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Patient-Centered Life-Cycle (PCLC) Value Chain--Process Reform: Value-Based Competition

Posted Oct 22 2008 6:27pm

Continuing the series on the PCLC Value Chain strategy [ click here for the first post in the series ], this post focuses on a second clinical process in need of reform, that is, the transformation to "value-based competition."

Current Competition Models are Misdirected

Healthcare market forces in America over the past decade have transitioned from managed care and capitation to integrated delivery (integration of health insurance with provider systems) to a vision in which providers compete to improve care quality and control costs, and consumers choose the best providers.[1]

There is now debate on whether competition should be redirected by:

  • Eliminating provider networks and encouraging informed, financially responsible consumers to choose the best provider for each condition
  • Encouraging integrated delivery systems with incentives for teams of professionals to provide coordinated, efficient, evidence-based care, supported by state-of-the-art information technology
  • Basing selection of particular healthcare services on local population needs and core competencies of the providers.
Why redirect competition? Because there's ample evidence that competition in our healthcare system today is misdirected, for example:
  • Instead of competing on the ability to prevent, diagnose and treatment healthcare problems … competition today is among health plans, hospitals, and networks
  • Instead of competing to improve healthcare value - the level of care quality per dollar spent over time … competition today focuses on cost reduction by transferring costs to someone else without reducing total costs
  • Instead of competing to create value at the level of health problems by developing expertise, reducing errors, increasing efficiency, and improving outcomes … competition today focuses on signing up healthy consumers, discounting prices to large payers and groups, consolidating for increased bargaining power, and cost shifting
  • Instead of competing at the regional and national level … competition today is local
  • Instead of competing based on distinctiveness by offering services and products creating unique value … competition today focuses on building full-line services, forming closed networks, reducing rivalry by consolidating with others, and matching competitors
  • Instead of focusing on obtaining and sharing information about providers and treatment alternatives for specific conditions … most information shared today is about health plans and consumer satisfaction surveys
  • Instead of helping consumers find the best care value for specific conditions, simplifying billing and administrative processes, paying bills promptly … payers today attempt to attract healthy subscribers, raise rate for people with health problems, restrict treatments and out-of-network services, and shift costs to providers and patients
  • Instead of focusing on developing areas of excellence and expertise by engaging in quality improvement programs and use evidence-based practice guidelines to enhance care effectiveness and efficiency, and to eradicate mistakes … providers today tend to offer every service, often below prevailing medical standards, refer patients with their own network if at all, spend less time with patients and discharge them quickly, and practice defensive medicine.[2]

Redirecting Competition

Redirecting competition in this way focuses on delivering better outcomes and reducing costs. Methods offered as ingredients for changing the current system of competition include:
  • Eliminate restrictions to competition and choice. Remove preapprovals for treatment or referrals, as well as network restrictions; enforce antitrust rules against collusion, excessive concentration, and unfair practices; and make co-payments and medical savings accounts more meaningful by applying high deductibles to give consumers incentives to seek high-value care, or else make people cost-conscious of their insurance premium and have clearly defined standardized benefit packages based on a community rated risk pool basis that allows unambiguous comparisons between different health plans.
  • Make useful information more accessible. Collect and widely disseminate appropriate information about treatments and alternatives; make immediately available information about providers' experience in treating particular health problems; develop, continually enhance risk-adjusted outcomes data; standardize some information to enable national comparisons.
  • Transparent pricing. Each provider sets a single price for each treatment/procedure, while different providers set different prices; price estimates are made available in advance to enable comparisons.
  • Simplified billing. Use one bill per hospitalization or period of chronic care; payers have legal responsibility for medical bills of paid-up subscribers.
  • Nondiscriminatory insurance. Eliminate re-underwriting; use assigned risk pools for those needing them; require health plan coverage that would create equity and value throughout the system.
  • Better treatment coverage. Use a national list of minimum required coverage; additional coverage results from competition, not litigation.
  • Fewer lawsuits. Provide more information that disclose risks and inform consumers of their choices; limit lawsuits to obsolete treatments and carelessness.[3]

New Care Delivery Models

There several care delivery models care, which focus on the establishment of collaborative, multidisciplinary teams of providers who deliver more coordinated care to their patients. These models include:
  • Integrated care."Integrated delivery systems" (IDSs) are built on the core of a large, multispecialty medical group practice, often with links to hospitals, labs, pharmacies, and other facilities, and often with sizable revenue based on per capita prepayment (as opposed to fee for service). Examples of IDSs include Kaiser Permanente, HealthPartners, Group Health Cooperative, Cleveland Clinic, Mayo Clinic, and Geisinger Health System). These systems execute processes to ensure the provision of appropriate, evidence-based care; offer the full spectrum of care coordination; use of comprehensive, shared patient records; and are able to improve efficiency on a large scale. Unlike a recommendation above, IDSs by their very nature restrict access to networks of providers.[4]

  • Integrated care versus selective diversification. Unlike "integrated care," the strategy of "selective diversification" focuses on selecting the particular healthcare services to offer based on local population needs and core competencies of the providers. Whereas integrated care can work well for organizations with mechanisms for governance that balances the authority of the system with the autonomy of key service units, selective diversification is more appropriate for organizations in which facility-specific local boards retain ultimate fiduciary authority. Under the selective diversification model, hospitals compete not for the entire clinical continuum, but for each service separately, which takes advantage of their local expertise, market potential and financial resources.[5]

Value-Based Competition

The cornerstone of value-based competition is for providers who demonstrate better results to gain competitive advantage for higher profits/income. That is, clinicians whose patients remain healthier longer, recover more quickly, and avoid complications--and who achieve these positive outcomes at a least cost--would receive more referrals, a higher payment rate, and/or other financial rewards.

