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Correction to This Article
A previous version of this piece erroneously described the Rand study as published in 2006 rather than 1984.

Using Value to Curb Health Costs

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By Alain Enthoven and Denis Cortese
Saturday, June 6, 2009

President Obama has noted that it would be impossible to balance the federal budget without constraining our health-care expenditures. Federal government health-care outlays and tax breaks of more than $1 trillion in 2008 consumed 7.5 percent of America's gross domestic product (GDP).

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While evidence clearly suggests that we should pursue two proven methods of health-care cost containment -- care organization and patient-provider incentives -- the debate in Washington seems to overlook these fundamental issues.

Through the American Recovery and Reinvestment Act, the president and Congress have focused on three interventions aimed at controlling health-care costs: health information technology, preventive care services and comparative effectiveness research. Over time, these initiatives will undoubtedly increase the value of health care in the United States by efficiently organizing patient and research data, helping people live healthier lives and informing providers about which treatments offer the best results.

But in the short term, these programs will not yield the significant cost savings we need. Rather, this trio of planks must be placed firmly upon the foundation of organized health-care delivery and aligned incentives.

First, we need to design a health-care system that delivers better-integrated, coordinated care. There are organizations -- usually large, multi-specialty group practices -- that produce high-quality, comprehensive care at a total per-person cost (premium and out of pocket) that is considerably less than the cost of independent practice. Research at Dartmouth Medical School published last year found that if all doctors practiced to the standard of Intermountain Healthcare in Salt Lake City, Medicare would cost 40 percent less. Similarly, a Rand Corp. study published in 1984 has shown that Seattle's Group Health Cooperative (a prepaid group practice) delivered high-quality care for 28 percent less than the cost of traditional medicine. Both of these organizations have a style of practice that emphasizes teamwork and excellence in outpatient care, leading to less hospitalization.

Second, we must change the monetary incentives that drive physician and patient behavior and fuel our rising health costs.

Research shows that if individuals have to pay 25 percent out of pocket for their elective medical services, they will visit the doctor about 20 percent less. Also, if people are offered a choice between a small, costly, uncoordinated practice and a less costly, organized delivery system, and are allowed to keep the full savings generated by their choice, a high percentage will choose the organized second system.

When Stanford University employees were given this choice, 81 percent chose a coordinated delivery system. And contrary to popular belief, there is little to no evidence suggesting that spending less on health care leads to poorer health.

Changing provider incentives is also critical. Medicare and commercial insurers today pay for piecework -- office visits, exams and procedures. A hospital's bottom line often improves when doctors run more tests, even if those tests add little diagnostic information to the clinical picture.

If we modify the way we pay for health care by financially rewarding providers who give patients the value that they want -- good outcomes and compassionate, coordinated care at a reasonable cost over time -- waste would begin to evaporate from the system.

Letting patients choose value would reward health-care providers who have low rates of patient mortality and high rates of patient satisfaction, and whose costs over time are below average. Providers with worse outcomes, less-satisfied patients and higher costs would lose patients. Loss of patients would eventually lead providers to improve the factors that are lowering value.

To bring health-care expenditure growth down to something approximating the growth in GDP, Congress needs to enact these principles of individual, cost-conscious consumer choice among competing alternatives. This would give doctors, other care providers and hospitals incentives to work together to form high-quality, efficient and accountable care systems. Then, let the American people sort out how much they are willing to pay for their health care.

Lower costs and better-quality health care go hand in hand. It's a two-for-one special called value.

Alain Enthoven is a professor of public and private management (emeritus) in the Graduate School of Business at Stanford University. Denis Cortese is president and chief executive of the Mayo Clinic.


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