Redefining health care: creating value-based competition on results.

Michael E. Porter and Elizabeth Olmsted Teisberg, Boston, MA, Harvard Business School Press, 2006, pp. 506

Introduction

The United States health care system has more competition than any other in the world. However, the system is performing poorly; costs are the highest in the world and growing rapidly. In 2007 health care expenditures account for approximately 16% of gross domestic product, a far higher share than for any other country. There have been many suggestions for improving healthcare performance ranging from a single payer system to increased competition.

Michael Porter and Elizabeth Olmsted Teisberg in Redefining Health Care argue that the major flaw in the system is that it does not create value for the patient which they define as "health outcome per dollar spent." They suggest that shifting the delivery of services to those who are more efficient, have better outcomes, and lower prices can solve many of our health care problems. Access, quality information, and outcome measures are major issues. Mandatory outcome measurements and reporting of results are the first step in reforming the health care system (Porter 2006, p. 7).

Porter and Teisberg argue that the culprit is the archaic system under which health care operates. Changing this system is necessary for controlling cost, increasing quality, improving access, and making the populous more healthy. The medical system needs to be proactive and not reactive with prevention and disease management the major keys to revamping the system. It needs to create value for the consumer.

Present System

Under the present system each part of the health care network has a tendency to take an adversarial position and not a cooperative one. Instead of creating value for the customer through cooperation, each component pursues its own narrow self-interest, trying to shift rather than to cut overall cost. Participants act as if they are working in the context of a zero-sum game. This behavior has led to a bureaucracy in which administrative cost is 30% of health care cost. How much is appropriate is not clear but this percentage is far higher than in comparable systems like Canada. In the current system between one half and one third of health provider time is spent on paperwork instead of providing health care services. This is inefficient and does not serve patients. The time could better be spent with the patient, thus creating more value for the patient [Porter 2006, p. 29].

The zero-sum nature of an adversarial health care system is illustrated by the experience of the early 1990s. Employers and health plans exercised their market power to obtain volume discounts, which decreased the profits of physicians and hospitals. In response physicians consolidated and even for a time discussed the possibility of unionizing to increase their bargaining power. Hospitals responded by mergers, which for the most part failed, some miserably, resulting in divestitures (Blackstone and Fuhr 2003). Hospitals also vertically integrated through purchasing physician practices to try to gain more market power and referrals of patients. These attempts have often been unsuccessful (Bums et al. 2000). The incentive was not overall cost cutting or increasing value to patients but lower costs for each participant through expansion of market power.

The present system actually is a negative sum game in which many resources are wasted through increased administrative and bureaucratic costs. For example, under the current system a physician orders a medical device after performing an operation. However, the insurance company does not accept the judgment of the physician and thus needs to pre-approve the device for a certain time period. The doctor may later decide that the device is needed longer than the initial period. The insurance company has to go through the bureaucratic exercise of approving the device for longer use. It sends a letter to the patient who must contact the physician and the supplier. Negotiation between the insurance company and supplier occurs with the physician and patient in the middle. Eventually, the insurance company and supplier come to a compromise on the cost shifting unless the frustrated consumer decides to pay for it. Much time, effort, and resources are wasted on this charade, adding cost and creating negative value for the consumer. If the insurance company trusted the judgment of the doctor that this device would add value to the patient then this bureaucratic waste of resources would be avoided. The insurance company is not much interested in whether the device adds value to patient but is more concerned with controlling short run costs.

Insurance

In the United States, consumers take responsibility for nearly all aspects of their life except health care. Arguably the health care system will work much better if consumers take responsibility for their health. The current financing and payment system through insurance with little direct payment for health care services has led to the proliferation of spending. Consumers are more vigilant when they are paying directly for the full cost of medical services.

Health insurance companies have deserved criticism by operating in ways that have been badly misaligned with value. The strategies and practices of health plans have increased bureaucracy and administrative costs, restricted the choices of physicians, limited the services available to patients, attempted to micromanage medical practice, and generally gummed up the works through adversarial relationships with both providers and members [Porter 2006, p. 11]. Health plans micromanage instead of rewarding excellence [Porter 2006, p. 219]. However, one can not reward excellence without having some measures of outcomes. This micromanagement also leads to an adversarial position between providers and health care plans and to high administrative costs.

Insurance companies have historically attempted to lower current costs without much regard for later periods. After all, the person may not be insured by that insurance company when the high cost occurs. This short run myopic view does not take into account that overall spending will decrease in the long run by practicing preventative care. Given the chum rate is only 25% over 5 years, the insurance company has a high probability that it will still be insuring the consumer when high costs occur. Insurance companies need to recognize that even though some customers to whom they provided preventative services may be insured elsewhere when the benefit from these preventative measures accrue, other new customers will be lower cost subscribers as a result of preventative measures provided by another company. Thus, an externality exists in that some of an insurance company's new subscribers would have had lower cost with preventative care, so all companies would gain through lower future costs.

Employers

Employers who spend a substantial amount on health care insurance have historically looked at ways of cutting cost and have not focused on the issue of quality or the overall health of their employees. However, by keeping their employees healthy they decrease health care cost, incur less sick time, and have more productive employees.

Employers have historically looked at the out of pocket cost of health care insurance and ignored the opportunity cost. They have been most concerned with obtaining quantity discounts and passing more of the costs to employees through higher deductibles, copayments, and premiums while they have largely ignored the quality issue. Receiving a discount on low quality services is no bargain. It is strange that employers would ignore the quality of the product or service that they are purchasing. Better quality can greatly benefit both the patient and employer. For example, if an employee enjoys a shorter recovery period from an operation, which results in the employee returning to work sooner, both the employee and employer have received added value. Further, the company would have lower cost. Employers have recently begun to address initiatives to improve quality and safety through such programs as Leap Frog and Pay for Performance. The authors contend that pay for performance is a move in the right direction but such a system pays for compliance rather than positive outcomes and results. Thus, such a program can create the wrong incentives since physicians are paid more to conform. Such a policy may even inhibit innovation [Porter 2006, p. 86].

Physicians

Physicians are structured to deliver discrete services, not to provide integrated care [Porter 2006, p. 153]. Also, physicians are paid to treat but much less to prevent. Thus patient care is "fractured across numerous specialties, hospital departments, and physician practices each of which focuses on its discrete intervention. Nobody integrates care for the medical condition across the full cycle, including early detection, treatment, rehabilitation, and long-term care" [Porter 2006, p. 45]. Most patients see multiple physicians with little or no coordination among physicians. Further because of the general paucity of electronic medical information each physician has different information about the patient. One may benefit from a more integrated system similar to that of Salick Health Center which specializes in cancer care. The Economist notes that "Salick has ... become the world's first full-service disease management firm" (Herzlinger 1999, p. 43).

Hospitals