Let me first define what I mean by "value." Value is measured by dividing the quality of care delivered by its cost, i.e., V = Q / C:

  • Q (Quality) is defined as the degree to which care is delivered safely, effectively and equitably. The care may include conventional and alternative interventions for treating illness, as well as wellness intervention for prevention and health optimization. Quality can be measured based process compliance standards, clinical outcomes standards, or both.
  • C (Cost) is defined as the degree to which the care is delivered efficiently and economically.

  • V (Value ), therefore, can be defined as cost-effectiveness ("bang for the buck").
So, in this sense, providers delivering the most cost-effective care are producing the greatest value for the consumer, and that value ought to be recognized and rewarded.

There is already some movement in this direction. For example:

"Seeing low fees for family doctors as a weak link in the nation's health care system, some big employers and health insurers are seeking new ways to pay doctors to reward high-quality medical care. An influential medical standards group plans to present a new model today [11/7/07] for helping employers and insurers to identify the best primary care doctors and to steer patients their way. Those doctors, in turn, would be paid for more services than are currently reimbursed under typical health plan payments for office visits.

The idea is to encourage doctors to meet with patients for more than a few minutes during an office visit and to also compensate them, or nurse coordinators, for communicating with patients by phone and e-mail outside office hours. Doctors would also be compensated for helping patients manage chronic conditions - like reminding diabetic people to take their insulin-- and would be encouraged to transmit prescriptions electronically.

The group proposing this model, the National Committee for Quality Assurance, a nonprofit organization focused on health care, plans to present its plan today in Washington at a big meeting of doctors, insurers and employers that provide health benefits."[6]

A related model promoting value-based competition on results involves having providers form "integrated practice units" (IPUs) that pull together the talent and facilities required to deliver coordinated care over the entire care cycle (i.e., each episode of care) for each patient. These IPUs would include all providers treating a patient and all services delivered by these teams, from diagnosis to treatment to rehabilitation and long term management, and even prevention. The IPUs focus on particular health condition for which they have expertise enabling them to demonstrate superb clinical results and efficiencies. Both risk-adjusted outcomes and costs would be measured over the full cycle of care; not for discrete interventions or procedures. Teams who have better outcomes at lower costs, i.e., deliver greater value, have a competitive advantage and receive more referrals, as well as financial incentives. These comparisons would be made at regional, national, and even world level, not only locally within their own healthcare system; patients would be given incentives to travel to the best providers. Successful IPUs would, therefore, gain ever greater experience treating particular conditions and would develop ever greater expertise and efficiencies, thereby continually improving the quality and lowering the cost of care delivered.

While coordinating care within multidisciplinary teams and rewarding cost-effective care are critical to improving our healthcare system, the IPU model has several shortcomings, including:

  • It is very difficult to categorize each patient's problems neatly into a finite set of standard medical conditions since they often have multiple (comorbid) conditions simultaneously requiring different treatments (e.g., Medicare patients are reported to suffer from five different chronic diseases at once). Thus, there is often need to deliver care across multiple conditions, which means such a complex patient cannot rely on a single IPU specializing on only one of his/her conditions. And it is unrealistic to expect complex patients to spend lots of time traveling to different IPUs, especially in rural areas where they may be few and far between.

  • It is very difficult to define and capture valid and reliable health outcomes data for rewarding good results, especially since (a) it could take many years for certain conditions to be resolved, which makes value-based payment a problem; (b) the actions or inactions of the patients themselves influence the outcomes, which means that both prevention of illness and compliance to treatment plans are both important factors to consider; and (c) there is insufficient use of health information technologies, along with the fact that most current systems do not handle comprehensive clinical outcomes data.

  • Specialists who are reputed to be "the best" in their field already have more patients than they can handle. This means referring more patients to them is hardly a reward since the have to turn them away.

For reasons such as these, I suggest that large, multi-specialty group practices (i.e., the integrated delivery and selective diversification systems described above) are better able than IPUs to provide high-value coordinated care to the average patients with multiple problems. And they should include patient-centered medical homes, which I discussed in my previous post.

Furthermore, we must focus on defining better measures of care value, which should go well beyond the quality metrics used today that are predominantly "process measures," not measures of clinical outcome (the results of care). For more about this issue, see this post.

In my next post, I examine how to transform current "pay for performance" into "pay for value" models that reward providers and insurers who offer high-value to patients/consumers.


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[1] Ginsburg, P. (2005). Competition In Health Care: Its Evolution Over The Past Decade, Health Affairs, 24, no. 6 (2005): 1512-1522. Available at http://content.healthaffairs.org/cgi/content/abstract/24/6/1512
[2] Porter, M. E. and Teisberg, E. O. (Jun 1, 2004). Redefining Competition in Health Care. Harvard Business Online. Available at http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id
[3] Ibid
[4] Enthoven, A.C. & Tollen, L.A. (2005). Competition In Health Care: It Takes Systems to Pursue Quality and Efficiency. Health Affairs. Available at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w5.420v11
[5] Robinson, J.C. & Dratler, S. (2006). Corporate Structure and Capital Strategy at Catholic HealthcareWest: Balancing mission and margin in the capital-intensive hospital industry. Health Affairs; 25(1), 134-147. Available at http://content.healthaffairs.org/cgi/content/abstract/25/1/134
[6] Freudenheim, M. (Nov. 7, 2007). A Model for Health Care That Pays for Quality. New York Times.Available at http://www.nytimes.com/2007/11/07/business/07care.html?_r=1&oref=slogin
[7] Porter, M.E. & Tiesberg, E.O. (2006). Redefining Health Care: Creating Value-Based Competition on Results. Harvard Business School Press.

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