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H E A L T H S Y S T E M S :
C O M P E T I T I O N
7 September 2005
Competition In Health Care:
It Takes Systems To Pursue Quality
And Efficiency
If systems are the best locus
of accountability for
health care quality and efficiency, then competition
should be designed to encourage evolution toward “systemness.”
by Alain
C. Enthoven and Laura A. Tollen
ABSTRACT:
Many stakeholders agree that the current model of U.S. health care competition
is not working. Costs continue to rise at double-digit rates, and quality is
far from optimal. One proposal for fixing health care markets is to eliminate
provider networks and encourage informed, financially responsible consumers
to choose the best provider for each condition. We argue that this “solution”
will lead our health care markets toward even greater fragmentation and lack
of coordination in the delivery system. Instead, we need markets that encourage
integrated delivery systems, with incentives for teams of professionals to provide
coordinated, efficient, evidence-based care, supported by state-of-the-art information
technology.
Americans are dissatisfied with their health care system—its soaring costs,
quality deficits, and growing numbers of uninsured people. Competition is a
widely recommended cure for such ills, but there is disagreement over the appropriate
nature of competition: Should it be among integrated systems of care, as we
have long advocated under the managed competition framework?1
Or should it be among individual providers and highly specialized groups, as
advocated by some proponents of the “consumer-directed,” wide-choice
products that are gaining in popularity?
In this paper we argue that the nature of competition affects the quality of
the health care delivery system and that competition among systems of care is
the best way to encourage high quality and efficiency. We begin by describing
what we see as the best health care market model. We then contrast this with
a 2004 proposal by Michael Porter and Elizabeth Teisberg in which they recommend
competition at the individual provider level.2 We
argue that their proposal leads us in the opposite direction from the type of
markets we need: those that encourage the formation of high-quality, efficient,
integrated delivery systems. We conclude by describing a path to a better competitive
framework.
Competition Among Integrated Delivery Systems
There is more to safe, appropriate, affordable health care than what is evident
to a patient in an encounter with an individual provider. We need systems to
ensure that health care providers are carefully selected, trained, and proficient
in the specific diagnosis and treatment needed by the patient; deployed in the
appropriate numbers and specialties to meet a population’s needs efficiently;
current on evidence-based practice and supported by tools (such as monitoring
and reminders) to overcome widespread practice variations and quality failures;
supported by a complete, up-to-date, and accurate medical history of each patient;
supported by teams of colleagues sharing goals, work processes, and information
and able to coordinate care across multiple settings; supported by a system
that records test results, diagnoses, and treatments and transmits orders accurately;
practicing in facilities with equipment selected based on evidence of safety
and efficacy; and supported financially and logistically to participate in common
efforts such as guideline development and pharmacy and therapeutics committees,
which are important for evidence-based practice.
In short, as the Institute of Medicine (IOM) argued in Crossing the Quality
Chasm, reform of U.S. health care needs to be based on delivery systems.3
In this paper we refer to “integrated delivery systems” (IDSs),
which are built on the core of a large, multispecialty medical group practice,
often with links to hospitals, labs, pharmacies, and other facilities and often
with a sizable amount of revenue based on per capita prepayment. Examples of
IDSs include health plans such as Kaiser Permanente, HealthPartners, and Group
Health Cooperative, and medical groups such as the Cleveland Clinic, the Mayo
Clinic, and Geisinger Health System. Members of the American Medical Group Association
that are or could become (under appropriate market conditions) IDSs care for
more than fifty million Americans.4
What are the characteristics of the IDSs that form the basis of the IOM’s
vision for reforming health care? And if, as the IOM argued, systems, not individuals,
are the best locus of accountability for health care quality, how can market
competition support their formation? We believe that the health care market
should be based largely on risk-adjusted prepayment and consumer choice of IDSs.
The systems themselves would have the following characteristics: processes to
ensure the provision of appropriate, evidence-based care; the full spectrum
of care coordination; use of comprehensive, shared patient records; and the
ability to improve efficiency on a large scale.
Prepayment.
Per capita prepayment, in competition to attract premium-sensitive subscribers,
is a powerful tool for aligning providers’ incentives with patients’
interests in choosing high-quality, affordable care.5
Prepayment rewards doctors for keeping patients healthy, for solving their problems
in economical ways, and for avoiding errors. It encourages superior ambulatory
care for patients with chronic conditions, thereby reducing their need for hospitalization.6
In contrast, the fee-for-service (FFS) payment system gives doctors powerful
financial incentives to do more (and more costly) procedures, which may not
be in patients’ best interests, financially or clinically.
Further, a system prepaid for total costs can examine the full spectrum of care
to find opportunities for cost reduction, not just shifting costs to other parts
of the system. For example, a prepaid delivery system can evaluate new technologies
for their cost-effectiveness and impact on quality and can deploy them as needed
in the hands of proficient personnel. It can match resources to the needs of
the population, including making decisions about services for which referral
to high-volume centers of excellence is appropriate.
