Redefining Health Care
Michael E. Porter & Elizabeth O. Teisberg

Page Contents

Health care reform

Competition based on patient outcomes

Administered health care systems

Meaningful competition in health care

Integrated practice units

Reorganizing to compete

FUTURECASTS online magazine
Vol. 9, No. 10, 10/1/07


The Need For Health Care Reform

The third party payer system mess:



  The fundamental task of delivering value to the patient is in conflict with all the economic incentives in the current health care system, Michael E. Porter and Elizabeth O. Teisberg emphasize at the beginning of "Redefining Health Care: Creating Value-Based Competition on Results." It is this that leads to the dysfunctional results so increasingly evident.

There are "not just skewed regulatory and private sectors incentives, but also a fundamental misalignment between the nature of competition and value for the patient" in the current health care system.

  Moreover, neither of the broad reforms currently most widely advocated - universal health coverage or methods of empowering consumers - can in their present form address the pertinent complex of problems.
  Large variations in quality of care are just as big a problem as the unconstrained inflation of health care costs. There are "not just skewed regulatory and private sectors incentives, but also a fundamental misalignment between the nature of competition and value for the patient" in the current health care system.
  The authors offer an extensively researched way forward with strategic and organizational reforms tailored for each of the major actors in the complex health care system. Their program involves major and often expensive transformations in the ways system participants currently do business, but most impressive, they note current movements in these directions by early adopters with demonstrated benefits in both the health care delivered and the efficiency and profitability of operations.
  The authors pound home their central theme with pervasive repetition that is undoubtedly way overdone. Nevertheless, this is a must-read book for health care providers, health plans, and employers that provide health benefits. It is loaded with detailed guidance that this review can only hint at. It is full of opportunities for improving health care results while containing costs and improving provider profit margins.

Other countries are moving away from their universal, single payer systems.

  A brief review of current problems is provided by the authors. Despite spending almost $2 trillion on health care as of 2006 and the capacity to achieve remarkable health care outcomes, the system suffers from large variations in the quality of care delivered, high error rates, the delivery of both too much and too little care, and all the problems of a mass medicine system. To access the required levels of care frequently requires determined efforts by patients and their families. Moreover, costs that are rising rapidly and inexorably threaten all the parties involved. Bureaucratic efforts to administer the system are strangling it.
  Reform efforts involving more of the same
persistently make matters worse. They are simplistic - targeting one or two salient features of a complex system. None of them will suffice. "Each of them is incomplete, and bring with it new problems."

  The law of complex systems: You can never change just one thing in a complex system. Each change will have unintended consequences, some of which will be noxious and require further changes that will lead to further unintended consequences - some of which will be noxious.

  Health savings accounts ("HSA"), government entitlements to cover drug costs, and the spread of information technology, may all be helpful, but all fail to address the complex underlying problems. Large integrated systems lack the needed forms of competition. Consumers, no matter how empowered, will frequently remain at a disadvantage when accessing the complex and arcane health care market. Other countries are moving away from their universal, single payer systems. There must be fundamental changes for all the participants in the health care system if the problems are to be effectively dealt with.

  The structure of the health care delivery system is the starting point for the authors. Structure drives cost and quality, which impacts insurance premiums and the amount of coverage feasible.

  "The fundamental problem in the U.S. health care system is that the structure of health care delivery is broken. This is what all the data about rising costs and alarming quality are telling us. And the structure of health care delivery is broken because competition is broken. All of the well-intended reform movements have failed because they did not address the underlying nature of competition.
  "In a normal market, competition drives relentless improvements in quality and cost. Rapid innovation leads to rapid diffusion of new technologies and better ways of doing things. Excellent competitors prosper and grow, while weaker rivals are restructured or go out of business. Quality adjusted prices fall, value improves, the market expands to meet the needs of more consumers."

    Competition in the health care system does none of these things.  Health care competition is today dysfunctional. Costs rise and quality varies widely, quality service is not rewarded, and weaker providers don't go out of business. Innovation diffuses slowly and doesn't drive value improvement the way it should.
  Health care system competition has instead become a zero-sum game. Gains for some participants come at the expense of others.

  "Participants compete to shift costs to one another, accumulate bargaining power, and limit services. This kind of competition does not create value for patients, but erodes quality, fosters inefficiency, creates excess capacity, and drives up administrative costs, among other nefarious effects."

  Misaligned incentives and prior strategic choices affecting all participants have created this "dysfunctional competition." Some large integrated participants like the Veterans Administration hospitals, Intermountain Health Care, and Kaiser have avoided this dysfunctional competition and achieved remarkable results. However, limiting competition is not the answer.

  Indeed, when put to the test by the flow of injured from the Middle East conflicts, the Veterans Administration system was found wanting in several respects. Nor is it cost effective.

Competition Based On Patient Outcomes

Value for patients:


  System participants should be competing on the basis of the value they deliver to patients instead of battling over who pays what and the achievement of short term goals.

The relevant factors today are inputs when they should be outcomes.


Real competition is stifled by confining patients to health plan networks, captive referrals within provider groups, and a lack of relevant information.

  None of the reforms, past or currently advocated, is designed to stimulate competition to deliver superior value for patients. Indeed, many create incentives that are badly misaligned with value for patients.

  "The problem is that competition does not take place at the medical condition level, nor over the full care cycle."

  Competition is currently in different ways "too broad, too narrow, and too local." The relevant factors today are inputs when they should be outcomes. The focus is on discreet interventions instead of on the full cycle of care. The care provided for individual medical conditions involves fragmented interventions instead of an integrated approach. Value for the patient involves the full cycle of care, not just the outcome of a single intervention, office visit or test.

  "Providers offer every possible service, and gear up to handle any patient who walks in the door. Health plan providers contract with providers across the board. Yet breadth of services per se has little impact on patient value -- it is the ability to deliver value in each medical condition that matters. Health plans and providers have merged and consolidated, but the pursuit of breadth and the duplication of services have only increased."

  Real competition is stifled by confining patients to health plan networks, captive referrals within provider groups, and a lack of relevant information. The patient faces a sometimes insuperable challenge in navigating the system. There is little guidance in the avoidance of unneeded interventions. There is little help in preventing disease or managing ongoing problems.

  The localized structure of health care services has been rendered obsolete by the increasing complexity of health care services and the increasing ease of travel. Local providers frequently lack the volume and experience to develop excellence for particular conditions. Expensive broad-scale facilities frequently lie idle. Supply frequently "creates" its own demand as providers order tests and - worse - perform interventions that are not needed in order to justify over-expanded capabilities.

Superiority of competition on results:

  Value to the patient depends on "patient outcomes per unit of cost at the medical condition level." Competition on this basis can be a winning proposition for all participants in the system. However, it requires that results be measured and disclosed.

  "The ability to measure results and to control fairly for initial patient circumstances" - to adjust for risks - has in fact been "conclusively demonstrated" the authors assert. Yet today no system participants require it or do it.

    "Mandatory measurement and reporting of results is perhaps the single most important step in reforming the health care system." (emphasis in original)

  Instead, the effort has been to control supply and micromanage provider practices - to set procedural standards of care and to review requirements for new capital investment.

  "Recent quality and pay-for-performance initiatives address process compliance rather than the quality of results achieved. These initiatives presume that good quality is more expensive, and seek to reward good performance with small differentials, which ensure the upward march of provider reimbursement. Process guidelines are comfortable to providers, because competent providers can readily meet them. Value-based competition on results and pay-for-performance, then, are very different models."

Any reform that doesn't involve value-based competition will fail to control costs or provide incentives for excellence.

  Instead of setting minimum standards that all can meet, it is essential that the better providers be recognized so patients can migrate towards them to apply pressure for innovation and excellences across the whole system. Any reform that doesn't involve value-based competition will fail to control costs or provide incentives for excellence.
  With competition on results, there is no need for inherently clumsy administered efforts that establish some inflexible structure for the system, dictate the processes of care or how IT systems should be designed, or that determine when new technologies should be adopted. Such administered efforts inevitably prove rigid and incompetent. "If every actor has to compete for every subscriber and patient," improvement and innovation will accelerate and there will be no need for ineffective administered micromanagement efforts. Top-down efforts at controlling costs and micromanaging the system can't possibly achieve what competition on results achieves.
  The authors provide a chapter summarizing the staggering scope of the current health care mess. While excellent care is available, the costs are too high - life expectancy in the U.S. is just average - preventive care is generally lacking - incidents of over-treatment and under-treatment and other medical errors are common - there are unjustifiable regional differences in practice standards and quality differences among practitioners - and the diffusion of medical knowledge is unconscionably slow. On average, it takes 17 years for the results of clinical trials to become standard practice. There seems to be no relationship between health outcomes and expenditures.
  Malpractice insurance premiums are rising. This induces resort to costly systems of defensive medicine. There is an overwhelming burden of expanding administrative costs.

  In properly functioning competitive markets, competition is a positive sum game where all customers receive higher quality and greater choice for reduced sums, markets expand and quality producers prosper while those that provide inferior goods and services are pushed aside. (These benefits flow in abundance even when competition is far from "perfect.")
  Value-based competition is what happens in just about every other segment of the U.S. economy. Applied to heavily regulated industries like airlines and trucking, or even to the sclerotic economies emerging from communism in Eastern Europe, value-based competition (that is far from "perfect") has delivered "extraordinary benefits," the authors emphasize.
  In the U.S., computers, automobiles, automatic teller machines and similar goods improve vastly every decade. These improvements are the result of value-based competition as businesses are driven to offer more for less cost to attract customers.

  In zero-sum competition - such as currently in health care - the financial pie doesn't expand. It is just repeatedly divided as participants fight over shares. Value to customers plays no role. Instead of striving to attract customers by creating value for them, participants struggle to shift costs and to capture customers by restricting choice, and to reduce costs by restricting services.
  "Cost shifting creates no net value." One participant's gain is another's loss, and it is a vast distraction from actual care giving. It involves vast increases in administrative costs. It drives consolidation in health care for purposes of enhancing bargaining power rather than for improving care.
  There is no economic rationale behind this consolidation. Offering service to large groups of diverse patients creates no economies of scale. Patients are still treated one at a time. It does not involve specialization. It leads to mass medicine as doctors are pressured to make up for discounting their services by seeing more patients in a given period of time and by reducing the scope of care.
  Costs are shifted to small groups, unaffiliated patients and the uninsured. Ultimately, even large groups pay more as fewer people can afford health insurance and must be provided free care in expensive emergency room settings. The use of capitation plans favors full line providers that are far less efficient than specialist providers.
  Thus, the onsolidation in health care that has drastically reduced competition has failed to achieve significant cost savings. Inevitably, this has enabled consolidated health care providers to raise prices.

  "Recent empirical studies across geographic markets confirm that hospital consolidations, rather than improving efficiency, result in price increases that at least equal, and usually exceed, the median price increases by other hospitals in the same market and that price increases are greater in the most concentrated markets."

  Dysfunction pervades the current system. The incentives of the current system raise costs while reducing the quality of care.
  Today, even doctors lack information on outcomes and costs sufficient to make knowledgeable referrals. Networked doctors refer within their networks. Competition among broad line providers and provider groups to sign up large numbers of potential patients has led to improvements in amenities but has little impact on health care when members get sick.
  The time to choose a provider is when you get a particular illness, not when you are healthy, the authors point out. Nevertheless, when illness strikes, patients find themselves restricted to providers within their network. These providers are included in the network on the basis of the discounts they offer rather than on their skills.
  Nor do networks provide continuity of care. Service lines are in different locations and are seldom integrated, "communication remains limited, the coordination of care is ad hoc, the multiple physicians treating a patient rarely meet as a team," and the ultimate results of care are rarely measured.

