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will have unintended consequences, some of which will be noxious and require further changes thatwill lead to further unintended consequences - some of which will be noxious.

Health savings accounts ("HSA"), government entitlements to cover drug costs, and the spread ofinformation technology, may all be helpful, but all fail to address the complex underlying problems.Large integrated systems lack the needed forms of competition. Consumers, no matter howempowered, will frequently remain at a disadvantage when accessing the complex and arcane health

care market. Other countries are moving away from their universal, single payer systems. There mustbe fundamental changes for all the participants in the health care system if the problems are to beeffectively dealt with.

The structure of the health care delivery system is the starting point for the authors. Structuredrives cost and quality, which impacts insurance premiums and the amount of coverage feasible.

"The fundamental problem in the U.S. health care system is thatthe structure of health care delivery is broken. This is what all thedata about rising costs and alarming quality are telling us. And thestructure of health care delivery is broken because competition isbroken. All of the well-intended reform movements have failedbecause they did not address the underlying nature of competition.

"In a normal market, competition drives relentless improvementsin quality and cost. Rapid innovation leads to rapid diffusion ofnew technologies and better ways of doing things. Excellentcompetitors prosper and grow, while weaker rivals are restructuredor go out of business. Quality adjusted prices fall, value improves,the market expands to meet the needs of more consumers."

Competition in the health care system does none of these things. Health care competition istoday dysfunctional. Costs rise and quality varies widely, quality service is not rewarded, and weakerproviders don't go out of business. Innovation diffuses slowly and doesn't drive value improvement thway it should.

Health care system competition has instead become a zero-sum game. Gains for some

participants come at the expense of others."Participants compete to shift costs to one another, accumulate

bargaining power, and limit services. This kind of competitiondoes not create value for patients, but erodes quality, fostersinefficiency, creates excess capacity, and drives up administrativecosts, among other nefarious effects."

Misaligned incentives and prior strategic choices affecting all participants have created this"dysfunctional competition." Some large integrated participants like the Veterans Administrationhospitals, Intermountain Health Care, and Kaiser have avoided this dysfunctional competition andachieved remarkable results. However, limiting competition is not the answer.

Indeed, when put to the test by the flow of injured from theMiddle East conflicts, the Veterans Administration system wasfound wanting in several respects. Nor is it cost effective.

Competition Based On Patient Outcomes

Value for patients:

System participants should be competing on the basis of the value they deliver to patientsinstead of battling over who pays what and the achievement of short term goals.

The relevant factors today are

inputs when they should be

outcomes.

None of the reforms, past or currently advocated, is designed to stimulate competition to deliversuperior value for patients. Indeed, many create incentives that are badly misaligned with value forpatients.

"The problem is that competition does not take place at the medical condition level, nor over the ful


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Real competition is stifled by

confining patients to health plan

networks, captive referrals within

provider groups, and a lack of

relevant information.

care cycle."Competition is currently in different ways "too broad, too narrow, and too local." The relevant facto

today are inputs when they should be outcomes. The focus is on discreet interventions instead of onthe full cycle of care. The care provided for individual medical conditions involves fragmentedinterventions instead of an integrated approach. Value for the patient involves the full cycle of care,not just the outcome of a single intervention, office visit or test.

"Providers offer every possible service, and gear up to handle any patient who walks in the door.Health plan providers contract with providers across the board. Yet breadth of services per se has littimpact on patient value -- it is the ability to deliver value in each medical condition that matters.Health plans and providers have merged and consolidated, but the pursuit of breadth and theduplication of services have only increased."

Real competition is stifled by confining patients to health plan networks, captive referrals withinprovider groups, and a lack of relevant information. The patient faces a sometimes insuperablechallenge in navigating the system. There is little guidance in the avoidance of unneeded interventionThere is little help in preventing disease or managing ongoing problems.

The localized structure of health care services has been rendered obsolete by the increasingcomplexity of health care services and the increasing ease of travel. Local providers frequently lackthe volume and experience to develop excellence for particular conditions. Expensive broad-scale

facilities frequently lie idle. Supply frequently "creates" its own demand as providers order tests and worse - perform interventions that are not needed in order to justify over-expanded capabilities.

Superiority of competition on

results:

Value to the patient depends on "patient outcomes per unit of cost at the medical condition level."Competition on this basis can be a winning proposition for all participants in the system. However, itrequires that results be measured and disclosed.

"The ability to measure results and to control fairly for initial patient circumstances" - to adjust forisks - has in fact been "conclusively demonstrated" the authors assert. Yet today no systemparticipants require it or do it.

"Mandatory measurement and reporting of results is perhaps the single most important step in

reforming the health care system."(emphasis in original)Instead, the effort has been to control supply and micromanage provider practices - to set procedura

standards of care and to review requirements for new capital investment."Recent quality and pay-for-performance initiatives address

process compliance rather than the quality of results achieved.These initiatives presume that good quality is more expensive, andseek to reward good performance with small differentials, whichensure the upward march of provider reimbursement. Processguidelines are comfortable to providers, because competentproviders can readily meet them. Value-based competition onresults and pay-for-performance, then, are very different models."

Any reform that doesn't involvevalue-based competition will fail

to control costs or provide

incentives for excellence.

Instead of setting minimum standards that all can meet, it is essential that the better providers brecognized so patients can migrate towards them to apply pressure for innovation and excellences

across the whole system. Any reform that doesn't involve value-based competition will fail to controlcosts or provide incentives for excellence.

With competition on results, there is no need for inherently clumsy administered efforts that establissome inflexible structure for the system, dictate the processes of care or how IT systems should bedesigned, or that determine when new technologies should be adopted. Such administered effortsinevitably prove rigid and incompetent. "If every actor has to compete for every subscriber andpatient," improvement and innovation will accelerate and there will be no need for ineffectiveadministered micromanagement efforts. Top-down efforts at controlling costs and micromanaging th


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system can't possibly achieve what competition on results achieves.

The authors provide a chapter summarizing the staggering scope of the current health care mess.While excellent care is available, the costs are too high - life expectancy in the U.S. is just average -preventive care is generally lacking - incidents of over-treatment and under-treatment and othermedical errors are common - there are unjustifiable regional differences in practice standards and

quality differences among practitioners - and the diffusion of medical knowledge is unconscionablyslow. On average, it takes 17 years for the results of clinical trials to become standard practice. Thereseems to be no relationship between health outcomes and expenditures.

Malpractice insurance premiums are rising. This induces resort to costly systems of defensivemedicine. There is an overwhelming burden of expanding administrative costs.

In properly functioning competitive markets, competition is a positive sum game where allcustomers receive higher quality and greater choice for reduced sums, markets expand and qualityproducers prosper while those that provide inferior goods and services are pushed aside. (Thesebenefits flow in abundance even when competition is far from "perfect.")

Value-based competition is what happens in just about every other segment of the U.S. economy.Applied to heavily regulated industries like airlines and trucking, or even to the sclerotic economiesemerging from communism in Eastern Europe, value-based competition (that is far from "perfect") hdelivered "extraordinary benefits," the authors emphasize.

In the U.S., computers, automobiles, automatic teller machines and similar goods improve vastlyevery decade. These improvements are the result of value-based competition as businesses are drivento offer more for less cost to attract customers.

In zero-sum competition - such as currently in health care - the financial pie doesn't expand. It isjust repeatedly divided as participants fight over shares. Value to customers plays no role. Instead ofstriving to attract customers by creating value for them, participants struggle to shift costs and tocapture customers by restricting choice, and to reduce costs by restricting services.

"Cost shifting creates no net value."One participant's gain is another's loss, and it is a vastdistraction from actual care giving. It involves vast increases in administrative costs. It drivesconsolidation in health care for purposes of enhancing bargaining power rather than for improvingcare.

There is no economic rationale behind this consolidation. Offering service to large groups of diversepatients creates no economies of scale. Patients are still treated one at a time. It does not involvespecialization. It leads to mass medicine as doctors are pressured to make up for discounting theirservices by seeing more patients in a given period of time and by reducing the scope of care.

