Frequently Asked Questions
Health care touches everyone’s life, but our own personal experiences have made it clear that the system is not working in the United States and in many other countries. Decades of reform have not solved the problem, and current “solutions” such as pay for performance, empowering consumers, or betting on IT are overly simplistic. We set out in the book to reexamine the health care system from the perspective of delivering value to patients, and apply the lens of competition and strategy. The sheer magnitude and constructive nature of the response to our 2004 article convinced us that change was possible. We were encouraged to write the book by the numerous examples of organizations we discovered in all parts of the system that are moving in the directions we advocate. The missing link has been an overall framework.
Value in health care is patient results (or medical outcomes) per dollar spent on care.
Competition in the current system is at the same time too broad, too narrow and too local. Participants in the system have misdefined the relevant business from a value perspective. Competition takes place on broad service lines, not around improving results for particular conditions (or combinations of conditions) as patients experience them. Paradoxically, competition is also too narrow in that it takes place on discrete interventions, rather than on the full cycle of care that determines results for patients. Care is structured around medical specialties and discrete services, rather then taking a care-cycle, patient-centric perspective. Competition is also too local, leading to problems of wide variation in care processes and to a tendency for supply to create demand. Instead of competing locally to provide the broadest line of services or the most of a particular procedure, every one providing health care should be striving to improve demonstrated results for patients relative to the best in the region or nation. The results that matter are patient outcomes, per unit of cost at the medical condition level.
The article framed the problem. The book deepens the diagnosis but is focused on the solutions. We offer concrete steps for each major actor in the system to move towards value-based competition. In the simplest terms, each participant must align its roles, services, and organizational structure with patient value, and measure their results. The book describes the steps to doing so for providers, health plans and other actors in some detail. The feasibility of such a transformation is demonstrated by the examples in our research. The great majority of our recommendations are already being implemented by leading organizations.
Value is the health outcomes per dollar spent in providing services. Outcomes are multidimensional, and include not only survival but extent of recovery or disability, errors, complications, recovery time, recurrences, and other aspects of the patient’s health experience. Outcomes (and costs) can only be measured and understood effectively for a medical condition, not for a physician group or a hospital overall. Value (outcomes and costs) can only be reliably measured over the full cycle of care, rather than for a discrete procedure or intervention (e.g., drugs, hospital stays, tests). Measuring and reporting outcomes and costs in a piecemeal fashion, as is the practice today, only encourages poorly coordinated care and cost shifting.
The only way to truly improve patient value is to measure results: risk-adjusted outcomes relative to costs. Right now, providers, patients, reforming physicians, and other actors in the system do not know how providers compare, medical condition by medical condition. Providers themselves need to know how they are doing to try effective improvement.
The book, through a series of examples, makes the case that there is little doubt of the capability to collect results information, adjust it for risk (patient circumstances), and use results information to dramatically increase patient value. The problem has been a lack of focus on results measurement, and a lack of will to collect and disseminate results information.
While there is growing and welcome attention to quality in health care, many current quality initiatives are flawed because quality is defined as compliance with specified care processes, instead of achieving excellent results. Using up-to-date processes of care is important, but process compliance can shackle judgment and retard innovation. Process compliance is just a new way to attempt to micromanage providers, and a return to the problematic aspects of managed care. Results are what really matters.
No provider should be allowed to practice medicine without measuring and reporting results. In this book, we talk about how to move to such a system.
In health care, higher quality is often less costly. The “good” or product is health, not treatment. Better health is inherently less expensive than poor health. This is different from buying a car, where leather seats or more horsepower are inherently more costly.
So, more than in perhaps any other sector, better quality inherently reduces costs. Getting the diagnosis right is more efficient than failed or unnecessary treatment. Fewer mistakes and complications cost less. Getting the right form of treatment to the right patients reduces the costs of failed or ineffective therapies. Faster recovery is less expensive than convalescence. Less disability means less long-term care. Less invasive treatments enable less expensive recovery. Prevention and disease management cost less than acute treatment and rehabilitation. Treatment earlier in the causal chain is less costly.
Much of U.S. health care is also well behind best practices in terms of value because of an absence of effective competition. Large variation in outcomes and efficiency are present and persist. In any business or service, there are opportunities for simultaneous improvement in quality and efficiency whenever the methods of producing a good or service fall behind known best practices. In health care, the opportunities to improve value are enormous.