  Competition for resources among participants does not focus on outcomes or even on overall costs. It permits providers with worse outcomes and higher costs to stay in business. Competition focused on patient outcomes "would drive improvements in efficiency, effectiveness, reduce errors, and spark innovation." Unfortunately, there is now almost no competition at the level of medical condition outcomes. Physicians and patients are generally confined within network practice. There is practically no information about comparative capabilities.

  "Lack of value-based competition on results has allowed  care of a patient to be fractured across numerous specialties, hospital departments, and physician practices, each of which focuses on its discrete intervention. Nobody integrates care for the medical condition as a whole and across the full care cycle, including early detection, treatment, rehabilitation, and long-term management."

  Inevitably, health plans and providers are driven to restrict treatment options to cut costs. This is clearly counterproductive for the patient. "De facto rationing" has thus become disturbingly widespread.
  Inevitably, this leads to unsatisfactory results, law suits, and rising malpractice premiums that further raise costs directly as well as indirectly through the incentive to practice "defensive medicine." Injured patients actually receive less than 30% of malpractice premium expenditures.
  Health care services are treated as a commodity under the current mass medicine system. This is clearly inappropriate.
  Health care service is a profession,
not a mere collection of scientific and practice techniques. Health care services are not fungible. There are wide variances in knowledge and skills and technical capabilities. Complexity increases rapidly with rapid advances in health care capabilities. Mass medicine practices are increasingly inappropriate - and dangerous. Yet, mass medicine is what the current system increasingly delivers.

  "Competing on costs instead of value makes sense only in  commodity businesses, where all sellers are more or less the same. Competing on pieces of costs, not total costs, does not make sense in any business. - - - The result is that health plans, employers, and even providers pay insufficient attention to the goal that really matters: improving value over time."

  There simply are no incentives at present for referring patients to the best providers - or knowledge as to who those providers may be. There are strong incentives for not going beyond network providers. Even for Medicare patients who have no network limitations, referrals are generally restricted to local providers because of habit, inertia and lack of information.

  Broad line providers stretch to provide services for which they have insufficient volume to achieve expertise and efficiency. For example, there were 139 hospitals offering heart transplant service, although many see only a few patients per year and have even fewer who survive. On the other hand, this supply often creates its own demand as providers stretch to utilize the diagnostic and treatment facilities they have whether or not the services are needed.
  Yet, ironically, full line providers suffer from fragmentation by academic specialty. There is no incentive for teamwork. "Each department or physician practice takes a piecemeal view of the care."

  "In many situations, the provider team never meets, information is not really shared, and both quality and efficiency suffer. Coordination and communication problems, in turn, raise the incidence of errors and impede the design and implementation of the improvement process. The fractured care structure inhibits conversations about improving results over the full cycle of care, but these conversations and ideas should be a shared source of excitement and professional satisfaction for every medical team."

  Cosmetic surgery is not substantially afflicted by third party payer systems. In that field, for example, quality improves and costs decline.
  The authors note that some consolidated groups have decided to rationalize and specialize. They identify Intermountain Health Care and the Cleveland Clinic. But most are content to provided duplicate capabilities in their various hospitals and clinics. Even substandard services are maintained to avoid referrals to outside providers. Most have not integrated practice units, but maintain the same old structure of care around discrete interventions and traditional specialties.
  Innovation has declined with consolidation. Previously, there were always a few doctors willing to experiment with new ideas or treatments - especially for poorly understood chronic ailments. They were quick to adopt newly proven clinical practices.

  "Given the need for reimbursement approvals and lacking rewards for better quality, provider groups have had little incentive to innovate, especially when a new approach raised costs in the short run."

  The use of buying groups to obtain discounts for supplies often results in large inventories of some items and shortages of others - and long delays in acquiring innovative products. Drug companies now spend large sums advertising their products to potential patients. All of this, of course, has to be paid for.

The need for focus on patient outcomes:



  Competition has to be focused on services for the patient. It should be focused on "addressing particular medical conditions" over the full cycle of care, "including monitoring, diagnosis, treatment, and ongoing management of the condition." This requires information about actual experience levels, treatments used, prices and results.

  Performance information is essential for such competition. Performance information stimulates quality improvements and controls costs. However, it is largely lacking in the current system. Indeed, pricing regulations have become so "Byzantine" that many providers couldn't quote a price if they wanted to. "Patient satisfaction" data is useful but clearly not specific enough. Ranking systems are not evidence based and have many inadequacies.

  "In only a few isolated disease areas -- notably cardiac surgery, organ transplants, cystic fibrosis, and kidney dialysis -- is broad-based results information available even to physicians. There is essentially no information at all on diagnostic effectiveness or its cost, except in a few forms of cancer screening."

  One study of results showed that death rates among stroke patients varied from zero to 36.8%. Clearly, such information is vital. In Pennsylvania, a study of heart valve replacement procedures showed that the most expensive hospitals had the worst results. Without such information, the primary disciplinary factor is law suits rather than competition. This, too, drives up costs.

  Some reporting systems have been established with major immediate benefits.

  "After four years of publishing [cardiac surgery] data, New York achieved the lowest risk-adjusted mortality following bypass surgery of any state in the country. Since then, New York has registered not only the lowest U.S. mortality rate but also among the greatest rates of improvement - - -, and improvements across the state have continued - - -. In Cleveland, death rates at the thirty participating hospitals dropped 11 percent in the first four years of published data."

  A variety of organizations have been established to provide outcome data for specific ailments. United Resource Networks specializes in organ transplants. Preferred Global Health covers Europe and the Middle East.
  Best Doctors, Pinnacle Care International, and Consumers Medical Resource cover various illnesses in the U.S. However, they lack specific information, and must rely on reputation and expert surveys. Dr. Foster, Ltd., in the United Kingdom, bases its outcomes information on specific data provided by the National Health Service.
  The current system withholds the information that patients need to play an active role in their health care. Patients should be encouraged to play and active role. Evidence shows that this improves outcomes and reduces costs. Without information, however, most just leave the decisions to other participants in the system.
  Copays, deductibles and health savings accounts encourage patients to be active participants. Here, too, there is a lack of adequate information, so the primary impact is to encourage self-rationing and to remain within networks.

Administered Health Care Systems

Health plan reforms:



  The authors repeat and elaborate all the problems of the health care system as they affect health plans, and then explain how to reorganize for success based on subscriber health outcomes instead of the mere cutting and shifting of costs. Reorganizing for value-based competition on results over the full cycle of care requires medically integrated care rather than "focused factories delivering specific procedures or piecemeal care."

  The history and development of the current dysfunctional third party payer system and the inevitably counterproductive administered alternatives to market pricing mechanisms that have been tried are described at some length. This is recommended reading as an example of the law of complex systems. Every reform quickly resulted in a multitude of unintended consequences, some of which inevitably made matters worse. Further reforms just repeated this cycle. The multiplication of unintended consequences by the series of reform efforts ultimately creates an impossible situation.

  Politicians and administrators hate to release the levers of power and influence. It is thus only when the politicians and administrators screw up so badly they don't know what else to do that we get deregulation and privatization. 

  National health care systems in other countries are now experiencing alarming increases in health care spending and are resorting to various forms of rationing. The evidence is that the quality of care is frequently inferior to the U.S. system and the rates of medical error are higher.

  "It is ironic that despite mounting evidence abroad of cost and serious quality problems in government-controlled systems, the idea of government control and a single payer system is gaining a new legitimacy in the United States. As desperation grows with the runaway costs of our system, and with no good alternatives evident, reformers throw up their hands and accept the need for rationing. The power of the right kind of competition to deliver huge improvements in value goes unrecognized." (See, Richmond & Fein, "The Health Care Mess," setting forth the case for establishment of a national single payer universal health care system.)

  Single payer national systems are now being viewed by many as the ultimate reform, and they do offer many theoretical possibilities for administrative simplicity and cost reduction. However, they destroy all competition, ration care to control budgets, deter innovation, and may kill the market for the development of new drugs. A national single payer system is the ultimate incentive for zero-sum competition.

  "It simply strains credulity to imagine that a large government entity would streamline administration, simplify prices, set prices according to true costs, help patients make choices based on excellence and value, establish value-based competition at the provider level, and make politically neutral tough choices to deny patients and reimbursement to substandard providers. Medicine as currently structured is deeply flawed in all these areas, and a single-payer system would do little to correct the problems. More likely a single payer would be just a payer, not a true health plan."

  Health savings accounts and other incentives for active "consumer" choice are viewed by the authors as useful steps in introducing the right kind of competition into health plans, but alone they do not go far enough. Health care consumers are still restricted to insurance or health plan options that are currently enmeshed in networked systems and engaged in dysfunctional forms of competition. Consumers are still left with the daunting task of making a series of appropriate decision over the full cycle of care on the basis of grossly inadequate information. Value based competition focused on the patient's particular medical condition over the full cycle of care creates positive incentives that eliminate these problems.
  Health savings accounts ("HSAs) have effectively been coupled with high deductible insurance to provide a complete health plan package. (See, Gratzer, "The Cure," at segment on "Health savings accounts.") Aetna has found that subscribers with such combinations spend more on preventive care, seek more information about health care choices, use emergency rooms less, use more generic medications, and experience significantly lower rates of health care cost increases. Most earn less than $30,000 and have money to roll over in their account at the end of the year.
  In the absence of adequate information, however, HSAs often lead to the self-rationing of care. They need a system of value-based competition and information about results to achieve their full benefits.

Pay for performance and similar recent quality-focused reforms are actually about process rather than quality.

  Pay for performance and similar recent quality-focused reforms are similarly viewed as useful but clearly insufficient. They are actually about process rather than quality. Most are really "pay for compliance" with accepted medical standards of practice. "Providers are expected to conform to specific processes, but are not necessarily rewarded for better results." (emphasis in original)
It is not surprising, then, that evidence is accumulating that such reforms are not achieving the desired results. The system rewards process rather than results. This is a deterrent to innovation. Only a few - often not the most important - processes are targeted while others go unmeasured, yet the whole hospital benefits for meeting a few targeted processes. The vast array of medical processes and their application to the vast array of health care needs is simply too complex for this administered solution. Accepted procedures keep changing faster than the administered guidelines.
  Finally, it is another example of paying for treatment rather than for results, and thus a sure driver of increased costs. It is just another futile attempt by administrators to micromanage health care.

  "Better care reduces costs through less invasive treatment, more expert care delivery, better management of chronic care, and improved risk prevention. Thus, higher pay will often not be necessary to reward better results."

  Extending tax deductibility to insurance premium payments by individuals does not address either cost or quality issues. Entitlement expansion and the purchase of drugs from Canada are just more cost shifting exercises that increase incentives for zero-sum competition. Purchase of drugs from abroad could destroy market justification for the development of new medicinal drugs.

Meaningful Competition in Health Care

Value-based competition on results:

  Positive-sum competition is created by value-based competition on results. All participants can win, although the least competent will be pushed aside as the most capable expand.