Properly aligned financial incentives can also lead to a greater focus on quality
as a system property. Prepaid (and partially prepaid) IDSs are far ahead of
small groups and individual doctors in the use of quality-enhancing decision
support tools, disease registries, guidelines, automated reminders, performance
feedback, patient self-management, linkages to community resources, and electronic
medical records (EMRs).7
Other characteristics.
Appropriate care. As noted, risk-adjusted prepayment should go hand
in hand with IDSs that possess a number of characteristics. The first of these
is a process to ensure the provision of “appropriate” care—the
right intervention for the right person at the right time and in the right setting.
To achieve appropriateness, a delivery system must encourage the development
of teams focused on the patient, rather than on the particular procedure each
doctor happens to do. RAND Health and others have documented the delivery of
a great deal of inappropriate care, as well as a failure to deliver care that
is known to be appropriate and effective.8 Also,
John Wennberg and colleagues have documented wide variations in health care
practices among different communities.9
Individual doctors face an insuperable challenge keeping up with medical science
and the professional literature to determine what is appropriate. The diffusion
of best practices takes many years, as more than 10,000 randomized controlled
trials are published annually.10 To make sense
of this avalanche of information, providers need qualified professionals to
develop guidelines. According to Donald Berwick and Sachin Jain of Harvard Medical
School, “To accomplish this requires support systems that can (1) find
the science, (2) embed the science in sound standards of practice, (3) make
the relevant knowledge available to clinicians and patients at the point of
care and at the time of care, and (4) track performance and improve it continually.
In development of these systems, prepaid group practices are at the forefront.”11
Examples of systems that have institutionalized processes for turning evidence
into practice guidelines include Kaiser Permanente’s Care Management Institute;
the Quality Enhancement Initiative of the Veterans Health Administration; and
the Institute for Clinical Systems Improvement, a collaborative of six health
plans in Minnesota.
Coordinated care. The second important characteristic of IDSs is that
they coordinate the full spectrum of care: at home, in the doctor’s office,
and in the hospital inpatient and outpatient settings. Providers must be able
to deliver care in the least costly appropriate setting, considering total system
costs, not just costs (and revenues) associated with one setting. IDSs can engage
in this type of planning in a way that disaggregated providers cannot. For example,
in an integrated system, it makes both clinical and financial sense to use a
more costly drug that reduces the need for hospitalization. In the nonintegrated
setting, such action would benefit the patient and the pharmacy but harm the
hospital.
Furthermore, patients must be followed and resources transferred smoothly among
settings as needs change. Doctors who see their patients in their offices must
know what tests and procedures were done in the hospital and by other providers.
The competing financial interests in the nonintegrated sector make such seamlessness
difficult, if not impossible.
Shared information. A third desirable delivery system characteristic
is a foundation of shared, comprehensive patient records. Large prepaid group
practices (PGPs) and multispecialty groups have long maintained such records,
giving providers a timely, accurate picture of each patient’s health history
and facilitating research on practice patterns. They are now converting these
paper records to electronic formats, opening up tremendous possibilities for
better research and convenient support tools for caregivers.12
Large-scale efficiency improvement. The fourth desired delivery system
characteristic is an ability to drive efficiency improvement and cost containment
on a large scale, not just in a few regional or specialty centers. In the seminal
RAND Health Insurance Experiment, total per capita costs (premium and out of
pocket) were 25–30 percent lower in PGPs than in FFS practice.13
Although market conditions have changed since the study, PGPs generally remain
less expensive or have richer benefits than FFS-based preferred provider organizations
(PPOs) and indemnity plans.14 If there were real
competition among delivery systems to produce value for money, the cost advantage
of IDSs would likely be greater.
Empirical research.
We have enumerated the theoretical reasons to expect large IDSs and multispecialty
group practices to provide higher-quality care than disaggregated providers
can. However, there is also a growing body of empirical research that supports
this notion.
