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 / Autumn 2009 / Issue 56(originally published by Booz & Company)


A Better Model for Health Care

The following changes in incentives are also needed:

  • Financial incentives for providers that encourage evidence-based care, prevention, and chronic condition management, which will orient them toward value rather than volume
  • New incentives (and other forms of support) for consumers that promote a greater sense of individual responsibility for their own health and medical decision making
  • End-of-life education to decrease the costs associated with heroic but often futile interventions

None of these issues can be addressed successfully without the proper relationships and incentives among the key nongovernmental players: sponsors, payors, providers, consumers, researchers, and suppliers. Structures, relationships, and incentives are needed that build on the lessons of the recent past (particularly from the use of HMOs and CDHPs) and retain at least some skepticism about the perfectibility of human nature. The necessary changes are daunting because they require shifts in many ingrained habits and practices.

For example, risk (and, one hopes, responsibility) should continue to shift to consumers, reinforcing and rewarding intelligent lifestyle choices and rational treatment decisions. Consumers need to be educated effectively on the value and costs of their decisions, with information that goes beyond what is available to them today. The same is true for health-care institutions. In modifying the behavior of both individuals and institutions, carrots (incentives and transparent information) work better than sticks (restrictions and fines).

In addition, the reduction of health-care costs requires a great deal more collaboration. Payors and providers could work together far more effectively to bring best-science protocols to prevention, management, and treatment. Providers (hospitals, clinics, and physicians) will need to drive clinical and operational efficiency in exchange for incremental volume. Plan sponsors (particularly employers) will have to adopt longer-term views about costs and risk, especially as the government’s changes go into effect. Pharmaceutical, biotechnology, and high-end technology suppliers will profit from best-value-in-use economics combined with rigorous best-science protocols. All of these forms of collaboration will require the various participating sectors to understand one another’s business models, and the ways they might fit together instead of competing for dollars.

Finally, the fragmentation, duplication, variability, and anecdotalism in health-care practices and processes, all of which drive waste and unnecessary costs, must be reduced. Some prominent commentators, including Michael Porter and Regina Herzlinger, have pointed this out, but most promoters of reform, including those in the Obama administration, have still not fully recognized the degree to which cost-effectiveness depends on standardization. The health-care industry — in the U.S. and around the world — is the only industry whose products and services are virtually always custom-built, that is, independently engineered for each customer. If reform efforts simply expand coverage and make the system work faster by installing electronic medical records, costs will only climb further.

Consider the US$36 billion planned investment in HIT, a comprehensive system of interconnected electronic records. The backbone of this system will be the International Classification of Diseases (ICD) codes developed by the World Health Organization, with many countries adopting their own variations. The current U.S. version (ICD-9) has more than 16,000 codes, covering individual diseases, diagnoses, and treatments. The newer version (ICD-10), already adopted by many countries, has more than 155,000 codes, including some 68,000 diagnosis codes. These become the basis for pricing throughout the health-care system. It’s as if when you went to buy a car, the salesperson pulled out a list of 155,000 components, asked which ones you wanted in the car, and then said, “We don’t know what the car will cost, but after it has been assembled and delivered, we’ll send you a bill.”

The alternative would be to introduce strong-form products based on best scientific practices, providing prevention and disease management, not just big-ticket acute care or hospital procedures. Strong-form products are integrated, consumer-centric offerings bundling world-class care from diagnosis through rehabilitation, simplified billing and payment, and consumer choice. Insurance pricing and billing must be part of the design of any strong-form product. To ensure that standardization takes hold, the bill must be the same regardless of which payor — employer, association, or government-funded insurance — is covering the cost.

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