  Value-based competition on results is "the only way to drive sustained improvements in quality and efficiency."

  "When providers win by delivering superior care more efficiently, patients, employers, and health plans also win. When health plans help patients and referring physicians make better choices, assist in coordination, and reward excellent care, providers benefit. And competing on value goes beyond winning in a narrow sense. When providers and health plans compete to achieve the best medical outcomes for patients, they pursue the aims that led them to the profession in the first place."
  "Unless providers have to compete to be excellent, there is simply no feasible way to create - - - incentives for rapid and widespread improvement. It is not realistic or effective to attempt to second-guess provider practices, review their choices, and specify from the outside the way care should be delivered. It is also not realistic to rely on specialized training or board certification to keep physicians up to date. Nor is it feasible to think that providers who do not know how they compare, and who do not have to compete, will always sift through the voluminous literature on clinical trials in search of ways to improve their outcomes."

  The authors identify the primary characteristics for value based competition.
  • The focus must be on value for the patient, not just costs. The quality of patient outcomes relative to costs must be the measure of success and the basis for financial rewards.

  Value for the patient - patient outcome - is a subjective standard. Different patients may value various outcomes differently and be willing to accept different degrees of risk. Some may prefer less aggressive treatment than others. No top-down system can deal with such variations. A competition-based system automatically takes such factors into account where a centrally managed system provides one-size-fits-all procedures.

  • Value is judged by ultimate outcomes for the patient.

  • The outcome is judged for the entire "medical condition," not just discreet procedures or interventions. "Only at the level of medical condition [such as diabetes, knee injuries, congestive heart failure] can outcomes and costs be compared." These are the results providers must strive for and competition must reward or punish.

  "A medical condition -- e.g. chronic kidney disease, diabetes, pregnancy -- is a set of patient circumstances that benefit from dedicated, coordinated care. The term medical conditions encompasses diseases, illnesses, injuries, and natural circumstances such as pregnancy. A medical condition can be defined to encompass common co-occurring conditions if care for them involves the need for tight coordination and patient care benefits from common facilities."

  To compete in this manner, providers will have to organize themselves to deal with and specialize in entire medical conditions - not just discreet interventions, treatments or services. This team approach with joint responsibility offers many opportunities for improvements in health care.

 "Competition on value over the care cycle will lead to more attention to the prevention, detection, and long-term management of illness relative to treatments and acute interventions."

  Such management can prevent early stage illness from progressing into more severe stages. Early stage kidney disease, for example, may be prevented from progressing into kidney failure. Yet, preventive health care measures are not generally a part of the current system.
  Changes in structure, organization, measurement and time horizon will be required for this shift to full health care cycle management. Integration and coordination of health care interventions is essential. The provider must be concerned with not just a particular intervention, but with the whole care cycle - including assessment of risks, prevention of occurrence, treatment, rehabilitation, and long term management. Such management efforts will deliver great benefits for patients. This management structure will create joint accountability for the entire health care team. In today's fractured health care system, there is little accountability for overall outcomes.

  "Focusing on value over the care cycle would shift this debate from one about controlling spending to one about the most effective use of drugs and other treatments to improve quality and efficiency in treating and managing specific diseases. In today's competition, the most cost-effective drug is not always chosen."

  The authors note a study that revealed that a new more expensive diuretic drug frequently resulted in worsened outcomes. However, this outcome was not widely known.
  Compliance with specified procedures is bound to be costly and disappointing. Success based on superior patient results over the full cycle of care will encourage best practices and reward best providers. Excellent providers will be rewarded with more patients. This requires information.

  • The value of an extensive practice is emphasized by the authors. Specialization is important for increasing the scale of practice and attaining experience and learning for particular medical conditions. Yet, the current system encourages part time practice covering diverse medical conditions.

  "Organizations with experience in a field will tend to have more skilled teams, develop more dedicated facilities, and achieve faster rates of learning. Experience allows individuals and teams to hone more effective techniques and routines and to get better at spotting and dealing with problems. Experience and specialization also tend to attract the most demanding patients. Serving them drives even more rapid learning."

  Scale is important in providing financial support for teams and facilities dedicated for particular medical conditions. "Scale results in multiple colleagues doing similar things who can consult with and get feedback from one another." The authors cite the orthopedic surgeons at New England Baptist Hospital.
  Scale permits integration of all aspects of the care cycle for a particular medical condition. It promotes flexibility and efficiencies in scheduling use of facilities and purchasing supplies.
  The authors cite the excellent results achieved at the Texas Heart Institute at St. Luke's Episcopal Hospital which has performed over 100,000 coronary bypasses. It attracts the most complex and demanding patients, yet experiences surgical costs that are one third to one half lower than at other academic medical centers.
  The hospital constantly examines and improves its procedures and has dedicated facilities that ease the coordination of different procedures. They have achieved an admirable record of advances in best practices state of the art. Today's reimbursement practices actually penalize this approach.
  Thus, competition on results for particular medical conditions can drive a "virtuous circle."

  "Deeper penetration in a medical condition leads to accumulating experience, rising efficiency, better information, more fully dedicated teams, increasingly tailored facilities, the ability to control more of the care cycle, greater leverage in purchasing -- many key purchases are practice-unit specific -- rising capacity for subspecialization within the practice unit, efficiencies in investing in practice development and marketing, faster innovation, and better results. Better results lead to an improving reputation, which attracts more patients and feeds the circle further."

Fragmentation of services in full service health care facilities results in "subscale services, dependence on less dedicated resources, shared facilities, quality problems, and inefficiency." Unfortunately, the current system rewards such inefficiency.

  But there has to be the right kind of competition. There has to be several competing providers specializing in treatment of each medical condition, otherwise complexity and complacency and repetition of conventional procedures may set in.
  Fragmentation of services in full service health care facilities results in "subscale services, dependence on less dedicated resources, shared facilities, quality problems, and inefficiency." Unfortunately, the current system rewards such inefficiency.
  Hundreds of studies show that specialist high volume physicians and teams get better results, often at lower cost. At least "a threshold level of experience in a particular condition is critical for good quality." Mammograms are far more accurately read, for example, when the reader examines over a thousand films each year.
  Conscious learning in a specialty is important and will be driven by competition on results. High volume hospitals that engage in clinical trials, for example, improve more than those that don't.
  Fragmented full service hospitals are not organized to capture and disseminate learning. They are often inconsistent in their procedures and unable to discern the sources of problems. Physician experience in such facilities does not improve patient results, which indicates a lack of learning. Because they are involved in so many different procedures for different medical conditions, their is minimal payoff for examination and updating of procedures for any one of them.
  In the absence of competition on results, even experienced providers are not under any pressure to learn or improve their practices. Study and improvement are discretionary. Thus, merely restricting certain procedures to high volume centers is not enough. "Introducing volume restriction without considering results could protect established providers from competition, which would actually reduce patient value."

  "The current nature of competition accentuates fragmentation. Health plans and government programs aim to lift all boats and support all providers in achieving a minimum standard of practice, instead of rewarding excellent providers with more volume. The net effect is a huge number of providers for most services, even in complex conditions such as neonatal cardiac surgery and organ transplants. With little or no accountability for results, providers enter every service perceived as profitable."

  • High quality care should actually be less costly.

  The authors note that improvements in the treatment of certain medical conditions - like coronary heart disease and gall stones - have resulted in reduced costs rather than increased costs. A diagnosis that leads to ineffective treatment is no bargain, while high-cost stroke intervention that avoids long nursing home confinement is a bargain.
  There is no inherent tradeoff between health care quality and costs. The substantial time lag between development and adoption of best health care practices offers obvious opportunities for increases in both quality and efficiency of health care. "Just by implementing known best practices, virtually all providers can improve both quality and margins without raising prices."
  Practice improvements at many points will reduce costs. Improvements in diagnosis, adoption of less invasive procedures, improved coordination and integration of the care cycle, improved management of chronic conditions, improved risk assessment and preventive health care, rapid adoption of best treatment procedures, all offer points where improvement is possible.
  The elimination of mistakes is an obvious way to increase quality and reduce costs. In health care, mistakes can be very costly - and are in fact hugely costly - involving many tens of billions of dollars.

  • Results must be measured and reported to provide information essential for competition to be effective.

  "Information about results, which is appropriately risk adjusted, must become the critical driver of behavior in the system -- by referring physicians, by health plans, by patients, and by providers themselves. Results -- outcomes versus cost -- also must be the ultimate basis on which drugs, medical devices, other technologies, and services are selected."

  The results that count are not reputation or amenities or results of discreet procedures, but the results for the specific medical condition over the full cycle of care. To develop such information will require patient tracking systems.

  "If, and only if, providers have to demonstrate excellent results in addressing specific medical conditions will errors decline, unnecessary tests not be performed, unnecessary treatments stop, the use of ineffective treatments cease, and the withholding of effective services come to an end. Supply-induced demand for unneeded care will decline when results are measured and compared. Physicians who cannot demonstrate patient value will go out of business."

  Information about results - about costs and treatment outcomes adjusted for risks and measured over the full cycle of care - is vital for effective competition. Patient choice and evaluation of providers must be based on reliable information.
  Information should include characteristics of the patient population - the severity of the cases handled - so that risk levels can be evaluated. The treatment methods employed should also be explained, and the experience levels of the teams and team members should be provided. Most important is the measurement and reporting of patient costs and treatment results.
  Even with imperfect information and imperfect competition, the effort to compete on the basis of value for patients will deliver a cornucopia of benefits. Competition need not be perfect to deliver vast benefits. Where information on results has been available - as in the treatment of cystic fibrosis - substantial improvements have quickly followed.
  The Veterans Administration instituted integrated and measured treatment procedures in the 1990s, and achieved substantial quality improvements. Intermountain Health Care in Utah, M.D. Anderson Cancer Center in Houston, and the Cleveland Clinic in Ohio are identified by the authors as applying many of these concepts.
  Currently, "process information" is being collected by a variety of organizations. Information about such general factors as infection control measures and the use of computerized order entry to reduce errors are reported. Less collected is "process information at the medical condition level." Such process compliance information is being collected for only a few medical conditions. But it is patient results that count most.

  "Health care delivery is complex, and protocols do not capture the entire care delivery process. Good medical practice involves adjustments to address each patient's particular circumstances. Providers differ in skill, facilities, and organizational structure."

  Standardized medicine is not the goal, the authors emphasize. Innovation and rapid diffusion of best practice advances is the intermediate goal. The true goal is improving risk-adjusted results over the full care cycle. Indeed, when results are accurately reported, the reporting of process information will be unnecessary. Collection of process information, of course, will still be a part of internal quality control and improvement efforts.
  Pricing reporting is needed
that discloses the prices for the bundles of related services involved in episodes or full cycles of care. Price reporting is impossible under current third party payer reimbursement procedures.

