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What health care can learn from airlines!
A big Thank You to Brian Whorley, Lois Drapin, and Jonathan Klaus for their invaluable input! And a special shout out to #writersguild of Health Tech Nerds - it is such a great community for writers giving each other feedback!
Times are challenging for the industry: understaffed, plagued by pent-up demand and operational hick-ups, tons of people are stranded or have to accept delayed services. I am not talking about health care here for once; I am talking about air travel this summer.
In many ways, health care and airlines are surprisingly similar:
They are highly regulated
Safety is a major concern, and a lot of things can go wrong
Complex operations with lots of parties have to work together
High fixed operating costs
However, when you look at the price development in these sectors, there are some significant differences:
Airlines are operating much more efficiently today than a few decades ago - average domestic airfares in the US dropped from $600 in 1990 to $314 in 2021 (adjusted for inflation). More people than ever can afford to hop on a plane.
Meanwhile, the average price for an office visit has risen from $60 to $109 from 2003 to 2016 (outpacing inflation), and while many people don't see these costs because their health plan pays for it, we all bear the costs through increased insurance premiums.
While at Palantir, I spent quite some time in both sectors and I saw firsthand some of the contrasts in how they operate. Today, I want to share my thoughts on what health care could learn from airlines to operate more efficiently and potentially bend the cost curve. Obviously, comparing those industries also has a lot of shortcomings, and they differ significantly in their "product" and processes. I have tremendous respect for professionals in both industries (doctors, pilots, technicians, nurses, etc.), and this article is more about inspiring a different viewpoint than drawing the most accurate comparisons. But several common challenges exist in both industries, and each sector has to address these. I will return to the limitations of my comparisons at the end of the article.
Let’s first have a look at the cost structure in which airlines and health care operate. Both have very high fixed and semi-fixed expenditures. A commercial aircraft costs tens of millions of dollars, with many wide-body aircraft starting in the hundreds of millions. The same is true for hospitals, imaging devices, and many other medical facilities cost millions to build - also, labor costs make up a significant proportion of expenses for both industries. These fixed costs require them to make sure they optimally utilize their available resources.
This can be broken down into two areas:
Supply Optimization: Optimize the availability of your asset/ services, given any operational constraints and disruptions - Think of this as: how can we maximize the number of flights/surgery slots per day?
Demand Optimization: Optimize the utilization of services by filling all available slots - think: how can we maximize the number of passengers we take for each flight/ number of patients we can see during a day?
Supply Optimization - efficiently opening up availabilities
70% of all (!) aircraft are usually in the air - this became especially obvious when there was not enough parking space for airplanes during the COVID pandemic when air travel demand dramatically dropped. Airlines need to keep their aircraft productive, so they spend a lot of effort optimizing their operations. However, planes need regular shorter and longer maintenance checks, which must be woven into an airplane’s operations schedule. These maintenance checks require differently certified technical personnel, facilities, and/ or spare parts, and during each check, there are usually more maintenance tasks that could be completed than there is time available. Airlines have developed sophisticated optimization tools to prioritize the right maintenance issues at the right time and location to limit their planes' ground time. In addition to this overall plan, their planning must also account for unforeseen interruptions like weather or unplanned maintenance issues.
The analogy for health care operations is evident. Many procedures require an interplay of different staff, facilities, and equipment. For surgery, you will need to organize an anesthesiologist, an operating room, a surgeon, special equipment, and clinical assistants. And even standard procedures often vary in the time they take, and unforeseen complications can change the operational plan. However, from my experience in both industries, I've seen a lot of airlines employing much more advanced and sophisticated planning tools than health care organizations.
Demand Optimization - efficiently fill availabilities
Once the organization has figured out which slots they should open, they must ensure that all these slots are booked and fully utilized. On average, airlines are able to fill 85-90% of their seats. The utilization metrics are much lower for medical facilities. Let's have a look at some of the challenges in filling their availabilities:
Handling no-shows: If passengers do not show up and their seat stays empty, the aircraft is not fully utilized. Airlines have developed sophisticated methods to avoid this from happening: They usually sell more tickets than seats on a plane, and they use sophisticated data analytics to estimate how many people will show up for a particular flight. For example, business travelers on Monday and Thursday tend to be much flakier than leisure travelers on Saturday. Additionally, they allow passengers (and crew members) to be put on the standby list so that they can fill any unused seats. The killer app to avoid no-shows, though, are non-refundable fares: we are so accustomed to this that we don't even think about it anymore. If we book a flight and don't take it, we will forfeit our ticket price. No-shows are a massive issue for health care organizations as well. Doctors report no-show rates of 20-40%!!! I think they can learn quite a lot from airlines here handling no-shows. Double-booking using statistical analysis, standby lists for short-notice appointments, and upfront co-pay collection can and should be more broadly employed by health care organizations.
