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HEALTH REFORM: Porter And Teisberg’s Utopian Vision

October 10th, 2006

In their recently published manifesto, Redefining Health Care (2006), Michael E. Porter and Elizabeth Olmsted Teisberg — hereafter simply PT — offer a utopian vision of a health system that might occur to anyone possessed of a modicum of common sense but not too familiar with the real world of health care.

In these authors’ utopian vision — summarized in the Conclusion of their book, and also in an earlier article in the Harvard Business Review (24 June 2004) — our health system would consist of a myriad of mini health care systems, each clinically integrated around one of a myriad of clearly identifiable “medical conditions,” each of which has a standard, finite life cycle. Each of several competing health systems specializing in a particular condition would quote for its treatment a single price, covering the entire life cycle of the episode.

Just how and when that price would be paid is not made clear. An individual afflicted with, say, standard medical condition no. 387 would be provided with accurate information on the price charged and the “health outcomes” achieved by the competing health systems specializing in condition no. 387. The afflicted individual would then choose the system offering the best “health outcomes” per dollar the consumer would have to pay. This market is described by the authors as a “positive sum” game in which the economic and professional incentives of all participants are aligned towards one goal only: the maximization of the “value,” defined by the authors as “the quality of patient outcomes [sic] relative to the dollars expended” (p. 98).

In a recent interview in the Conference Board’s Across the Board (July/August 2006), Porter professes himself “stunned” that this vision has not driven the health policy debate before. In fact, numerous distinguished authors before PT have hit upon the central idea of their book, that “value must be measured for the patient, not the health plan, hospital doctor, or employer.” The reason why no health system anywhere in the world has yet been structured around this idea is that the real world of health care is much more complex, and solutions to its problems are much more intractable than these two authors dream in their philosophy.

For starters, PT vastly underestimate how hard it will be in practice to categorize the complaints patients present to the health system neatly into a finite set of standard “medical conditions,” each with a standard life cycle. Next, they vastly underestimate how hard it will be to define, measure, and capture in user-friendly metrics the often subtle, multidimensional “health outcomes” for which the providers of health care are to be rewarded in PT’s utopian market.

Who would read the meter on these metrics and report them to the public: the providers themselves, or some third party? If providers, who would audit the data for accuracy, and what penalties would there be for gaming the numbers? Furthermore, these “health outcomes” are driven by many environmental, socioeconomic, and behavioral factors completely outside the health system’s control. Absent proper statistical control for these other factors in the published metrics, the mini health systems in PT’s world surely would be tempted to control for these factors operationally, by discriminating against certain patients thought to be associated with infelicitous external factors — e.g., race or educational attainment. It would allow them to report better “value” along PT’s definition.

The Reality Of Health Policymaking

Finally, and most importantly, PT seem totally innocent of the often cynical modus operandi by which modern democracies make health policy. To illustrate with just one example, in the early 1990s the Physician Payment Review Commission (PPRC), which advised Congress on paying physicians for services rendered Medicare beneficiaries, had proposed to bundle the services of radiologists, anesthesiologists, and pathologists (the RAPs) into the per case fees Medicare pays hospitals for some 550 or so distinct, diagnostically related groupings of inpatient episodes (the DRGs). The objective was to let hospitals become the integrators for the entire inpatient episode, taking both fiscal and clinical responsibility for it. Fearing their loss of professional and economic independence, and also a loss of income, the RAPs heavily lobbied Congress to drop this clinically and economically sound idea. Ever beholden to these providers’ well-endowed political action committees (PACs) that help finance political campaigns, Congress promptly obliged.

PT seem to imply that if only someone like PT had told providers what to do, they naturally would do the right thing for patients, even at the cost of their own economic independence and profit. A very small number of providers, cited over and over again by the authors, have moved gingerly and experimentally toward partially integrated episodic bundles of health care, even without the authors’ advice, and probably not to their own disadvantage. On the other hand, in the 1990s Oxford Health Plan of New York had tried with great fanfare to put entire episodes of cardiac care out for competitive bid, only to fail in that attempt.

Not only Congress has failed to encourage patient-centered health care. It can fairly be concluded that by and large, the private sector has not moved in that direction either, although, unencumbered by the need for campaign financing, it would have been perfectly free to do so. PT might ponder why that is so. Unfortunately, PT’s book offers few practical hints on how the U.S. health system would transit from its current, allegedly negative-sum game to the allegedly positive-sum utopia PT envision. That transition would vastly rearrange the distribution of economic power and clinical autonomy in our health system. It is naive to assume that the potential losers in that transition would simply roll over and accept their fate.

