Health-care costs in the United States in 2010 topped out at $2.6 trillion, which represented 17.6 percent of GDP, according to the Centers for Medicare & Medicaid Services (CMS). During the next 10 years, CMS projects that health-care spending adjusted for inflation will grow by 51 percent, taking an even larger bite of GDP—19.8 percent. In contrast, the economy is expected to grow by only 31 percent during this period.

Formulating a national health-care policy that might successfully keep these costs in check has been a decades-long, rancorous and complex ordeal. It is uncertain whether the latest legislative attempt at reform, the 2010 Affordable Care Act, will be effective or even remain in effect after the 2012 presidential elections.

Mark G. Duggan, professor of business and public policy at the Wharton School, suggests an alternative strategy.

“The hope is that small businesses and entrepreneurs will come up with innovations that push back against the incentives to spend and, in turn, improve the quality, lower the costs and increase the efficiency of medical care,” he says.

This market-based solution comes from the former senior economist for health-care policy at the White House Council of Economic Advisors and current research associate at the National Bureau of Economic Research.

Mark V. Pauly, Wharton’s Bendheim Professor and a professor of health-care management and business and public policy, doubts that one “silver bullet” innovation will slow down the growth of health care spending.

“It’s much more likely that a transformation will come from small companies and entrepreneurs making changes, which, when added together, may amount to a big change,” says Pauly, who also served as co-editor of the second volume of the Handbook of Health Economics.

Not surprisingly, several Wharton alumni are leading this cumulative charge by creating technological, medical and operational strategies that address both the efficacy and delivery of health care.

Drugs to Match Your Genes

The right drug can help a patient avoid costly surgery and leave the hospital sooner. The trick is finding an appropriate drug from the beginning of treatment, rather than wasting time and resources testing medication.

“It’s more cost-effective to give a drug than it is to keep patients in an intensive care unit post-surgery, if a drug can provide the same effect,” says Mark C. Rogers, WG’91, a physician and former CEO of the Duke Hospital and Health Network who is also the founder and major stock holder in Linus Oncology, a cancer-drug development company in Miami.

The strategy behind Linus Oncology is to profile and categorize patients by their genetic code and then assess which drugs are good DNA matches. For example, the efficacy of certain kinds of breast-cancer drugs is determined in part by whether the patient’s genetic material aligns well with the medications.

“We look at [patients’] markers, which reveal how they metabolize drugs genetically and pharmacologically,” Rogers says.

Rogers also notes that, in addition to saving lives and money, this protocol can prove a drug’s efficacy during clinical trials. Many drug-development companies already try to match the DNA of trial participants with the drug in question.

“During trials, you’ll obviously get better results if the participants’ conditions improve,” Rogers says. “The key is to have participants who are good genetic and pharmacological matches with the drug you’re testing.”

Data Rush

In many medical schools outside of the United States, students are typically taught how to analyze data from research done on medical procedures and devices. Data-mining of medical literature is also slowly catching on in this country. Jeff Voigt, WG’85, principal of Medical Device Consultants of Ridgewood in Ridgewood, NJ, is an advocate of comprehensively gathering, analyzing and combining data and has built his company around this discipline.

“A huge initiative in health care in this country is something called comparative effectiveness, which is what medical data-mining measures,” Voigt says. “It’s a tool that can help reduce costs in a meaningful way.”

Voigt’s clients are predominantly drug and medical-device manufacturers that want to get their products in front of decision-makers at hospitals, insurance companies and medical practices.

Start-up device or drug companies typically don’t have the skillset in house or the financial resources to analyze the available research on their product.

Yet that research might put their product “on top of the efficacy list,” according to Voigt. Insurance companies, for example, rely on product research and data assessment to write treatment coverages that in many cases are “quite poor,” says Voigt. What’s needed is well-documented proof of the benefits of a product or procedure.

“The greater the value and cost-effectiveness of the product that our research is able to show, the greater the chance that the product or technology can be more widely adopted,” Voigt says.

So these small startup companies hire Voigt. For one client, Voigt demonstrated that antibiotics, delivered within a narrow 30-minute window prior to a surgical incision being made to implant a cardiac electronic device, cut the rate of systemic infection exponentially; this type of infection costs the U.S. health-care system $1 billion annually.

“Over several years, that’s billions of dollars in cost savings, simply by addressing problems that are extremely simple to solve, which are the first issues that should be addressed,” Voigt says.

Clients often use Voigt’s research to tweak their products before marketing them.