Demand fluctuations: certain times of the day/ week are more desirable for airline travel than others, and demand peaks during Christmas, Thanksgiving, and the summer holidays. Health care is no different - ERs have peak hours, and certain appointment times are more desirable for patients to book (late afternoon vs. lunchtime). Airlines can modulate and distribute demand through dynamic prices, i.e., making less desirable times cheaper so people will shift to these times. However, demand fluctuations are a much more significant challenge for healthcare organizations - as, in general, they cannot move acute visits to other times, and I don't think we will see "surge pricing" for health care soon. However, some interesting trends are happening around virtual care. Moving less acute care from urgent care clinics and ERs to an online setting for triage can make addressing demand fluctuations more feasible. Another interesting way health care can handle this is by filling low-demand slots more efficiently: airlines are using thousands of programs and sophisticated analytics to build loyalty with their customers and get them to travel with them. Health care can also employ more of these tactics to fill open slots with preventative care screenings by activating patients.
Efficient distribution: Another critical piece to filling all appointment slots is efficiently distributing your capacity to anyone in need. The travel industry has developed very efficient distribution channels for their tickets: Airlines not only show their available tickets on their website and to their own booking agents, but they also give them to third-party distributors who will make their inventory available to travel websites and other agents. Health care is severely lacking this: I've written about the friction in the scheduling process, which trickles down to making availabilities more broadly available to anyone who needs an appointment.
Managing "Fare Classes"
A passenger is not a passenger. Airlines know that quite well! A passenger traveling for business has quite a different willingness to pay than a student booking their flight back home to their parents. Airlines developed various strategies so passengers self-select into different fare classes, and the airline can maximize the amount of money they get from each customer.
People don't like to talk about it, but fare classes also exist in health care. However, it is much more subtle - because a patient usually does not know whether they are a "business class" or an "economy class" patient, and health care generally does not differentiate the level of service they provide to each patient. However, patients generate different amounts of revenue for doctors in two main ways:
Insurance rates: Health plans pay vastly different rates for the same procedure at the same hospital. The rates depend a lot on the negotiating power the health plan has with the health system and the type of coverage. Rates for commercial insurance is usually much higher than for Medicare and Medicaid patients.
Procedures: Certain treatments and procedures are much more profitable than others for a doctor. GI doctors can bill much more for endoscopies than for spending time on patient consultations. A patient's condition can be more procedure or more consultation-heavy and thus generate different amounts of revenue for the practice.
Like airlines, health care organizations need to balance their "patient mix" so they can operate without a loss. They often say that their commercial population "subsidizes" their Medicare and Medicaid population and that they operate these at a loss. This is a bit too easy to say as you have to look at their operations as a whole. With their high fixed cost, any additional patient increases their revenue, same as any additional economy ticket is a value add to an airline. While it is true that airlines make a bulk of their income from business class tickets, they would not be able to operate profitably without their economy class passengers.
An interesting thought is what these fare/ patient classes mean for utilization metrics. Airlines are pretty fixed in how they configure their aircraft and decide on how many business class and economy class seats they add. However, they can hold business class capacity basically until boarding and then fill it with economy class passengers later. For many doctors, this is a bit more nuanced. Instead of seeing a patient once (selling a one-time ticket), they often establish a longer-term relationship with their patients. If they have seen the patient once, it is harder for them to "drop" the patient than for an airline that "upgraded" an economy class passenger. They have to optimize their "patient mix" more long-term, and they do that whenever they accept a new patient to their practice. They basically don't have great mechanisms to shift capacity between these classes in the same way airlines can move passengers. This means that there is potentially some capacity that is not being fully utilized.
Another interesting observation is that airlines have differentiated themselves to focus on certain passenger types; for example, low-cost carriers focus on economy class passengers, and regional carriers concentrate on certain types of routes! We are starting to see more and more differentiation by procedures and patient populations for doctors. For a while now, outpatient surgery & imaging centers (low-cost carriers) have tried to unbundle hospitals (legacy carriers) by focussing on streamlined processes and facilities for certain procedures. Also, value-based payment models are promoting more differentiation of providers by population groups. Cityblock, for example, focuses solely on Medicaid patients, and provider groups like Cano, ChenMed, and Oak Street focus on Medicare populations.
Passenger Operations: Booking, Check-in, and Boarding
The razor-thin operating margins for airlines have spurred a lot of creativity to streamline every operational process. Examples are: replacing paper manuals with iPads (= less weight), switching faster from aircraft power to ground power at the gate (= less fuel), etc., etc.! In addition to aircraft operations, airlines became very good at shifting manual labor from the airline onto their passengers. Here are a few examples:
Book tickets online
Automated security background checks (TSA Pre-check, FBI no-fly lists, etc.)