Costs are shifted to small groups, unaffiliated patients and the uninsured. Ultimately, even large

groups pay more as fewer people can afford health insurance and must be provided free care inexpensive emergency room settings. The use of capitation plans favors full line providers that are farless efficient than specialist providers.

Thus, the onsolidation in health care that has drastically reduced competition has failed to achievesignificant cost savings. Inevitably, this has enabled consolidated health care providers to raise prices

"Recent empirical studies across geographic markets confirm thathospital consolidations, rather than improving efficiency, result inprice increases that at least equal, and usually exceed, the median


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price increases by other hospitals in the same market and that priceincreases are greater in the most concentrated markets."

Dysfunction pervades the current system. The incentives of the current system raise costs whilereducing the quality of care.

Today, even doctors lack information on outcomes and costs sufficient to make knowledgeablereferrals. Networked doctors refer within their networks. Competition among broad line providers anprovider groups to sign up large numbers of potential patients has led to improvements in amenitiesbut has little impact on health care when members get sick.

The time to choose a provider is when you get a particular illness, not when you are healthy, theauthors point out. Nevertheless, when illness strikes, patients find themselves restricted to providerswithin their network. These providers are included in the network on the basis of the discounts theyoffer rather than on their skills.

Nor do networks provide continuity of care. Service lines are in different locations and are seldomintegrated, "communication remains limited, the coordination of care is ad hoc, the multiple physiciantreating a patient rarely meet as a team," and the ultimate results of care are rarely measured.

Competition for resources among participants does not focus on outcomes or even on overall costsIt permits providers with worse outcomes and higher costs to stay in business. Competition focused opatient outcomes "would drive improvements in efficiency, effectiveness, reduce errors, and sparkinnovation." Unfortunately, there is now almost no competition at the level of medical conditionoutcomes. Physicians and patients are generally confined within network practice. There is practicallyno information about comparative capabilities.

"Lack of value-based competition on results has allowed care ofa patient to be fractured across numerous specialties, hospitaldepartments, and physician practices, each of which focuses on itsdiscrete intervention. Nobody integrates care for the medicalcondition as a whole and across the full care cycle, including earlydetection, treatment, rehabilitation, and long-term management."

Inevitably, health plans and providers are driven to restrict treatment options to cut costs. Thiis clearly counterproductive for the patient. "De facto rationing" has thus become disturbinglywidespread.

Inevitably, this leads to unsatisfactory results, law suits, and rising malpractice premiums that furtheraise costs directly as well as indirectly through the incentive to practice "defensive medicine." Injurepatients actually receive less than 30% of malpractice premium expenditures.

Health care services are treated as a commodity under the current mass medicine system. This isclearly inappropriate.

Health care service is a profession, not a mere collection of scientific and practice techniques.

Health care services are not fungible. There are wide variances in knowledge and skills and technicalcapabilities. Complexity increases rapidly with rapid advances in health care capabilities. Massmedicine practices are increasingly inappropriate - and dangerous. Yet, mass medicine is what thecurrent system increasingly delivers.

"Competing on costs instead of value makes sense only in commodity businesses, where all sellersare more or less the same. Competing on pieces of costs, not total costs, does not make sense in anybusiness. - - - The result is that health plans, employers, and even providers pay insufficient attentionto the goal that really matters: improving value over time."

There simply are no incentives at present for referring patients to the best providers - or knowledge


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to who those providers may be. There are strong incentives for not going beyond network providers.Even for Medicare patients who have no network limitations, referrals are generally restricted to locaproviders because of habit, inertia and lack of information.

Broad line providers stretch to provide services for which they have insufficient volume to achieve

expertise and efficiency. For example, there were 139 hospitals offering heart transplant service,although many see only a few patients per year and have even fewer who survive. On the other hand,this supply often creates its own demand as providers stretch to utilize the diagnostic and treatmentfacilities they have whether or not the services are needed.

Yet, ironically, full line providers suffer from fragmentation by academic specialty. There is noincentive for teamwork. "Each department or physician practice takes a piecemeal view of the care."

"In many situations, the provider team never meets, informationis not really shared, and both quality and efficiency suffer.Coordination and communication problems, in turn, raise theincidence of errors and impede the design and implementation ofthe improvement process. The fractured care structure inhibitsconversations about improving results over the full cycle of care,but these conversations and ideas should be a shared source ofexcitement and professional satisfaction for every medical team."

Cosmetic surgery is not substantially afflicted by third party payer systems. In that field, forexample, quality improves and costs decline.

The authors note that some consolidated groups have decided to rationalize and specialize. Theyidentify Intermountain Health Care and the Cleveland Clinic. But most are content to providedduplicate capabilities in their various hospitals and clinics. Even substandard services are maintainedto avoid referrals to outside providers. Most have not integrated practice units, but maintain the sameold structure of care around discrete interventions and traditional specialties.

Innovation has declined with consolidation. Previously, there were always a few doctors willing texperiment with new ideas or treatments - especially for poorly understood chronic ailments. They

were quick to adopt newly proven clinical practices."Given the need for reimbursement approvals and lacking rewards for better quality, provider group

have had little incentive to innovate, especially when a new approach raised costs in the short run."The use of buying groups to obtain discounts for supplies often results in large inventories of some

items and shortages of others - and long delays in acquiring innovative products. Drug companies nowspend large sums advertising their products to potential patients. All of this, of course, has to be paidfor.

The need for focus on patient

outcomes:

Competition has to be focused on services for the patient. It should be focused on "addressingparticular medical conditions" over the full cycle of care, "including monitoring, diagnosis, treatmentand ongoing management of the condition." This requires information about actual experience levelstreatments used, prices and results.

Performance information is essential for such competition. Performance information stimulates

quality improvements and controls costs. However, it is largely lacking in the current system. Indeedpricing regulations have become so "Byzantine" that many providers couldn't quote a price if theywanted to. "Patient satisfaction" data is useful but clearly not specific enough. Ranking systems are nevidence based and have many inadequacies.

"In only a few isolated disease areas -- notably cardiac surgery, organ transplants, cystic fibrosis, ankidney dialysis -- is broad-based results information available even to physicians. There is essentiallyno information at all on diagnostic effectiveness or its cost, except in a few forms of cancer


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screening."One study of results showed that death rates among stroke patients varied from zero to 36.8%.

Clearly, such information is vital. In Pennsylvania, a study of heart valve replacement proceduresshowed that the most expensive hospitals had the worst results. Without such information, the primardisciplinary factor is law suits rather than competition. This, too, drives up costs.

Some reporting systems have been established with major immediate benefits."After four years of publishing [cardiac surgery] data, New York achieved the lowest risk-adjusted

mortality following bypass surgery of any state in the country. Since then, New York has registerednot only the lowest U.S. mortality rate but also among the greatest rates of improvement - - -, andimprovements across the state have continued - - -. In Cleveland, death rates at the thirty participatinhospitals dropped 11 percent in the first four years of published data."

A variety of organizations have been established to provide outcome data for specific ailments.United Resource Networks specializes in organ transplants. Preferred Global Health covers Europeand the Middle East.

Best Doctors, Pinnacle Care International, and Consumers Medical Resource cover various illnessein the U.S. However, they lack specific information, and must rely on reputation and expert surveys.Dr. Foster, Ltd., in the United Kingdom, bases its outcomes information on specific data provided bythe National Health Service.

The current system withholds the information that patients need to play an active role in their healthcare. Patients should be encouraged to play and active role. Evidence shows that this improvesoutcomes and reduces costs. Without information, however, most just leave the decisions to otherparticipants in the system.

Copays, deductibles and health savings accounts encourage patients to be active participants. Here,too, there is a lack of adequate information, so the primary impact is to encourage self-rationing and remain within networks.