“We can look critically at high-quality studies, combine them with other similar studies, such as clinical trial results, and then arrive at meaningful outcomes that affect how care is delivered,” he says.

Investors looking to find a value opportunity—a way to provide better therapies at lower cost—also come to Voigt, who can connect appropriate parties for their mutual benefit.

Doing Business Development Better

Bio-pharmaceutical startups may seek to lower costs, too, through outsourcing of the startup’s business development.

Corporate and business development advisory firm Locust Walk Partners—named by co-founders Jay Mohr, WG’91, and Geoff Meyerson, WG ’07 for Penn’s famed campus pathway—helps fledgling life-sciences companies partner with pharmaceutical companies interested in their particular research and product.

“And, of course, we seek out funding opportunities,” says Mohr, who serves as Locust Walk’s managing director.

When a drug has demonstrated efficacy, Mohr explains, that product’s investors generally want to realize value by hiring a partner to further develop this asset. Clients typically hire Locust Walk to work with a specific drug that’s either in the pipeline or undergoing clinical trials. An imprimatur from the ideal partner—a large pharmaceutical company—carries tremendous weight in validating the drug and may even lead to funding by big pharmaceutical companies.

Mohr concedes that, although some players in the industry saw the benefits of virtualization a decade ago, many emerging firms still hold traditional views. “They feel they need to have all their core functions under one roof,” he says.

A shift is occurring, however, with even larger pharmaceutical companies using contracted research organizations to help supplement their own in-house resources. At emerging bio-pharmaceutical companies, the scientists and former academics who run them realize they lack business development expertise and prefer to keep their firms lean.

“It’s a much more capital-efficient way to create value by allowing young drug companies to continue to develop life-saving products,” he says, adding that the increased efficiency then can lead to less cost being shifted to employers and health-care consumers.

Cost Comparison for All

Sky-rocketing health-care costs to businesses—which on average increase 10 percent a year—have hit the workforce hard. As employers require their workers to pay proportionally more toward their health insurance premiums, employees find themselves becoming more conscientious health-care consumers as they join higher-deductible plans and other programs with more out-of-pocket costs. Some companies, eager to help their workers cope with these seismic shifts, are providing technological tools to help them make more cost-efficient medical choices.

“Health-care transparency is a very hot space at the moment,” says Ethan Prater, WG’04, vice president of product marketing at Castlight Health in San Francisco.

Companies license Castlight’s technology for workers in their medical plan, and then employees use the tool to compare out-of-pocket medical costs for specific treatments and procedures across providers at hospitals, out-patient clinics and private medical practices. Most of Castlight’s clients are self-insured companies with 3,000 or more employees who are eager to help their workforce save money.

The out-of-pocket payment for the same medical procedure may be 15 times higher in one facility versus another because insurance companies negotiate different payment rates with different providers, Prater explains.

Using the Castlight tool, a consumer could realize that his out-of-pocket expenses might be half the price at one hospital over another and then opt for the lower-cost facility.

“There’s a strong financial incentive for the patient to have the procedure done more cheaply,” he says, noting that Castlight also reveals the rate that the insurance company negotiated with the health-care provider.

But health-care consumerism is not based on price alone, Prater underscores. Castlight also encourages its users to compare hospital and provider quality, based on patients’ reviews, data from government agencies like CMS and all other available quality metrics.

“As workers are required to pay more out-of-pocket expenses in these consumer-directed plans, they’re simultaneously having to become more accountable about better understanding costs and quality,” Prater says. “The upside is that this process of comparing data also helps them become more empowered.”

 Entrepreneurs to the Rescue

Experts don’t foresee a slow-down for health-care spending. The best-case scenario, they say, is a slowing down of annual cost increases from an out-of-control gallop to a more manageable trot.

“There’s a huge national imperative to lower health-care costs and improve efficiency,” Duggan says. “With even a small reduction in cost growth—as little as a one percentage point a year—the impact on savings over the long term can be huge.”

“Those on the front line—the entrepreneurs and small business owners—may be better equipped to think outside the box,” he adds.

For Pauly, the solution lies in better government incentives.

“You need to put into place programs that foster and reward relatively small improvements and changes to save money,” he says. “But it’s not just about saving money.”

“Some health procedures save lives, but not money, and that’s why we don’t necessarily want the level of spending on care to fall. We want it to grow at a manageable pace, which allows a better health return—in terms of lives saved—on increased spending,” Pauly says.

For insurers and policy-makers who are open-minded enough to accept this new health-care model, Wharton entrepreneurs are part of the vanguard, keen to help transform a failing system.