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VIEWPOINT

Health Care Cost and ValueThe Way ForwardLaurence F. McMahon Jr, MD, MPHVineet Chopra, MD, MSc

THE INCREASING COST OF HEALTH CARE HAS BEEN A

focal policy issue since the 1970s. During thisperiod, many interventions aimed at moderatinghealth care costs, including the managed-care

movement and reforms in hospital and physician pay-ment, have failed. It is estimated that by 2019, 19.3% ofthe US gross domestic product (GDP) will be devoted tohealth care.1 An increasing proportion of GDP committedto health is simply unsustainable.

Although there is no more contentious area than theinterface between health care delivery and public policy,the fundamental precepts of the health care cost conun-drum are simple. Health care cost is merely the sum of ser-vices delivered multiplied by their price. To decrease over-all health expenditure, either the cost, number of services,or both must decrease. However, this formula must bemoderated by clinical value. Although it is easy to measurecost, quantifying value is problematic because it varies bypatient preference and clinical circumstance. As the debateregarding the definition of valuable health care continues,a more fundamental problem has developed: the inabilityto eliminate services that offer little or no clinical value.2,3

Any rational attempt to address health care cost must firstaddress these services.

Existing Approaches to Control Health Care CostTwo approaches have been attempted to control healthcare expenditure: a cost-centric approach, which empha-sizes constraining the cost of care vs a value-centricapproach, which accentuates enhancing net value deliv-ered for a given price.

The cost-centric approach is frequently promulgated bynonclinicians and represents the motivation behind the de-velopment of health maintenance organizations and ac-countable care organizations. The goal of this model is tocontrol cost by providing a global payment for health careservices. Proponents of this approach rely on the assump-tion that global payments will lead to either a decrease inthe number of services provided or a decrease in the priceof services. Consequently, this construct hinges on the pro-fessional integrity of hospitals and physicians because it as-

sumes that organizations will collaborate to improve thehealth of populations, that waste and inefficiencies will beeliminated, and that physician groups will “right-size” them-selves for the good of the population.

History has shown this to be a naive perspective. Rather,when faced with a global payment, members of the healthcare system often respond in ways that protect their owninterests. For example, in a lawsuit naming Health andHuman Services Secretary Kathleen Sibelius and then Cen-ters for Medicare & Medicaid Services Director Don Ber-wick, 6 physicians allege that primary care physicians havebeen harmed by the agency’s overreliance on an opaque,imbalanced, and financially conflicted payment structureinformed by special interests in the American MedicalAssociation’s Relative Value Update Committee.4 In a tan-gible example of the “tragedy of the commons,” certainspecialties have increased their spending at the expense ofothers, contributing, in part, to the current sustainedgrowth rate (SGR) impasse in Medicare.5 There were con-cerns that the Boston-based, not-for-profit Partners Health-care system used its market power to limit trade or artifi-cially increase prices.6 The large pharmaceutical companyPfizer paid a record $2.3 billion fine and pleaded guilty to1 felony count in settling federal criminal and civil chargesrelated to Bextra and other drugs.7 Taken together, ampleevidence suggests that major members of the health caresystem are unable to self-regulate for the good of society.

In distinction to the cost-centric approach, proponentsof the value-centric approach contend that only high-valueservices should be reimbursed. Accordingly, this approachrests on dichotomous interpretations of value for pay-for-performance measures. Although this approach is noble inconstruct, it fails to recognize that value is a continuum andnot an absolute. For example, results from a randomizedcontrolled trial represent an average across a continuum ofrisk. Thus, an intervention designed to reduce mortality inacute myocardial infarction will provide the greatest ben-efit to those at highest risk of death compared with those atlowest risk of death. This spectrum of value is blurred whenresults are presented as an average across a group with hi-erarchical risk because those at highest risk of death who

Author Affiliations: Division of General Medicine, Department of Internal Medi-cine, University of Michigan Health System. Ann Arbor.Corresponding Author: Laurence F. McMahon Jr, MD, MPH, 300 N Ingalls St,Room 7C27, Ann Arbor, MI 48109-5429 (lmcmahon@umich.edu).

©2012 American Medical Association. All rights reserved. JAMA, February 15, 2012—Vol 307, No. 7 671

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stand to receive the most benefit from the intervention willappear to exhibit lesser benefit due to averaging. Con-versely, those at lowest risk are perceived to have signifi-cantly greater benefit than they actually receive. Because morepatients tend to have lower-risk conditions, this approachoverestimates the net value of an intervention and errone-ously justifies costs associated with often marginal improve-ment in outcomes.

The Way ForwardIn the current US health care system, patients are tasked withdetermining the value of a test, drug, or procedure. Thirdparties externally moderate this decision through co-payments, deductibles, noncoverage, and other such mecha-nisms. Physicians and hospitals are paid regardless of whetherthe services delivered are of high- or low-clinical value. Thismodel is flawed and a new exemplar is necessary.