Administered Health Care Systems

Health plan reforms:

The authors repeat and elaborate all the problems of the health care system as they affect health

plans, and then explain how to reorganize for success based on subscriber health outcomes instead ofthe mere cutting and shifting of costs. Reorganizing for value-based competition on results over thefull cycle of care requires medically integrated care rather than "focused factories delivering specificprocedures or piecemeal care."

The history and development of the current dysfunctional third party payer system and theinevitably counterproductive administered alternatives to market pricing mechanisms that have beentried are described at some length. This is recommended reading as an example of the law of complexsystems. Every reform quickly resulted in a multitude of unintended consequences, some of whichinevitably made matters worse. Further reforms just repeated this cycle. The multiplication ofunintended consequences by the series of reform efforts ultimately creates an impossible situation.

Politicians and administrators hate to release the levers of power and influence. It is thus only whenthe politicians and administrators screw up so badly they don't know what else to do that we getderegulation and privatization.

National health care systems in other countries are now experiencing alarming increases in healthcare spending and are resorting to various forms of rationing. The evidence is that the quality of care frequently inferior to the U.S. system and the rates of medical error are higher.

"It is ironic that despite mounting evidence abroad of cost andserious quality problems in government-controlled systems, theidea of government control and a single payer system is gaining anew legitimacy in the United States. As desperation grows with therunaway costs of our system, and with no good alternatives


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evident, reformers throw up their hands and accept the need forrationing. The power of the right kind of competition to deliverhuge improvements in value goes unrecognized." (See, Richmond

& Fein,http://www.futurecasts.com/book review 9-

5.htm"The Health Care Mess," setting forth the case forestablishment of a national single payer universal health care

system.)

Single payer national systems are now being viewed by many as the ultimate reform, and they dooffer many theoretical possibilities for administrative simplicity and cost reduction. However, theydestroy all competition, ration care to control budgets, deter innovation, and may kill the market forthe development of new drugs. A national single payer system is the ultimate incentive for zero-sumcompetition.

"It simply strains credulity to imagine that a large governmententity would streamline administration, simplify prices, set pricesaccording to true costs, help patients make choices based onexcellence and value, establish value-based competition at theprovider level, and make politically neutral tough choices to denypatients and reimbursement to substandard providers. Medicine ascurrently structured is deeply flawed in all these areas, and asingle-payer system would do little to correct the problems. Morelikely a single payer would be just a payer, not a true health plan."

Health savings accounts and other incentives for active "consumer" choice are viewed by theauthors as useful steps in introducing the right kind of competition into health plans, but alone they dnot go far enough. Health care consumers are still restricted to insurance or health plan options that acurrently enmeshed in networked systems and engaged in dysfunctional forms of competition.Consumers are still left with the daunting task of making a series of appropriate decision over the fullcycle of care on the basis of grossly inadequate information. Value based competition focused on thepatient's particular medical condition over the full cycle of care creates positive incentives thateliminate these problems.

Health savings accounts ("HSAs) have effectively been coupled with high deductible insurance to

provide a complete health plan package. (See, Gratzer, "The Cure," at segment on "Health savingsaccounts.") Aetna has found that subscribers with such combinations spend more on preventive care,seek more information about health care choices, use emergency rooms less, use more genericmedications, and experience significantly lower rates of health care cost increases. Most earn less tha$30,000 and have money to roll over in their account at the end of the year.

In the absence of adequate information, however, HSAs often lead to the self-rationing of care. Theyneed a system of value-based competition and information about results to achieve their full benefits.

Pay for performance and similarrecent quality-focused reforms

are actually about process rather

than quality.

Pay for performance and similar recent quality-focused reforms are similarly viewed as useful butclearly insufficient. They are actually about process rather than quality. Most are really "pay forcompliance" with accepted medical standards of practice. "Providers are expected to conform to

specific processes, but are not necessarily rewarded for betterresults." (emphasis in original)

It is not surprising, then, that evidence is accumulating that such reforms are not achieving thedesired results. The system rewards process rather than results. This is a deterrent to innovation. Onlya few - often not the most important - processes are targeted while others go unmeasured, yet thewhole hospital benefits for meeting a few targeted processes. The vast array of medical processes andtheir application to the vast array of health care needs is simply too complex for this administeredsolution. Accepted procedures keep changing faster than the administered guidelines.


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Finally, it is another example of paying for treatment rather than for results, and thus a sure driver oincreased costs. It is just another futile attempt by administrators to micromanage health care.

"Better care reduces costs through less invasive treatment, moreexpert care delivery, better management of chronic care, andimproved risk prevention. Thus, higher pay will often not benecessary to reward better results."

Extending tax deductibility to insurance premium payments by individuals does not addresseither cost or quality issues. Entitlement expansion and the purchase of drugs from Canada are justmore cost shifting exercises that increase incentives for zero-sum competition. Purchase of drugs fromabroad could destroy market justification for the development of new medicinal drugs.

Meaningful Competition in Health Care

Value-based competition on

results:

Positive-sum competition is created by value-based competition on results. All participants can winalthough the least competent will be pushed aside as the most capable expand.

Value-based competition on results is "the only way to drive sustained improvements in qualityand efficiency."

"When providers win by delivering superior care moreefficiently, patients, employers, and health plans also win. When

health plans help patients and referring physicians make betterchoices, assist in coordination, and reward excellent care,providers benefit. And competing on value goes beyond winningin a narrow sense. When providers and health plans compete toachieve the best medical outcomes for patients, they pursue theaims that led them to the profession in the first place."

"Unless providers have to compete to be excellent, there issimply no feasible way to create - - - incentives for rapid andwidespread improvement. It is not realistic or effective to attemptto second-guess provider practices, review their choices, andspecify from the outside the way care should be delivered. It isalso not realistic to rely on specialized training or board

certification to keep physicians up to date. Nor is it feasible tothink that providers who do not know how they compare, and whodo not have to compete, will always sift through the voluminousliterature on clinical trials in search of ways to improve theiroutcomes."

The authors identify the primary characteristics for value based competition.

y The focus must be on value for the patient, not just costs. The quality of patient outcomerelative to costs must be the measure of success and the basis for financial rewards.

Value for the patient - patient outcome - is a subjective standard. Different patients may value variououtcomes differently and be willing to accept different degrees of risk. Some may prefer lessaggressive treatment than others. No top-down system can deal with such variations. A competition-based system automatically takes such factors into account where a centrally managed system provideone-size-fits-all procedures.

y Value is judged by ultimate outcomes for the patient.y The outcome is judged for the entire "medical condition," not just discreet procedures or

interventions. "Only at the level of medical condition [such as diabetes, knee injuries,congestive heart failure] can outcomes and costs be compared." These are the resultsproviders must strive for and competition must reward or punish.

"A medical condition -- e.g. chronic kidney disease, diabetes, pregnancy -- is a set of patientcircumstances that benefit from dedicated, coordinated care. The term medical conditions


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encompasses diseases, illnesses, injuries, and natural circumstances such as pregnancy. A medicalcondition can be defined to encompass common co-occurring conditions if care for them involves theneed for tight coordination and patient care benefits from common facilities."To compete in this manner, providers will have to organize themselves to deal with and specialize in

entire medical conditions - not just discreet interventions, treatments or services. This team approachwith joint responsibility offers many opportunities for improvements in health care.

"Competition on value over the care cycle will lead to more attention to the prevention, detection, anlong-term management of illness relative to treatments and acute interventions."Such management can prevent early stage illness from progressing into more severe stages. Early

stage kidney disease, for example, may be prevented from progressing into kidney failure. Yet,preventive health care measures are not generally a part of the current system.

Changes in structure, organization, measurement and time horizon will be required for this shift tofull health care cycle management. Integration and coordination of health care interventions isessential. The provider must be concerned with not just a particular intervention, but with the wholecare cycle - including assessment of risks, prevention of occurrence, treatment, rehabilitation, and lonterm management. Such management efforts will deliver great benefits for patients. This managemenstructure will create joint accountability for the entire health care team. In today's fractured health carsystem, there is little accountability for overall outcomes.

