Directly, the law only modestly impacts incentives for innovation. It sets up a Center for Innovation to sponsor new forms of care delivery, creates an institute to assess the comparative effectiveness of treatments, funds a telemedicine pilot for a small number of the very sick, establishes a range of pilot programs to support quality efforts in healthcare institutions, and promises a national strategy for healthcare quality improvement by the start of 2011. These are all laudable initiatives but will do little to impact the overall innovation climate.
Indirectly, the law substantially impacts healthcare firms’ innovation agendas. The pharma industry is a clear winner, with extended protection for biologic drugs spurring investment in “personalized medicine” that creates high-value tailored therapies for relatively small sets of people (a sea-change from the blockbuster-oriented business model of the past). Other sectors may be most impacted by how the act affects incentives for health insurance firms (payers), hospitals, and physicians.
While payers could have come out far worse in this process, the law still requires a fundamental re-think of strategy and an embrace of disruptive innovations. Subsidies to bring the uninsured into the system will create a temporary uplift, but after 2014 it will be quite difficult for payers to differentiate their offerings, leading to severe pricing pressure in an industry that is already fairly commoditized. Payers will be required to accept all applicants for coverage, they will have less ability to vary prices, and their plans will have to meet certain minimum standards to qualify for inclusion on health insurance exchanges. To make good profits, payers will need to differentiate through working closely with care providers to improve healthcare outcomes, enhance the patient experience, and engineer costs out of the system. There is vast room for improvement along these dimensions, but change has been hindered by the Balkanization of American healthcare among fragmented payers, a profusion of hospitals and physician practices, and myriads of healthcare professionals who dislike having change dictated by insurance firms. No more.