The United States health care system has the wrong kind of competition, at the wrong level, and on the wrong things. Competition is value dividing, or “zero-sum.” Gains of one system participant come at the expense of others, through cost shifting, efforts to increase bargaining power, and restriction of services. Zero-sum competition actually reduces value through added administrative costs and restricting high value services; while creating inappropriate cross subsidies such as higher prices for small groups and for the uninsured. Instead of competition to divide value, the United States needs to move to competition that drives sustained increases in value.
The current competition in health care is dysfunctional. Competition is taking place at the wrong levels and on the wrong things. Instead of competition that creates value for patients, it has gravitated to a zero-sum competition in which the gains of one system participant 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 crate value for patients, but erodes quality, fosters inefficiency, creates excess capacity and drives up administrative costs, among other nefarious effects. But zero sum competition is not inherent in the nature of competition, or in the nature of health care, as we discuss in this book.
This book focuses on how to redefine competition around value and improving results. Competing on patient results is a positive sum competition from which all system participants can benefit. When providers succeed in delivering superior value, not only do they win, but patients win, employers win and health plans also win through better outcomes achieved at lower costs. In this type of competition, one provider team’s improvements in patients’ outcomes encourage and enable others to improve too. That is the essence of positive-sum competition – when Dr. Leroy Mathews published his results of 2% annual mortality rate among his cystic fibrosis patients, that drove the other cystic fibrosis teams to drive their mortality rates down from 25%. Patients “won,” Dr. Mathews “won,” and every physician that improved “won” too.
Value based competition on results creates value by driving simultaneous improvement in outcomes and efficiency.
Competition is not inevitably about one-upmanship, or even about winning and losing. The right kind of competition is striving for excellence relative to peers. This is a positive sum situation that creates value. When a clinical team creates a better way to deliver service, it creates value. In this kind of competition, patients, health plans, and society all benefit. In health care, however, zero-sum competition creates a situation where there is only one winner.
Health coverage must be mandatory, like car insurance, with subsidies for those with low incomes. Otherwise, risk is not shared and healthy people can opt out and not pay their fair share into the system to cover their cost if they later become sick. In a system of mandatory insurance, people who cannot afford to pay the full cost of their coverage should contribute what they can, with subsidies to close the gap.
Health coverage must also be universal. This is necessary for an efficient and high value system, not just for reasons of fairness and compassion. The United States already has a form of de facto universal health coverage, because emergency care and hospital care are required to be provided to anyone who presents for care. However, this is the most expensive and the worst kind of universal coverage. People without health plans tend to present for care at later stages, making care less effective and more expensive. Such patients access care in unnecessarily expensive settings such as emergency rooms. The absence of primary and preventive care leads to worse outcomes and much higher costs. The lack of universal coverage also leads to cost-shifting and huge administrative costs, as health plans and other system participants try to shift the burden of uninsured and high risk patients to others.
Ultimately, however, universal coverage will not solve health care crisis if the current dysfunctional competition continues. The system must be restructured to radically improve value. Otherwise, increasing amounts of rationing and administrative control of health care are inevitable. Dramatic improvements in value will enable better outcomes and more care for more people. Value-based competition on results, then, is the only way to truly reform the health care system.
Discussions of health care reform traditionally focus on health insurance access and coverage. But the central goal of reform must be to improve the value of health care (the quality of health outcomes per dollar expended). Not only is improving health the purpose of the health care system, but more access and more coverage become possible with dramatic improvements in the value of health care.
Past reforms have assumed that the quality of health care was good enough, and seen the problem as cost. However, one of the paradoxes of health care is the more the focus is on driving down costs, the more costs tend to go up. This is because efforts to control costs often degenerate to cost shifting and eliminating discretionary but high value preventive and monitoring services, while introducing major inefficiencies in the system. Value is eroded in the long run. The best way to reduce cost is to drive improvements in quality, measured by results. There is ample evidence that better quality care enables improved efficiency.
Insurance coverage for everyone is critical, but that does not require a single payer. There are far better ways to achieve coverage for all and control costs, as are discussed extensively in the book.
A single payer system would not fix the root problems in the health care system, which is the structure of care delivery. Unless competition is transformed so that providers must compete on results, a single-payer system will only make things worse by exacerbating the zero-sum competition present in the current system. Moreover, a single payer would create an inefficient monopoly with irresistible pressures to exert bargaining power, limit services, and attempt to micromanage care delivery. The experience of other countries is making it clear that a single payer is no solution. In fact, many other advanced nations are moving away from this model.
