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Low-Cost, High-Quality Care In America

July 28th, 2009

As President Barack Obama and his allies press their case for health care reform, the president exhorts that his vision will slow the growth of medical expenditures, expand coverage to millions, and improve the quality of care.  In the trenches, where millions of medical interventions occur daily, physicians and hospital managers who do the heavy lifting describe a far more grueling path “to bending the cost curve,” one that takes dedicated years to navigate and often loses money because the inflationary fee-for-service payment system rewards providers for rendering more, not less, health care.  At a conference last week, that was the clear message of doctors and managers who have tried to bend the cost curve while improving the quality of care in health care enterprises in communities across the United States. 

In many respects, their voices provided a rationale for why achieving reform is so critical and why — as legislators head for home and countless conversations with their constituents — the road to reform will prove so difficult.  Speaking of the interests of physicians alone, the community voices left unanswered a looming question: will national health reform be able to transform the practice of medicine by weaning physicians from inflationary fee-for-service payments and promoting a more conservative style of practice without causing a rebellion among practitioners who already feel put upon by the gathering forces of policymakers and payers?

Small teams of doctors, hospital managers, health insurers, and others were brought together in Washington, D.C., by four national health care improvement experts to describe their efforts to reduce medical costs in the 10 communities where they work.  The purpose of the meeting, held on July 21 at the Henry J. Kaiser Conference Center, was clear in its title:  “How Do They Do That?  Low-Cost, High-Quality Health Care in America.”  The communities represented were  Sacramento, CA; Cedar Rapids, IA; Portland, ME; Ashville, NC; Sayre, PA; Temple, TX; Richmond, VA; Everett, WA; La Crosse, WI; and Tallahassee, FL.  

In opening remarks, Dr. Donald Berwick, chief executive officer of the Institute for Healthcare Improvement (Cambridge, MA) and one of the four sponsors, said:  “Of course, from a global perspective we already know that it’s possible to have the same or better care as we do in America for half the price.”  But, he added, the sponsors had concluded that if they were “going to get public, political, and professional traction on cost and quality based on successful examples,” they had to draw on American examples if they could find them.  “We can.  We have.”

The communities were selected based on how health care delivered there ranked on an array of measures, a number of which were developed and are published annually in the Dartmouth Atlas of Health Care. The atlas, a treasure trove of data that has long tracked the wide variations in clinical practice patterns across the United States, sorts the country into what it calls 306 “Hospital Referral Regions.” The health improvement experts sought to identify those regions within the 306 that ranked well on measures of cost, quality, and patient satisfaction.  They winnowed the number down to 70 regions where health care expenditures had been substantially reduced and where quality of care and patient satisfaction were well above the norm.  From the list of 70 regions, the sponsors selected 10 communities that were reasonably representative of the political, geographic, and demographic landscape of the U.S.

Berwick explained:  “What we wanted to know, and still do,” is, “What are the conditions — environmental, cultural, organizational, financial, historical…and so on — that can possibly explain how regions in America can perform at a level of cost and quality that — it is almost possible to assert — would, if universal, almost solve America’s health care financing crisis?” In addition to Berwick, the other three sponsors, all of whom are physicians, were Elliott Fisher of Dartmouth Medical College (Hanover, NH), Atul Gawande of Brigham and Women’s Hospital (Boston), and Mark McClellan of the Brookings Institution (Washington, DC).

Describing How They Do It

In the conference’s opening phase, team members briefly described key characteristics that influenced how their local health care providers operated. Most of their medical groups and hospitals are structured as not-for-profit enterprises, reflecting a more community than solely commercial purpose in their management styles. A Sacramento team member said:  “We believe that the commonality of hospitals as not-for-profit institutions have provided a moral compass for our community.” Members of other teams stressed the importance of nurturing a culture of collaboration, rather than one of strict market competition, and making certain that physicians were well represented in the management of hospitals where they practiced.

Conference participants underscored the growing importance of data to measure performance and in moving their systems toward more patient-centered care. And they emphasized that having a strong cadre of primary care doctors is critical to operating an efficient health care system. As Gawande described it, many of these systems “put the needs of patients first rather than the needs of their business model.”  Through these characteristics and others, the 10 communities were able to deliver care to Medicare beneficiaries that, on the basis of per capita spending, placed them in the lowest quartile of the 306 “Hospital Referral Regions” in 2006.  The communities also were in the lowest quartile of a Health Care Intensity Index (a measure of the number of hospital days and physician visits in the last two years of life among Medicare beneficiaries) and ranked well above the norm in providing quality care while maintaining, if not improving, patient satisfaction.

