Book Reviews
Redefining Health Care: Creating Volume-Based Competition on Results
By Michael Porter and Elizabeth Olmsted Teisberg. 2006. Harvard Business School Press, 506 pages, $35 hardcover.
Have you ever wondered why the medical marketplace is not more like markets for other goods and services? If so, this book by Porter and Teisberg (P&T) is a must read.
Annual spending on Medicare enrollees varies from less than $4,000 in Hawaii to more than $8,000 in Louisiana. Yet those states that spend more do not have better outcomes, reduced mortality, higher satisfaction, or better access to care. In a normal market, entrepreneurs monitor their competitors; and cost-reducing, quality- improving innovations are quickly emulated. Yet P&T argue that in health care wide differences in quality and efficiency—among doctors, facilities, and regions—persist for long periods of time.
Excellence exists within the U.S. health care system, and P&T identify numerous examples. Survival rates for heart transplant patients at the Cleveland Clinic, for example, are well above the national average. At the Texas Back Institute (in Plano), only ten percent of the patients end up needing surgery. But excellence appears to be distributed randomly— perhaps the result of the energy and enthusiasm of a few individuals at various institutions scattered here and there.
To explain this phenomenon, the authors have identified what they consider to be the single most important problem in health care; and it is a problem health economists tend to routinely ignore. To wit: we don’t bundle and price health services the way we would if the medical marketplace even remotely resembled an efficient, competitive market.
Take diabetes, for example. Care tends to be delivered in discrete bundles, each with its own price. No one provider is responsible for the end result (fewer emergency room visits, lower blood sugar level, etc.). This is because no one has bundled “diabetic care” as such—taking responsibility for final outcomes over a period of time—in return for a fee. P&T produce a rich smorgasbord of other examples of failures to bundle and price in sensible ways, and they argue persuasively that costs are higher and quality is lower as a result.
Further, the problems pervade every aspect of our health care system— from physicians who operate as independent agents, focused on their own specialties rather than on the patients’ conditions; to hospitals that try to be all things to all patients rather than specializing and becoming proficient in a few areas; to insurers who compete to avoid the sick rather than competing on their skills at healing and curing in efficient ways.
As an example of how the system works overall, P&T offers this stunning statistic: information technology investment averages $3,000 per worker in health care, versus a private industry average of $7,000, and $15,000 in an information-intensive field such as banking.
So what can be done? The authors take a management approach, not an economic one. Beginning with the idea that you can’t manage what you don’t measure, they would make reporting of quality-of-care data mandatory for the entire health care system. And they show that the publication of quality-of-care data alone can have immediate effects on hospital performance. They also produce elaborate diagrams of how various conditions should be managed—kidney disease, strokes, and breast cancer, for example—complete with information gathering, measuring, managing, and feedback loops.
Of course, efficient management requires entrepreneurs; and the authors clearly intend their book to serve as an entrepreneurial road map. But business economists are sure to ask why entrepreneurs have been so slow to seize the opportunities. Surely, the answer must be in our system of third-party payment.
The authors point to cosmetic surgery (where there virtually are no third-party payers) as an example of the value-based competition they applaud. They could have gone further. Wherever we find competition based on price—walk-in clinics in shopping malls, online sellers of drugs and medical tests, and Wal- Mart’s new $4 price for a month of generic drugs—the patient is invariably paying the bill.
Although the authors are favorable toward Health Savings Accounts and consumer directed health care, they do not mention a wider point. In today’s medical marketplace, doctors are unable to be entrepreneurial because the bundles and the prices have already been determined for them by third-party payer bureaucracies. To appreciate this fact, consider a world without third-party payment. Here is an imaginary conversation with a doctor speaking to a diabetic patient (my own example, not P&T’s): “You do not need to come to my office as often as you do. Most of our communication can be by telephone or email. For these consultations, you will pay less. I need to put your records on a computer so that I can take advantage of safety protocols and order your prescriptions electronically. For these quality improvements, you will pay a bit more. I’m also going to teach you how to manage your own care, and I’m going to charge for the instruction. But you’ll get your money back through fewer consultations. Also, I’m going to show you how to cut your drug costs by shopping in a national online marketplace, and I’m going to charge you for that advice as well. But you’ll get that money back, too, through lower drug prices.”
This conversation cannot take place in the current system because each of the bundles of care mentioned above are services Blue Cross does not pay for. (No e-mail, no telephone, no electronic records, etc.) Medicare doesn’t pay for these bundles either. Nor do most employer plans. However, this conversation, and thousands of others just like it, probably would take place if patients were managing their own health-care dollars and providers competed for their business, just as they do in other markets.
Walk-in clinics provide examples of the service bundles the authors discuss. These clinics are spreading like wildfire around the country, and they developed entirely outside the third-party payment system. Entrepreneurs created their own service bundles and set their own prices. They charged half the normal fee and provided better quality through closer adherence to protocols. Subsequently, most third parties began reimbursing the fees because they have concluded the services are cheaper than the alternatives. But, in doing so, they are paying for more competitively determined bundles at more competitive prices.
Entrepreneurship will eventually find ways around our bureaucratic third-party payment system. The more dollars that are controlled by patients, the faster that change will likely be. Redefining Health Care is an important contribution to understanding how the health care system can and should change.
John C. Goodman
National Center for Policy Analysis