See also in Health Affairs: Book Review of Redefining Health Care

Uwe Reinhardt on “The Pricing Of U.S. Hospital Services: Chaos Behind A Veil Of Secrecy” [2-week free access]

Tomorrow, Alain Enthoven on competition and consumers.

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8 Responses to “HEALTH REFORM: Porter And Teisberg’s Utopian Vision”

  1. Neil Gardner Says:

    annecarroll Says:
    October 27th, 2006 at 5:43 pm

    What we don’t need is religious adherence to doctrine.

    Amen, and very nice analysis! IMO, what we do need is some kind of adherence to practice guidelines and especially standards, and these standards must be well founded, kept effective, and evidenced based. These standards will NEVER come from the consumer of services upward, NEVER!

    Everything else falls eventually into place if this kind of overall data and practice standardization could be implemented. Assaults on people are generally considered illegal in this country, and it used to be considered unethical to steal from the sick. However, in the healthcare system in America, these rules have never gained firm ground. I know market freedom is good and all and caveat emptor is the American market motto, but in some social endeavors that were designed from the top down to begin with, it is just disingenuous to think they will be able to change from the bottom up!

  2. annecarroll Says:

    Dr. Reinhardt highlights the difficulty of commoditizing healthcare delivery in the real world, especially in attempts to manage the demand for services. Others have discussed some assumptions of market competition such as perfect information for all participants (doesn’t exist due to the low level of development and usage of information technology and imperfect measures), unimpeded entry (doesn’t exist due to politics), numerous providers (doesn’t exist due to regional health system monopolies). However, there is a troubling lack of attention to this proposal from the patient’s/consumer’s perspective–the player who is supposed to be maximizing their utility by making “rational choices” about the market products on offer, and deciding how much utility is “real” and how much is “marginal”, and if they can “take it or leave it.” Most of the time, consumers of healthcare services have neither “choices” nor the time or technical knowledge to make “rational” decisions, especially if they are really sick. 1) Think of a panicked parent who is trying to deal with a child’s illness and must make life-and death-decisions as their child’s agent, without having the ability or time to “research” the child’s condition and its “correct” management. Will that parent calculate the “marginal utility” of each extra year of that child’s life in the same way they would another car or another TV, decide when they have had “enough”, and use their resources for other “purchases”? 2) Patients value their relationship with their doctor as much as the technical care they receive; this is a big variable in decisions whether to sue for malpractice when there is evidence of a medical error. How will this variable be quantified? 3) A “choice” of whether and where to buy healthcare services may entail a “choice” to take themselves out of another market: the employment market. What may seem a “rational choice” to the market may not look like a rational choice to the patient. 4) Patients make counter-intuitive decisions all the time, such as factory employees who have beeen poisoned at their work and will surely become sicker and maybe even die if they stay there, but must continue to work there because they now need the medical benefits to have access to their treatments. 5) Who has measured or even included in their “competitive market” model the “externalities” of having good health? Surely there are unmeasured benefits to individual consumers, their families, and to society if they can continue to work and produce income (and taxes) and be healthy enough to raise their children. How is this “instrumentality” of good health measured or factored into the model?

    Perhaps it is a good idea to standardize treatments for particular “disease conditions” in order to improve quality and minimize variations (not even dealing with the variability of patients with regard to co-morbidities, tolerance to particular treatments, etc.); but it is also necessary to compare apples with apples in measuring patient outcomes when applying these standards and claiming that the market offers a “homogeneous commodity” for each “disease condition” among which “consumers” can make “rational choices” about “maximizing their utility.” In order to do this, physicians must be using the same practice guidelines. However, in the real world, some don’t even subscribe to, or even aren’t aware of, the “best practices” recommendations of their own specialties.

    The “competitive market” model of healthcare decision-making is of such limited utility that it’s a wonder that there is so much persistence in designing “build-it- and-they-will-come” “solutions” based purely on market theory. First it’s necessary to understand the real meaning that “good health” (or even just “health”) has for individuals, patients, and their families. What we don’t need is religious adherence to doctrine.

  3. FrankOpelka Says:

    I find many comments of the healthcare economists as variations on a theme of change. All admit to waste in the system, a lack of quality, uncontrolled costs. I hear a need for value within a call for the right care for the right person at the right time. I also agree with the concepts of overwhelming complexity.

    It seems that everyone adds insights from all sides of the debate and all of these comments are constructive, even when the philosophies disagree.

    What seems to be different in the new efforts is that CMS, AHQR, NQF, IOM, purchasers, payers, hospitals, providers, patient groups, etc..are all in the same room. Once, the “situation” room was filled only with economists, then only politicians, next only payers…

    What Porter and Teisberg suggest is that we bring everyone into some form of accountability for our national health. It is a multidimensional problem that needs a multistakeholder solution.