"Focusing on value over the care cycle would shift this debate from one about controlling spending one about the most effective use of drugs and other treatments to improve quality and efficiency intreating and managing specific diseases. In today's competition, the most cost-effective drug is notalways chosen."The authors note a study that revealed that a new more expensive diuretic drug frequently resulted i

worsened outcomes. However, this outcome was not widely known.

Compliance with specified procedures is bound to be costly and disappointing. Success based onsuperior patient results over the full cycle of care will encourage best practices and reward bestproviders. Excellent providers will be rewarded with more patients. This requires information.

y The value of an extensive practice is emphasized by the authors. Specialization isimportant for increasing the scale of practice and attaining experience and learning forparticular medical conditions. Yet, the current system encourages part time practice coverin

diverse medical conditions."Organizations with experience in a field will tend to have more skilled teams, develop more

dedicated facilities, and achieve faster rates of learning. Experience allows individuals and teams tohone more effective techniques and routines and to get better at spotting and dealing with problems.Experience and specialization also tend to attract the most demanding patients. Serving them driveseven more rapid learning."

Scale is important in providing financial support for teams and facilities dedicated for particularmedical conditions. "Scale results in multiple colleagues doing similar things who can consult withand get feedback from one another." The authors cite the orthopedic surgeons at New England BaptisHospital.

Scale permits integration of all aspects of the care cycle for a particular medical condition. Itpromotes flexibility and efficiencies in scheduling use of facilities and purchasing supplies.

The authors cite the excellent results achieved at the Texas Heart Institute at St. Luke's Episcopal

Hospital which has performed over 100,000 coronary bypasses. It attracts the most complex anddemanding patients, yet experiences surgical costs that are one third to one half lower than at otheracademic medical centers.

The hospital constantly examines and improves its procedures and has dedicated facilities that easethe coordination of different procedures. They have achieved an admirable record of advances in bestpractices state of the art. Today's reimbursement practices actually penalize this approach.


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Thus, competition on results for particular medical conditions can drive a "virtuous circle."

"Deeper penetration in a medical condition leads to accumulatingexperience, rising efficiency, better information, more fullydedicated teams, increasingly tailored facilities, the ability tocontrol more of the care cycle, greater leverage in purchasing --

many key purchases are practice-unit specific -- rising capacity forsubspecialization within the practice unit, efficiencies in investingin practice development and marketing, faster innovation, andbetter results. Better results lead to an improving reputation, whichattracts more patients and feeds the circle further."

Fragmentation of services in fullservice health care facilities

results in "subscale services,

dependence on less dedicated

resources, shared facilities,

quality problems, and

inefficiency." Unfortunately, thecurrent system rewards such

inefficiency.

But there has to be the right kind of competition. There has to be several competing providersspecializing in treatment of each medical condition, otherwise complexity and complacency andrepetition of conventional procedures may set in.

Fragmentation of services in full service health care facilities results in "subscale services,dependence on less dedicated resources, shared facilities, quality problems, and inefficiency."Unfortunately, the current system rewards such inefficiency.

Hundreds of studies show that specialist high volume physicians and teams get better results, often alower cost. At least "a threshold level of experience in a particular condition is critical for goodquality." Mammograms are far more accurately read, for example, when the reader examines over athousand films each year.

Conscious learning in a specialty is important and will be driven by competition on results. Highvolume hospitals that engage in clinical trials, for example, improve more than those that don't.

Fragmented full service hospitals are not organized to capture and disseminate learning. They areoften inconsistent in their procedures and unable to discern the sources of problems. Physicianexperience in such facilities does not improve patient results, which indicates a lack of learning.Because they are involved in so many different procedures for different medical conditions, their is

minimal payoff for examination and updating of procedures for any one of them.

In the absence of competition on results, even experienced providers are not under any pressure tolearn or improve their practices. Study and improvement are discretionary. Thus, merely restrictingcertain procedures to high volume centers is not enough. "Introducing volume restriction withoutconsidering results could protect established providers from competition, which would actually reducpatient value."

"The current nature of competition accentuates fragmentation.Health plans and government programs aim to lift all boats andsupport all providers in achieving a minimum standard of practice,instead of rewarding excellent providers with more volume. Thenet effect is a huge number of providers for most services, even incomplex conditions such as neonatal cardiac surgery and organ

transplants. With little or no accountability for results, providersenter every service perceived as profitable."

y High quality care should actually be less costly.The authors note that improvements in the treatment of certain medical conditions - like coronary

heart disease and gall stones - have resulted in reduced costs rather than increased costs. A diagnosisthat leads to ineffective treatment is no bargain, while high-cost stroke intervention that avoids longnursing home confinement is a bargain.

There is no inherent tradeoff between health care quality and costs. The substantial time lag between


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development and adoption of best health care practices offers obvious opportunities for increases inboth quality and efficiency of health care. "Just by implementing known best practices, virtually allproviders can improve both quality and margins without raising prices."

Practice improvements at many points will reduce costs. Improvements in diagnosis, adoption of lesinvasive procedures, improved coordination and integration of the care cycle, improved management

of chronic conditions, improved risk assessment and preventive health care, rapid adoption of besttreatment procedures, all offer points where improvement is possible.

The elimination of mistakes is an obvious way to increase quality and reduce costs. In health care,mistakes can be very costly - and are in fact hugely costly - involving many tens of billions of dollars

y Results must be measured and reported to provide information essential for competition tbe effective.

"Information about results, which is appropriately risk adjusted, must become the critical driver ofbehavior in the system -- by referring physicians, by health plans, by patients, and by providersthemselves. Results -- outcomes versus cost -- also must be the ultimate basis on which drugs, medicadevices, other technologies, and services are selected."

The results that count are not reputation or amenities or results of discreet procedures, but the resultfor the specific medical condition over the full cycle of care. To develop such information will requirpatient tracking systems.

"If, and only if, providers have to demonstrate excellent results inaddressing specific medical conditions will errors decline,unnecessary tests not be performed, unnecessary treatments stop,the use of ineffective treatments cease, and the withholding ofeffective services come to an end. Supply-induced demand forunneeded care will decline when results are measured andcompared. Physicians who cannot demonstrate patient value willgo out of business."

Information about results - about costs and treatment outcomes adjusted for risks and measuredover the full cycle of care - is vital for effective competition. Patient choice and evaluation of providemust be based on reliable information.

Information should include characteristics of the patient population - the severity of the cases handle

- so that risk levels can be evaluated. The treatment methods employed should also be explained, andthe experience levels of the teams and team members should be provided. Most important is themeasurement and reporting of patient costs and treatment results.

Even with imperfect information and imperfect competition, the effort to compete on the basis ofvalue for patients will deliver a cornucopia of benefits. Competition need not be perfect to deliver vasbenefits. Where information on results has been available - as in the treatment of cystic fibrosis -substantial improvements have quickly followed.

The Veterans Administration instituted integrated and measured treatment procedures in the 1990s,and achieved substantial quality improvements. Intermountain Health Care in Utah, M.D. Anderson

Cancer Center in Houston, and the Cleveland Clinic in Ohio are identified by the authors as applyingmany of these concepts.

Currently, "process information" is being collected by a variety of organizations. Information aboutsuch general factors as infection control measures and the use of computerized order entry to reduceerrors are reported. Less collected is "process information at the medical condition level." Suchprocess compliance information is being collected for only a few medical conditions. But it is patientresults that count most.

"Health care delivery is complex, and protocols do not capture


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discovered they were misdiagnosed; one in ten discontinued atreatment considered unnecessary, ineffective, or unproven; andone in five changed doctors."

y The system must reward innovation that increases value to patients. When new methods,new facilities, new organizational structures, new processes, new forms of collaborationacross providers that increase value to patients are reported, rewards for innovative providerwill flow from the attraction of increased demand for their services. In this way, innovationwill not only improve quality of health care, it will reduce costs without rationing.