  The measurement and reporting of experience with particular medical conditions is more straightforward than for methods and results. It is a fair but not perfect proxy for results expectations. Experience reports should be systematically broken down with relation to treatment approach, disease subtypes, patient populations -- age and risk factors -- complications, initial conditions, etc. Eventually, genetic data will be included.
  High quality comparative outcome data is currently being collected and reported for a variety of medical conditions. The authors mention pediatric oncology, cystic fibrosis, end stage renal disease, intensive care, cardiac surgery, and organ transplants. In each instance, measurements may be partial and reporting is frequently restricted. Nevertheless, reduced mortality and other substantial benefits in health care have flowed from these measurement and reporting efforts. "The improvement in patient value has been enormous," the authors report. It is no longer credible to doubt the feasibility of such reports.
  The authors go at some length into the requirements and methods of outcome measurement and reporting. Organizations have been established to collect and disseminate this information for several medical conditions. But providers and other vested interests have blocked widespread reporting of outcomes data. Frequently, only process data is reported. Providers assert that results measurement and risk adjustment are too imprecise, and may deter acceptance of the sickest patients. This fear has proven unfounded, and as with anything else, improvements in measurement come with use.

  "There needs to be an array of measures to capture the multidimensionality of outcomes. Providers and medical societies need to participate in defining measures. Providers must be able to check and correct the accuracy of data before -- and after -- it is published."

    Health plans fear that patients will demand the most expensive treatment. This fear too has proven unfounded. "Empirical evidence shows that informed patients tend to choose less invasive, less expensive care and achieve better outcomes."
  Results data - even if less than perfect - is the single most important factor in driving health care system improvement. Substantial declines in mortality rates for several serious conditions provides clear objective proof of the value of results measurement efforts. However, coupling it with reporting and competition on results would be a vast further improvement. Mandatory reporting of results information for specific medical conditions would bring tremendous health care improvements.

  "Honeywell estimates that it has cut more than $2 of health care expenditures for every $1 it spent on a program that enabled employees to call a medical information company, Consumer's Medical Resource, for up-to-date practical information on forty specific diseases. The information helps employees learn which treatments and drugs are most effective. Even though no provider results information was included, the benefits were substantial. Of the Honeywell employees who used the service, one in thirty discovered they were misdiagnosed; one in ten discontinued a treatment considered unnecessary, ineffective, or unproven; and one in five changed doctors."

  • The system must reward innovation that increases value to patients. When new methods, new facilities, new organizational structures, new processes, new forms of collaboration across providers that increase value to patients are reported, rewards for innovative providers will flow from the attraction of increased demand for their services. In this way, innovation will not only improve quality of health care, it will reduce costs without rationing.

  "[Innovation] is discouraged in the current system by a wide variety of factors, including a lack of accountability, reimbursement practices that penalize better methods, buying group structures focused on short-term cost savings, and rationing mind-sets."

  Innovation studies have to be expanded to examine the results of full care cycle outcomes and various aspects of care besides drugs and surgical implants. At present, there is little incentive for such studies, yet changes in organization and processes have provided major improvements in care. The authors provide several examples. Competition on value would provide such incentives. The measurement of risk-adjusted outcomes facilitates such studies.

  "Effectively, hundreds of thousands of natural experiments occur daily in U.S. hospitals and physician practices as medical teams deliver care, doing the best they can. The variations in patients' conditions, treatments, and outcomes can be analyzed for patterns that reveal the relative effectiveness of processes and therapies that are currently in use. - - - Indeed, evidence-based medicine, at its foundation, involves widespread gathering and reporting of risk-adjusted outcome data. With a standardized set of outcome measures in each area of practice, analysis can be done both within an institution and across institutions to rapidly advance the understanding of effective care."

  • Competition must be geographically broad - even national or international in scope. Results must be judged against those achieved in other geographic areas. Severe cases should be directed to the hospitals best suited to deal with them within a broad geographic area.

  The ability to deal with severe stroke victims varies widely among hospitals, the authors point out. Getting to the right hospital within the first 3 hours can be critical. Trauma centers offer another example of the superiority of dedicated facilities. For less time-sensitive  conditions, competition can be national or even international. Yet, the current system does not disseminate information about such specialized capabilities and poses obstacles to going beyond local or network facilities.
  Health plans and employers should thus encourage competition across broader geographic areas to achieve better results for subscriber and employee patients. Broadened competition will even drive improvement in local facilities and the practices of local physicians. Local hospitals and physicians will seek relations with the best specialized facilities for consultation or the referral of difficult cases.

  "The goal should be to encourage excellent providers to grow in their areas of expertise, rather than to lift all boats. Raising every provider to an acceptable standard in every medical condition will perpetuate fragmentation of service lines. Drawing from a wider geographic area, providers treating less common conditions could serve enough patients to benefit from scale, experience, and learning."

  A general hospital is needed for emergency care, routine and preventive care, disease management, and follow-up care. For complex medical conditions, they should have relationships with specialized providers unless they have the scale to create their own dedicated teams.
  Traumatic brain injury, for example, is a medical condition requiring expert intervention. Only about 16% of hospitals have this expertise. CarePath, a specialized service company, provides web-based information to local hospitals and telephone coaching by leading experts. Local hospitals should also have relationships with a leading national brain trauma center.

Integrated Practice Units

Organizing for effective competition:


  To prepare for value-based competition, healthcare providers must systematically identify and analyze the health care processes they offer and related developments in the field, adapt information technology to support those processes, and systematically examine the results of those processes at the medical condition level.

Not-for-profit organization with a well-meaning service orientation is often an obstacle to reform.

  Most important is the removal of barriers to change, ranging from entrenched organization elements and mind-sets to obsolete regulations and counterproductive reimbursement models. Many providers succumb to inertia. They will be left behind. Not-for-profit organization with a well-meaning service orientation is often an obstacle to reform.

  "Community service, - - -, is interpreted as offering everything. Taken too literally, then, such noble aims can actually work against patient value as providers attempt to cater to the needs of all constituencies. To maintain financial viability while supporting a broad array of services, providers also seek charitable donations to support uneconomic, subscale services."

  The organization dictated by current reimbursement models and the desire of individual physicians to engage in a varied practice also create barriers to effective focus.

The dramatic increase in the number and complexity of health care services renders unfocused methods obsolete and even dangerous to patients.


Rather than breadth of services, providers should have a breadth of alliances and associations with other specialized providers.

    Hospitals, physician groups and individual physicians need to focus their practice. They have to define purpose and goals, the medical business they will operate in, the service they will offer, and how they will distinguish themselves from their peers. It is focus that provides direction to attain "true excellence."

  "Every provider can begin immediately to take voluntary steps toward competing on value. Leading providers are already doing so, and reaping the benefits in the form of better patient care, greater expertise, better clinical data, improved margins, and strengthened reputations, even in today's flawed system."

  Clear goals will determine organizational structures, measurement systems, and facility usage. Current full-service and traditional broad practice provide none of this. The dramatic increase in the number and complexity of health care services renders unfocused methods obsolete and even dangerous to patients. Lack of focus undermines skill levels and generates excess capacity in underutilized facilities and equipment - the cost of which has to be passed on to all patients.
  Currently, services offered are generally too broad to assure top quality, services are not integrated for particular medical conditions, and the market served is too local to generate needed scale of operations. "It is experience, scale and expertise in each service that matters, not overall breadth of services," the authors emphasize. Rather than breadth of services, providers should have a breadth of alliances and associations with other specialized providers.

The complexity of today's health care requires integrated teams specializing in particular medical conditions.

  Focus on particular medical conditions can guide integration of various types of care givers into appropriate teams specializing in those medical conditions throughout the cycle of care. At present, care is fragmented.

  "The various units involved in the care cycle, which frequently includes separate organizational entities, rarely work jointly and accept responsibility to improve the overall value of care. Instead, relationships across the care cycle tend to be arm's length, even within a hospital or provider group. This fractured delivery of patient care across the cycle seriously undermines patient value."

  Traditions of separate individual specialties and professional independence arose in simpler times. The complexity of today's health care requires integrated teams specializing in particular medical conditions. "To be strategic, providers will need everyone involved in care delivery to have a common goal centered on the patient, and a shared commitment to overall results, not individual agendas."

  To achieve adequate scale to justify dedicated staff and facilities, providers must compete over broader geographic areas. Modern transportation facilitates such broadening of service areas. Excellence will draw patients regionally or even nationally and internationally. Partnerships with other specialized providers should be formed equally broadly.
  Providers that deliver superior patient results will be in a position to prosper even with all the current obstacles to the focused provision of health care services. 

  "Patient value, then, is the compass that must guide the strategic and operational choices of every provider group, hospital, clinic, and physician practice. Every provider must do its best to measure patient value, service line by service line, and compare its performance to others. If value for patients truly governed every provider choice, the health outcomes per dollar expended in the U.S. health care system would improve dramatically."

  To achieve this, hospitals, physician groups and even individual physicians must develop their practice around particular medical conditions in which they can specialize and achieve excellence. "The business is congestive heart failure, for example, not heart surgery, cardiology, angiography, or anesthesiology."

    "How to define the appropriate set of medical conditions around which to organize care sometimes involves judgments, as does where to begin and end the care cycle. Different providers can, and should, define medical conditions differently based on their strategies, the complexity of the cases they undertake, and the patient groups they serve."

  The choice of the range and types of services provided is the key strategic decision. This must depend on the mix of patients, provider skills, facilities, and cost base, among other factors.

  "Routine or simple services should not be offered by institutions that cannot deliver them at competitive cost. Conversely, complex or unusual services should not be offered by institutions that lack the experience, scale, and capabilities to provide excellent results."

  While an array of services will be offered by most hospitals, competitive pressures will ultimately run against attempts to offer everything. When information about results becomes available, there will be accountability for performance that will force withdrawal from poorly performed services.
  Already there is an array of specialized hospitals that draw the most difficult patients from across the nation and even from abroad. Bascom Palmer Eye Institute in Miami, the Hospital for Special Surgery in New York, the cystic fibrosis units of Fairview Children's Hospital and the Minnesota Cystic Fibrosis Center are mentioned by the authors. These institutions routinely achieve superior results. The Minnesota Center also has developed specialized diabetes, gastrointestinal clinics, and lung transplant capabilities since these problems often afflict cystic fibrosis patients.

  Specialization initiates a virtuous circle starting with quality improvements that result in enhanced reputation, greater patient flow, and many other benefits. "The huge variations in performance across providers reveal the magnitude of the opportunity" for developing specialized medical condition expertise.
  Beth Israel Deaconess Medical Center in Boston, for example, has an arrangement with Milton Community Hospital to take the most complex cardiac cases and then return them to Milton when they no longer need specialized care. Milton now advertises its relationship with Beth Israel to attract patients.
  The Cleveland Clinic tries to return patients to referring doctors. It keeps the referring doctors informed and encourages patients to make follow-up appointments with referring doctors. Referring doctors have access to patient records at the Clinic.

  The vertically integrated provider-HMO organization model is viewed as a second-best solution. Such organizations look attractive only because of the flaws in the current system.

  "They appeal to those who believe that top-down control and oversight of providers is the only hope, including some leading advocates of managed care. They appeal to those who see today's zero-sum competition as inevitable, rather than those who envision a world of value-based competition on results."

  "The integrated practice unit" is the team organized to treat particular medical conditions.

  "Integrated practice units are defined around medical conditions, not particular services, treatments, or tests. An integrated practice unit includes the full range of medical expertise, technical skills, and specialized facilities needed to address a medical condition or set of related medical conditions over the cycle of care. Ideally, the individuals and facilities involved in a practice unit are dedicated -- that is, they are focused solely on that practice unit. The fundamental organizational unit in health care delivery should be the integrated practice unit (IPU). It is the overall care of a medical condition that creates value for the patient -- not the radiology department, the anesthesiology group, or the cardiology group."