In several instances, physicians, hospitals, and others were subject to the constraints of certificate-of-need (CON) laws. CON laws that apply in Iowa, Maine, and Virginia require a provider or an investor to seek state approval before purchasing an expensive piece of medical equipment or constructing a new hospital that would add capacity to a community’s existing health care supply.

Most of the communities are served by independent medical groups, local single or multihospital systems, and one or more health plans. They operate to various degrees in collaboration with one another, but also compete for patients. Scott & White Clinic of Temple, TX, is an exception to this rule, reflected in the fact that its entire team was composed of representatives of this medical group that employs 800 physicians and is the major provider in that part of the state. The clinic has expanded its operations from three to nine hospitals, making it a much larger player and one that has drawn the scrutiny of the Federal Trade Commission.

Can Successful Cultures Be Replicated Elsewhere?

Dr. Nancy Nielsen of Buffalo, who stepped down in June as president of the American Medical Association, characterized as “some Utopian land” the compact between managers and physicians at the Scott & White Clinic. She asked how it would be possible to take “this culture” that had developed and form similar organizations across the United States. “I have to tell you,” she said, speaking colloquially, “this ain’t where it is at in other places.”

Nielsen said that “competitiveness and every man for himself” dominates physician behavior in most communities, including her own, where, she continued, medical groups “hold the health plans hostage. …In other communities, you can’t teach culture. Physicians have to have some reason” for building cultures like those that thrive in some of the 10 communities.

While Scott & White is the dominant system in its region, the  Sacramento team described how three systems there decided to challenge the dominance of the Kaiser Permanente Medical Care Program. One consequence of their collaboration was to substantially lower their annual per capita spending among Medicare beneficiaries while maintaining a high level of care quality. One Sacramento team member said:  “The development of integrated networks outside of Kaiser Permanente required dramatic changes in our culture.”

Out With Fee-For-Service, And In With . . . Something Else

Among many of the teams there was general recognition that the fee-for-service model under which most physicians practice must be changed, but there was no agreement on what the new model should be.  A Sacramento team member said: “The mixture of fee-for-service and capitation payments creates schizophrenia among physicians.”  One Everett, WA, team member said: “We want to change the basic (physician) payment model. It won’t be capitation payments, but the amount of revenue will be determined by the clinical outcome of care and patient satisfaction.” 

An increasing number of physicians are becoming salaried employees of hospitals and medical groups. But, in some instances, because this payment model does not increase the compensation of a doctor if she sees more patients, practitioners were not as productive as they were expected to be. Some medical groups have created payment incentives designed to encourage doctors to increase their productivity. The teams from Scott & White; Sayre, PA; and Sacramento all reported having instituted payment incentives to drive improvements in physician productivity.

Some of the teams reported that the quality of care had improved in their communities but that they still had a long way to go to reach their quality goals.  A Tallahassee team member said:  “We are pleased with our quality results but not satisfied with them. …We have room for major improvements.”   An Everett team member said: “We are less worse that the rest of the U.S.” And a team member from La Crosse lamented: “I am troubled to learn that we are national leaders because we have a long way to go.”

The Threats To Successes Achieved By Communities 

In a question posed by Gawande, who asked the teams what they considered were “threats” to their local practices and hospitals, they identified the following prospects:  too much economic pressure that would force the unraveling of their collective efforts to lower spending and improve quality; no real idea of the future role consumers will play in a reconfigured system; the prospect that system reform might establish unrealistic timetables for changes in the delivery of care; and the possibility that reform might not recognize primary care physicians as an endangered species, thus threatening access to primary care services.

The View From Buffalo

In the closing session, the sponsors invited Dr. Michael Cropp, a family physician who is CEO of Independent Health in Buffalo, a not-for-profit HMO with some 365,000 enrolled members, to relate what he heard during the day-long discussion. Cropp said he thought that the “collective community sense” mentioned by many of the 10 teams was one of the important recurring themes, along with a recognition that current cost trends were unsustainable and that the pursuit of improved quality was a never-ending quest.

