Home (Healthcare) Economics

December 2, 2014 • Cato Online Forum
By Philip Auerswald

Of the ten job classifications that experienced the greatest growth following the recession, three were in home, outpatient, and senior health services. Every indication suggests that this fact represents a secular trend. In particular, assuming that legislators and regulators act to enable rather than obstruct the advance of distributed health services, demand for home health care focused on seniors is likely to experience continued growth, due both to the projected increase in demand for health services as a consequence of the aging population and to the cost‐​reducing and service‐​improving potential of healthcare to the home. An entrepreneur‐ and innovation‐​led pathway toward distributed health service delivery in the United States thus has potential to improve quality, reduce costs, and expand access to health services. The widespread deployment of distributed health service delivery, in turn, has potential to increase economic growth both directly (via increased transactions required to meet the growing service demands of an aging population) and indirectly (via an increase in the effective size of the workforce enabled by improved population health).

Defining Distributed Health Service Delivery

Not too long ago, of course, most healthcare services were provided in the home.1 The capital requirements of the medical profession were minimal, so there was little reason for an office. Since it cost little (if anything) to certify as a physician, barriers to entry into medical practice and the relative wage paid to physicians were both lower than today. The advent of modern medicine over the past century changed this. In 1930, house calls constituted 40 percent of physician encounters; by 1950 that number had dropped to 10 percent; by 1980 it was just 1 percent.

However, in the past two to three decades, the advantages of hospital‐​based care have started to erode. Part of this erosion has been due to a reversal of the advantages of hospital‐​based health care2 due to high cost,hospital acquired infections, and injury or death directly induced by hospital care.

At the same time, technologies and organizational innovations enabling healthcare provision both in the home and at a distance have improved radically in terms of both performance and cost. I employ the term “distributed health service delivery” to refer to four distinct categories of innovations in health service provision that, jointly, are creating lower cost, equal or greater effectiveness options for consumers:

  • Telehealth / Remote Medicine & Mobile Health (mHealth)
  • Medical House Calls / Home‐​based Primary Care
  • Health Agency Care / Peer‐​to‐​Peer Health Service Delivery
  • Big Data

Together, the four elements listed above combine to create a very real, but as yet unrealized, potential for distributed health service delivery on a large scale.

Overall, what fraction of the services currently provided within hospitals can be offered within the home? We don’t know the answer to that question. But we do know that it is a far greater fraction than is reflected by current practice.

Recent studies of home healthcare provision using existing technologies have shown reductions of 15–30 percent compared with hospital‐​based care for similar patient populations, with savings that may potentially be realized from a full embrace of existing telehealth and home healthcare services over the next 25 years projected at $200 billion. Considerably greater cost reductions may be attainable using powerful, distributed technologies currently under development, and benefiting from ubiquitous broadband that is a proximate reality. By allowing a competitive environment to evolve in which entry by distributed health service providers occurs at scale, government at various jurisdictional levels can accelerate economic growth while simultaneously address first‐​order national concerns related to the budget and the quality of life of citizens.

Enabling Distributed Health Service Delivery3

Federal policy toward home healthcare has undergone a steady progression, focusing first on post‐​acute care; gradually incorporating “housekeeping services” as part of post‐​acute care; envisioning home health as a substitute for nursing home care; and ultimately extending that vision to include a range of individuals above a minimum threshold of medically demonstrated need. Constants over this lengthy interval have been concerns over costs and access, all driven by the parallel growth of populations of people over 65 years of age and of people suffering from chronic illness and disabilities.

The core challenge for health care policy at present is not in increasing the uptake of one or another existing model of health service provision in the home, but rather in enabling the creation of entirely new business models aimed at helping people become and remain healthy outside of institutional settings. The key to enabling new, viable business models is a great deal of experimentation. That experimentation must be legal, it must be feasible, and it must be compensated.

Action in three specific policy domains is required, with the objective in each case being the reduction of barriers to entry that advantage incumbents to the detriment of beneficial change:

  • Technical/​regulatory (e.g. regulatory approvals, standards for interoperability)
  • Financial/​regulatory (e.g. methodologies for determining eligibility for reimbursements)
  • Labor market/​regulatory barriers to entry (e.g. certification requirements)

Technical/​Regulatory Barriers to Entry

Lack of regulatory clarity is currently a significant impediment to realizing the full benefit of distributed health service delivery. Representative Mike Honda (D-CA), who in 2013 proposed legislation to create an FDA Office of Wireless Health,4 offers this perspective: “The tech community needs confidence in a consistent, reliable framework for wireless health. The FDA has a critical role to play. Today, there is no confidence [among people in the] industry. It’s nonexistent.”

