From Hospitals and Health Networks Online, September 9, 2008

Toward a value-based health care system.

Do you get what you pay for in health care? How can you tell? What if you could tell?

However we re-organize the payment of health care in the United States over the next several years, these are the key questions that determine whether the system works, or whether it evolves to become a new, more complex form of today’s rolling disaster.

Value-Based System Design

Michael Chernew, a professor of healh policy at Harvard, and Allison Rosen and Mark Fendrick, of the University of Michigan, promote “value-based insurance design” (VBID), and a few companies have even adopted it. The idea is simple: Lower or eliminate co-pays, deductibles or any other barriers to the use of certain common preventive procedures (such as mammograms and prenatal care), diagnostic and educational visits, and drugs that control common chronic syndromes (such as ACE inhibitors, angiotensin-receptor blockers, beta-blockers, statins, and medications to control diabetes and asthma).

This makes sense. It makes whack-the-forehead “Duh!” sense. From a medical point of view, from a public health point of view, and from a plain business spreadsheet point of view, why would you want to discourage people from doing the inexpensive things that prevent expensive hospitalizations and surgeries? Studies clearly show that even modest co-pays discourage people from using such services. But so far very few employers or insurers have adopted this idea, due to concerns about legal details, lack of good information systems, and the usual inertia that attaches to all systemic changes.

But if we pull the VBID suggestion apart, we can begin to see not only why it should work, but where we might need to go from there: from VBID to a kind of “value-based system design” (VBSD).

And we will add one more element to this equation: Don Berwick, Tom Nolan and John Whittington, in their recent landmark article in Health Affairs, “The Triple Aim: Care, Health, and Cost,” make the key point that health care must re-organize around integrators—organizations that, by their nature, take all three aims into account in their business plans, their strategies and their capabilities.

No such organizations now exist in health care, but the closest we get, on the ground, in real operations, are integrated medical systems that include a wide array of services from primary to specialists, from home care to intensive care to long-term care, and that include financing mechanisms such as health plans.

If we imagine such an “integrator” infused with the principles of value-based system design, we can begin to see the building blocks of a health care system that works.

Where Simple Economic Analysis Fails

In classic economic terms, health care protocols that include patient education, health assessments, health coaching, preventive measures and drugs to control chronic disease have high value—they return a lot of benefit for a relatively low cost. A number of other procedures (a lot of back surgeries, for instance; many of the 150,000 cardio CT scans done per year; a number of radical procedures done on frail, elderly patients in the end-of-life stage) have relatively low value—they return little real benefit, and they cost enormous amounts. A Rand Corporation study suggests that one-third of all health care in the United States is of little value; similarly, studies by the Dartmouth Group put it at 30 percent or more.

In classic, “free-market” terms, the price should adjust to reflect the value: Diabetes medicine should be more expensive, since it is more valuable, and back surgeries cheaper.

This is obviously nonsense, but why? For quite practical reasons: The patient is doing the choosing, but the benefit (or lack of it) accrues both to the patient and the payer. Yet the payer has more information, and a longer-term view. The patient makes the choice on the basis of a classic cost-benefit analysis, but the patient’s analysis balances real, short-term cost against perceived, long-term, future benefit—“Shall I fill the gas tank and get the transmission fixed so that I can go to work and keep my job, or shall I refill my prescription?” The patient may be making what we see as the wrong choice, but given his or her information and priorities at the moment of decision, it is a rational choice.

So the payer, with the longer-term view and more information, has to help the patient out. The patient often does not realize the value of preventive and controlling measures in a way that shows up in behavior, when the short-term alternative is to pay nothing. The payers and the providers, on the other hand, do realize the value of preventive and controlling measures—and can transmit that value information through shifts in co-pays. That’s the rationale behind value-based insurance design.

What’s Missing: The Better Provider

But here’s what’s missing from this picture: Value-based insurance design still treats all providers as equal, and all medical decision-making as of equal value. As long as health care is treated as a commodity, as long as there is no financial reward for doing things better, faster and cheaper, health care will never improve. Any organization ultimately does what it is paid to do. It cannot afford to do otherwise. Even the most charitable non-profits and the most dedicated academic medical facilities have no access to magic.