Health plans have exacerbated cost shifting and other forms of zero-sum competition that have not contributed to value. Past practices of health plans are one of the reasons why there are calls for a single payer.
However, as we describe in the book, a system of competing health plans can add value, by moving away from the narrow role of “payer.” Many health plan leaders are now recognizing the need for new roles, and becoming a positive force for enhancing value for their members. The book discusses new roles and strategies for health plans in detail.
Pay for performance initiatives grew out of recognition of the need to create incentives for high quality. Quality improvement is critical, but most current pay for performance programs fall short by focusing on inputs or process compliance. They have become a new way to attempt to micromanage providers, rather than reward truly good results.
There are four main problems with the process compliance approach. First, medical understanding of best processes changes. An outside specification just can’t keep up. There are significant improvements possible in the near term from getting processes up to date, but this won’t create a system that encourages innovation and drives toward excellence and efficiency over time.
Second, specifying all of the relevant processes is too complex, and patients have individual circumstances. The system must allow for judgment.
Third, even when everyone complies with process standards, evidence shows that the results differ. Process compliance is not the same as good results.
Fourth, premiums for process compliance build in cost escalation. Excellent providers will earn higher margins, but this will not always require higher prices. Better health care is often more efficient care with fewer mistakes, less invasive procedures and faster recovery. The way to drive quality and value is to measure and reward results, and reward excellent providers with patients.
“Consumer-driven” health care oversimplifies the problem. How can we expect consumers to navigate the system when the doctors can’t do it? Consumers cannot offset or counteract the dysfunctional competition in the current system. They cannot direct their own care in a system with fractured care cycles, constrained networks, and prices that depend on who is paying rather than on what care is being delivered. Without results information and competition centered on improving results at the medical condition level over the care cycle, consumers will not be able to identify good value or make good choices about necessary services. Shifting more of the financial burden to the consumers will not transform the system. Higher co-pays or HSAs themselves do nothing to improve value. Instead, they run the risk of cost-shifting in the guise of “empowering the consumer,” and skimping on “discretionary” preventive or disease management services but not acute care.
Medicare and Medicaid have not offered better value, but simply shifted costs to the private sector in the form of discounted reimbursement relative to private charges. Medicare exercises tremendous bargaining leverage. By dictating lower prices for its patients, Medicare skews the incentives for doctors and hospitals and drives up list prices. This increases the costs of uncompensated care and, over time, drives up costs for everyone. Medicaid’s focus on discounts has curtailed its beneficiaries’ access to primary care physicians, resulting in the patients seeking care in expensive settings and thus further driving up the total costs in the system. Like other health plans, the activities of Medicare and Medicaid must shift to improving health care value for the people they serve.
Providers (e.g., hospitals, physician practices, clinics) are the core of the system. First and foremost, providers must adopt the overarching goal of patient value, which will be empowering for all health professionals. Today, most providers mis-define their businesses, the hospital business, the surgery business, or the radiology business. To achieve the goal of value, the providers must redefine their services around medical conditions. The relevant business is the integrated care for a medical condition over the cycle of care. Current provider strategies, organizational structures, and management practices are not well-aligned with delivering value for patients.
For some providers, however, the move to value-based competition is already happening, as we discuss in the book. Institutes dedicated to particular medical conditions, centers of excellence, and clinics are opening around the country. The Cleveland Clinic is publishing reports on its outcomes in every service. M.D. Anderson organizes its care around medical conditions. Intermountain Health is using outcome data to drive improvement processes.
Health plans need to fundamentally change their roles to become health organizations. In the past, the strategies and practices of health plans detracted from value through bureaucracy, administrative costs, restricting physicians’ and patients’ choices, limiting services, attempting to micromanage medical practice, and having adversarial relationships with both providers and members. In order to create value, health plans must shift away from this “culture of denial.” They must support both physicians and patients with information and unbiased counseling, assemble results information on providers and treatments, and organize information and patient support around the full cycle of care. Health plans should offer comprehensive disease management and prevention services for all members. And, health plans must measure themselves, by tracking and publishing their members’ health results.
