Thursday, April 14, 2016

No, commercial aviation isn't a good analogy for the health care industry

Ezra Klein has a post today that analogizes the commercial aviation industry to the medical sector, suggesting that health care providers model themselves on Southwest Airlines. While the comparison is largely unrelated to his (quite interesting) actual points, it badly misunderstands the core business model of Southwest.

Unlike major legacy carriers who operate complex hub-and-spoke systems, Southwest primarily runs a simple point-to-point operation connecting major cities and high-volume markets. Not coincidentally, its routes are highly profitable and enable complementary process advantages, like using a single type of aircraft.

Taking Klein's health care analogy, it would be like a hospital or insurer only serving the lowest-maintenance consumer group and offering treatments for only the most straightforward illnesses. This is obviously unrealistic, in part because the direction of cost-bundling in these two industries is precisely opposite.

Health systems start with lots of complicated, expensive consumers (elderly, chronically sick) and try to extend their margin into younger healthy (profitable) populations. In commercial aviation, the easy profitable routes are between huge markets, and bigger carriers use scale to snag those marginal fliers in smaller cities.

To really torture this analogy, it's instructive that the federal government directly subsidizes airlines for flying to tiny airports, nominally because these customers aren't profitable. Klein is totally justified in wishing for a true innovator in health systems that can provide young healthy people with simple, awesome care. But I suspect any such business model is incompatible with the collective social responsibility of serving the neediest groups, which are necessarily the most expensive and complex.

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