So not only do patients often make poor short-term decisions to forgo needed care, doctors and health care institutions often make decisions to give more care (or more expensive care) than the evidence really calls for.

To put it in its simplest terms, what’s missing is (1) providers bundling services into products, and (2) payers differentiating between providers on the basis of the quality of outcome. A cardio CT scan is a test. A “heart evaluation” would be a product, which might include a CT angiogram, an ultrafast CT scan, a stress test, a catheterization or any mix of these and other tests, depending on the patient’s history and symptoms.

Packaging the evaluation as a product with a price and spreading it over populations (“We will provide heart evaluation service for these 1,000 employees for this amount per year”) eliminates any incentive to do unnecessary tests to amortize the cost of the CT scanner. Publicly reporting the outcomes—in this case, cost versus false negatives—eliminates the incentive to avoid necessary tests when one is indicated.

And you get real business rewards for doing it better. You build a better diabetes management program, and I jigger the co-pays to encourage patients to come to you. You make money by using lean management techniques and outcomes feedback to determine what works and eliminate what does not work, to do it all better faster cheaper, to get your costs down and effectiveness up, and so increase your margins.

Steps to VBSD

Value-based system design will not emerge silently and without coaxing from the fog of today’s health care. A number of barriers stand in the way. To create a system that works, providers need to do a number of things:

Digitize. You can’t do this unless your data universe is not only digitized, but integrated, so that cost data, clinical data and workflow data can be aggregated, analyzed and tracked. At the same time, this means developing full health assessment data for all patients. This is the employers’ or insurers’ responsibility, but it is a product the provider can offer.

Integrate VBID with disease management programs. Getting people to actually undergo tests, fill their prescriptions and take their pills is just the first step. Insurance design should be guiding patients into full disease management—which can and should be a product that you provide.

Develop disease management programs that are broadly defined. They should include proven alternatives, such as acupuncture for back pain, yoga for flexibility and joint pain, or diet and exercise programs for cardiovascular disease. Sticking with allopathic cut-and-dose as the sole product answer for all problems is one of the reasons our health care is so inefficient and ineffective.

Target areas that have been clearly identified by
research as being high-value. Offer a high return on the invested dollar (such as blood-pressure reduction), or low-value (such as back surgery for chronic pain).

Target particular syndromes and patient populations for whom (as Chernew, Rosen and Fendrick delineate it) (1) the risk is high, (2) the cost of a bad outcome is high, (3) you can identify a service or product that is very effective at preventing the bad outcome and (4) the patients are very responsive to the incentives that you, the health plan or the employer can offer.

Strengthen communication with your patients, with their employers, with the health plans and with any unions involved. Studies and field experience both show that patients and organizations will support smart system design if they understand its real health and financial benefits and goals.

Work toward changes in legal definitions of health savings accounts, in Medicare and Medicaid regulations, state laws and union contracts that restrict medical practice in unhelpful ways. For instance, they may disallow payment for any group activity, for preventive activities, for patient education or for online interaction. Often, even when allowed, payments for such activities are disproportionately low.

Work with employers to make sure that VBID is extended to all their employees, to avoid adverse selection.

Changing the System

As I have written before, providers may need to get into the insurance market simply to get paid honestly, and to deliver their customers from the fear of “post-claim underwriting.” But value-based insurance design offers the further opportunity to enter that market with a competitive edge on the insurance side. Value-based system design extends that competitive edge into the provider side as well. In fact, for this same reason, any “captive” insurance entity should provide insurance not only for your own services, but for those of all providers in the area—driving other health plans and other providers into competition with you based on value.

The future of health care is not just about finding more and more equitable funding for the system as it is, it’s about changing the system. There are reasons we run a system that is 50 percent more expensive than that of our nearest rivals, and roughly twice as expensive as other developed countries, with worse results. Those reasons are rooted in the lack of feedback in the system, the lack of measurement of real effectiveness and efficiency, and the lack of reward for doing it better faster cheaper.

Any nuanced shifts in the system that reward real effectiveness and efficiency—that allow the customer to answer the question, “Did you get what you paid for?”—will have a large-scale catalytic effect, precipitating massive positive changes.