    I am pleased to see the wisdom of all the experts – healthcare economists, masters of business competition, providers, patients, purchasers, payers, etc…When we measure each and every aspect we will define extraordinary complexities that will not accept a simple solution. Still its a step in a problem-solving direction we have never taken before. It is worthy of everyone’s attention.

    Just maybe, starting with something simiple enough could craft a culture of change that will open our minds to solutions for more complex challenges.

  4. LFBaltrucki Says:

    To Jaan Sidorov,

    I believe you are refering to my comments concerning the EMR.

    I could not agree with you more. Technology alone will not lead to transformation. The implementation of comprehensive EMRs and the adoption of business management principles/practices that have been developed for other industries alone will not lead to the most meaningful and most enduring changes. This is because the health care system and all of its componenets, (i.e. health networks, professional practice groups, etc.) are fundamenatally social systems and the forces driving substantive changes are social in nature.

    Significant changes will be much more about people and relationships than they will be about technology. On the other hand this technology is incredibly empowering.

    When implementation of the EMR fails, I suspect that this “failure”, in the vast majority of cases will ultimately be traced to an attempt to use the technology to support current processes and to maintain existing professional boundaries. This is not reengineering. In fact, there is no such thing as reengineering part of anything.

    I suspect that the various groups of stakeholders in health care delivery tend to be bit “too introverted”. Perhaps the decision that Health Affairs has made to initiate this “Blog site” is a response to this situation.

    The point that I wanted to make in my previous post was that in terms of determining the value of and reimbursement for health care services, it is clearly time for us to do something different, and perhaps that members of the various stakeholder groups could work on this together.

  5. Charles Weller Says:

    Uwe’s “most important[]” point is indeed very, very important, but often overlooked or ignored –PACs and other political realities make it very difficult and usually impossible for Congress or any government to pass a law that rearranges economics or clinical autonomy. One has to be “totally innocent, “naive,” or both, to think health care reform can happen without this political reality filter.

    Does the PT model require Congress or any government to pass any law before it can be implemented on a major scale? Absolutely not.

    As a lawyer with 30 years in the field under by belt, I estimate that about half of the $2 trillion spent annually on health care could adopt the PT model without a single law being passed.

    More good practical news for the PT model from this lawyer. Unlike HMOs, capitated and premium based ideas, none of the 52 state (including DC and Puerto Rico) insurance laws apply to the PT model and its re-arrangement of dollars spent to pay providers treating a patient’s disease system. State insurance law “101” is these payments are not “insurance” (buying a house is not insurance; buying protection against the chance the house burns down is insurance).

    Thus the public and private employers and other payers that do not buy state regulated insurance and are self-insured (about 130 million covered people) can implement the PT model tomorrow.

    Has anything like this, without Congressional or other governmental action, happened before? Yes, and at iPod speed. Old-timers like me watched and participated in unprecedented switch to PPOs in the 1980s-1990s, for similar reasons — no law needed to be passed, costs were exploding and all the other ideas had failed.

    Finally, the decision makers now that can make the PT idea happen are the same that made PPOs happened then, plus some new players — self-insured employers, and their current and potential benefits providers. The new players potentially include banks (with $7 billion ins HSA accounts already), IBM, Intel, Microsoft and others since no insurance license is required and collaborative networks, now involving health care science by disease system, are one of their core competencies.

    They also solve major problem Uwe correctly raises about categorizing medical conditions. In an insurance world, categories are king. But in the self-insured world, it is the self-insured’s money, and the categories are only the beginning of a health care science, not an insurance, question: how to improve patient resulted and reduce total costs (not individual provider costs) for this condition, or a better definition based on what can be done to add value.

    (In the interest of full disclosure, I was privileged to help Mike and Elizabeth over the last six years, and was so taken by their idea I published a book chapter “Science Teams By Disease When Ill” on practical aspects of their idea, in Unique Value (2004), and now run a company implementing it called Next Generation Healthcare, LLC.)

  6. Jaan Sidorov Says:

    While I agree that getting from “Here” (fragmentation) to “There” (medical condition integration) would be politically difficult, defining the clinical boundary around Condition 387 isn’t THAT challenging. While not perfect, there are software products using insurance claims that already do that for many conditions, and they are already use in many Health Plans using credible methodologies that statistically control for the effect of confounding clinical and socioeconomic variables. They are also getting better over time, and may have already achieved the tipping point.

    While gaming is indeed possible, the answer to that issue is transparency: markets can arguably assess the results from data appropriately submitted to credible third parties for confirmation (they’re already out there too). With time, I suspect the data endpoints and the analysis for many Conditions could migrate to a de-facto version of HEDIS.