Cropp said that as hospitals and medical groups contemplate greater integration, the system will need some relief from antitrust laws. Cropp was struck at the emphasis many of the 10 teams placed on developing stronger physician leaders.  He said in Buffalo “physician leadership is sorely lacking” and that, in all communities, it was unlikely that doctors would emerge as leaders unless investments were made in training them to serve in that capacity.

The conference seemed to energize many of the participants, but as Berwick said in his opening remarks, the sponsors expected that more questions than answers could come from the day of dialogue, and that is definitely what they heard.  “We do hope we can harvest at least a few ideas for policy,” he added.  However, the key characteristics of the 10 community systems — not-for-profit status, cultures nurtured through years of effort and making physicians group leaders when they are trained to be autonomous professionals — are hardly features that can be woven quickly into health reform policies.

The Distance Between McAllen, Texas, and Temple, Texas

Nevertheless, the promising stories of the 10 communities stood in stark contrast to the picture that one of the health care improvement experts — Gawande — depicted in a widely read June 1 article in The New Yorker titled, “The Cost Conundrum.”  The article highlighted the “Hospital Referral Region” in McAllen, TX, and compared it with El Paso, a city 800 miles away. Gawande, based largely on Dartmouth Atlas data, reported that McAllen has among the highest per capita Medicare costs in the country — more than $15,000 per beneficiary per year in 2006 — while costs in El Paso were only half as much.

Gawande’s article burst into the policy limelight and even caught the attention of President Obama, who is reported to have made the essay required reading among his White House staff members.  But the McAllen story is probably closer to the costs of care in more American communities than those of the 10 teams that were brought to Washington to tell their stories. It only highlights the challenges facing the United States as it moves gradually toward a national reform plan designed to lower costs and improve quality throughout a country driven by the imperatives of capitalism, independence, and a limited government.

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3 Responses to “Low-Cost, High-Quality Care In America”

  1. Thomas Cox Says:

    The unaddressed “gorilla in the room” of health care (finance) system reform is the deeply flawed capitation mechanism. Capitation is always less efficient than indemnity insurance funded health care in equally efficient insurance markets and equally efficient clinical environments.

    Capitation transfers insurance risks to health care providers. Insurance risk transfers are best done between when the entity accepting the risk is larger than the entity transferring the risk. This is trivially clear: Individuals do not accept insurance risks from insurers, insurers accept insurance risks from large numbers of individuals.

    The Central Limit Theorem applies to insurance rate making and reserving, capitation contracting and statistical sampling theory. The difference is the size of the samples/portfolios. Everything else remains the same.

    Small insurers produce annual loss ratios that are more distant from the population loss ratio than the loss ratios produced by large insurers. The relationship varies with the square root of the relative portfolio sizes. It is therefore very easy to quantify the inefficiency induced by capitation contracting.

    Since capitation sub-portfolios are usually much smaller than the full portfolio of the risk transferring entity, the variation around the population loss ratio is larger for risk accepting health care providers than it would be if the risk transferring entity retained the risks.

    Greater variation translates to much higher probabilities of extreme losses or profits; higher surplus requirements; and increased probabilities of insolvent insurance operations. Capitation increases inefficiency in every dimension of insurance operations: Marketing, claims adjustment, and risk management. The only way efficient providers could offset the adverse impact of insurance risk assumption is by systematically lowering the level/cost of the care they provide. By doing this they can reduce the probabilities of being unprofitable, incurring net losses, and the big one, reduce the probability that they will become insolvent because of their inefficient insurance operations.

    The big myth is that the entities transferring these insurance risks play any roles as insurers. A fully capitated, managed care organization performs no insurance risk management function at all. Rather, these organizations are more like insurance brokers, selling insurance products on behalf of the real insurers, risk assuming health care providers.

    In short, the only insurance function served by fully capitated managed care organizations is being a conduit for putting health care providers in the insurance business. All the benefits of insurance as a collective risk management system are destroyed when the risks are dis-aggregated and parceled out to smaller, risk assuming health care providers. But it gets worse. The portfolios transferred are not even random samples so each sub-portfolio produces a biased estimate of the population loss ratio. This adds to the risk assuming health care provider’s risk profile because the sub-portfolio they have may require far more care than the average for the full portfolio.

    As well, compared to the large organizations transferring the risks, the risk assuming health care providers are also more geographically concentrated, increasing their conflagration risk exposure.