Regarding use of recommended care processes, Lawrence Casalino and colleagues
found that a medical group’s increased size and affiliation with a hospital
or health system were significantly associated with increased use of recommended
care management processes for the chronically ill.15
Stephen Shortell and Julie Schmittdiel found that even among large medical groups,
prepaid multispecialty groups were more likely than others to use care management
processes.16 A 2004 survey of California physicians
found that those in the Permanente Medical Groups have adopted system-level
care management tools to a much greater degree than physicians in independent
practice associations (IPAs) or “cottage-industry” practices. Kaiser’s
two group practices in California were more likely to use care management processes
and financial incentives linked to quality of care and patient satisfaction
than were IPAs, solo practitioners, and other group practices.17
Regarding the use of information technology (IT), Casalino and colleagues also
found that organized delivery systems are more likely than independent, FFS
providers to have both the financial incentives and access to the capital to
invest in clinical information systems.18 Anne-Marie
Audet and colleagues found that the predominant factor affecting use of clinical
IT is practice size.19 Eighty-seven percent of
physicians in large group practices have electronic access to test results,
compared with 36 percent of physicians in solo practice. Other information technologies
follow a similar pattern. Physicians in large group practices are more likely
than solo practitioners to use EMRs, receive electronic drug alerts, use e-mail
to communicate with colleagues and patients, and practice in a “high-tech”
office (as defined by the survey). How doctors are compensated also affects
use of IT, with 34 percent of salaried physicians working in a high-tech office,
compared with 17 percent of nonsalaried ones.
Regarding the use of care teams, a 2002 survey of California physicians found
that Kaiser Permanente physicians are more likely to work in interdisciplinary
teams than physicians working in IPAs and other types of managed care networks.20
Regarding the ability to measure performance and outcomes, Casalino and colleagues’
research supported the commonsense notion that large groups of physicians are
better able than physicians in smaller groups or solo practice to monitor clinical
performance and implement clinical protocols.21
The body of research regarding the performance of different forms of physician
organization is growing.22 A formal analysis of
this work would help inform the debate about the most appropriate structure
for improving quality for different types of conditions (acute versus chronic)
and settings (rural versus urban).
Individual-Level Competition
Much of the public discourse about health reform focuses on the notion of empowered
consumers accepting greater responsibility for the cost of their care in exchange
for more control over where, how, and by whom it is delivered. Some believe
that such consumers are best supported by a market in which their choices are
unfettered by network boundaries—in other words, a market that encourages
competition among individual providers, rather than among comprehensive systems.
One version of this market model was put forward prominently by Michael Porter
and Elizabeth Teisberg in 2004.23 They argued that
competition takes place at the wrong level: the level of health plans, networks,
and hospital groups. They believe that value is added only at the level of diagnosis
and treatment of individuals’ diseases, and that is where competition
should take place.
They summarize the failings of our current markets as follows: “Instead
of competing to increase value at the level of individual diseases or conditions,
the players in health care have entered into four unhealthy kinds of competition….
One is the annual competition among health plans to sign up subscribers. Because
of strong network restrictions, however, signing up for a health plan blocks
most of the competition at the level of diseases and treatments.”24
They go on to say that “under positive-sum competition, all restrictions
to choice at the disease or treatment level would disappear, including network
restrictions and approvals of referrals.”25
Further, “Some recently proposed reforms will even exacerbate zero-sum
competition. For instance, some employer groups advocate ‘system to system’
competition, in which physicians are forced to commit to one closed network
or another. This actually limits competition at the level of diseases and treatments.”26
They make the following recommendations to employers: (1) Select plans that
do not restrict employees’ access to treatments or out-of-network providers.
(2) Expect from providers information about their experience, use of prevailing
standards, and outcomes. (3) Ensure employee access to information on diagnoses
and alternative treatments. Share collected information regionally and nationally.
(4) Insist that employees be treated by experienced providers. (5) Require a
single posted fee for each service. (6) Require one bill per hospitalization
or treatment cycle. (7) Eliminate billing of employees by health plans or providers.27
We believe that competition among IDSs is a more promising approach than the
disaggregated, largely solo- or single-specialty group-practice model Porter
and Teisberg rely upon. Here, we address their recommendations directly, grouping
them into four categories (which necessitated some paraphrasing).
Eliminate network restrictions
on choice of providers.
Porter and Teisberg believe that networks produce little clinical value and
exist only to give health plans and physicians bargaining leverage relative
to one another. We think, however, that it all depends on how one defines “network.”
If one is speaking of independent small-group or solo-practice physicians, then
the value is largely as a bargaining unit. If one is speaking of providers sharing
common management, practice style, information, and responsibility for a population’s
health, the value is much greater. If “eliminating restrictive networks”
means foreclosing the possibility that consumers would commit annually to receive
care from the latter kind of “network” (that is, an IDS), then we
cannot support this recommendation.
Further, the elimination of network restrictions is essentially a return to
the FFS indemnity system from which government and employers have struggled
to escape for the past two decades. (While Porter and Teisberg do not specify
a mechanism by which these nonnetwork providers would be paid, FFS payment dominates
indemnity plans and those that allow a wide choice of providers, such as most
PPOs.)28 FFS indemnity compounds the moral hazard
inherent in all health insurance by paying providers more for doing more, whether
or not more is likely to benefit the patient. As a result, neither patient nor
physician is motivated to moderate spending, which leads to unnecessary care
and contributes to wide variations in practice patterns (as factors other than
clinical value enter into medical decision making).29
In the past, this model did not lead to competition on quality and value. It
led to a level and growth of spending that purchasers found unbearable.