The way forward is a new system in which payment forany test or procedure is directly linked to the clinical valueit provides to an individual patient. Consequently, physi-cians would no longer receive the same payment for an in-tervention but rather, a tiered-payment based on the dem-onstrated value of the service. For example, placement ofan elective cardiac stent in a patient with stable coronaryartery disease who did not undergo noninvasive testing todemonstrate ischemia would receive significantly less pay-ment than would the same stent placed in the setting of anacute myocardial infarction.8 Similarly, surveillance endos-copy performed before the recommended 10-year intervalin a patient who previously had a normal colonoscopy wouldreceive less payment than an appropriately timed fol-low-up examination.9 In this manner, physicians and healthorganizations would be motivated via higher payment to pro-vide clinically valuable interventions. In relation to the on-going health care debate, there is no “rationing” of care orintrusion into medical decision making. Rather, the intro-duction of clinical value-based incentives engenders a medi-cal marketplace in which these domains become aligned atthe level of the clinician providing the service.

Although a systematic way to gauge value in health careis lacking, this model would offer several ways to promotethis understanding while controlling health care costs. First,because payment is linked to the clinical value of services,an incentive would be generated for comparative effective-ness studies needed to enhance and inform future pay-ment. Second, the medical marketplace would become in-herently autoregulated as those most able to make clinicallyappropriate judgments (eg, physicians, health care organi-zations), would be placed at economic risk. Third, becauseboth physician and facility payment would be affected, capi-tal investment and workforce expansion would become in-extricably linked to interventions of proven value. Fourth,

this approach would preserve medical decision making andpatient autonomy because it would only influence insur-ance or government payment. In every instance, patients andtheir physicians may elect services deemed to have a lowclinical value, but patients would have to pay for them outof pocket.

The creation of a value-based payment system cannot oc-cur overnight. This proposal merely outlines the process ofmigrating to such a payment system. A credible first step,however, may be to immediately lower payment to both cli-nicians and hospitals for procedures, for which ample evi-dence has failed to demonstrate clinical benefit to patients,such as vertebroplasty.10

ConclusionThe United States can no longer afford to allow its healthpriorities to be set by the vagaries of a payment system dis-connected from clinical value. The health care system mustevolve to provide the care that the population needs, sup-ported by a payment system that reinforces this care. A medi-cal market that is focused on physicians and health care or-ganizations and based on providing clinical value to patientscan enhance care and potentially reduce cost. This is theway forward.

Conflict of Interest Disclosures: All authors have completed and submitted theICMJE Form for Disclosure of Potential Conflicts of Interest. Dr McMahon re-ported pending institutional grants from the Blue Cross Foundation of Michiganand the Agency for Healthcare Research and Quality. Dr Chopra reported no con-flicts of interest.

REFERENCES

1. Sisko AM, Truffer CJ, Keehan SP, Poisal JA, Clemens MK, Madison AJ. Na-tional health spending projections: the estimated impact of reform through 2019.Health Aff (Millwood). 2010;29(10):1933-1941.2. Prasad V, Cifu A, Ioannidis JP. Reversals of established medical practices: evi-dence to abandon ship. JAMA. 2012;307(1):37-38.3. Qaseem A, Alguire P, Dallas P, et al. Appropriate use of screening and diag-nostic tests to foster high-value, cost-conscious care. Ann Intern Med. 2012;156(2):147-149.4. Klepper B, Kibb D. A legal challenge to CMS’ reliance on the RUC. HealthAffairsB log; August 9, 2011. http://healthaffa i rs .org/blog/2011/08/09/a-legal-challenge-to-cms-reliance-on-the-ruc. Accessed September 7, 2011.5. Medicare Payment Advisory Commission. Moving forward from the sustain-able growth rate (SGR) system. http://www.medpac.gov/documents/10142011_MedPAC_SGR_letter.pdf. Accessed October 14, 2011.6. Weiszman RKL. US investigates Partners’ contracts—health network exam-ined for possible antitrust violations. Boston Globe. April 29, 2010. http://www.boston.com/business/healthcare/articles/2010/04/29/justice_department_launches_antitrust_review_of_partners_healthcare. Accessed October 14, 2011.7. Farquhar DB. Pfizer reaches record settlement with feds; yes, that is $2.3 bil-lion with a ‘B.’ FDA Law Blog. September 2, 2009. http://www.fdalawblog.net/fda_law_blog_hyman_phelps/2009/09/pfizer-reaches-record-settlement-with-feds-yes-that-is-23-billion-with-a-b.html. Accessed October 14, 2011.8. Lin GA, Dudley RA, Lucas FL, Malenka DJ, Vittinghoff E, Redberg RF. Fre-quency of stress testing to document ischemia prior to elective percutaneous coro-nary intervention. JAMA. 2008;300(15):1765-1773.9. Goodwin JS, Singh A, Reddy N, Riall TS, Kuo YF. Overuse of screening colo-noscopy in the Medicare population. Arch Intern Med. 2011;171(15):1335-1343.10. Staples MP, Kallmes DF, Comstock BA, et al. Effectiveness of vertebroplastyusing individual patient data from two randomised placebo controlled trials:meta-analysis. BMJ. 2011;343:d3952. doi:10.1136/bmj.d3952.

VIEWPOINT

672 JAMA, February 15, 2012—Vol 307, No. 7 ©2012 American Medical Association. All rights reserved.

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