students?
Craig Garthwait…: Oh, absolutely. Yeah. So, we have, in our regular, full time program, we have an MD/MBA program. So, these are MD students who are getting their MBA concurrently. Our executive MBA program, it’s practicing doctors sitting next to pharmaceutical executives, sitting next to payers. We try and get the doctors and the payers a little bit separated, but-
Bill Frist: [crosstalk 00:30:53].
Craig Garthwait…: Yeah, but … Yeah. No, the-
Bill Frist: So … yeah.
Craig Garthwait…: The idea is that they learn better by having to interact with people that don’t just have their world view.
Bill Frist: Yeah. Are there any trends compared to when you started, when you first came, to where they are now, that are either positive or negative?
Craig Garthwait…: So, far more doctors are interested in business education. I think then … even 10 years ago. Part of that I think is the reality of the complex nature of medical businesses. I think looking back, this pre-dates my history, but sort of looking at sort of the way the world has evolved, it used to be the head of the hospital was a doc who became the head of a hospital, [crosstalk] you’re sympathetic to.
Bill Frist: Yeah, yeah, yeah, yeah.
Craig Garthwait…: Then it became a bunch of MBAs who weren’t docs at all. That wasn’t so good, all right? So, they were just doctors who don’t know how to run a business, not so good. Just business, aren’t doctors, not so good. What we’re seeing now is some marriage here where it’s doctors becoming sort of more smart like an MBA, but MBAs also learning a lot more about medicine and what it means to sort of interact with doctors. I think that’s lead to a better operation of the system.
Craig Garthwait…: I think if you look at the sort of most egregious things happening in healthcare, right, and that really, really piss people off, it tends to be … For lack of a better … It’s private equity driven companies that are doing it. I think that’s unfortunate, because I think private equity has a really important role in the economy. I think they sort out bad business models, but when it comes to healthcare, the pure profit maximization, particularly on the provider side, can lead to really negative outcomes. Then we do need someone to step in as government and say, “We have to have some limits here.”
Craig Garthwait…: In many ways, I think medicine, for a long time, really self regulated the industry, where there were things that you couldn’t do or you wouldn’t do, even in pharma. Pharma, I have a … There’s a guy called Martin Shkreli, right? He’s the pharma bro. Everyone dislikes this guy, and there are clear reasons for that, but he identified this financial innovation, which was that a really small market product … So, he only had 10,000 prescriptions for his product a year. You’re never going to face competition. No one’s ever going to enter your market, so you can raise the price as high as you want. The other pharma companies knew that. They knew they could do it. It just wasn’t worth it for them because they’re going to invite everything that’s happened since then, all of the regulatory scrutiny. So, they make 10 million dollars on this product and lose 10 billion dollars on the regulation. So, it’s these, the really sort of high pricing and all that you see in … The stuff that really just gets people upset tends to come from outside of the medical system, and we have to find a way to think about regulating that.
Bill Frist: That’s where the teaching, the interaction, the engagement … It sounds like if you have 210 students next week, you’re right in the middle of it.
Craig Garthwait…: Oh yeah. Mm-hmm (affirmative).
Bill Frist: Is there a policy or a magic wand, if you could wave that magic wand, is there one thing that incrementally would have a bigger impact than other things that you could share with us?
Craig Garthwait…: I mean, one thing is if we could get every policy maker to come through Kellogg’s program. I think that would … They would be much better to do that.
Bill Frist: I agree. I agree. You’re right.
Craig Garthwait…: Absent that, how about push back a little bit on the concept, right? Let’s think about sort of level setting a fact here. The US spends 18% of its GDP on healthcare. That makes the US healthcare economy roughly Germany. That’s what it is in sort of its size.
Bill Frist: The country, yeah.
Craig Garthwait…: The country of Germany. You can’t disrupt the country of Germany, right? That’s not going to happen. You’re not going to disrupt US healthcare. You’re not going to have a policy solution that solves whatever your problem is for US healthcare, but you can identify very specific segments where you think that something is not operating well and you want to change that.
Craig Garthwait…: If you think about an example of that in an innovation sense, so it started here in Chicago, a company called Oak Street Healthcare. Oak Street’s a great company. They target the dual eligible population. These are poor old people. This is the least efficient part of the medical system. What do they do? They provide direct primary care to those individuals. They take on full risk, so they’re responsible if these guys end up spending a lot at the hospital or get sick or something like that. They focus on that population, and they say, “We’re going to develop the right services for them so that we can control their medical spending.” That’s what disruption has to look like, right? A very clear problem, a thesis as to how you’re going to create and capture value from it, and then rigorous execution.
Bill Frist: Not in the aggregate, or not try to do it across the board? So, if there were certain segments, certain sectors, it can be well defined. Go after it. Engage. Implement, execute, and measure.