Porter and Teisberg’s answer to these failings of the FFS indemnity system—“reasonable
copays and large deductibles combined with medical savings accounts [that] would
let patients take some financial responsibility for their choices”—is
insufficient.30 Copays give patients some responsibility
for the frequency with which they demand doctor visits but leave them insensitive
to the costs of services provided during those visits. Deductibles aren’t
a solution because health care expenses are concentrated among patients whose
costs exceed reasonable deductibles. By most estimates, the most costly 30 percent
of patients account for 90 percent of total health care spending.31
This kind of insurance leaves patients cost-unconscious once they anticipate
reaching the deductible or out-of-pocket spending limit. Coinsurance helps,
but only to the point where limits on out-of-pocket spending—typical in
most health insurance arrangements—are reached. Ironically, though, it
is the very people who will exceed these limits (those who need expensive treatments)
for whom Porter and Teisberg expect regional centers of excellence to compete
on cost and quality.
Provide high-quality
consumer information about providers’ practices and outcomes and about
diagnoses and alternative treatments.
We agree that this type of information should be available and generally is
not. We recognize that it is hard to obtain and communicate, and most patients
find it difficult to process. A notable example of the type of information Porter
and Teisberg recommend is the series of New York studies on risk-adjusted outcomes
for coronary artery bypass graft (CABG) surgery.32
Risk-adjusted outcome studies have spread slowly, in large part because of provider
resistance. The publication of outcomes by some providers has not created market
pressure on those who do not report.33 The leaders
of the New York CABG project reported that there was “no movement of patients
away from hospitals with high mortality rates.”34
Two examples illustrate both consumers’ and providers’ indifference
to the available data. First, the most high-profile CABG patient in the nation—former
President Bill Clinton—chose to undergo this procedure at New York–Presbyterian
Hospital/Columbia University Medical Center in 2004, although this hospital
ranked twenty-second in risk-adjusted CABG mortality rates among thirty-six
hospitals performing the procedure in the state.35
In a more disappointing example, the Pennsylvania Health Care Cost Containment
Council published a consumer guide to CABG surgery with risk-adjusted mortality
data.36 In a random sample of 50 percent of Pennsylvania
cardiologists, 87 percent said that the guide had little or no influence on
their referral recommendations.37 If referring
cardiologists do not use this information, it is unlikely that patients will.
Although it is important to provide this kind of information, much more work
must be done to make it useable for patients.
Insist that employees
be treated by experienced providers.
On its face, this recommendation is sound. But we believe that Porter and Teisberg
mean that patients should not be constrained by network boundaries in choosing
the most experienced provider for their condition or procedure. Selective referral
to high-volume providers is indeed important for volume-sensitive procedures.
However, this recommendation conflicts with their first one (“eliminate
network restrictions”), as it is often patients’ preference for
the local hospital—not network requirements—that sends people to
low-volume providers.
Porter and Teisberg also overstate the importance of volume sensitivity to quality.
A review of the literature found statistically significant results supporting
a volume-outcome relationship in only thirty-six conditions/procedures.38
There are other ways to ensure that patients go to high-volume providers for
volume-sensitive procedures, short of eliminating networks. In fact, an IDS
with a defined network is well positioned to determine which procedures should
be centralized and then to contract with the most appropriate centers of excellence.
Make billing and pricing
more transparent and easier to understand.
Again, this recommendation is attractive on its face. Under Porter and Teisberg’s
proposal, all purchasers would pay the same price for the same service. There
would be no discounts for large purchasers and therefore no price discrimination.
Although admirable, this proposal is unenforceable. Medical care is the ultimate
nonstandard product. Moreover, the authors would ask government (Medicare and
Medicaid) and employers to forgo large discounts, which they would surely oppose.
The authors also call for “one bill per hospitalization,” but they
do not provide further explanation. If this is a way to encourage doctors and
hospitals to offer fixed, all-inclusive package prices, it is a good idea; it
encourages integration and the efficiencies that come from it.
Questioning the focus
on acute care.
Finally, although this is not a response to a specific recommendation, we must
address a flaw in Porter and Teisberg’s formulation and in the provider-level
competitive model generally: the implicit assumption that most of the care people
require is acute or episodic and can be sought out from specialty or subspecialty
centers of excellence. In fact, about 45 percent of noninstitutionalized Americans
have chronic illnesses, and they account for 75 percent of personal health care
spending.39 These people require what the IOM calls
“continuous healing relationships” with the same providers over
time.40
Under a completely free-choice model such as that of Porter and Teisberg, a
patient with diabetes would seek out the best providers for diabetes, and a
patient with congestive heart failure would do similarly. Putting aside doubts
that ill patients will regularly travel far from home to centers of excellence,
the problem remains: Many patients have multiple chronic conditions. In addition,
people with chronic illnesses also need primary care. It simply cannot be good
medicine for people with multiple chronic diseases to receive primary care and
care for each of their conditions in separate locations, with different sets
of doctors who don’t communicate regularly about the patient.