"[Innovation] is discouraged in the current system by a wide variety of factors, including a lack ofaccountability, reimbursement practices that penalize better methods, buying group structures focuseon short-term cost savings, and rationing mind-sets."

Innovation studies have to be expanded to examine the results of full care cycle outcomes and varioaspects of care besides drugs and surgical implants. At present, there is little incentive for such studieyet changes in organization and processes have provided major improvements in care. The authorsprovide several examples. Competition on value would provide such incentives. The measurement ofrisk-adjusted outcomes facilitates such studies.

"Effectively, hundreds of thousands of natural experiments occurdaily in U.S. hospitals and physician practices as medical teamsdeliver care, doing the best they can. The variations in patients'

conditions, treatments, and outcomes can be analyzed for patternsthat reveal the relative effectiveness of processes and therapies thatare currently in use. - - - Indeed, evidence-based medicine, at itsfoundation, involves widespread gathering and reporting of risk-adjusted outcome data. With a standardized set of outcomemeasures in each area of practice, analysis can be done both withinan institution and across institutions to rapidly advance theunderstanding of effective care."

y Competition must be geographically broad - even national or international in scope.Results must be judged against those achieved in other geographic areas. Severe cases shoulbe directed to the hospitals best suited to deal with them within a broad geographic area.

The ability to deal with severe stroke victims varies widely among hospitals, the authors point out.Getting to the right hospital within the first 3 hours can be critical. Trauma centers offer anotherexample of the superiority of dedicated facilities. For less time-sensitive conditions, competition canbe national or even international. Yet, the current system does not disseminate information about suchspecialized capabilities and poses obstacles to going beyond local or network facilities.

Health plans and employers should thus encourage competition across broader geographic areas toachieve better results for subscriber and employee patients. Broadened competition will even driveimprovement in local facilities and the practices of local physicians. Local hospitals and physicianswill seek relations with the best specialized facilities for consultation or the referral of difficult cases.

"The goal should be to encourage excellent providers to grow in their areas of expertise, rather thanto lift all boats. Raising every provider to an acceptable standard in every medical condition willperpetuate fragmentation of service lines. Drawing from a wider geographic area, providers treatingless common conditions could serve enough patients to benefit from scale, experience, and learning."

A general hospital is needed for emergency care, routine and preventive care, disease management,and follow-up care. For complex medical conditions, they should have relationships with specializedproviders unless they have the scale to create their own dedicated teams.

Traumatic brain injury, for example, is a medical condition requiring expert intervention. Only abou16% of hospitals have this expertise. CarePath, a specialized service company, provides web-basedinformation to local hospitals and telephone coaching by leading experts. Local hospitals should alsohave relationships with a leading national brain trauma center.

Integrated Practice Units


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Organizing for effective

competition:

To prepare for value-based competition, healthcare providers must systematically identify andanalyze the health care processes they offer and related developments in the field, adapt informationtechnology to support those processes, and systematically examine the results of those processes at thmedical condition level.

Not-for-profit organization witha well-meaning service

orientation is often an obstacle to

reform.

Most important is the removal of barriers to change, ranging from entrenched organizationelements and mind-sets to obsolete regulations and counterproductive reimbursement models. Manyproviders succumb to inertia. They will be left behind. Not-for-profit organization with a well-meaning service orientation is often an obstacle to reform.

"Community service, - - -, is interpreted as offering everything. Taken too literally, then, such nobleaims can actually work against patient value as providers attempt to cater to the needs of allconstituencies. To maintain financial viability while supporting a broad array of services, providersalso seek charitable donations to support uneconomic, subscale services."

The organization dictated by current reimbursement models and the desire of individual physicians engage in a varied practice also create barriers to effective focus.

The dramatic increase in thenumber and complexity of healthcare services renders unfocused

methods obsolete and even

dangerous to patients.

Rather than breadth of services,

providers should have a breadth

of alliances and associations

with other specialized providers.

Hospitals, physician groups and individual physicians need to focus their practice. They have todefine purpose and goals, the medical business they will operate in, the service they will offer, and

how they will distinguish themselves from their peers. It is focus that provides direction to attain "truexcellence."

"Every provider can begin immediately to take voluntary steps toward competing on value. Leadingproviders are already doing so, and reaping the benefits in the form of better patient care, greaterexpertise, better clinical data, improved margins, and strengthened reputations, even in today's flawesystem."

Clear goals will determine organizational structures, measurement systems, and facility usage.Current full-service and traditional broad practice provide none of this. The dramatic increase in thenumber and complexity of health care services renders unfocused methods obsolete and evendangerous to patients. Lack of focus undermines skill levels and generates excess capacity inunderutilized facilities and equipment - the cost of which has to be passed on to all patients.

Currently, services offered are generally too broad to assure top quality, services are not integrated

for particular medical conditions, and the market served is too local to generate needed scale ofoperations. "It is experience, scale and expertise in each service that matters, not overall breadth ofservices," the authors emphasize. Rather than breadth of services, providers should have a breadth ofalliances and associations with other specialized providers.

The complexity of today's healthcare requires integrated teams

specializing in particular

medical conditions.

Focus on particular medical conditions can guide integration of various types of care givers intoappropriate teams specializing in those medical conditions throughout the cycle of care. At present,care is fragmented.

"The various units involved in the care cycle, which frequently includes separate organizationalentities, rarely work jointly and accept responsibility to improve the overall value of care. Instead,relationships across the care cycle tend to be arm's length, even within a hospital or provider group.This fractured delivery of patient care across the cycle seriously undermines patient value."

Traditions of separate individual specialties and professional independence arose in simpler times.The complexity of today's health care requires integrated teams specializing in particular medicalconditions. "To be strategic, providers will need everyone involved in care delivery to have a commogoal centered on the patient, and a shared commitment to overall results, not individual agendas."

To achieve adequate scale to justify dedicated staff and facilities, providers must compete overbroader geographic areas. Modern transportation facilitates such broadening of service areas.Excellence will draw patients regionally or even nationally and internationally. Partnerships with othspecialized providers should be formed equally broadly.


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Providers that deliver superior patient results will be in a position to prosper even with all the curren

obstacles to the focused provision of health care services."Patient value, then, is the compass that must guide the strategic and operational choices of every

provider group, hospital, clinic, and physician practice. Every provider must do its best to measurepatient value, service line by service line, and compare its performance to others. If value for patients

truly governed every provider choice, the health outcomes per dollar expended in the U.S. health caresystem would improve dramatically."

To achieve this, hospitals, physician groups and even individual physicians must develop theirpractice around particular medical conditions in which they can specialize and achieve excellence."The business is congestive heart failure, for example, not heart surgery, cardiology, angiography, oranesthesiology."

"How to define the appropriate set of medical conditions aroundwhich to organize care sometimes involves judgments, as doeswhere to begin and end the care cycle. Different providers can, andshould, define medical conditions differently based on theirstrategies, the complexity of the cases they undertake, and thepatient groups they serve."

The choice of the range and types of services provided is the key strategic decision. This must

depend on the mix of patients, provider skills, facilities, and cost base, among other factors."Routine or simple services should not be offered by institutions that cannot deliver them at

competitive cost. Conversely, complex or unusual services should not be offered by institutions thatlack the experience, scale, and capabilities to provide excellent results."

While an array of services will be offered by most hospitals, competitive pressures will ultimately ruagainst attempts to offer everything. When information about results becomes available, there will beaccountability for performance that will force withdrawal from poorly performed services.

Already there is an array of specialized hospitals that draw the most difficult patients from across thenation and even from abroad. Bascom Palmer Eye Institute in Miami, the Hospital for Special Surgeryin New York, the cystic fibrosis units of Fairview Children's Hospital and the Minnesota CysticFibrosis Center are mentioned by the authors. These institutions routinely achieve superior results. ThMinnesota Center also has developed specialized diabetes, gastrointestinal clinics, and lung transplan

capabilities since these problems often afflict cystic fibrosis patients.

