Monthly Archives: January 2011

To Bend the Cost Curve You Must Change How Doctors Are Paid

The heated debate over the healthcare crisis and what to do about it has reached a fever pitch. We now have a bill passed from the House though contentious issues remain and the Senate and reconciliation prospects still represent a daunting challenge. The question is how do we fix the American system of care where we pay more than any other country in the world and yet get mediocre quality. Despite the high costs, only 55% of patients receive the care that guidelines say they should. Its like we are paying for a Rolls-Royce that runs only half the time. Care is so expensive that, unlike other industrialized countries, we don’t insure all of our citizens. Part of the healthcare reform puzzle is figuring out how we can pay the insurance costs for an additional 46 million people when the costs of care for those covered is bankrupting companies, individuals and the government. To make matters worse, like a ticking time bomb, cost increases are out-pacing GDP growth every year. How can our businesses be competitive when every year healthcare costs are eating up more and more of their profits? Healthcare costs are a part of the reason for the failure of the automakers. As a country, we now spend more on healthcare than we spend on food. If this situation continues, at some point we will spend all of our money on healthcare. It will crowd out spending on every other good. That scenario would be an economically disastrous and untenable position. This, of course, cannot happen. There will be a breaking point where the government and employers simply will not be able to foot the bill anymore. We are reaching that point now. The early symptoms are that small employers are eliminating the health benefit and larger employers are shifting more and more costs to the employee. If we don’t solve the cost issue, it doesn’t matter who pays the bills, whether it is the government or employers or individuals, they will not be able to afford it.  Most Americans say they are happy with their healthcare. That is because those with private or government insurance are shielded from the full cost of their care. They are paying a small percentage of the full cost and therefore are feeling the pressure on their bank accounts that business are experiencing. Nevertheless, when someone has a catastrophic illness, especially with the increased cost sharing, it still can cause bankruptcy. In this recession, the average American is even more vulnerable to this outcome. In the debate about the public option and death panels, we are missing the root issue. The cost of healthcare is simply the math of price vs volume of services. It doesn’t matter who pays for care, the price is too high. The Health Affairs September/October 2009 issue is focused on “Bending the Curve” of healthcare costs.  This is a very good issue with some of the best thinking on the topic aggregated into one publication. Every one involved in reform should read this issue. One of the most important articles clearly defines what the root issues are that are driving our dysfunctional system. “Market Failure And The Failure Of Discourse: Facing Up To The Power Of Sellers” by Bruce C. Vladeck and Thomas Rice describes the fact that the fundamental problem is the lack of power by purchasers which allows the “sellers” of healthcare services (providers and pharmaceutical companies) to control price. This, in addition to other related structural factors, is why healthcare does not operate like a typical market. Normal market forces are not in play and the power and control of the sellers is one reason. Remember that one person’s cost is another person’s income.  In the US healthcare sellers will resist any effort to reduce their income which just happens to be healthcare costs.  In just about every other country in the world, through various means, purchasers of healthcare have acquired greater leverage. This purchasing leverage is used to control the price of healthcare services and pharmaceuticals and thereby overall costs. This is only one mechanism but it is a fundamentally important and powerful mechanism to control healthcare costs. In other words, we must pay doctors, hospitals and pharmaceutical companies differently if we really want to control costs and improve quality. This is a politically risky proposition due to the power of these groups but, as also noted in the Health Affairs issue, we are seeing promising approaches and experiments popping up throughout the country.

There are only three ways to decrease the underlying cost of healthcare: (1) decrease demand (2) decrease utilization and/or (3) improve efficiency of delivering services (typically through innovation as in other industries) and thereby reduce prices. In healthcare, of course, you must accomplish this while maintaining or improving quality. There are no other options. In other industries due to price pressure, there is an industry motivation to innovate and continually bring to market less costly products and services. In truly competitive markets, there are incentives to fundamentally and continually reduce production costs and innovate to create margins at lower prices and gain market share.  Healthcare is fundamentally difference for two at least reasons. First, clinicians have specialized knowledge that makes it difficult for consumers to judge the quality and reasonableness of their recommendations. In addition when you are dealing with the risk of your or a family member’s health, it is difficult to question the motives or recommendations of your doctor. You can more easily say to a salesperson I don’t need that extra memory on my computer than to say to your doctor I really don’t need that angiogram to see if my heart vessels are clear. When you are not directly paying for or paying a significant proportion of the cost of the procedure as well, why not get the test and gain some reassurance of your health? Secondly, the healthcare reimbursement model is based on Fee-For-Service (FFS) with pricing that is somewhat arbitrary and not necessarily directly related to costs. In the FFS model providers are rewarded for volume of services, not the quality of those services nor the outcomes. In theory, as consumers we should be buying health and longevity for our healthcare dollars. In the US, we are getting a bad bargain for the price we pay. When you combine the FFS model with the specialized knowledge of clinicians, you realize that clinicians can create their own demand apart from the true clinical needs of the patient. Chest pain that could be easily ruled as being dangerous by history, exam, EKG and blood tests could also be extended to include an expensive but unnecessary angiogram. When the price of that angiogram is set by the sellers and not based on competition, as Vladeck and Rice describe, then you get the situation we have in the US.