To be fair, under the provider-level competitive model, one could imagine regional
specialty centers that treat a variety of conditions that often coexist with
one another (for example, the diabetes center would include experts in hypertension
and heart disease). However, this raises the question of whether there are natural
limits to the expansion of that expertise that stop short of a fully integrated
delivery system. We do not think so.
By focusing on competition among regional specialty centers for what is mostly
tertiary care, Porter and Teisberg’s model gives short shrift to prevention,
primary care, and office-based secondary care (such as obstetrics and dermatology),
all of which are important to health maintenance and to detection, treatment,
and management of chronic diseases (and which most people want to access close
to home). Most health care is local. National referral centers are an important
but small part of the total health care system.
The Role Of Responsible Consumer Choice
If, as we contend, systems are the best locus of accountability for health care
quality and efficiency, then competition should be designed to encourage evolution
toward “systemness.” This means that the critical driver of competitive
markets—informed consumer choice—must be exercised at the delivery
system level. However, today’s markets are not structured to support system-level
choice.
Much of today’s competition is among managed care plans with loose networks
of independent providers, not among IDSs. These “carrier HMOs” (health
maintenance organizations) do not have the common medical management, integration,
and leadership that “delivery system HMOs” have.41
They are necessary transitional vehicles on the road to IDSs. However, market
forces are not driving a speedy transition. Why not?
One reason is that the so-called managed care backlash effectively reversed
two decades of increasing enrollment in HMOs. From 1987 to 1992, health insurance
premiums grew at an alarming rate, leading President Clinton to attempt placing
all health care spending under federal controls. When his proposal failed, employers
panicked, forcing employees into HMOs with little choice and without visibly
transferring to them the savings those HMOs created. Research shows that people
without a choice were far more likely than people with a choice to be dissatisfied
with managed care.42 In contrast, experience shows
that millions of people in multiple-choice arrangements, such as the Federal
Employees Health Benefits Program (FEHBP) and the California Public Employees’
Retirement System (CalPERS), have chosen HMOs and been satisfied. In those models,
consumers’ choice of HMOs led to visible personal financial savings.
As a result of the backlash, conventional wisdom now has it that people don’t
like managed care. The more nuanced truth is that they don’t choose managed
care when their employers pay practically the full premium of whatever they
choose. Then, there is little to be gained financially by accepting a limited
provider network. In contrast, when employers pay a fixed-dollar amount and
each employee can keep the full savings, experience shows that high percentages
of employees choose economical care. For example, 70–80 percent of active
employees and dependents covered by the University of California, CalPERS, and
Wells Fargo in California choose HMOs.43
Another reason markets have not produced competition among IDSs is the widespread
employer practice of offering only one insurance carrier, which, in turn, offers
only one delivery system (although this is changing; see the discussion of tiered
networks below). Seventy-seven percent of insured employees are offered only
a single carrier.44 For a delivery system to market
its superior efficiency, it usually needs to be affiliated with its own or a
partner carrier. Thus, offering different carriers is a necessary but not sufficient
condition for competition among delivery systems.45
Ten carriers all offering every FFS doctor in town is not competition, nor is
one carrier offering three plan designs (HMO, PPO, point of service), all using
the same doctors.
Competition to serve whole employer groups on a single-carrier basis has historically
resulted in all-inclusive networks. But for these to be effective, carriers
must select providers based on quality, efficiency, and willingness to work
in teams and with evidence-based guidelines. However, people want to choose
their own doctors. In a world of competitive delivery system–based managed
care, therefore, people must have a choice among managed care organizations
as well as “unmanaged care”—if they are willing to pay the
excess cost.
Many small and mid-size employers offer only a single carrier and delivery system
because they find it administratively burdensome to offer choices. Furthermore,
from the insurers’ perspective, smaller employer groups don’t provide
a stable base for spreading risks and administrative costs. Fearing adverse
risk selection, insurers resist “slice” business and offer lower
premiums to employers who give them the whole group.