    I\’m also confused by the description of the bundling of RAPs into inpatient DRGs as clinically and economically “sound,” since this seems to be an endorsement of PTs vision.

    As for EHRs (comment above), their mere existence alone won’t make a transformation happen. Future versions will need to possess sufficient process and outcomes data granularity to enable the uber-analyses necessary to support PT’s vision, and that’s only the 1st step. Assuming Ver 2 EHRs arrive, the same class of software products could be applied to these data…perhaps reconcile claims AND EHR data.

    I really admire Matt Holt (and his blog!) but his anecdote about Sutter is only one more reason to start looking for ways to get “there” from “here” ASAP.

  7. Matthew Holt Says:

    Uwe is right as ever, but implementing the PT strategy for hospitals may be actually worse than he suggests. It would have been OK, had the US implemented an Enthoven-type system, because then the dominant health plans would have used the resources from providers in the most cost-effective way. So the PT book reads like an interesting alternate history of the 1990s.

    But as Alain Enthoven will tell us tomorrow, his ideas were not adopted by the US, and as Uwe points out, politics and market clout trumps rationality. So on the ground, provider networks that were able to operate comprehensive monoploy services for health plans in their region were the ones that were able to extort the most moneyout of payers in the last decade. The best example is Sutter Health in California, but there are plenty of others.

    Had Sutter taken PT’s advice in 1994 it would have become really really good at a small number of services, and discovered that its customer health plans would have played it off against others in the region who could also provide those services. If its services were specifific enough (e.g. transplants only) it might have found that the payers were able to avoid it altogether (and buy those services elsewhere on the margin).

    What Sutter actually did was both the most economically prucdent move and the complete opposite of what PT argue it should have done. It merged horizentally to create a local oligopoly/monopoly, and it made sure that to get to any of its service in the region its customers had to sign up for all its services. And because they had no place else to go (yes, monopolies are fun!), its customers found that they ended up paying much more than they wanted to.

    Maybe, just maybe, in 5-10 years time telemedicine technology will enable national and international provision of services that break these local monopolies. But any major regional system whose management decides to adopt the PT strategy is taking a huge gamble. But as I’ve stated elsewhere, that won’t stop the consultants (PT included) from selling them the concept.

  8. LFBaltrucki Says:

    To Prof Reinhardt,

    I am encouraged to read your assessment of PT’s utopian vision as completely unrealistic. Not only are patients (especially seniors) inherently complex, so too are their “episodes of care”. Indeed, there are so many clinical variables that any data concerning outcomes would be suspect even if the “meters” were being read by individuals with the utmost integrity.

    Your point about health outcomes being driven by variables “completely outside the health system’s control” is also right on target. I see this every day, particularly patient choices. It is remarkable how frequently human beings make lifestyle and health care decisions that are not in their best interests.


    I am a poor but honest pathologist who has been working in the VA’s integrated delivery system for the past ten years. As a salaried Federal employee I will never have the money or the inclination to make a contribution to a PAC. Lacking the high-powered representation that my colleagues at the private hospital across the street enjoy, allow me to speak for myself and my profession.

    When it comes to “Redefining Health Care”, allow me to suggest that the electronic medical record, which I have been using for the past 10 years to provide a full range of diagnostic pathology services to Veterans and their providers, has allowed the creation of an entirely new paradigm for health care delivery; (i.e. the integrated health care delivery system).

    Lets’ be honest; how much do Health Care Policymakers or Health Care executives really know about Pathology and Laboratory Medicine. How can we place a value on something that we know so little about?

    Fortunately, now that we have the electronic medical record we can move from outdated systems of payment, to “data-driven” valuation. Pathologists make unique contributions to health care delivery. Not only is the information that we create unique and inherently valuable, so too is the “flow” of this information. This is because “information flow” is the fundamental determinate of how a patient will flow through a system, and “patient flow” is inextricably linked to patient outcomes and the cost of care.

    The EMR gives us the means of capturing the entire sequence of events in the process of care for every patient in the system, in virtually every clinical setting, across the entire continuum of care. The “input” from pathologists (as well as that of every other professional group) and everything that results from it can now be documented, and the value that each group brings to patient care can now be evaluated objectively, based on “hard data”.

    I am certain that there are other practitioners, like myself, who are ready willing and able to explain and promote our profession and our enterprise (and how they are being transformed in the context of the 21st century health care system) to any Healthcare Policy-makers or Healthcare Executives that are willing to listen.

    The essence of integrated health care delivery is based on each component in the system developing a deeper understanding of the other components and adapting their practice accordingly, to optimize the system’s performance. Perhaps it is time for Policy-makers, Health care executives, Payers, and Physicians to adopt the same standard for the benefit of our patients, our society, and our nation.

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