  Most providers will operate multiple units for those medical conditions for which they have sufficient scale and expertise. They probably shouldn't be practicing medicine in other lines.

  The IPU model provides multidisciplinary resources for diagnosis, treatment and disease management. However, the focus is on best practices in delivering care - not the procedure offered by particular skills. They cover common complications and medical conditions that require similar treatment skills, facilities and care delivery approaches. They should encompass the full cycle of care.
  IPUs should be patient centric, not procedure or doctor centric. The patient belongs to the whole team, not just the doctor involved in a particular procedure or to some lead doctor. Outside referring doctors, rehabilitation specialists and disease management providers "are integrated into the care delivery process" so the team remains accountable for results.
  An example offered by the authors is the congestive heart failure practice at Sentara, a Norfolk, Va. group, that maintains monitoring capabilities for discharged patients. This has reduced hospital readmissions by more than 75% and has provided superior results for patients. Sentara also has dedicated facilities and staff for stroke victims - again with major gains in treatment outcomes.

  "In the IPU model, many if not most staff are dedicated -- they work exclusively in a medical condition. Staff, including nurses and specialized technicians, are co-located in dedicated facilities: dedicated clinics, dedicated imaging facilities, dedicated operating and recovery facilities, dedicated wards, dedicated floor, and even entire dedicated buildings. This allows and encourages better medical integration, deepening of expertise, and the tailoring of facilities to the medical condition."

  Ultimately, IPUs form hospitals within hospitals and practices within practices.

  Benefits of the team approach begin with diagnosis. With more people involved in diagnosis, more experience is brought to bear and accuracy should be improved. Mistakes in diagnosis can be costly. Often, diagnosis is influenced by what a particular doctor is set up to treat. Diagnosis can be iterative, and can change as treatment is attempted.
  The authors note that the famed Mayo Clinic takes a team approach to diagnosis, which is its specialty. The Cleveland Clinic offers a national service of second opinions for 300 serious diagnoses. It charges a fixed fee and employs a comprehensive information technology infrastructure.
  Similarly, prevention, risk management and disease management benefit from a team approach.

  Urban community hospitals and rural hospitals should concentrate on the medical conditions for which they have sufficient volume. For other conditions, they should have "medically integrated relationships" and even partnerships with excellent providers to whom they refer patients. They will of course still provide emergency care and diagnosis and treatment of relatively common conditions. They will also provide follow-up care and disease management for chronic conditions. By closing low volume service lines, they will reduce costs and increase resources for what they do best.
  Primary care physician practices can be integrated both into the front end - involving preventive care, initial monitoring and diagnosis - and the back end - involving disease management. Care for routine injuries and other medical conditions of course remain with primary care practitioners. The primary care physician should establish strong relationships and efficient coordination with focused medical care providers and should also measure results.

  Examples of providers that have moved towards the IPU model are provided by the authors.
  Intermountain Health Care identified about 10 health conditions that accounted for 90% of its costs, and began concentrating on them in the 1990s. Benefits have been quite extensive. For example, mortality rates for cardiovascular surgery declined 19.5%, and significant cost savings were achieved in its specialty areas.
  Four spine surgeons at New England Baptist Hospital incorporated and began comparing notes and recording outcomes. They now perform about 2,000 spine surgeries annually, have published studies and devised specialist medical devices in the field. They have arranged with the hospital to place their patients together on one floor and to work with the same team of nurses, anesthesiologists, radiologists and technicians. They market themselves to health plans and have substantially increased their market share of patients in the region. Dartmouth-Hitchcock Medical Center has also developed an integrated spine center.
  The Texas Back Institute has a dedicated facility and staff at Plano Presbyterian Hospital. The staff includes rehabilitation specialists, so the focus is on the entire care cycle. They work with nine free-standing feeder clinics. Surgery is involved in only 10% of their cases.
  The Cleveland Clinic has already been mentioned. There is a similar unit with dedicated facilities and staff at the Cole Eye Institute. The M. D. Anderson Cancer Center has over a dozen clinics with dedicated facilities and integrated staffs for different kinds of cancer. Other cancer specialty centers are forming around the country.

  The volume achieved by these units supports their dedicated facilities and staffs. With measurement of results, they achieve constant improvements in techniques. Various methods are used to involve the units in the full cycle of care, but this is still an evolving area.

  "Reporting structures in which physicians remain in traditional specialty groups or in which there is dual reporting both to a practice unit head and the specialty group remain the norm. Over time, however, we believe that the primary reporting relationship for operational purposes should be the IPU, not the medical specialty."

  The ultimate goal is to have patient-centered care for particular medical conditions dedicated and integrated over the cycle of care. However, specialization should go even further. Medically centered care units should develop elements of expertise that distinguish them from similar units. Concentration can focus on complex diagnoses, serving particular patient groups by gender or age that experience co-occurring conditions, offering extraordinary timeliness or efficiency or excellence in particular treatments or disease management.
  Care levels will continuously be pushed above established averages by competition based on measurable results. "The pursuit of a distinctive approach will drive the development of deeper expertise and stimulate innovation in facilities and methods." (The delivery of health care - although thankfully supported by a growing array of scientific developments - remains a "profession" - a non-scientific practical art.)
  The authors outline some of the care aspects and patient characteristics that provide opportunities for specialization within a medical condition. Rural providers can distinguish themselves by the quality of their referral relationships and their integration with centers for complex conditions. The heart surgeons and spine surgeons mentioned above, for example, specialize in particular kinds of heart and spine surgery.

Measuring and reporting results:



  Measurement of results is the key to improving care techniques, reducing costs, and marketing services. Providers are in fact increasingly being driven to measure and report results. However, this must not be focused just on good practices or hospital-wide results. It should be focused on health outcomes for particular medical conditions over the full cycle of care.

The focus has been less on understanding and reducing costs than on learning to bill creatively to maximize revenue.


Even initial steps at outcomes measurement have yielded startling benefits for patient care.

  Costs and pricing information, provider volume and experience, methods and patient characteristics also constitute important information that should be clearly measured and reported. This will be a complex and varied undertaking, and the authors go into it in some detail. Individual IPUs as well as medical boards and societies should all be involved in developing measurement standards. General categories of information include outcome measurements - complications, errors and failed treatments - diagnostic accuracy - patient registries to facilitate tracking of long term outcomes - and patient feedback. Cost data pertinent to IPU activity over the care cycle should also be measured and reported.

  "It is striking that in a field so preoccupied with cost, the understanding of cost is often so primitive. The focus has been less on understanding and reducing costs than on learning to bill creatively to maximize revenue. Charges have simply been passed on. The attention that has been paid to cost has tended in many cases to be focused on throughput, physician productivity -- e.g., patients per day --, and bargaining down the prices of big-ticket inputs -- e.g., implants, drugs, and supplies --. Minimizing these costs, however, may not be the best approach to improving value."

  Only by combining relevant cost data with patient outcome data and patient characteristics can true value for patients be determined. An outline of the clinical and outcome information collected by the Boston Spine Group is provided as an example. However, this type of information has not been widely collected for a wide variety of reasons. This should all change as practice unit structures are developed and begin to compete on the basis of value delivered to patients.

  "In a practice unit structure, information becomes the central management tool. It is how leaders evaluate IPU performance, measure the performance of individual contributors, and set priorities for enhancing care delivery. There needs to be a physician with clear responsibility for practice information, and an administrator to coordinate the process of assembling information and preparing reports and analyses. While there can be a central support group, the fundamental responsibility for information must rest with each practice unit."

  ThedaCare and Sentara collect outcomes data on individual physicians. Even initial steps at outcomes measurement have yielded startling benefits for patient care. The Cleveland Clinic is moving to require all clinical departments to develop and publish outcomes data. The authors provide Cleveland Clinic reports and excerpts in an appendix to the book. Other hospitals are following suit. This supports their marketing efforts by demonstrating their commitment to improvement and patient value.

Billing practices:

 Providers have to change their billing practices. The patient must receive a single bill that can be priced in advance for each care episode or cycle.

  The current system has been misshaped - like so much else - in response to the reimbursement practices of third party payers - primarily Medicare. With rising deductibles and expanding use of health savings accounts, providers are going to increasingly have to respond to the patients themselves. Health plans and employers, too, are likely to increasingly want single, unified bills. This will beneficially force doctors and hospitals to work more closely together in pricing and integrating services.
  Care cycle pricing is not capitation, the authors stress. It requires precise specification of care cycles so that unexpected complications can be separately priced when they occur. An increasingly competitive health care environment is going to force this rationalization of billing practices. Those providers that demonstrate superior outcomes will be able to justify higher prices or will profit from greater market share.

  "Those providers that can begin to offer such pricing models to health plans and patients, together with robust data on results to support them, will be in a position to gain market share. In this and in so many other of the areas we have discussed, providers can either find reasons to resist change or become leaders. Those providers that move proactively to align their practice with value will not only better serve patients, but also will increasingly prosper as competition on value grows."


  The focus of health care marketing must be practice unit excellence.

  Reputation plus breadth of services, convenience, external referral relationships and word of mouth are inferior or at best secondary factors to patients. Concrete evidence on experience and results will attract patients, but is today mostly lacking. Instead of mere general claims, providers "should begin to disseminate the information patients really want -- their experience, expertise, methods, and results."
  The "brands" that count most to patients are the brands of the individual practice units, not the brand of the broad institution. Practice unit brands must be based on information about experience - about health care results and patient value.




  Individual practice unit expansion opportunities lie in two geographic directions. The first is deeper penetration of a local market based on superior outcomes for patients with particular medical conditions.

  Then, there are opportunities for broader geographic expansion. There are regional, national and even international expansion opportunities. With expansion comes the opportunity to "leverage scale, expertise, care delivery methods, staff training, measurement systems, and reputation to serve more patients."

  "A rising number of patients in the practice unit feeds economies of scale, the subspecialization of teams, and more efficient division of labor across locations. Ultimately, the best providers in a practice unit can operate nationally through extensive networks of dedicated facilities. While this possibility seems radical today, the main barriers are attitudinal and artificial -- e.g., state licensing requirements and archaic corporate practice of medicine laws."

  Expansion by a mere increase in the range of services offered locally has little to do with patient value, and will be a losing strategy in competitive health care markets. Services that lack the scale to support experience and develop excellence will lose out to individual practice unit competition as it expands into local markets. There are only limited opportunities for synergies from expansion of services offered, and that is just a one time benefit.
   There are a variety of ways geographic expansion can be organized, but the integration requirements remain. The authors offer several models involving managing partners or by taking over existing facilities or building new facilities. However, "unified processes, common information infrastructure, common performance measurement systems, shared training of physicians and other staff, and efficient division of labor by location" must take place under an integrated management system.

  Rural hospitals can participate through geographic integration models encompassing contiguous rural regions and through regional centers. "There is no reason that rural institutions, through medical integration and careful choice of partnerships in complex practice units, cannot offer truly world-class care at high levels of efficiency to their communities." Primary care practice "will increasingly become the front end and the back end of integrated care cycles."
  The authors note Sentara's remote monitoring of several small intensive care units to illustrate the substantial benefits in cost savings and reduced mortality rates possible by having a remote physician always on duty. Late night calls are referred to the remote physician instead of constantly beeping off-duty physicians. Broader geographic service areas could assure excellent providers for patients even in remote communities.