Innovative “exchanges” may ameliorate the problems associated with
multiple-choice offerings for small and mid-size employers. For example, California
Choice, PacAdvantage, and the Connecticut Business and Industry Association
each offer a range of carriers and delivery systems to the employees of small-employer
members.46
Another innovation in exchanges is BENU, now in operation in Seattle and Portland,
and starting up in Washington, D.C. BENU offers employers the convenience of
a single source of health insurance, while simultaneously offering employees
multiple choices of plan designs and delivery systems from two carriers (Kaiser
Permanente or Group Health Cooperative, and CIGNA). BENU uses risk adjustment
technology to protect the carriers against uncompensated adverse selection so
they do not need to build “selection-risk” margins into their premiums.47
Large employers are more likely to offer a choice of delivery systems, but they
often do it in a manner that attenuates employees’ incentives to choose
the most efficient system. Most choice-offering employers contribute a fixed
percentage of the premium of the employee’s chosen plan or otherwise systematically
pay more on behalf of plans that charge more. In 2000 fewer than 10 percent
of Fortune 500 employees were offered a choice of carriers and a fixed-dollar
employer contribution.48 In 2004, only 19 percent
of covered workers in choice-offering firms received a fixed-dollar employer
contribution, regardless of the plan chosen.49
This structure prevents efficient delivery systems from taking market share
from inefficient ones: If an employer pays 80 percent of the premium, a health
plan must reduce its price by five dollars for employees to see a one-dollar
price reduction.
Why do employers persist in this policy? Initially, it probably had to do with
tax advantages; the employer contribution was tax-free to the employee, an incentive
for the employer to pay the whole premium. Now, however, through salary reduction,
employees can pay their own share with pretax dollars.
Some employers may fear that a change in their benefit contribution policy will
alienate employees. Others see their current contribution strategy as a rough
form of risk adjustment, subsidizing higher-cost plans on the assumption that
they enroll sicker people. However, with risk-adjustment technology, the extent
of adverse selection can be measured and compensatory payments made in the “background”
without distorting employees’ choices.
Some employers have successfully converted from fixed-percentage to fixed-dollar
“defined” contributions, including Stanford, Harvard, the University
of California, Wells Fargo, and Hewlett Packard. Their experience is favorable.
If everyone had a responsible choice, experience suggests that over time, 70–80
percent of employees would choose HMOs that increasingly would be closely linked
with IDSs. These plans would become the mainstream of a health care system that
would be more efficient and of higher quality than the disaggregated FFS non-system.
Ongoing competition to provide value for money would generate continuing innovation
and efficiency improvement.
Although competition among fully integrated delivery systems is the desired
state, we do believe there is hope for achieving improved quality outside of
such systems by moving disaggregated providers in the direction of systemness.
In fact, several innovations in the FFS sector are designed to achieve the benefits
of systems among less integrated providers. Regional health information organizations
(RHIOs), such as the Indiana Health Information Exchange and the Pittsburgh
Regional Healthcare Initiative, are prominent examples. These organizations
promote the development and use of comprehensive, longitudinal, patient-focused
medical records across community providers.50
Other examples of ways in which disaggregated providers are moving toward systemness
include narrow and tiered-network benefit plans such as those offered by Aetna
and UnitedHealthcare. These plans direct patients to providers selected for
their quality or cost, or both. “Pay for performance” initiatives,
such as the one among California HMOs, are another example of a movement toward
systemness.51 These payment arrangements help make
the business case for innovations that support improved quality (for example,
use of care management protocols and IT) but are not necessarily reimbursed
under FFS. Still another class of examples is disease management demonstrations
such as those sponsored by Medicare, designed to motivate teams of providers
to focus on chronic illness.
Loose networks of selected,
high-performance providers from the FFS, disaggregated sector, supported by
these innovations, might serve as transitional vehicles on the road to full
integration. But without integration of finance and management, they are unlikely
to achieve the performance of IDSs. However, they certainly should be given
the same market opportunities as IDSs have.
The authors thank the following people for their thoughtful review of and
comments on this paper: Bob Crane, Victor Fuchs, Paul Ginsburg, Murray Ross,
Steve Shortell, and the anonymous peer reviewers.
NOTES
1. A.C. Enthoven, “Consumer-Choice Health Plan,”
New England Journal of Medicine 298, nos. 12 and 13 (1978): 650–658
and 709–720; A.C. Enthoven, Health Plan: The Practical Solution to
the Soaring Cost of Medical Care (Washington: Beard Books, 2002); and A.C.
Enthoven and L.A. Tollen, eds., Toward a Twenty-First-Century Health System:
The Contributions and Promise of Prepaid Group Practice (San Francisco:
Jossey-Bass, 2004).
2. M. Porter and E. Teisberg, “Redefining Competition
in Health Care,” Harvard Business Review (June 2004): 65–76.
3. Institute of Medicine, Crossing the Quality Chasm: A
New Health System for the Twenty-first Century (Washington: National Academies
Press, 2001), 31.
4. American Medical Group Association, “Who We Are,”
www.amga.org/WhoWeAre/index_whoWeAre.asp
(28 July 2005).
5. It is not necessary for a provider group to receive all of
its revenue as prepayment to reap the benefits of this approach. By receiving
even a portion of revenue as capitation, a group shows that it is capable of
managing costs. Best practices developed for prepaid patients are likely to
spill over to fee-for-service patients.