Specialization initiates a virtuous circle starting with quality improvements that result in enhancedreputation, greater patient flow, and many other benefits. "The huge variations in performance acrossproviders reveal the magnitude of the opportunity" for developing specialized medical conditionexpertise.

Beth Israel Deaconess Medical Center in Boston, for example, has an arrangement with MiltonCommunity Hospital to take the most complex cardiac cases and then return them to Milton when theno longer need specialized care. Milton now advertises its relationship with Beth Israel to attractpatients.

The Cleveland Clinic tries to return patients to referring doctors. It keeps the referring doctorsinformed and encourages patients to make follow-up appointments with referring doctors. Referringdoctors have access to patient records at the Clinic.

The vertically integrated provider-HMO organization model is viewed as a second-best solutionSuch organizations look attractive only because of the flaws in the current system.

"They appeal to those who believe that top-down control andoversight of providers is the only hope, including some leading


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advocates of managed care. They appeal to those who see today'szero-sum competition as inevitable, rather than those who envisiona world of value-based competition on results."

"The integrated practice unit" is the team organized to treat particular medical conditions."Integrated practice units are defined around medical conditions, notparticular services, treatments,

or tests. An integrated practice unit includes the full range of medical expertise, technical skills, andspecialized facilities needed to address a medical condition or set of related medical conditions overthe cycle of care. Ideally, the individuals and facilities involved in a practice unit are dedicated-- thais, they are focused solely on that practice unit. The fundamental organizational unit in health caredelivery should be the integrated practice unit (IPU). It is the overall care of a medical condition thatcreates value for the patient -- not the radiology department, the anesthesiology group, or thecardiology group."

Most providers will operate multiple units for those medical conditions for which they have sufficiescale and expertise. They probably shouldn't be practicing medicine in other lines.

The IPU model provides multidisciplinary resources for diagnosis, treatment and diseasemanagement. However, the focus is on best practices in delivering care - not the procedure offered byparticular skills. They cover common complications and medical conditions that require similar

treatment skills, facilities and care delivery approaches. They should encompass the full cycle of care

IPUs should be patient centric, not procedure or doctor centric. The patient belongs to the wholeteam, not just the doctor involved in a particular procedure or to some lead doctor. Outside referringdoctors, rehabilitation specialists and disease management providers "are integrated into the caredelivery process" so the team remains accountable for results.

An example offered by the authors is the congestive heart failure practice at Sentara, a Norfolk, Va.group, that maintains monitoring capabilities for discharged patients. This has reduced hospitalreadmissions by more than 75% and has provided superior results for patients. Sentara also hasdedicated facilities and staff for stroke victims - again with major gains in treatment outcomes.

"In the IPU model, many if not most staff are dedicated -- they work exclusively in a medicalcondition. Staff, including nurses and specialized technicians, are co-located in dedicated facilities:

dedicated clinics, dedicated imaging facilities, dedicated operating and recovery facilities, dedicatedwards, dedicated floor, and even entire dedicated buildings. This allows and encourages better medicintegration, deepening of expertise, and the tailoring of facilities to the medical condition."

Ultimately, IPUs form hospitals within hospitals and practices within practices.

Benefits of the team approach begin with diagnosis. With more people involved in diagnosis, moexperience is brought to bear and accuracy should be improved. Mistakes in diagnosis can be costly.Often, diagnosis is influenced by what a particular doctor is set up to treat. Diagnosis can be iterativeand can change as treatment is attempted.

The authors note that the famed Mayo Clinic takes a team approach to diagnosis, which is itsspecialty. The Cleveland Clinic offers a national service of second opinions for 300 serious diagnoses

It charges a fixed fee and employs a comprehensive information technology infrastructure.

Similarly, prevention, risk management and disease management benefit from a team approach.

Urban community hospitals and rural hospitals should concentrate on the medical conditions forwhich they have sufficient volume. For other conditions, they should have "medically integratedrelationships" and even partnerships with excellent providers to whom they refer patients. They will ocourse still provide emergency care and diagnosis and treatment of relatively common conditions.They will also provide follow-up care and disease management for chronic conditions. By closing low


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volume service lines, they will reduce costs and increase resources for what they do best.

Primary care physician practices can be integrated both into the front end - involving preventive carinitial monitoring and diagnosis - and the back end - involving disease management. Care for routineinjuries and other medical conditions of course remain with primary care practitioners. The primarycare physician should establish strong relationships and efficient coordination with focused medical

care providers and should also measure results.

Examples of providers that have moved towards the IPU model are provided by the authors.

Intermountain Health Care identified about 10 health conditions that accounted for 90% of its costs,and began concentrating on them in the 1990s. Benefits have been quite extensive. For example,mortality rates for cardiovascular surgery declined 19.5%, and significant cost savings were achievedin its specialty areas.

Four spine surgeons at New England Baptist Hospital incorporated and began comparing notes andrecording outcomes. They now perform about 2,000 spine surgeries annually, have published studiesand devised specialist medical devices in the field. They have arranged with the hospital to place thei

patients together on one floor and to work with the same team of nurses, anesthesiologists, radiologisand technicians. They market themselves to health plans and have substantially increased their markeshare of patients in the region. Dartmouth-Hitchcock Medical Center has also developed an integratespine center.

The Texas Back Institute has a dedicated facility and staff at Plano Presbyterian Hospital. The staffincludes rehabilitation specialists, so the focus is on the entire care cycle. They work with nine free-standing feeder clinics. Surgery is involved in only 10% of their cases.

The Cleveland Clinic has already been mentioned. There is a similar unit with dedicated facilities anstaff at the Cole Eye Institute. The M. D. Anderson Cancer Center has over a dozen clinics withdedicated facilities and integrated staffs for different kinds of cancer. Other cancer specialty centersare forming around the country.

The volume achieved by these units supports their dedicated facilities and staffs. With measuremeof results, they achieve constant improvements in techniques. Various methods are used to involve thunits in the full cycle of care, but this is still an evolving area.

"Reporting structures in which physicians remain in traditional specialty groups or in which there isdual reporting both to a practice unit head and the specialty group remain the norm. Over time,however, we believe that the primary reporting relationship for operational purposes should be theIPU, not the medical specialty."The ultimate goal is to have patient-centered care for particular medical conditions dedicated and

integrated over the cycle of care. However, specialization should go even further. Medically centeredcare units should develop elements of expertise that distinguish them from similar units. Concentratiocan focus on complex diagnoses, serving particular patient groups by gender or age that experience coccurring conditions, offering extraordinary timeliness or efficiency or excellence in particulartreatments or disease management.

Care levels will continuously be pushed above established averages by competition based onmeasurable results. "The pursuit of a distinctive approach will drive the development of deeperexpertise and stimulate innovation in facilities and methods." (The delivery of health care - althoughthankfully supported by a growing array of scientific developments - remains a "profession" - a non-scientific practical art.)


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The authors outline some of the care aspects and patient characteristics that provide opportunities fospecialization within a medical condition. Rural providers can distinguish themselves by the quality otheir referral relationships and their integration with centers for complex conditions. The heartsurgeons and spine surgeons mentioned above, for example, specialize in particular kinds of heart anspine surgery.

Measuring and reporting

results:

Measurement of results is the key to improving care techniques, reducing costs, and marketingservices. Providers are in fact increasingly being driven to measure and report results. However, thismust not be focused just on good practices or hospital-wide results. It should be focused on healthoutcomes for particular medical conditions over the full cycle of care.

The focus has been less on

understanding and reducing

costs than on learning to bill

creatively to maximize revenue.

Even initial steps at outcomes

measurement have yielded

startling benefits for patient care.