  "Local physicians could deliver care in state-of-the-art facilities and enjoy the benefits of expertise, training, and management by the best in the world in their field. Consultation on any aspect of care would be easy and instantaneous. Referrals of complicated and specialized cases to an appropriate center would become the norm. Continuity of care after treatment elsewhere would be automatic. Physicians, nurses, skilled technicians, and managers would be trained, measured, and coached by true experts and have a career path in their practice unit across locations based on their skill level, experience, and performance."

Reorganization for Value-based Competition

Effective competition:

  A transformation based on IPUs organized around specific medical conditions is required for effective value-based competition The authors offer an extensive outline for how current systems can transform themselves.
  A "Care Delivery Value Chain" is described for restructuring IPUs. It is an analytical tool producing customized results for different medical conditions and classes of patients. It is not a rigid framework. Support activities - including contracting, billing, facilities management, etc., have to be configured for the purposes of the practice units and medical conditions.
  Care delivery value chains begin with monitoring and prevention, then continue through diagnosing, preparing, intervening and rehabilitating. How patients access and move through the system, how their conditions are measured, and how patients are informed and educated are concerns throughout the value chain process. There are feedback loops at every stage of the value chain based on patient condition and response.

  "The iterative character of care delivery is inherent in medicine to some degree, but can be reduced by careful design of methods and reduction of errors. Iteration or recurring effort is a danger sign in any process or business. Much of today's iteration is caused by mistakes, poor processes, and inattention to the full care cycle. An incorrect diagnosis, for example, can send a patient down an entire care cycle that is ineffective or even harmful, making iteration inevitable. Excellent providers will tend to minimize iteration. Analyzing the incidence, nature, and causes of iterations in care is an important aspect of improving patient value."

  Just engaging in the value-based competition transformation exercise can rationalize the care giving process with major improvements in efficiency and in health care outcomes. The authors provide extensive guidance in this important process.

  Harnessing the power of information technology is a vital part of this process - not just for billing and records but as "a platform for integrated, results based management." This requires the patient-centered organization of data. Information "silos" are of little utility. The integrated practice unit and the medical condition are the units for the aggregation of information. Thus, the practice unit must be involved in the design of the system. Rolling out the system in logical stages is also vital. The Cleveland Clinic information technology infrastructure is cited as an example.
  Professional skill can be developed in a systemized way once results are reported and appropriately included in the data base. This is a major advantage of dedicated practice unit systems, and the authors stress its importance. They provide examples of major cost savings and reduced mortality rates from the development of relatively simple procedural changes. Practice guidelines such as are currently favored are just the starting point.

  "The goal is not standardized or generic medicine, but excellent results. Providers can learn from guidelines, the practices of excellent centers, and their own experience how to transform and improve their structures, methods, and facilities to deliver better results."

Barriers to value-based competition:

  Third party payer reimbursement practices and federal and state regulations create major barriers and disincentives for the development of value-based competition.

  Vested interests in the current system and simple inertia also make change difficult. A shortage of management skills within health care providers makes any change a challenge.

  "Medical education does not equip young physicians for their role in a value-driven health care system, nor does it serve the needs of experienced physicians."

  Professional attitudes also create obstacles. Professional independence is prized, and physicians want to handle an array of cases.

  "The challenges of getting physicians together into integrated practice units, organizing care around care cycles, and engaging in disciplined information collection and process improvement are compounded by the academic medical setting, where the focus on traditional specialties is even greater because of the research and teaching missions."

  Examples of how these obstacles are being overcome in both health care practice and medical education are provided by the authors. 

Third party payers:

  It is in the interests of third party payers to encourage and support the transformation to value-based competition.

  This will require significant changes in their attitudes and reimbursement practices. They, too, must refocus on health value for patients rather than on just reimbursement for costs. Major benefits for both cost containment and member health will flow naturally from that change. For private health plans, the transformation will also create substantial competitive advantages.

  "It will be difficult for some plans to move beyond the discount mind-set, the attitude that providers and members need top-down micromanagement, and the culture of denial. We are encouraged, however, by the growing number of plans that are beginning to address these challenges, with promising results. As with providers, those health plans that move early to embrace value-based competition will reap enduring benefits."

  • Instead of restricting the choice of providers and treatments, plans should be providing information that facilitates such choice and patient management of health.
  • Instead of micromanaging providers, plans should measure and reward providers based on health results.
  • Instead of complex and costly administrative activities, plans should minimize administrative needs and simplify billing.
  • Instead of competing on the basis of minimizing premiums, plans should compete on subscriber health results.

  There are tremendous cost savings available from the simplification of the administrative procedures of both payers and providers, and from the achievement of superior health outcomes. The authors explain and earnestly advocate the desired changes. The current top-down regulation of processes is a losing and ultimately costly approach.

  "A basic tenet of economic and management theory is that it makes more sense to set goals and measure results than to specify methods and try to enforce them. Patients should be assisted in accessing the truly excellent providers in a given service, not spread among the excellent and the mediocre. - - - Those health plans that are moving to build quality-based networks - - - are finding that the excellent providers often will offer more favorable fee structures because of their inherent efficiencies."

  Unfortunately, the opportunities and incentives to shift costs will not disappear under any pervasively third party payer system that covers ordinary costs. Inevitably, third party payer systems that shield members from ordinary costs will continue to pose major obstacles to rationalization of health care and the proper functioning of health care markets. Obviously, it will be the government third party payers that will be the worst offenders.

Pay for performance rewards are always higher payments when they should be increased patient flow and greater margins from efficiency and expertise.

  Current "pay-for-performance" policies concentrate on practices rather than results. The reward is always higher payments when it should be increased patient flow and greater margins from efficiency and expertise.
  Health plans should play a major role in facilitating patient care through the entire health care cycle and in accumulating data on health care outcomes, the authors stress. They recognize that this will involve some substantial additional costs that will have to be reflected in premium rates. These higher premiums will have to be justified by a record of superior member health results if they are to be viable. The authors provide recent examples of health plans that have published health outcome improvements from their disease and risk management efforts.
  Independent health care plans have far more flexibility to engage in this kind of competition than integrated payer-provider plans. The independent plan can move subscribers to the best providers and to new, more effective treatments. The integrated payer-provider "must depend on process improvements or cost controls by a fixed set of providers."

  Here, too, it is competition that will ultimately drive these reforms. The authors provide an extensive outline of the measures health plans can take to shift to value-based competition. They are similar and complimentary to the steps advised for health care providers. They involve multiyear subscriber contracts as a basis for involvement in full cycle care for particular medical conditions, including "providing health information, counseling, and ongoing support to members." Indeed, they should develop specialized health condition management units and subunits for reasons similar to those supporting the development of provider IPUs.

  "Some health plans, such as CIGNA, are beginning to move in this direction. Such plans have units responsible for case management of acute care in a number of medical conditions, and other units responsible for disease management for some chronic conditions. Such a structure is a good start, but can be extended across all the important medical conditions. Ultimately, the structure has to embrace the  care-cycle model rather than artificially separate acute and chronic care."

Information collected over the full cycle of care will reveal the most skilled diagnosticians and cut down on duplicate testing, among other things.


Data for stroke, heart and diabetes care indicates that the highest skilled providers routinely prove the most efficient and least costly.

  All member health records should be accumulated in a member information management unit. Objective information about health outcomes would facilitate member choices of providers and treatments. Each provider would be required to provide this information on results, provider experience, methods and patient attributes. Information should be collected over the full cycle of care from diagnosis to disease management and prevention. This would reveal the most skilled diagnosticians and cut down on duplicate testing, among other thing.
  The authors acknowledge that sources for all this information are inadequate and sometimes not even available at present. But each plan already has some of this data, Medicare has much claims data, and outcome data is already collected for some particular diseases such as dialysis and transplants. Providers should routinely be asked for this data.

  "The health plan, when it is not wedded to any provider network, should be able to be more objective than any provider, and better placed to recommend a regional center over a local provider if this is justified. By imparting results information and support to patients and physicians, health plans will become the crucial market makers and enablers of value-based competition."

  The authors cite Harvard Pilgrim and United Health Group as moving in this direction. Health plans do not have to do all this in-house. They may outsource these requirements for highly specialized conditions such as transplants, end-stage renal disease, infertility treatment, neonatal cardiac surgery.
  United Resource Networks offers such data on organ transplants to health plans nationwide. They do not make the choice of provider, but explain the health outcomes and cost data to the patients and referring physicians who do make the choice. Preferred Global Health is an international organization that specializes in information about 15 serious diseases. As a result, patients achieve better outcomes at significantly lower costs. United Resource Networks is expanding its services to include some adult cancer patients, neonatal congenital heart disease and other health conditions. The authors advise that plans cover reasonable travel costs to encourage the use of best providers.
  Data for stroke, heart and diabetes care indicates that the highest skilled providers routinely prove the most efficient and least costly, the authors note. This is supported by data on a wide variety of conditions identifying "hospital centers of excellence."

  The health plan is in the best position to aggregate data over full care cycles, and in the best position to help patients navigate the system through the full care cycle. After all, primary care doctors themselves do not at present have the data needed to make referral choices. Frequently, all they have is reputation information.
  Health plans can and should provide much more. Health plans can put patients and their physicians in touch with - and reimburse for the services of - specialty organizations like Best Doctors that specialize in the diagnosis and treatment of difficult cases. Once again, evidence indicates major improvements not just in health outcomes but also in cost savings from use of Best Doctors specialists.
  Some plans offer additional counseling as a premium service. The authors note several disease management system programs that have achieved substantial gains in health outcomes and reduced costs, especially for chronic conditions. Blue Cross Blue Shield of Minnesota (BCBSMN) covers 17 diseases in its management program. It compared results with employer-funded plans that did not opt to pay for this service.

  "In its first year, BCBSMN reported a 14 percent decrease in the rate of hospital admissions, an 18 percent drop in emergency room visits, and a return of $2.90 for every dollar invested -- for a total savings of over $36 million -- relative to a similar cohort that was not enrolled in the program."

  BCBSMN keeps expanding this program. Chronic conditions account for about 75% of health care expenditures - a percentage that keeps rising.

Reimbursement policy must not follow that of Medicare "whose flawed reimbursement structure is not aligned with costs, outcomes, or value."

  Risk assessment and disease prevention programs are now being offered by some health plans. Healthy pregnancy programs are prominent examples. "When health plans and providers work together around value and health results, efficiency will improve exponentially and administrative costs will fall."
  All these efforts must be reimbursed. Provider excellence should be rewarded by more patients and higher margins from health care efficiency. Reimbursement policy must not follow that of Medicare "whose flawed reimbursement structure is not aligned with costs, outcomes, or value."

  Providers must not be penalized for excellence. They must not be penalized for better outcomes and less invasive treatment. Quality related pricing models are being used by such health plans as Harvard Pilgrims and BCBS of Mass., but these models are currently too limited. "Pay-for-performance bonuses should be specific to medical conditions, not across the board." More important than bonuses, however, is an increased flow of referrals and higher margins from superior outcomes and efficiency.
  Providers must be permitted to capture some of the gains from treatment improvements. They must be compensated for email and telephone consultation. This should all be included in a value-based compensation system based on full cycle patient health outcomes.
  The authors emphasize the substantial differences between their single pricing concept and current capitation systems. The latter bear no relationship to health outcomes and provider quality. Moving to a single price for service bundles, episodes of care, and even full care cycles will encourage the use of value enhancing services and discourage duplication and unnecessary treatment. It will also facilitated value-based competition on results. Complications can be reimbursed at agreed-upon rates, with rates of complicating incidents reflecting on provider status.

