Our payment system rewards fragmented care and short-term medical strategies, says Regina Herzlinger, DBA, the Nancy R. McPherson Professor of Business Administration Chair at the Harvard Business School. Herzlinger recently shared with hfm her vision of a healthcare system that rewards payers, providers, and patients for improving long-term health through long-term, comprehensive, and transparent contracts.
Q: What do you see as the greatest shortfall(s) in the current healthcare delivery business model?
A: The key problem of the U.S. healthcare system lies in the inefficiency of the service delivery model. McKinsey estimated U.S. health care was $500 billion costlier than it should be compared with health care in developed European countries, whose healthcare systems are hardly benchmarks for ideal efficiency themselves.
Our systems for paying providers and our formulations for health insurance are the key culprits. They contain perverse incentives for fragmented care and short-term medical strategies. These incentives are especially pernicious for the large and growing numbers of people who suffer from chronic diseases or disabilities.
The payment system contains few incentives to optimize along a continuum of care for a disease or disability. Instead, the system motivates every provider of care to optimize itself by paying only for the portion of care they provide. The turf warfare that continually rages among different types of medical care suppliers—hospitals versus pharmaceutical firms, for example—and within a profession—specialists versus primary care physicians, for example—provides evidence of a payment system that motivates these fragmented providers to gain the most economic turf for themselves. The providers of preventive care are the losers in this turf warfare. All too often, they receive the least or no payment.
The British military learned, during World War II, that optimizing the location of each military warning station yielded worse protection than optimizing the system as a whole; but that lesson has been lost on our payers.
Rather, our present payment system ensures that no good deed goes unpunished. For example, if an integrated delivery system develops a new way of treating a disease that so improves the patient’s health status that it lowers hospitalizations, their loss will equal the foregone contribution from the reduced hospital stays.
As for health insurance, the lethal combination of low to no pay for preventive measures and insurance policies of one-year duration motivates a short-term medical strategy. Thus providers who undertake the costly, lengthy process of reversing destructive lifestyle—as in programs for smoking cessation—receive inadequate remunerations and the insurers that support their efforts may not reap the rewards for their investments in prevention if the enrollee moves to a different insurer.Last, an insurance system that does not enable the prices charged by different providers to be reflected in the insurance premiums inhibits entrepreneurial providers from gaining market share by cutting their prices.
Q: How does this shortfall hurt the quality of care and increase cost?
A: Let me count the ways.
We all know that integrated care improves health status and lowers the cost of treating chronic diseases and disabilities, but our fragmented payment system penalizes those providers who undertake it. We all know that preventive care is the equivalent of an apple a day keeps the doctor way, but inadequate payment limits such efforts.We all know that treatment protocols for chronic disease or disabilities should extend over the lifetime of the condition, but our insurance policies last for only one year.
We all know that the best providers are typically lower cost, but an insurance system that does not pass on these lower costs to the consumer stops lower-cost, higher-quality providers from gaining market share.
Q: How do you think the care delivery business model should evolve?
A: A better system would pay a multidisciplinary group focused on particular chronic illnesses—including all complications—a fixed fee for providing all needed care for a number of years. Because they receive a fixed fee for several years, they are motivated to invest in up-front prevention that saves money over the long run, reward patients for adherence to medical regimens, and otherwise improve outcomes. Different organizational forms—for example, hospital-affiliated or freestanding physician groups—could receive these fees after they demonstrate the ability to provide all necessary care.
This long-term form of payment simplifies billing and payment, with only one per billing cycle. Providers are also motivated to create an electronic medical record to ensure coordinated oversight of all aspects of care. Last, because the provider group oversees all aspects of care, it can be held accountable for long-term outcomes. Chronic disease patients could thus eventually select an integrated provider group on the basis of its demonstrated outcomes—important data currently unavailable.
The potential market size is enormous. A small town of 50,000, for example, spends $50 million on its diabetic population alone. Providers who can control long-term outcomes can earn significant financial rewards as well as professional kudos.
Q: Are there any examples of this currently?
A: Sadly, no.
Q: What should providers do to facilitate this evolution?
A: Three features are essential to the success of long-term contracts: appropriate payment for treating the sick, transparency of outcomes,
and the ability to reward patients for healthy behavior.
This system would enable providers to name their long-term prices for caring for the chronically ill. Insurers then offer these groups to their enrollees. But if prices were not adjusted for the patient’s health status, providers may avoid the very sick. On the other hand, if they were, insurance would be prohibitively expensive for the chronically ill.
Switzerland and the Netherlands handle this problem by charging all patients the same price. In Switzerland’s case, this price is adjusted only for age, gender, and location. A reinsurance agency then transfers money from the groups that enroll healthier than average patients to those that enroll sicker than average individuals. The risk-adjusting formulas can be designed by a government entity; Medicare already risk adjusts its payments to capitated plans, a coalition of private health insurers, or, as in Switzerland and the Netherlands, by the government with input from all constituents, including insurers and consumers. Although these risk adjusters are not perfect, in Switzerland, they have enabled the sick to receive excellent medical care at a reasonable price, while the insurers and providers who treat them remain profitable.
Collection and dissemination of meaningful, long-term, risk-adjusted outcome data will ensure that provider teams compete on quality,
as well as price. This process can be expedited with proper public/private oversight that includes all relevant stakeholders, such as patient and physician groups.
To realize their potential, long-term providers must be able to reward healthy behaviors. The Health Insurance Portability and Accountability Act currently limits employers’ ability to reward their employees for achieving health outcomes. Among other restrictions, penalties or rewards must not exceed 20 percent of the cost of the health plan. These constraints, designed to prevent price discrimination against the sick, inadvertently limit the rewards that can reverse destructive lifestyle patterns.
We must move away from a system that encourages expensive tests and procedures regardless of their efficacy and toward one that rewards payers, providers, and patients for improving long-term health through long-term, comprehensive, and transparent contracts. The three barriers to their implementation—lack of risk-adjustment tools, lack of meaningful long-term outcomes data, and restrictions on rewarding healthy behavior—can be remedied with appropriate legislation. These remedies are also cheap, because they focus on improving the money we currently spend on chronic illness, not on spending more of it.
Sidebar 1
about Regina E. Herzlinger, DBA
Regina E. Herzlinger, DBA, is the Nancy R. McPherson Professor of Business Administration Chair at the Harvard Business School, Boston. She was the first woman to be tenured and chaired at Harvard Business School and the first to serve on a number of corporate boards. She is widely recognized for her innovative research in health care, including her early predictions of the unraveling of managed care and the rise of consumer-directed health care and healthcare focused factories, two terms that she coined. Her newest book, Who Killed Health Care? (McGraw-Hill, 2007), was selected by the U.S. Chamber of Commerce as one of the 10 books that changed the debate in 2008.
Herzlinger received HFMA’s Board of Directors’ Award in 2004. She has served on the Scientific Advisory Group to the U.S. Secretary of the Air Force and as a board member of many private and publicly traded firms, mostly in the consumer-driven healthcare space, often as chair of the governance and audit subcommittees. She received her bachelor’s degree from MIT and her doctorate from the Harvard Business School.