Check-in Kiosks & Bag self-tagging
Facial recognition security checks
You can argue that a lot of this means less service (as we have to do a lot ourselves), on the other hand, they made it very easy for us to do these tasks and I usually hate it if I have to call the airline for something I could do in their app.
Many of these processes directly map to similar activities for health care organizations. However, there is much less pressure to optimize and digitize these processes. Most doctor appointments still have to be booked via phone, patient registration is done on paper, and insurance checks and prior authorizations often require the practice to pick up the phone to complete the registration.
While we see changes here, adoption is very slow. There is just much less pressure to change…
Safety & Quality: Standard operating procedures
Commercial airlines in the US have not had a fatal crash since 2009. Flying is the safest means of transport by far, and the reasons for this can be found in how airlines handle safety issues. Over the last decades, every accident or near-accident has been meticulously analyzed by investigators. They publish detailed reports about the different immediate and secondary reasons for what led to the accident, and they include recommendations on how standard operating procedures need to be adopted to avoid any future accidents. These reports are not to blame but to learn from mistakes. Even if an accident was caused by human error, they would look into how better system design could have prevented the mistake. Over the decades, this has made air travel incredibly safe. Airlines have sophisticated checklists and safety procedures to catch and mitigate errors early.
In “The Checklist Manifesto” Atul Gawande describes how adopting more checklists in the medical field can reduce the number of fatalities due to medical errors, which is a much higher number than in air travel. I don’t want to go into too much detail here, as I am not a doctor. Still, I guess there is quite some opportunity for health care organizations to better codify and share best practices and have industry-wide post-mortems to improve standards of care.
Differences - why are they not the same?
Okay, so let's examine why many of these comparisons are probably much more nuanced than what I have written above and also what some of the dynamics are why health care is less eager to address some of the issues:
Demand exceeds supply: In the summer of 2022, airlines operate probably the most similar to health care than ever. After two years of sitting at home, pandemic-fatigued travelers just want to travel at whatever price. Also, layoffs and retirements during the pandemic put airlines in a tough staffing spot. In health care, this problem is much worse and much more chronic: demand for certain doctors and specialties often exceeds supply, and medical staff burnout is real. As long as the number of doctors are artificially constrained by the number of available residencies (vs. by a candidate’s aptitude) and nurses and nurse practitioners are restricted in their permitted activities, we will continue to see this dynamic.
Price sensitivity: Probably the most significant difference between airline travel and health care is: patients don't shop for prices when going to the doctor. While a $10 ticket price difference can make passengers switch airlines, we don't see this dynamic for patients. They don't see the prices and generally don't have to pay them directly. Even high deductible plans have changed little about this. Also, even if they see the prices, people care more about brand and quality when they look for health care. Interestingly, patients behave quite similarly to passengers traveling on a company’s dime. They won’t choose the most affordable ticket but book based on their loyalty program and buy tickets that maximize their collected miles. Hello, adverse incentives!
What is the baseline quality? From a safety perspective - all airlines will guarantee a minimum of quality. Even when flying a low-low-low cost carrier, without seat assignment, your knees in the back of your front passenger, and $10 on-board water bottles, you can be assured that the plane is very, very unlikely to crash. Defining the minimum level of quality for health care is much harder to determine. There are differences in quality and outcomes depending on the doctor and facility you go to. Still, it is hard to tie them back to the doctor's capability as health care outcomes are inherently variable. Due to the complex nature of health care, it is much harder to impose and regulate standards for everything.
Regional diversity and diversity of needs: Health care is a regional business - the competitive dynamics in a certain market depend a lot on the specific mix of health systems and independent providers as well as a number of payers in the market. In many markets health systems form a quasi-monopoly for care. Airlines, however, compete much more on a national scale, as in principle, any airline can start and close a route at any airport, thus increasing competition. Also, entry barriers for airlines are much lower than for health. In addition to the regional dynamics, health care organizations serve much more diverse needs than airlines. Air transportation is about safely getting from A to B, with comfort being another dimension, but not much else. While aircraft maintenance crews have to handle thousands of checklists for different systems and aircraft types, the human body is unlikely more complicated. There are many specialties, many types of populations to serve, and thousands of different treatments and procedures. Health care is a much less standardized "product", and thus processes are much harder to be streamlined.
These differences explain why health care is behind in solving many of the challenges above. There is much less pressure to change than in the highly competitive airline industry. But maybe the shift to value-based care and the financial pressure of the COVID pandemic will spur the adoption of innovations in health care - and thus creates massive opportunities for new products!
I would love to hear from you about what else health care could learn from other industries. Let me know in your comments, or reach out to let me know your thoughts!
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