  "Health plans will contract more efficiently, with less need for detailed specifications of the care itself and what specific care is paid for. Instead, providers will be measured on results. Single pricing will also trigger beneficial changes by providers. Providers will be motivated to measure overall costs, rather than piecemeal costs. Ultimately, providers will have strong incentives to integrate care medically across facilities and specialists. The patient benefits and economic benefits will be striking."

  Much administrative complexity will be eliminated, which will help balance the costs of increased health plan involvement in the health care process. Specialist information organizations will arise that enable health plans to efficiently outsource much of this data collection and analysis effort. Long term contracts between health plans and subscribers will become an important feature of full cycle health care medical record keeping. Health plan structure involving HSAs "can encourage better patient choices while creating a structure for savings to meet future medical needs."

  The gathering and maintenance of complete subscriber medical records is most efficiently focused in health plans. Members will "own" their records, control dissemination, and demand transferal if they change plans. There are widespread benefits for having complete medical records available. Service companies are forming to provide medical record maintenance services. However, appropriate inducement for provider input is critical.
  A relationship of trust with subscribers will be required for this expansion of the health plan role. Also required will be improved information technology and record keeping standards, the acquisition of new skills and new personnel. However, as with many complex reforms, benefits accrue at each step along the way. Here, too, early movers will gain competitive advantages. They will quickly differentiate themselves from their competitors.

  "Imagine if the interests of health plans, patients, providers, and plan sponsors were all fundamentally aligned. If health plans were truly dedicated to health, the consequences in terms of creativity, innovation, and health care value would be enormous.

Suppliers, consumers and employers:

  Similar and complimentary analyses and recommendations are provided by the authors for suppliers, consumers and employers.

  Dysfunctional supplier conduct is pervasively dictated by third party payer reimbursement policies.

  "Suppliers are drawn into competing by offering incentives for physicians to use their products, rather than by demonstrating superior results or offering meaningfully lower prices."
  "Suppliers have sought to expand usage to as many patients as possible rather than focusing on reaching those patients for whom their products offer the best value. This has contributed to the unfortunate situation in which many therapies produce disappointing results for too many patients."
  "[Equipment] suppliers encourage providers to match each other's investments in expensive technology, even when there is low utilization."

  The adoption of evidence-based medical practice will force suppliers to concentrate on overall value added rather than just episodic usage. Suppliers, too, have to begin competing on delivery of unique value over full care cycles. Me-too products will be revealed as of little value by health care outcomes data gathered and evaluated by providers and health plans under the spur of competition. The broader availability of medical information will reveal the appropriate usage of drugs and devices. The authors provide an analysis of the shifts in supplier practices required by an evolving value-based competitive environment.

  Consumers can drive this process by expecting information relevant to full cycle care outcomes. and by seeking appropriate advice. Health plans should be chosen based on their commitment to a health care valued added model of competition and the expectation that treatment will be provided by physicians who have a record of superior outcomes for each medical condition.
  The authors assert that poor consumer choices under the current system are more the result of a lack of information than the result of the third party payer system. Copayments and deductibles should be at rates that substantially cut premium costs and encourage effective treatment choices and healthy living practices. HSAs can play a major role in these respects. However, here as elsewhere, it is adequate information on full cycle health care results for pertinent medical conditions that is the vital factor in facilitating consumer choice.

  Even in the absence of medical establishment transparency, support groups for various medical conditions have formed and post vast amounts of information on the internet about treatments and the quality of providers. The health care market is increasingly gaining the capacity to judge treatments and providers whether the medical establishment wants it or not. However, much of this information is anecdotal rather than systematic.

The reward for greater quality should usually be more patient volume and higher margins, not higher prices.

  Employers desperately need changes in the current system. Health benefits per employee have risen 140% in ten years to more than $8,400. Health benefit costs add $1,500 to the cost of every American car. The ultimate cost shift is to government and the taxpayer. (This would be a disastrous alternative - resulting in sharply higher taxes without any realistic cost containment mechanism other than the rationing of care.) But cost shifting is the only response most employers know.

  "Rather than working strategically with health plans to find ways to improve value and reduce the long-term costs of health care for the company and employees, many employers have pushed for discounts and the lowest annual premium increases, thereby biasing health plans even more toward short-term cost reduction and cost shifting."

  An example of new approaches is the Leapfrog Group of major public and private employers that are determined to reduce medical errors. They insist on electronic prescription systems, intensive care physicians available in intensive care units, and provider volume thresholds to assure experienced providers for five high risk surgeries. Clinical process standards are also now required for such surgeries, as is a quality index standard based on National Quality Forum data. A list of qualifying and nonqualifying hospitals is kept on its website. However, all this is predominantly process focused rather than health care outcome focused.

  "Employers also need to motivate the adoption of value-adding roles by health plans, and hold them accountable, rather than to insert themselves as another layer into an already complicated system."

  Pay-for-performance models also must shift towards competition on results. "When performance is defined as compliance rather than results, providers and health plans cannot raise their performance metrics with prevention, but only through acute treatment." The reward for greater quality should usually be more patient volume and higher margins, not higher prices.

  "[Health] care is a field where the advancing quality has a particularly strong potential to lower costs through faster recovery, fewer errors and complications, more accurate diagnoses, less invasive methods, reduced disability, and, most important, better health through prevention of illness and disease management."

  Employers cannot micromanage providers. They should change their goals from minimizing costs to maximizing health care value. Poor health and reduced productivity of employees is the cost that should be minimized.
  Employers must seek longer term relationships with those health plans that strive to acquire superior  health care outcomes. Employers can drive both providers and health plans to shift from zero sum cost shifting and cost cutting competition to value-based competition on results. They can encourage employees to engage in preventive health programs - especially for smoking cessation and weight control and healthy lifestyles. They should offer combinations of HSAs and high deductible insurance to encourage active participation by employees in health decisions. Employer benefit staff should accumulate data from health plans measuring care results and costs.


  Similar and complimentary analyses and recommendations are offered by the authors for state and federal governments and their health plan agencies.

"If there is any overarching perspective that has guided public policy, it is government's version of zero-sum competition: drive down the cost of government programs by policing costs, forcing down prices, and shifting costs to the private sector."

  A radical shift of focus in government agency reimbursement regulations is urged by the authors..

  "The fundamental flaw in U.S. health care policy is its lack of focus on patient value. There has been no overall framework guiding reforms. Instead, policies are piecemeal, reactive, and incremental. And they are rife with unintended consequences. If there is any overarching perspective that has guided public policy, it is government's version of zero-sum competition: drive down the cost of government programs by policing costs, forcing down prices, and shifting costs to the private sector. Medicare, for example, requires lower charges for Medicare patients than private patients in providing identical services. This cross subsidy in Medicare's favor keeps prices high for non-Medicare patients and deters price reduction that would require corresponding reductions in Medicare charges."

"Government-run health systems in other parts of the world are encountering increasing problems with quality, costs, and rationing."

  Government run health care is obviously not the answer.

    "A government-run system can allow universal coverage and tight cost control, but will eliminated competition altogether and worsen the problems with the value of care that plague the current system. Government-run health systems in other parts of the world are encountering increasing problems with quality, costs, and rationing."

  Other nations are currently moving away from the single payer approach, since it inevitably involves cost shifting and rationing.
  "Fortunately, government is not the key to health care reform." Even with current dysfunctional government policies, the various participants in the health care market are  being driven to rationalize their health care approaches. However, appropriate changes in government reimbursement policies and reductions in state mandates would remove substantial barriers to reform. Medicare currently is tentatively experimenting with some value-based reimbursement policies. The authors go at considerable length into the many changes in government health care policy that can facilitate reform.

Mandatory health care insurance:

  Universal insurance coverage for "essential services" with subsidies or vouchers for the poor is advocated by the authors.

  However, employer self-insured plans currently represent a large proportion of health plan subscribers, and they are largely free of state regulation. This is the primary defense by which businesses escape some of the cost shifting by government and private health plans. Imposing insurance requirements on the self-insured will require regulatory changes.

  It will require more than that. The Nanny State rears its ugly head as the authors indicate the dictated requirements and the regulatory framework needed for mandatory universal health insurance coverage.

  Over time, employer-sponsored group plans could be phased out with employers required to provide cash amounts for health benefits indexed to inflation. (Health care inflation or general inflation?)

  Here, health benefits begin looking less like compensation for employment and more like a tax. It is a politician's joy - a regular tax increase indexed to inflation that doesn't require any further legislative action - like those real estate taxes that people have come to love so much. However, health insurance tax increases will not be balanced by wealth increases.
  This mandatory health insurance program could be another HUGE blow to the traditional family and the nation's entrepreneurial spirit. This tax punishes the acts of providing employment and raising a family - both activities that society has to encourage and facilitate. It is insanity to punish them instead.

  Indeed, the authors propose reporting requirements and higher Medicare and Medicaid taxes for employers that do not provide health benefits. They refer to the Massachusetts plan - still within the state legislative process at the time the book was being published.

  A federal program will have features that render the analogy to the Massachusetts program inapt. Nevertheless, it is to be hoped that experience with the Massachusetts plan will accumulate before establishment of the federal program.
  Things are already not going well for the Massachusetts program. It is already grossly over budget even though benefits have been scaled back. Exemptions have been granted, making it less than universal. Its bureaucracy has exploded and its popularity has plummeted. Voluntary compliance has not occurred as many have rejected the government's mandated terms.

  To encourage movement towards value-based competition, the authors then recommend a variety of law and regulatory changes. These include a ban on re-underwriting for sick individuals, and a requirement that health plans be legally responsible for payment of all covered services.

  When people are late with premium payments or stop making payments, what will the enforcement mechanism be? Will health plans still be liable for services? Undoubtedly, the Internal Revenue Service will be tasked with the enforcement process, making the program in fact a tax program. The government enforcement and regulatory agency will have to be of substantial size.

  A good starting point for establishing a minimum coverage standard is the Federal Employee Health Benefits (FEHB) program, the authors suggest. Primary care, preventive care and essential acute care should be included. After that, it gets more complicated.

  "Discretionary services and nice-to-have mandates must be avoided to allow a basic affordable plan to be available in every state. The minimum required coverage needs to be reviewed periodically to ensure that new types of high-value care are added and ineffective or obsolete care is no longer covered."

  The Institute of Medicine - an independent group that is part of the National Academy of Science - is currently working on minimum coverage standards. Meanwhile, the standards of the FEHB applicable to Congress and federal employees seem reasonable. Additional coverage could be offered at terms set by competition.

  Beware the unintended consequences!
Mandatory coverage will become a HUGE disincentive for providing employment. It will become a HUGE disincentive for the middle class to marry and have children, especially as employer plans are phased out. Informal households will proliferate so that mothers and their children can qualify for health care welfare subsidies. Rigorous enforcement will drive fathers out of the home. More parents will kick their teenagers out of the house at the earliest time so their children can qualify for health care subsidies.
  We have seen this happen with welfare families. We have seen this happen so teenagers can qualify for college tuition assistance. We can see this happening in retiree communities where social security incentives induce septuagenarians to live in sin.