Craig Garthwait…: Yeah, because if you think about the Oak Street example, we’re talking about there’s … It’s not just direct primary care. It’s direct primary care to manage risk for dual eligible population. Now, the problem is is that’s a lot less sexy than Oscar Health, right? Oscar was going to disrupt all of US healthcare with their big website. I think the best we can say about them now is that they are losing less money now each quarter than they lost the previous quarter, which is better than losing more, I guess, but …
Bill Frist: Are you optimistic overall? You see the students coming through. You see the changes in the trends. You see more engagement. You see a, probably, a better product in the driver’s seat, wherever they are, on the payer’s side or on the provider’s side. Are you optimistic or pessimistic or neutral, or is it unfair to even give any of those taglines to-
Craig Garthwait…: Here’s what I’ll say. I will say that … Sometimes I’ve talked to people about what’s happened in healthcare. I says, “I can give you much less expensive healthcare. I’ll cut you a deal. I will give you 2000, year 2000 healthcare today for 25 for 50 percent less than what you’re currently paying.” I don’t think anyone wants that deal.
Bill Frist: No, no.
Craig Garthwait…: Because there’s so much innovation that’s happening, and we have to figure out the way to figure out the access to it and all of those things, but we’re doing things now. I think we’re on the cusp with precision medicine and all of that, to really solve some problems we never thought were solvable before. Even just what we have with gene therapy and drugs along those lines, people’s average experience at the hospital and things like that. People are living longer. That’s something to be very optimistic about.
Craig Garthwait…: I worry that there’s going to be this pushback in the end, that either private equity people or other sort of more rapacious actors that are demanding more profits from the system are going to push the political system to a point that the political system doesn’t make incremental changes, right? I worry that it’s not going to be fine … We would sort of fine tune the system to figure out access. It’s that we just throw the baby out with the bath water.
Craig Garthwait…: I watch the Democratic Primary with worry on that dimension. I don’t mean that as political as I sound, but that primary has shifted so much further left than anything we’ve talked about in the past 15 years. I can understand why. So, I can see the politics as to how it happened, but I don’t think that’s a way to solve it, have the government come in and say, “Okay, we’re going to run all of US healthcare.” I think there are limits to what we can learn from foreign countries for … This is always gets the health policy people mad at me because they’re like, “Oh, Denmark has fixed this.” Well, that’s great. Denmark is, at best, a small US state, and it’s a small, racially and income homogenous state. The US population, the United States in general is this … It’s this fantastic country. It’s breadth of experience of rural and urban areas and rich and poor and black and white, right, that’s part of what makes us such a great country, but it makes it very hard to think about a single central policy that’s going to dictate this. So, I worry about the idea that we’re going to try and have some national standard for that that doesn’t take in account the sort of uniqueness that is America.
Bill Frist: Finally, is there anything … You have your students coming through, and when you see a young, bright, industrious, aspirational student come through, any advice that you give them in, specific to health or healthcare … I know it depends on what career they’re going in, but is there any advice that you would give them?
Craig Garthwait…: What I tend to tell the students is I want you … Look for the place where you’re creating value. I don’t mean that in some aspirational sense. I’m an economist and that’s not really what we do, but if you create value, you’re going to be successful. Define that however you want. Economists … I define it like willingness to pay minus cost is value. Figure out where you can do that, and where you care about doing it, and the financial returns will flow to you. If you’re able to do that, you’re going to get either the financial or the non-financial returns that you care about.
Craig Garthwait…: So, in healthcare, I think it’s look for the inefficiencies. Look for where things are not working well. Look for the market failure and figure out what you can do to solve it, but respect the incentives there, right? Don’t think you’re going to come in and … Uwe Reinhardt, who passed away, always had this great quote about, “Every dollar of healthcare spending is someone else’s income,” right, including waste, fraud, and abuse, because you’ve got to understand. If you’re going to start taking away money from people, they’re going to push back. So, think about that. Think about the reality of what you’re facing. Understand that healthcare is not some fantasy land different from the rest of the economy, right? People are there and they respond to the same broad incentives everywhere else.
Craig Garthwait…: Docs always get mad at me about this because I say they respond to financial returns. Then, they say, “Well, no. We’re here for a higher calling.” I was like, “Well, A, I’ve walked through the parking lot at the hospital and there are a lot of the hospital and there are a lot of Teslas there. So, it seems like there’s some higher calling, yeah.” Also, if I look about how doctors pick their specialties, right, everyone wants to be an orthopod. I don’t see people killing to go into family medicine. So, you guys have to respect that.
Bill Frist: Yeah. Listen, thank you. I guess what impresses me most is the fact that you’re out there on the frontline teaching and sharing the information. It’s a world that is constantly changing, constantly evolving. To have people like you on the frontline sharing your knowledge and being open and leading them to these futures that we know are exciting, and from a medical standpoint, as a physician, you’ve hit right upon what I think’s most important, is that if we all stay focused and do our part, then we will lift people up to live healthier lives and lives of greater well being. So, thank you for doing more than your part. I appreciate it.
Craig Garthwait…: Well, thank you for the podcast too. It’s great, yeah.
Bill Frist: Thank you. Appreciate it.
Craig Garthwait…: Yeah.
Bill Frist: Thank you.
Craig Garthwait…: Okay.
Bill Frist: This episode of A Second Opinion was produced by Todd Schlosser, the Motus Creative Group, and Snapshot Interactive. You can subscribe to A Second Opinion on Apple Podcasts, or wherever you’re listening right now. Be sure to rate and review A Second Opinion so we can continue to bring you great content. You can get more information about the show and our guest and sponsors at asecondopinionpodcast.com. A Second Opinion broadcasts from Nashville, Tennessee, the nation’s Silicon Valley of health services, where we engage at the intersection of policy, medicine, and innovation.