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strategy and business
 / Spring 2007 / Issue 46(originally published by Booz & Company)


Does Health Care Have a Future?

Porter and Teisberg argue strongly that such a model would actually work better under a universal, single-tier payment system. “Universal coverage provides a payment mechanism that covers everyone but does not guarantee good-quality care,” they write. “Changing the structure of health care delivery is fundamental to improving care for the poor. Value-based competition on results will be necessary to ensure that excellent care is received by all patients.” Reducing the cost of care through competition makes it possible to treat those who cannot afford it. A single-tier system eliminates the perverse incentives to shave coverage and quality for those in the lower tier.

Delivering Value
Put together any of the schemes for introducing universal coverage with Regina Herzlinger’s vision of consumer-driven health care and Porter and Teisberg’s vision of value-based competition on results, and you get a system that meets all eight of the criteria above.

The most compelling part of this “health-care delivery value chain” model is that it is possible: It can arise from current realities, piecemeal, in a self-reinforcing fashion. In fact, it already is doing so. New structures for public reporting of medical results are popping up on federal, state, and regional levels. Weak, voluntary, and secret reporting systems are being superseded by mandatory public systems tied to reimbursement, such as the U.S. Health and Human Services Department’s “Hospital Compare” initiative. In many of these initiatives, process measures (such as use of thrombolytics in heart attack patients) are starting to give way to results measures (such as risk-adjusted mortality rates for patients undergoing bypass grafts).

In a number of regions, new tiered payment models use co-payments and other means to encourage patients to use the providers with the lowest cost and highest quality scores. Such models also reward more efficient systems, those that beat their risk-adjusted cost targets, with higher reimbursements, and punish less efficient providers with lower reimbursements. New insurance companies like HealthMarkets of North Richland Hills, Tex., provide customers with cost and quality scores by procedure, physician, and facility for all providers in their area; other companies, such as Boston-based Best Doctors, offer the information independent of insurance products. A number of major providers, such as Intermountain Healthcare of Salt Lake City, the Cleveland Clinic, the Boston Spine Group, M.D. Anderson Cancer Center of Houston, the Texas Back Institute, the Texas Heart Institute, and Wisconsin’s ThedaCare, have moved increasingly toward organizing their care into the kinds of medically integrated practice units that Porter and Teisberg describe.

Each of these pieces — transparency, integrated products, and true measurement — is coming into play in the health-care marketplace, and as they do, those who use them are being rewarded. The result is likely to leave health care looking dramatically different in as little as five years. As Porter and Teisberg express it: “If competition on results drove the pursuit of health care value for patients, the gains would be enormous. Huge gains are possible by reducing the variations in the value of care across geography and providers, reinforcing and rewarding excellent providers, and encouraging physician and consumer choices based on information and results. It is within the nation’s capability to increase health-care quality and lower cost dramatically, even using today’s technologies and methods. The enormous savings that could be achieved would help pay for improved care for every American, especially those who lack access in the current system.”

A health-care system arising from true value-based competition is not inevitable. To reach that goal, we need a wholesale reorganization of health care. And although it does not require government to pass any mind-numbingly vast scheme that changes everything all at once (as the U.S. Congress is sometimes tempted to do), it does require legislators and regulators (including state and local officials in the U.S.) to understand the goal well enough to get out of its way — by changing the numerous laws and regulations that impede transparency and consumer choice. And this plan requires both providers and payers to see and seize the opportunities it affords. Based on Booz Allen Hamilton’s experience with clients, we believe this will require nothing less than a fundamental transformation of health care from a wholesale to a retail industry. (See “The Retail Health-Care Solution,” by David Knott, Gary Ahlquist, and Rick Edmunds, s+b, Spring 2007.)

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Health-Care Resources
Works mentioned in this review.

  1. Donald L. Barlett and James B. Steele, Critical Condition: How Health Care in America Became Big Business and Bad Medicine (2004; Broadway, 2005), 286 pages, $14.95
  2. Susan Starr Sered and Rushika Fernandopulle, Uninsured in America: Life and Death in the Land of Opportunity (University of California Press, 2005), 272 pages, $15.95
  3. The Institute of Medicine, Insuring America’s Health: Principles and Recommendations (National Academies Press, 2004), 222 pages, $26.10, or download PDF for $22.50 at Click here.
  4. Charles R. Morris, Apart at the Seams: The Collapse of Private Pension and Health Care Protections (Century Foundation Press, 2006), 86 pages, $14.95
  5. Jill S. Quadagno, One Nation, Uninsured: Why the U.S. Has No National Health Insurance (Oxford University Press, 2005), 286 pages, $28
  6. Arnold S. Kling, Crisis of Abundance: Rethinking How We Pay for Health Care (Cato Institute, 2006), 120 pages, $16.95
  7. Regina E. Herzlinger, editor, Consumer-Driven Healthcare: Implications for Providers, Payers, and Policymakers (Jossey-Bass, 2004), 926 pages, $55
  8. Michael E. Porter and Elizabeth Olmsted Teisberg, Redefining Health Care: Creating Value-Based Competition on Results (Harvard Business School Press, 2006), 524 pages, $35
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