Therefore in terms of true solutions and not cost shifting, you can attack demand, utilization and/or prices. By changing how physicians are paid you can attack all three issues simultaneously. By shifting from FFS to a global payment model you can address several issues. You can address consumer driven demand by prevention, self-management and healthier lifestyles. However, provider driven demand or “supply driven” demand as described by Wennberg, can be reduced by a global payment method. There are several variations but the principle of paying a set amount for a category of services or episode care reduces the perverse incentive to do more just for the sake of making more. As long as there are controls and monitors for quality and service, then you balance the opposite incentive to do less to make more money. Inappropriate utilization also decreases in this model. If you also have competition at this level, then you begin to move to a more rational market environment. The model also makes it easier to define competition on pricing and can lead to innovative methods of delivering care. This should be where competition occurs. Costs are driven by decisions at the care delivery level and therefore, this is where competition should occur as described by Michael Porter , not at the health plan level.  When you compete at this level you get the kind of innovation that is occurring at Kaiser Permanente, Mayo Clinic and Geisinger. We will see a test of this model in Massachusetts as they test a global payment model. Thus far, the current passed bill and other proposals only weakly impact and acknowledge the importance of this mechanism to control costs. However, the evolution and acceptance of a new model of provider payment will be critical for true transformation of our healthcare system.


At the intersection of system redesign, informatics and quality is healthcare transformation!

It is well accepted that American has a healthcare crisis that is now at the point of failure. The high costs are bankrupting individuals and making this benefit unaffordable for businesses. We have over 46 million people uninsured. Despite having the highest cost, our quality is mediocre and over 100,000 patients die unnecessarily in our hospitals every year. Information technology is barely used in a business where timely and accurate information can mean the difference between life and death. Incomplete, missing and inaccurate information drives inefficiencies and medical errors. The lack of information integration and sharing between providers leads to tremendous inefficiencies and fragmentation of care.  We are in a grave situation.  Yet, the solutions are within our hands if we have the will and commitment to apply them. Regardless of how healthcare reform plays out, the elements of solving this crisis revolves around three fundamental features we must optimize to achieve healthcare transformation.

The three critical elements are:

1) System redesign: our current system was designed for acute care during the 1800’s when infectious diseases dominated our culture. We have substantially managed infectious disease and have extended life expectancy from the age of late 40’s in 1900 to the late 70’s today. Now chronic disease management is the dominant requirement for care delivery. Furthermore, our poor lifestyle habits are driving up the prevalence of obesity which is a risk factor for several chronic conditions. We therefore have to redesign the system to better manage longitudinal, chronic care that is delivered outside of the medical office setting and that is often complex, with the interaction of several healthcare providers. This is in addition to acute and, very importantly, preventive care. Our reimbursement system must be overhauled as well. Paying for the quantity of services without considering the quality or customer service aspects locks providers into a mindset of more is better for financial reasons. With decreasing reimbursement from the government and payers, it leads to a strong incentive to increase services and sometimes, trying to game the system, in order to maintain incomes. There are other important elements of redesign as well such as clinical workflow changes, team-based care and improving patient self-management.  Our healthcare model is an antiquated model T and any version of reform, to be successful, must encourage and support updating the delivery system vehicle.

2) Informatics: the healthcare industry is one of the few over the past 10-15 years that has not substantially benefited from the huge efficiencies gained in other industries from the use of Information Technology (IT).  I now rarely go into the bank and conduct nearly 100% of my transactions online or at an ATM machine.  I pay bills, transfer money and check balances on my computer and now on my mobile phone.  Healthcare is miles behind other industries in terms  of making their records electronic, establishing standards so that different systems can communicate and interact, establishing convenient consumer interfaces for transactions and using intelligent rules engines (such as in the credit processing industry) to improve decision-making.  Despite being one of the most information intensive industries in the world, we have not effectively leveraged IT.  This gap leads to cost and patient risk that is unacceptable.  Medical Informatics, the study and use of IT in healthcare, is a critical enabler of closing this gap.  We must rapidly expand use of IT and reform efforts so far are aligned.  However, there is much work to be done.

3) Quality: a high quality outcome and a high quality experience should be a fundamental characteristic of a healthcare delivery system.  Yet the American system delivers on this requirement only around 50% of the time.  Patient safety issues have been well-documented and persistent.  The status of your physical and mental health has such a far reaching impact on your life achievements, your family dynamics, your community vitality and your work productivity, that we cannot leave it at a 50/50 chance that you will receive quality care.  Improving care to near perfect levels should be the goal as well as better engaging patients in their care.  We are seeing isolated examples of achieving these objectives with tremendous impact, but they are far to infrequent.

This blog will focus on these issues and track, share and explore the many opportunities we have to transform healthcare through system redesign, informatics and quality.

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