Costs and pricing information, provider volume and experience, methods and patientcharacteristics also constitute important information that should be clearly measured and reported.This will be a complex and varied undertaking, and the authors go into it in some detail. IndividualIPUs as well as medical boards and societies should all be involved in developing measurementstandards. General categories of information include outcome measurements - complications, errorsand failed treatments - diagnostic accuracy - patient registries to facilitate tracking of long termoutcomes - and patient feedback. Cost data pertinent to IPU activity over the care cycle should also b

measured and reported."It is striking that in a field so preoccupied with cost, the understanding of cost is often so primitive

The focus has been less on understanding and reducing costs than on learning to bill creatively tomaximize revenue. Charges have simply been passed on. The attention that has been paid to cost hastended in many cases to be focused on throughput, physician productivity -- e.g., patients per day --,and bargaining down the prices of big-ticket inputs -- e.g., implants, drugs, and supplies --.Minimizing these costs, however, may not be the best approach to improving value."

Only by combining relevant cost data with patient outcome data and patient characteristics can truevalue for patients be determined. An outline of the clinical and outcome information collected by theBoston Spine Group is provided as an example. However, this type of information has not been widecollected for a wide variety of reasons. This should all change as practice unit structures are developeand begin to compete on the basis of value delivered to patients.

"In a practice unit structure, information becomes the central management tool. It is how leaders

evaluate IPU performance, measure the performance of individual contributors, and set priorities forenhancing care delivery. There needs to be a physician with clear responsibility for practiceinformation, and an administrator to coordinate the process of assembling information and preparingreports and analyses. While there can be a central support group, the fundamental responsibility forinformation must rest with each practice unit."

ThedaCare and Sentara collect outcomes data on individual physicians. Even initial steps at outcommeasurement have yielded startling benefits for patient care. The Cleveland Clinic is moving torequire all clinical departments to develop and publish outcomes data. The authors provide ClevelandClinic reports and excerpts in an appendix to the book. Other hospitals are following suit. Thissupports their marketing efforts by demonstrating their commitment to improvement and patient valu

Billing practices:

Providers have to change their billing practices. The patient must receive a single bill that can bepriced in advance for each care episode or cycle.

The current system has been misshaped - like so much else - in response to the reimbursementpractices of third party payers - primarily Medicare. With rising deductibles and expanding use ofhealth savings accounts, providers are going to increasingly have to respond to the patients themselveHealth plans and employers, too, are likely to increasingly want single, unified bills. This willbeneficially force doctors and hospitals to work more closely together in pricing and integratingservices.


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Care cycle pricing is not capitation, the authors stress. It requires precise specification of care cyclesso that unexpected complications can be separately priced when they occur. An increasinglycompetitive health care environment is going to force this rationalization of billing practices. Thoseproviders that demonstrate superior outcomes will be able to justify higher prices or will profit fromgreater market share.

"Those providers that can begin to offer such pricing models to

health plans and patients, together with robust data on results tosupport them, will be in a position to gain market share. In this andin so many other of the areas we have discussed, providers caneither find reasons to resist change or become leaders. Thoseproviders that move proactively to align their practice with valuewill not only better serve patients, but also will increasinglyprosper as competition on value grows."

Marketing:The focus of health care marketing must be practice unit excellence.

Reputation plus breadth of services, convenience, external referral relationships and word ofmouth are inferior or at best secondary factors to patients. Concrete evidence on experience and resuwill attract patients, but is today mostly lacking. Instead of mere general claims, providers "should

begin to disseminate the information patients really want -- their experience, expertise, methods, andresults."

The "brands" that count most to patients are the brands of the individual practice units, not the brandof the broad institution. Practice unit brands must be based on information about experience - abouthealth care results and patient value.

Expansion:

Individual practice unit expansion opportunities lie in two geographic directions. The first isdeeper penetration of a local market based on superior outcomes for patients with particular medicalconditions.

Then, there are opportunities for broader geographic expansion. There are regional, national an

even international expansion opportunities. With expansion comes the opportunity to "leverage scaleexpertise, care delivery methods, staff training, measurement systems, and reputation to serve morepatients."

"A rising number of patients in the practice unit feeds economies of scale, the subspecialization ofteams, and more efficient division of labor across locations. Ultimately, the best providers in a practiunit can operate nationally through extensive networks of dedicated facilities. While this possibilityseems radical today, the main barriers are attitudinal and artificial -- e.g., state licensing requirementsand archaic corporate practice of medicine laws."Expansion by a mere increase in the range of services offered locally has little to do with patient

value, and will be a losing strategy in competitive health care markets. Services that lack the scale tosupport experience and develop excellence will lose out to individual practice unit competition as itexpands into local markets. There are only limited opportunities for synergies from expansion ofservices offered, and that is just a one time benefit.

There are a variety of ways geographic expansion can be organized, but the integration requiremen

remain. The authors offer several models involving managing partners or by taking over existingfacilities or building new facilities. However, "unified processes, common information infrastructurecommon performance measurement systems, shared training of physicians and other staff, andefficient division of labor by location" must take place under an integrated management system.

Rural hospitals can participate through geographic integration models encompassing contiguous


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rural regions and through regional centers. "There is no reason that rural institutions, through medicaintegration and careful choice of partnerships in complex practice units, cannot offer truly world-clascare at high levels of efficiency to their communities." Primary care practice "will increasingly becomthe front end and the back end of integrated care cycles."

The authors note Sentara's remote monitoring of several small intensive care units to illustrate the

substantial benefits in cost savings and reduced mortality rates possible by having a remote physicianalways on duty. Late night calls are referred to the remote physician instead of constantly beeping offduty physicians. Broader geographic service areas could assure excellent providers for patients even iremote communities.

"Local physicians could deliver care in state-of-the-art facilitiesand enjoy the benefits of expertise, training, and management bythe best in the world in their field. Consultation on any aspect ofcare would be easy and instantaneous. Referrals of complicatedand specialized cases to an appropriate center would become thenorm. Continuity of care after treatment elsewhere would beautomatic. Physicians, nurses, skilled technicians, and managerswould be trained, measured, and coached by true experts and havea career path in their practice unit across locations based on their

skill level, experience, and performance."Reorganization for Value-based Competition

Effective competition:

A transformation based on IPUs organized around specific medical conditions is required foreffective value-based competition The authors offer an extensive outline for how current systems cantransform themselves.

A "Care Delivery Value Chain" is described for restructuring IPUs. It is an analytical toolproducing customized results for different medical conditions and classes of patients. It is not a rigidframework. Support activities - including contracting, billing, facilities management, etc., have to beconfigured for the purposes of the practice units and medical conditions.

Care delivery value chains begin with monitoring and prevention, then continue through diagnosing

preparing, intervening and rehabilitating. How patients access and move through the system, how theconditions are measured, and how patients are informed and educated are concerns throughout thevalue chain process. There are feedback loops at every stage of the value chain based on patientcondition and response.

"The iterative character of care delivery is inherent in medicine to some degree, but can be reducedby careful design of methods and reduction of errors. Iteration or recurring effort is a danger sign inany process or business. Much of today's iteration is caused by mistakes, poor processes, andinattention to the full care cycle. An incorrect diagnosis, for example, can send a patient down anentire care cycle that is ineffective or even harmful, making iteration inevitable. Excellent providerswill tend to minimize iteration. Analyzing the incidence, nature, and causes of iterations in care is animportant aspect of improving patient value."

Just engaging in the value-based competition transformation exercise can rationalize the care givingprocess with major improvements in efficiency and in health care outcomes. The authors provide

extensive guidance in this important process.

Harnessing the power of information technology is a vital part of this process - not just for billingand records but as "a platform for integrated, results based management." This requires the patient-centered organization of data. Information "silos" are of little utility. The integrated practice unit andthe medical condition are the units for the aggregation of information. Thus, the practice unit must beinvolved in the design of the system. Rolling out the system in logical stages is also vital. TheCleveland Clinic information technology infrastructure is cited as an example.


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Professional skill can be developed in a systemized way once results are reported and appropriatelyincluded in the data base. This is a major advantage of dedicated practice unit systems, and the authostress its importance. They provide examples of major cost savings and reduced mortality rates fromthe development of relatively simple procedural changes. Practice guidelines such as are currentlyfavored are just the starting point.