The fundamental problem lies in the mismatched timescales in which the digital economy and the regulatory structure operate. As with the case of methodologies for determining eligibility for Medicare reimbursements, the standard operating procedures for device approvals at the Food and Drug Administration are as much as an order of magnitude slower than the rate of innovation in distributed health service provision. Institutional innovations to reduce this gap are an urgent priority for federal action.

Policymakers and regulators in health care at all levels also must get past the notion that health care is exceptional when it comes to privacy. Other industries — financial services and education, notable among them — also face privacy issues that must be balanced against the considerable gains attainable from data aggregation. While these issues are well beyond the scope of the current paper, a general takeaway for policymakers is well stated in the 2012 report of a Kauffman Foundation Task Force on Cost‐​Effective Healthcare Innovation:

We believe current data‐​sharing rules within the medical system are more overprotective than they need to be. The consensus of the task force is that health care data, suitably anonymized, should be treated as a “public good” — something that benefits society broadly and whose benefits cannot be restricted to just a few…5

Even if, and when, industry and government actors converge on the technical, organizational, and regulatory parameters for open data exchange that will enable genuine inter‐​operability of systems, the actual implementation of such systems is likely to be a slow and laborious process.

Our federal system of government, a source of strength in many respects, creates another set of challenges for innovators who must contend with 50 different state laws related to telehealth licensure6 and 50 different state laws concerning privacy. A priority for policy at the state level is to reduce the impediments such laws create for innovators by reducing their complexity and increasing their consistency across municipalities.

Finally, in an era of flat or declining federal government spending on research and development, the federal government’s own procurement spending can represent a significant lever for innovations. Recent controversies over access to care within the VA healthcare system highlight endemic shortages that are unlikely to be resolved through modifications to existing procedures within institutional settings. The most promising pathway for improving access to care within the VA system without increasing costs is the same as that for the healthcare system as a whole: distributed health service delivery. By making further, coordinated investments to expand distributed health service delivery, the VA will be accomplishing two priority national objectives: providing timely, quality care to veterans and creating prototype systems that can spread to the private sector.

Financial/​Regulatory Barriers to Entry

In principle, whether in the case of healthcare or in other areas, governments at all levels should only be paying for privately provided services that are effective and competitively priced. Given a fixed portfolio of clinical interventions, medical science has well‐​developed methodologies for assessing effectiveness of existing, well‐​established protocols. These methodologies center on the randomized controlled trial (RCT). However, such methodologies are not particularly well‐​suited either to assessing new integrative models of health service delivery with a social dimension (as opposed to specific clinical interventions) or to establishing the value of diagnostic tools aimed at management of chronic disease or improved general wellness. Innovations in distributed health services are not conventional clinical interventions, because (for starters) they don’t take place in clinics, and they mostly are not interventions. RCTs are simply too costly, and too slow, to keep up with the pace of innovation in business models focused on providing people with health services. The government must rather focus its efforts on partnerships with the private sector that enable entrepreneurial teams to build businesses that provide people with increased options.

The lack of clarity of policy at the federal and state level with regard to reimbursement for the use of diagnostic tools is another barrier to the full realization of the benefits of distributed health service delivery. Population‐​based approaches initiated in the Affordable Care Act care via Accountable Care Organizations (ACOs) go some way toward creating incentives for service providers to deploy low‐​cost, digital diagnostic tools in the communities within which they work. But federal and state governments can do more to validate and support the many companies developing and deploying a new generation of digital diagnostic tools.

Overall, a strong consensus exists that improvements in health service delivery require reimbursements to be value‐​based rather than fee‐​for‐​service based. The acceptance of a varied portfolio of proven assessment methodologies — notably including ones appropriative to entrepreneurial ventures — accomplishes this goal in a manner that allows for innovation.

One dimension of the Accountable Care Act that is strongly unfavorable to innovation in distributed health services is the 2.3 percent revenue tax on medical devices. In recent Congressional testimony, Dr. T. Forcht Dagi, a partner at HLM Venture Partners in Boston, described the particularly deleterious distortionary impacts of this tax:

The tax of 2.3 percent sounds modest but it is not. This is a tax on revenue. It is not a tax on profits. The vast majority of entrepreneurial ventures developing MMAs are very small and very early. Some of the companies in which we invest may in fact generate some revenue but very unlikely to generate profit. Revenues are plowed back into the company for growth, and therefore the 2.3 percent tax on small startup companies delays their ability to reach profitability and increases the amount that must be invested before a company can become cash flow positive.

The principle of ensuring that the Affordable Care Act was budget neutral was a laudable one. However, imposing a tax with potential to adversely affect a nascent industry of first‐​order significance to the overall fiscal health of the country was not the best approach for accomplishing that objective. The medical device tax within the Affordable Care Act should thus be repealed, or its interpretation by the IRS sufficiently narrowed that it does not adversely impact the development of inter‐​related market areas focused on distributed health service delivery.