6. A.B. Bindman et al., “The Impact of Medicaid Managed
Care on Hospitalizations for Ambulatory Care Sensitive Diagnoses,” Health
Services Research 40, no. 1 (2005): 19–38.
7. S.M. Shortell and J. Schmittdiel, “Prepaid Groups and
Organized Delivery Systems: Promise, Performance, and Potential,” in Toward
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8. RAND Health, “Assessing the Appropriateness of Care,”
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10. M.R. Chassin, “Is Health Care Ready for Six Sigma
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11. D.M. Berwick and S.H. Jain, “The Basis for Quality
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12. G.C. Halvorson, “Prepaid Group Practice and Computerized
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13. J.P. Newhouse and the Insurance Experiment Group, Free
for All? Lessons from the RAND Health Insurance Experiment (Cambridge,
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14. For example, see A.C. Enthoven and B. Talbott, “Stanford
University’s Experience with Managed Competition,” Health Affairs
23, no. 6 (2004): 136–140. See Exhibit 1, which shows that in 2004 the
Kaiser Permanente annual family premium (age- and sex-adjusted) was 57 percent
of the PPO premium. (Note that the benefits were not comparable; the PPO had
a deductible, and the Kaiser Permanente plan did not.)
15. L. Casalino et al., “External Incentives, Information
Technology, and Organized Processes to Improve Health Care Quality for Patients
with Chronic Diseases,” Journal of the American Medical Association
289, no. 4 (2003): 434–441.
16. Shortell and Schmittdiel, “Prepaid Groups and Organized
Delivery Systems.”
17. D.R. Rittenhouse et al., “Physician Organization
and Care Management in California: From Cottage to Kaiser,” Health
Affairs 23, no. 6 (2004): 51–62.
18. Casalino et al., “External Incentives.”
19. A.M. Audet et al., “Information Technologies: When
Will They Make It into Physicians’ Black Bags?” Medscape General
Medicine 6, no. 4, 7 December 2004, www.medscape.com/viewarticle/493210
(4 August 2005, registration required).
20. K. Grumbach et al., California Physicians 2002: Practice
and Perceptions, December 2002,
www.futurehealth.ucsf.edu/pdf_files/Phass2.pdf
(28 July 2005).
21. L.P. Casalino et al., “Benefits of and Barriers to
Large Medical Group Practice in the United States,” Archives of Internal
Medicine 163, no. 16 (2003): 1958–1964.
22. See, for example, A.M. Audet et al., “Measure, Learn,
and Improve: Physicians’ Involvement in Quality Improvement,” Health
Affairs 24, no. 3 (2005): 843–853; T. Bodenheimer et al., “What
Are the Facilitators and Barriers in Physician Organizations’ Use of Care
Management Processes?” Joint Commission Journal on Quality and Safety
30, no. 9 (2004): 505–514; K. Chuang et al., “The Clinical and Economic
Performance of Prepaid Group Practice,” in Toward a Twenty-First-Century
Health System, 45–60; R. Li et al., “Organizational Factors
Affecting the Adoption of Diabetes Care Management Processes in Physician Organizations,”
Diabetes Care 27, no. 10 (2004): 2312–2316; R.H. Miller and H.S.
Luft, “HMO Plan Performance Update: An Analysis of the Literature, 1997–2001,”
Health Affairs 21, no. 4 (2002): 63–86; and J. Schmittdiel et
al., “The Use of Patient and Physician Reminders for Preventive Services:
Results from a National Study of Physician Organizations,” Preventive
Medicine 39, no. 5 (2004): 1000–1006.
23. Porter and Teisberg, “Redefining Competition.”
24. Ibid., 67–68.
25. Ibid., 73.
26. Ibid., 69.
27. Ibid., 75.
28. Some degree of prepayment (on a per episode basis, for
example) might be compatible with Porter and Teisberg’s vision, but they
do not provide details about this.
29. RAND Health, Assessing the Appropriateness of Care;
and Center for the Evaluative Clinical Sciences, The Quality of Medical
Care in the United States.
30. Porter and Teisberg, “Redefining Competition,”
73.
31. M.L. Berk and A.C. Monheit, “The Concentration of
Health Care Expenditures, Revisited,” Health Affairs 20, no.
2 (2001): 9–18.
32. E.L. Hannan et al., “Improving the Outcomes of Coronary
Artery Bypass Surgery in New York State,” Journal of the American
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33. P.S. Romano and H. Zhou, “Do Well-Publicized Risk-Adjusted
Outcomes Reports Affect Hospital Volume?” Medical Care 42, no.
4 (2004): 367–377. (Note: Their short answer is “no.”)