    I call this “Professional Caregiver Insurance Risk.” In simple terms, for every dollar of care provided through a capitated finance system, less money is available at the point of care than in an equally clinically efficient indemnity insurance funded health care system. Since capitation is demonstrably more inefficient than indemnity insurance, what possible beneficial impact could it have on improving efficiency in the health care system? Inefficiency begets inefficiency, not efficiency.

    Since providers have to act like the insurers they are, the impact at the point of care is dramatic. Millions of claims are being processed, every day in clinics, hospitals, and offices as health care providers, qua insurers, decide what claims to honor, what tests to offer/withhold, what treatments to offer/withhold, and in essence which claims they will delay, and deny.

    The ethical and legal implications of health care providers’ undisclosed relationship as their patients’ insurers means that there are potentially hundreds of billions of dollars of unfunded litigation costs in the future. Since capitation could never work, even the protections afforded in ERISA are likely to be pierced eventually as quantitatively literate lawyers realize the magnitude of the flawed system and its legal implications.

    Moreover, since benefit plan coverage varies greatly from patient to patient, an ‘efficient’ health care provider, qua insurer, is one who achieves a delicate balance. Being efficient means they cannot “over treat.” This need for caution reduces the level of service available to both capitated and non-capitated patients. Non-capitated patients wait alongside capitated patients in offices around the country, despite the higher costs of their insurance plans. Even when they are seen, the standard of care they are likely to receive is more likely to mirror that of capitated patients than it is to rise to the standards they are paying to receive.

    This is not some esoteric result from actuarial risk theory that nobody can understand. “Professional Caregiver Insurance Risk” is Insurance 101 and Statistics 101.

    Additional details are available at:

  2. SteveBeller Says:

    The perverse incentives of the fee-for-service model are certainly a problem area that needs to be addressed. But it seems to me that it is not the underlying cause of our healthcare crisis. The real problem, I contend, that the healthcare industry has failed to focus enough on answering this question: How can providers and patients make valid, reliable evidence-based decisions about the most cost-effective ways to prevent and treat each person’s physical and mental health problems? Lacking answers to this question is a critical knowledge gap that cannot be filled by being overly focused on economic strategies.

    Answering the question about cost-effectiveness to fill the knowledge gap is a daunting challenge that requires persistent widespread (country-wide, world-wide) collaboration among clinicians in all disciplines, researchers, patients, and informal caregivers to overcome the knowledge gap. This includes collecting, sharing, and analyzing comprehensive biopsychosocial (biomedical, psychological, social, and mind-body) health data and translating them into evolving personalized practice guidelines that are vastly superior to the generic guidelines current in use. And it means developing next generation health IT for healthcare professionals and consumers that (a) implement patient-centered cognitive support computational models to increase understanding of people’s risks, strengths, needs, preferences, and care options; (b) guide decisions for selecting the most cost-effective options for each particular person; (c ) provide training, instruction, and other relevant educational materials tailored to each person’s level of knowledge; and (d) continually track the clinical and financial results of treatments and self-care using outcome measures (not just process measures) and compile the results in research data warehouses.

    We MUST FAIL UNLESS we balance (a) economic strategies that focus primarily on cost-control with (b) strategies aimed at filling the knowledge gap. As the article discussed, likely consequences of this failure include reduced care quality and productivity, as well as provider resistance.

    The only rational solution, therefore, is to focus on replacing ignorance with profound evidence-based knowledge and on providing health IT tools that expand the limits of the human mind, so we can answer the question: What are the most cost-effective (i.e., high-value) ways to prevent and treat a person’s health problems? Once we can answer that question with confidence, we can then incentivize providers for following guidelines that prove to bring high-value to the consumer. This is an absolutely essential part of solving our healthcare crisis, and it expands President Obama’s healthcare reform strategy from not doing what doesn’t work to doing what works AND is most cost-effective.

    Steve Beller, PhD

  3. mgoozner Says:

    Non-profit groups and hospitals. Major role for primary care physicians leading team-based medicine. Community-engaged institutions. Competition among plans. End fee-for-service. Alas, as Dr. Nielson of the AMA points out, Berwick, Iglehart, et al are preaching four-part harmony to a medical choir singing free market, what-in-it-for-me rock-and-roll. My only question this morning is why the policy community’s mighty effort over many, many years to trumpet these cost-saving, quality-improving ideas appears to have had almost no impact on the political debate? Maybe we should stop worrying about cost-effective medicine and start worrying about cost-effective health care wonkery.

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