Labor Market/​Regulatory Barriers to Entry

The access to care controversy in the VA system is arguably, to a significant extent, simply a reflection of a broader skilled labor scarcity in medicine, particularly in primary care. Part of the solution to this problem may be a relaxation of binding constraints on primary care residency training created by Medicare’s decade‐​and‐​a‐​half long freeze on subsidized residency slots.7 However, a more comprehensive approach to addressing workforce shortages in the health sciences would adjust reimbursement requirements to allow nurse practitioners to provide a broader range of activities which they are — with proper physician oversight and technological support — capable of providing. Yet even that is not likely to comprise an adequate solution, as “the number of homebound adults who could benefit from house calls is overwhelming in comparison to the number of qualified and willing providers.“8

In the longer‐​term, then, realizing the full benefits of distributed health service delivery will require the creation of a new category of certified, digitally‐​empowered health workers, who act simultaneously as health coaches, social support case workers, and front‐​line diagnosticians. The creation of such a job category would potentially serve both to attract new, tech‐​savvy, talent to the health service field and also to provide a pathway toward formalizing and extending the skills of home health workers, personal care aides, and family caregivers who “are the front line of keeping patients at home, though they receive little or no training.“9 In this way the national objective of “bending the cost curve” in health care will intersect with that of increasing opportunity in the workforce — particularly among young people, who have a comparative advantage in the use of technology, and among a growing number of workers over 60, who have a comparative advantage in the care of generational peers (or near‐​peers).


Economic disruption creates both winners and losers. For that reasons, the impacts of disruption within any particular industry on growth prospects can be ambiguous in the near‐ to medium‐​term. However, in the long term, disruption enhances growth due to second‐ and third‐​order impacts on the vitality of economies. Of no industry in the United States is disruption more likely to create beneficial impacts than healthcare service delivery. The inefficiencies of the U.S. healthcare system have, for over a generation now, acted as a significant drag on entrepreneurial initiative in the United States and created enormous — and in many cases unmanageable — liabilities for U.S. established businesses. Initiatives from existing institutional providers notwithstanding, the pace of change in the healthcare industry lags well behind the magnitude of the opportunity to improve the quality and lower the cost of health services provision. Action — or in many cases, restraint — by government operating at multiple scales is required to realize the full disruptive potential of distributed health service delivery. The benefits for the country will be to improve both the wellbeing of citizens and to enhance the prospects for economic growth in the long term.

The author thanks Jody Ranck and anonymous reviewers for contributing insights incorporated into this essay, James Broughel for ably overseeing production, and Steve Rossi for providing research assistance.


Hayashi, Jennifer, Linda DeCherrie, Edward Ratner, and Peter A. Boling (2009), “Workforce Development in Geriatric Home Care,” Clinics in Geriatric Medicine, 25, pp. 109–120.

Kauffman Task Force on Cost‐​Effective Health Care Innovation (2012), Valuing Health Care: Improving Productivity and Quality, Kauffman Foundation, working paper, April.

Litan, Robert E. (2008), “Vital Signs Via Broadband: Remote Health Monitoring Transmits Savings, Enhances Lives,” Better Health Together working paper, October.

Rampell, Catherine (2013), “Solving the Shortage in Primary Care Doctors,” New York Times, December 15; A5.

Risse, G.B., R.L. Numbers, and J.W. Leavitt. eds. (1977). Medicine Without Doctors: Home Health Care in American History, New York: Science History Publications.

U.S. Department of Health and Human Service (2010), Special Report to the Senate Appropriations Committee: Telehealth Licensure Report, Washington DC: U.S. Department of Health and Human Service.

1 Risse, Numbers, and Leavitt (1977).
2 The implication here is that exogenous changes have made hospitals less desirable, making it more desirable to use non‐​hospital settings. However, as my colleague Bob Graboyes has pointed out to me, one can argue that rather than fleeing the hospitals, a better approach might be to stop implementing policies that make hospitals unappealing. I leave the exploration of that line of argument to others.
3The recommendations that follow draw from multiple sources, notably including Litan (2008) and Kauffman Foundation (2012).
4 Health Care Innovation and Marketplace Technologies Act of 2012, H.R. 6626, 112th Cong. (2012). The bill did not advance past committee.
5 Kauffman Foundation (2012).
6 U.S. Department of Health and Human Services (2010).
7 Rampell (2013).
8 Hayashi et al. (2009).
9 Hayashi et al. (2009), p. 114. Citing a 1998 study from the Department of Health and Human Services, they further note that “over three‐​quarters (78%) of adults receiving long‐​term care at home rely exclusively on informal caregiving.”

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on reviving economic growth.

About the Author
Philip Auerswald