In today’s flawed system, integrated health plan-providers reduce dysfunctional zero-sum competition between health plans and providers. They also appear to offer advantages in better controlling capacity and services. However, integrated health plan/provider systems eliminate competition at the provider and medical condition level, and run grave risks of perpetuating cost instead of value competition. Integrated health plan-provider systems should be able to compete if they provide full transparency of results at the provider level, but this should not be the dominant model. We believe that a system of competing health plans is the best way to enable value-based competition among providers and provide unbiased results information, counseling and support to members.
Suppliers can add far more value in health care delivery than they have yet realized.
They must shift their thinking from volume to value. They must compete on delivering unique value over the full care cycle, based on careful study of long term costs and results versus alternative therapies. They must ensure that their products and services get only to the patients who truly benefit. We discuss the principles of value-based competition for suppliers in Chapter 7.
Health care is a service in which physicians and patients are co-producers. Consumers need to participate actively in managing their health through lifestyle choices, obtaining routine care and testing, seeking excellent providers, complying with treatments, and active participation in disease management and prevention. Consumers need to be the front-line participants in their health and health care. Even in today’s flawed system, studies show that informed and involved patients tend to choose less invasive (and thus less expensive) treatments, have better results, and better compliance with medical instructions. These observations underscore the potential for all participants to benefit from a value-based positive sum competition.
Employers must set the goal of increasing health value for their employees and their families, not minimizing the cost of health benefits. Lost productivity proves to be a far bigger cost than many employers have realized. The discount mindset has failed to control the rise in health care costs. Employers must set new expectations for health plans, including self-insured plans, and provide health plan continuity for employees rather than encouraging plan churning. Employers should expect that their employees are cared for by excellent providers, and support and motivate employees in making good health care choices and manage their own health. Employers should also find ways to expand insurance coverage and advocate reform of the insurance system to level the playing field and end today’s unfair cost shifting.
The government has an important role to play in enabling value-based competition at the right levels. First and foremost, government needs to require the universal collection and dissemination of the risk-adjusted outcome and price information at the medical condition level. Second, government should eliminate artificial impediments to value-based competition such as state level licensing, the Stark laws, specialty hospital restrictions, and corporate practice of medicine laws. Third, government also should modify pricing practices and lead the move to care cycle pricing to align prices with value. Finally, government can play an important role in developing information technology standards to ensure interoperability of systems and information sharing. Chapter 8 discusses these and other needed policy changes in detail, as well as new directions for Medicare.
Value-based competition will dramatically improve care for low-income Americans. Results reporting will mean that substandard care for any patient will reflect poorly on the provider, so quality and value will improve for all. The best providers will be available to all citizens because they are often the most efficient. The idea of “safety net” hospitals and clinics is misguided. Two class care, which creates a separate system for lower income patients, is unnecessary and counterproductive because it detracts from scale and efficiency. Instead, the best way to serve low income patients is to harness value-based competition on results to drive quality improvements that will reduce costs. The best quality care should not be the most expensive.
The biggest challenges will be recognizing and accepting the root causes of today’s performance, and overcoming obsolete mindsets. Health plans, for example, have had a culture of denial, not of value added. Providers often attempt to treat all medical conditions, rather than pursue excellence and measure results. Employers work to minimize health benefit costs, rather than maximize employee health and productivity. Suppliers seek to maximize usage, rather than work to get the right treatment to the right patient. We raise these and other barriers in the book.
All this said, however, redefining health care is already underway. Actors in all parts of the system are voluntarily adapting value-based practices, and benefiting from them. Altruism is not required.
There are a myriad of skewed incentives that affect every participant in the health care system which we described ten years ago, and which are well understood. The puzzle is why do these incentives persist? Our recent research revealed that skewed incentives cannot be corrected within a system of dysfunctional competition. As we looked deeper, the root cause of the problem is that competition is on the wrong level. Many thoughtful efforts have been made to correct incentives. Because the system is not aligned around creating value for patients, however, correcting one incentive creates other skewed incentives. Only when competition is centered on results for patients (outcomes and costs) can incentives can be truly aligned.
The same framework applies to any country, whatever the starting point. The principles of value-based competition all apply. A number of other advanced countries are ahead of the United States in implementing universal health coverage. There has been progress in some countries in tracking outcomes. However, no country has yet created value-driven competition in its health care system. Without value-based competition on results, every country will face unsustainable cost increases along with unacceptable quality variations and increasing rationing. This is why virtually every country today is rethinking its policies for health insurance and the structure of the delivery system.