34. M.R. Chassin, E.L. Hannan, and B.A. DeBuono, “Benefits
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of Medicine 334, no. 6 (1996): 394–398.
35. New York State Department of Health, Adult Cardiac
Surgery in New York State: 2000–2002, October 2004, www.health.state.ny.us/nysdoh/heart/pdf/2000-2002_cabg.pdf
(28 July 2005).
36. Pennsylvania Health Care Cost Containment Council, Pennsylvania’s
Guide to Coronary Artery Bypass Surgery, 1994–1995, May 1998, www.phc4.org/reports/cabg/95
(28 July 2005).
37. E.C. Schneider and A.M. Epstein, “Influence of Cardiac-Surgery
Performance Reports on Referral Practices and Access to Care: A Survey of Cardiovascular
Specialists,” New England Journal of Medicine 335, no. 4 (1996):
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38. R.A. Dudley et al., “Selective Referral to High-Volume
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39. C. Hoffman, D. Rice, and H.Y. Sung, “Persons with
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Medical Association 276, no. 18 (1996): 1473–1479.
40. IOM, Crossing the Quality Chasm.
41. Preface to Enthoven and Tollen, eds., Toward a Twenty-First-Century
Health System.
42. K. Davis and C. Schoen, “Assuring Quality, Information,
and Choice in Managed Care,” Inquiry 35, no. 2 (1998): 104–114;
A.A. Gawande et al., “Does Dissatisfaction with Health Plans Stem from
Having No Choices?” Health Affairs 17, no. 5 (1998): 184–194;
and A.C. Enthoven et al., “Consumer Choice and the Managed Care Backlash,”
American Journal of Law and Medicine 27, no. 1 (2001): 1–15.
43. University of California, Human Resources and Benefits,
Quarterly Statistical Report—April 2005, Group Medical Plans
(Oakland: UC, 16 June 2005); California Public Employees Retirement System,
Facts at a Glance: Health, 13 June 2005, www.calpers.ca.gov/eip-docs/about/facts/health.pdf
(28 July 2005); and Sally Wellborn, vice president, Wells Fargo, personal communication,
12 November 2004.
44. M.S. Marquis and S.H. Long, “Trends in Managed Care
and Managed Competition, 1993–1997,” Health Affairs 18,
no. 6 (1999): 75–88.
45. The Buyers Health Care Action Group (BHCAG) was an exception,
an attempt to create competition among care systems. But its survival depended
on a stable employer coalition, a condition that could not be fulfilled, given
corporate and personnel instability. See J. Christianson and R. Feldman, “Exporting
the Buyers Health Care Action Group Purchasing Model: Lessons from Other Communities,”
Milbank Quarterly 83, no. 1 (2005): 149–176.
46. See California Choice, “Our Health Plans,”
2003, www.calchoice.com/HealthPlans.aspx
(28 July 2005); PacAdvantage, “PacAdvantage Pool,” 2005, www.pacadvantage.org/brokers/pool.asp
(28 July 2005); and Connecticut Business and Industry Association, “Health
Insurance for Connecticut Companies,” www.cbia.com/ins/hlt/VR/default.htm
(24 August 2005).
47. See Testimony of Jeffrey M. Closs, president and CEO, BENU,
before the Joint Economic Committee of the U.S. Congress, 24 September 2004,
jec.senate.gov/_files/97228.PDF
(28 July 2005), 10–12.
48. J. Maxwell and P. Temin, “Managed Competition versus
Industrial Purchasing of Health Care among the Fortune 500,” Journal
of Health Politics, Policy and Law 27, no. 1 (2002): 5–30.
49. Henry J. Kaiser Family Foundation and Health Research and
Educational Trust, Employer Health Benefits: 2004 Survey, Pub. no.
7418 (Menlo Park, Calif.: Kaiser Family Foundation, 2004).
50. C.A. Sirio et al., “Pittsburgh Regional Healthcare
Initiative: A Systems Approach for Achieving Perfect Patient Care,” Health
Affairs 22, no. 5 (2003): 157–165; and J. Andrews, “Blame It
on RHIOs,” Healthcare IT News, July 2005, www.healthcareitnews.com/NewsArticleView.aspx?ContentID=3018&ContentType
(28 July 2005).
51. See Integrated Healthcare Association, “Pay for Performance,”
www.iha.org/Ihaproj.htm (24 August
2005).
Alain Enthoven (enthoven{at}gsb.stanford.edu)
is the Marriner S. Eccles Professor of Public and Private Management, Emeritus,
at the Stanford University Graduate School of Business in Stanford, California.
Laura Tollen is a senior policy consultant at the Kaiser Permanente Institute
for Health Policy in Oakland, California.
DOI: 10.1377/hlthaff.w5.420
©2005 Project HOPE–The People-to-People Health
Foundation, Inc.
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