  After all, everyone who drives is required to have automobile insurance since accidents can impose costs on the public. With today's health care system, the authors argue, everyone can impose costs on the public, so mandatory health insurance is similarly a reasonable requirement.

  "Mandatory coverage would end this cost shifting and free riding by people who can afford -- or afford to contribute to -- insurance but prefer to take the risk and go without it because they are young, currently healthy, or have other financial priorities."

  The authors here play semantics games for propaganda purposes. The avoidance of cost shifting is referred to pejoratively as "free riding." Many of these people simply don't like to remain helplessly on the receiving end of cost shifting.

  Mandatory coverage is far more efficient and effective than the current system. It would end the use of emergency rooms as the default source of ordinary care for the poor and would encourage all to seek care earlier in disease processes. The self-insured who can afford coverage will begin supporting the system. It would end costly patient dumping and cost shifting practices. Without mandatory coverage, cost shifting to subsidize the poor simply raises prices and drives more people away from coverage.

  No, mandatory coverage does not end cost shifting. If facilitates government cost shifting. Government is the ultimate cost shifter.
  Mandatory health insurance poses real problems. Health insurance is far more expensive than automobile insurance. This constitutes a HUGE increase in costs for new and small businesses. It is a HUGE new expense for currently self-insured families. How will it be administered and enforced? What will be the overall economic impact? What will be the social impacts?
  Throughout the book, the authors deplore cost shifting practices. However, a mandatory health insurance scheme is the ultimate scheme for cost shifting. It is an open invitation for abuse by government third party payers.

  Will governments continue to attempt cost shifting by providing inadequate subsidies and vouchers and reimbursement rates? Will Medicare and Medicaid suddenly cease their cost shifting practices? Anybody want to take a bet on this?
  Those who advocate the widespread expansion of health care entitlements - ultimately to achieve socialized medicine - and much more of the socialist agenda - actually count on government cost shifting onto the private health care sector to drive out the private for-profit sector so all become dependent on government and inefficient not-for-profit providers and insurers. See, Richmond & Fein, "The Health Care Mess," at segment entitled "A mere expansion of the FEHB program."
  Government cost shifting onto the private health care sector is actually a sales tax on health care that drives costs ever higher. Once the option of self insurance is eliminated, there is no longer anything the private sector and private individuals can legitimately do about this. As the authors intend, all become required to contribute to the government program. Every expansion of government health care increases this sales tax and drives more people out of private acquisition of insurance and into dependence on government.
  If the system turns out to be a lousy deal, people will no longer be able to vote with their feet. After all, there are whole classes of people - mainly children and the aged and those with certain handicaps - who do not drive and do not obtain auto insurance. Many others don't drive or get insurance temporarily when they rent a car. Insurers can opt to leave states that impose onerous requirements. Under a national scheme, their only option is to go out of the health insurance business.
  The analogy is thus inapt. Mandatory health insurance is a tax program, not an insurance program. Indeed, the authors themselves make this look like a disguised tax.

  Those engaged in risky conduct must pay higher premiums to discourage that conduct and to bear more of the costs, the authors assert. After all, the government, the taxpayer and society now bear major costs for risky conduct,

  Who will define what is risky? How will this apply to the poor who receive subsidies and vouchers? Will they be the only free individuals left in the Home of the no longer so Free and the Land of the no longer so Brave?

  The authors suggest that higher premiums could be charged for those "who do not accept responsibility for their health." Smokers and those who fail to participate in health screening and prevention programs or disease management programs would be hit with higher premiums. (But the need for health screening varies greatly with age and individual health status. Government can only impose one-size-fits-all requirements.)

  Insurance premiums thus become just another form of taxation - used by social engineers to dictate people's lives. Should mountain climbers, skiers and other amateur athletes pay higher premiums?  How about those with promiscuous sex lives? How about those who regularly patronize fast food restaurants? Should there be a fat tax? Should there be a federal sales tax on restaurants? These are politically explosive questions that are unlikely to be resolved on an economically rational basis.
  Will those convicted of illicit drug use have to pay permanently higher premiums based on the known risk of recidivism? One can easily take this to ridiculous extremes, but the ridiculous inevitably becomes a real part of complex administered systems. Just check the tax code or the federal budget - or Medicare regulations.

  Personal intimate decisions become suspect even under the current system. The authors note:

  "The move to mandatory coverage should also be accompanied by tightened rules that prevent individuals from transferring assets or income to heirs or relatives to avoid paying their own health care."

  Dumping granny's nursing home costs on the government and the taxpayers is a widespread method of gaming the current system, the authors point out.

  But the ability of the public to find ways of gaming the system will not suddenly disappear.

  End of life care is an especially emotional and costly question. The authors assert that it should not be covered beyond what is of proven value "based on demonstrated results and evidence of patient preference." Living wills establishing each person's preference for end of life care should be required.
  High risk pools could be used
to cover the uninsured who are already ill. A national standard for "essential services" would reduce state mandates that today vary widely.
  The authors contemplate varying levels of deductibles up to a maximum level, but don't like copays which entail extra administrative costs. High deductibles coupled with HSAs are considered desirable. However, the authors recognize that HSAs introduce problems with disincentives for participation in disease prevention and management programs and the early acquisition of care. (The government will thus also have to regulate the terms of HSAs. Eliminating copays will not be enough. Government will have to regulate deductible levels.)

  The most efficient and least disruptive alternative is for government to simply purchase the health care services it wants for indigent patients as part of its welfare programs. Like any major government program, this would not escape serious problems. However, it could be devised to end the use of emergency rooms for ordinary care of indigent patients and to encourage preventive and early care.
  Unfortunately, this is not a politically correct alternative. The politically correct alternative is for everyone to be dragooned into vast universal tax and entitlement programs that continuously generate uncontrollable complexity and rising costs. All must become equally dependent on the tender mercies of government.

Reporting requirements:




  A government reporting requirement for results information is the single most important government step in establishing value-based competition on results and will assist all other aspects of the health care system. The authors go at some considerable length in outlining this important procedure.

  "Government's role is to create an environment that requires and enables competition based on patient value."

  Government should require outcome information by medical condition and care location, with risk adjustments, and leave other types of information requirements to the health providers and health plans. Experience with mandates for transplants, dialysis and cardiac surgery indicates that tasking professional associations with acquiring the mandated data is superior to placing the responsibility with a government agency. Medicare has many treatment quality reporting initiatives under way, but none are focused on results. The authors suggest several interim measure that would provide quick benefits. They again emphasize that "reporting must move beyond process compliance and embrace results measurement."
  The analogy they use is to the Securities Law reporting requirements. Government should establish basic reporting requirements for particular medical conditions that will spur competitive provision of additional reports and the development of private organizations to analyze the data. Either the various medical societies should be charged with establishing minimum outcome measures or expert panels should be established for that purpose. Provider experience levels for particular medical conditions should also be reported.

  "The initial focus should be on a core set of outcome measures for each significant medical condition. Outcomes are multidimensional, so every condition will have and should have multiple measures. Measures also will be needed for diagnosis and, eventually, for preventive care and long term disease management."

  Improvements in reporting processes can be expected with experience. Ultimately, when standards for outcome measures and risk adjustments have been established, outcome reporting for particular medical conditions should become legally mandatory. It already is for organ transplants, dialysis and in some states for cardiac surgery. The government also has a role in collecting and disseminating this data.




Transparent pricing will generate competition based on value to the patient.

  Prices should cover the full bundle of services and product delivered together for each medical condition. They should not be determined by the patient's "group affiliation." They should be clearly disclosed in advance. This will reduce administrative costs, cost shifting, and incentives for restrictive networks. It will also generate competition based on value to the patient.

  "Prices for episodes, service bundles, and ultimately full cycles of care should be required to be reported and be readily accessible, ideally via the Internet, in a single place for all providers to facilitate comparisons."


  A wide variety of barriers to value-based competition have evolved.

  • The Stark Laws barring self referral to providers in which referring physicians have an interest should be removed. These laws have the unintended consequence of fracturing the care cycle. It becomes unnecessary when competition based on value to the patient for a full cycle of care becomes the disciplinary force. "As results information becomes available, Stark law restrictions on coordination can be eliminated."
  • Corporate employment of physicians should also be permitted. These restrictions "deter the salaried employment of physicians by hospitals and other entities, which works against integrated practice delivery across the care cycle."
  • Health plan networks pose another barrier to competition. Justification based on results reports should be required for referrals within networks and patients should be able to obtain information about providers outside networks upon request.
  • Bans and restrictions on specialty hospitals and other new health care providers should be eliminated. These are just protectionist devices for the benefit of influential current providers.
  • Certificates of need requirements are another set of complex and protectionist regulations that become unnecessary when there is real value-based competition.
  • Geographic barriers to expansion should be eliminated. States should reciprocally accept licensed providers from states with similar professional standards. Tax deductions for health care travel should be the same as for business travel.

  However, the authors propose some requirements in support of value-based competition.

  • License renewal for providers should be based on "objective evidence of results that meet or exceed national benchmarks" for particular medical conditions.
  • Application of antitrust laws will become essential as providers consolidate into a few large groups for particular medical condition practice. "Consolidation leads in practice to higher prices," and reform initiatives that seek to limit competition to avoid duplicate facilities is "nave." There will be difficult antitrust law questions concerning market definition and prospects for new entries. But if competition on results is sustained, it "will define the best configuration of the system for patient value."
  • Anticompetitive group buying practices should be banned. Tying, bundling and exclusive dealing thwart competition. Buying groups should not be permitted to accept funding from suppliers.

Information technology:



  Standards for the interoperability of hardware and software should be established by government to facilitate a universal system. Government standards for medical data and for privacy protection are also needed. Accreditation or Medicare reimbursement requirements for information technology would expedite adoption of appropriate IT systems.

Malpractice Reform:

  Malpractice litigation creates noxious incentives for defensive medicine and drives up costs for malpractice insurance. Reforms can include caps on punitive damages awards. It can also include caps on lawyer contingency fees and sanctions against lawyers for frivolous suits. (Good Luck!)


  Medicare should be transformed into a health plan. It should no longer be a regulator.

  Medicare's regulations and third party payer practices have been particularly noxious. However, Medicare is now experimenting with some promising new practices - publishing data comparing hospitals, offering disease management for some medical conditions, paying for counseling to help people stop smoking, providing free medical records software to physicians, and, "more tentatively, recognizing and [rewarding] results and not just processes."

  "Government should require outcome data reporting from all providers, freeing Medicare from the need to tie reimbursement to the reporting of data. Medicare should focus solely on improving health results for subscribers. Ideally, Medicare would operate less and less as an entity unto itself and more and more under rules that govern the entire system."

  Medicare efforts to administer prices have predictably induced numerous dysfunctional health care practices. It rewards inputs rather than outputs, devalues certain services such as consultation, rewards unnecessary diagnostic and treatment procedures, drastically distorts the health care market, discourages innovation, among many - many - other things. It works "at cross purposes to patient value and value improvement."
    "Administered prices will never really work," the authors point out. (They can't work! See, Administered Prices and Health Care Entitlements.)
  Basically, the authors propose that Medicare adopt practices that facilitate and induce results-based competition, and rely on that for pricing discipline.

  "Once there is information on results at the medical condition level, Medicare will be able to ask providers for prices, rather than setting them."

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  Copyright 2007 Dan Blatt