"The goal is not standardized or generic medicine, but excellent

results. Providers can learn from guidelines, the practices ofexcellent centers, and their own experience how to transform andimprove their structures, methods, and facilities to deliver betterresults."

Barriers to value-based

competition:

Third party payer reimbursement practices and federal and state regulations create major barrierand disincentives for the development of value-based competition.

Vested interests in the current system and simple inertia also make change difficult. A shortage management skills within health care providers makes any change a challenge.

"Medical education does not equip young physicians for their role in a value-driven health caresystem, nor does it serve the needs of experienced physicians."

Professional attitudes also create obstacles. Professional independence is prized, and physicians wan

to handle an array of cases."The challenges of getting physicians together into integratedpractice units, organizing care around care cycles, and engaging indisciplined information collection and process improvement arecompounded by the academic medical setting, where the focus ontraditional specialties is even greater because of the research andteaching missions."

Examples of how these obstacles are being overcome in both health care practice and medicaleducation are provided by the authors.

Third party payers:

It is in the interests of third party payers to encourage and support the transformation to value-based competition.

This will require significant changes in their attitudes and reimbursement practices. They, too, murefocus on health value for patients rather than on just reimbursement for costs. Major benefits forboth cost containment and member health will flow naturally from that change. For private healthplans, the transformation will also create substantial competitive advantages.

"It will be difficult for some plans to move beyond the discount mind-set, the attitude that providersand members need top-down micromanagement, and the culture of denial. We are encouraged,however, by the growing number of plans that are beginning to address these challenges, withpromising results. As with providers, those health plans that move early to embrace value-basedcompetition will reap enduring benefits."

y Instead of restricting the choice of providers and treatments, plans should be providinginformation that facilitates such choice and patient management of health.

y Instead of micromanaging providers, plans should measure and reward providers based onhealth results.

y Instead of complex and costly administrative activities, plans should minimize administrativneeds and simplify billing.

y Instead of competing on the basis of minimizing premiums, plans should compete onsubscriber health results.

There are tremendous cost savings available from the simplification of the administrativeprocedures of both payers and providers, and from the achievement of superior health outcomes. Theauthors explain and earnestly advocate the desired changes. The current top-down regulation of


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processes is a losing and ultimately costly approach."A basic tenet of economic and management theory is that it makes more sense to set goals and

measure results than to specify methods and try to enforce them. Patients should be assisted inaccessing the truly excellent providers in a given service, not spread among the excellent and themediocre. - - - Those health plans that are moving to build quality-based networks - - - are finding thathe excellent providers often will offer more favorable fee structures because of their inherent

efficiencies."Unfortunately, the

opportunities and incentives toshift costs will not disappearunder any pervasively thirdparty payer system that coversordinary costs. Inevitably, thirdparty payer systems that shieldmembers from ordinary costswill continue to pose majorobstacles to rationalization ofhealth care and the properfunctioning of health caremarkets. Obviously, it will bethe government third partypayers that will be the worstoffenders.

Pay for performance rewardsare always higher payments

when they should be increased

patient flow and greater margins

from efficiency and expertise.

Current "pay-for-performance" policies concentrate on practices rather than results. The reward always higher payments when it should be increased patient flow and greater margins from efficiencyand expertise.

Health plans should play a major role in facilitating patient care through the entire health care cycleand in accumulating dataon health care outcomes, the authors stress. They recognize that this willinvolve some substantial additional costs that will have to be reflected in premium rates. These highepremiums will have to be justified by a record of superior member health results if they are to beviable. The authors provide recent examples of health plans that have published health outcome

improvements from their disease and risk management efforts.

Independent health care plans have far more flexibility to engage in this kind of competition thanintegrated payer-provider plans. The independent plan can move subscribers to the best providers andto new, more effective treatments. The integrated payer-provider "must depend on processimprovements or cost controls by a fixed set of providers."

Here, too, it is competition that will ultimately drive these reforms. The authors provide anextensive outline of the measures health plans can take to shift to value-based competition. They aresimilar and complimentary to the steps advised for health care providers. They involve multiyearsubscriber contracts as a basis for involvement in full cycle care for particular medical conditions,including "providing health information, counseling, and ongoing support to members." Indeed, they

should develop specialized health condition management units and subunits for reasons similar tothose supporting the development of provider IPUs."Some health plans, such as CIGNA, are beginning to move in

this direction. Such plans have units responsible for casemanagement of acute care in a number of medical conditions, andother units responsible for disease management for some chronicconditions. Such a structure is a good start, but can be extendedacross all the important medical conditions. Ultimately, thestructure has to embrace the care-cycle model rather thanartificially separate acute and chronic care."


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Information collected over thefull cycle of care will reveal the

most skilled diagnosticians and

cut down on duplicate testing,

among other things.

Data for stroke, heart and

diabetes care indicates that the

highest skilled providers

routinely prove the most efficientand least costly.

All member health records should be accumulated in a member information management unit.Objective information about health outcomes would facilitate member choices of providers andtreatments. Each provider would be required to provide this information on results, providerexperience, methods and patient attributes. Information should be collected over the full cycle of carefrom diagnosis to disease management and prevention. This would reveal the most skilleddiagnosticians and cut down on duplicate testing, among other thing.

The authors acknowledge that sources for all this information are inadequate and sometimes not eve

available at present. But each plan already has some of this data, Medicare has much claims data, andoutcome data is already collected for some particular diseases such as dialysis and transplants.Providers should routinely be asked for this data.

"The health plan, when it is not wedded to any provider network, should be able to be more objectivthan any provider, and better placed to recommend a regional center over a local provider if this isjustified. By imparting results information and support to patients and physicians, health plans willbecome the crucial market makers and enablers of value-based competition."The authors cite Harvard Pilgrim and United Health Group as moving in this direction. Health plans

do not have to do all this in-house. They may outsource these requirements for highly specializedconditions such as transplants, end-stage renal disease, infertility treatment, neonatal cardiac surgery.

United Resource Networks offers such data on organ transplants to health plans nationwide. They dnot make the choice of provider, but explain the health outcomes and cost data to the patients andreferring physicians who do make the choice. Preferred Global Health is an international organizationthat specializes in information about 15 serious diseases. As a result, patients achieve better outcomeat significantly lower costs. United Resource Networks is expanding its services to include some aducancer patients, neonatal congenital heart disease and other health conditions. The authors advise thatplans cover reasonable travel costs to encourage the use of best providers.

Data for stroke, heart and diabetes care indicates that the highest skilled providers routinely prove thmost efficient and least costly, the authors note. This is supported by data on a wide variety ofconditions identifying "hospital centers of excellence."

The health plan is in the best position to aggregate data over full care cycles, and in the bestposition to help patients navigate the system through the full care cycle. After all, primary care doctothemselves do not at present have the data needed to make referral choices. Frequently, all they havereputation information.

Health plans can and should provide much more. Health plans can put patients and their physicians touch with - and reimburse for the services of - specialty organizations like Best Doctors thatspecialize in the diagnosis and treatment of difficult cases. Once again, evidence indicates majorimprovements not just in health outcomes but also in cost savings from use of Best Doctors specialis

Some plans offer additional counseling as a premium service. The authors note several diseasemanagement system programs that have achieved substantial gains in health outcomes and reducedcosts, especially for chronic conditions. Blue Cross Blue Shield of Minnesota (BCBSMN) covers 17

diseases in its management program. It compared results with employer-funded plans that did not optto pay for this service."In its first year, BCBSMN reported a 14 percent decrease in the rate of hospital admissions, an 18

percent drop in emergency room visits, and a return of $2.90 for every dollar invested -- for a totalsavings of over $36 million -- relative to a similar cohort that was not enrolled in the program."

BCBSMN keeps expanding this program. Chronic conditions account for about 75% of health careexpenditures - a percentage that keeps rising.

Reimbursement policy must not Risk assessment and disease prevention programs are now being offered by some health plans.


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