For the amount we are currently spending on health care in the United States (about $2.4 trillion a year, 16.6 percent of the GDP), it would be possible to provide quality health care for all—if organized rationally. The problem? The US health care system is uncoordinated, rife with perverse economic incentives, and lacking in management systems that promote quality and efficiency. Frequently, health care providers respond to proposed cost-reducing innovations by claiming they will cause providers to lose revenue—which is often true. The answer? Competition. Not dog-eat-dog, race-to-the-bottom, lowest-common-denominator competition but rather the kind of competition that forces doctors and providers to benchmark what they are doing against what others are doing, and continuously improve. Value for money must be considered as valid for health care as it is for anything else.

Health care in America is dominated by the small-practice, uncoordinated, fee-for-service model. The system is oriented to care for acute illness, although more than 75 percent of spending pays for care to people with chronic conditions. As Congress is starting to see, fee-for-service punishes cost-reducing innovations and pays even for inferior-quality care. (Only a few months ago did Medicare finally begin to balk at covering some of the consequences of poor quality, such as infections caused by hospital error.) The fee-for-service approach rewards high-cost and duplicative diagnostic tests. It will probably take Medicare years to figure out how to give doctors a serious financial incentive for avoiding errors. At the same time, as a study by RAND has shown, the fee-for-service model fails to provide much appropriate (and often less lucrative) care, such as chronic disease management by nonphysicians.

One of the worst features of this nonsystem is that doctors have no business reason to invest in areas of IT that might help to rationalize how patients are cared for—and improve their outcomes as well. A recent study, conducted by the Institute for Health Policy at Massachusetts General Hospital in June of 2008, found that only 4 percent of physicians surveyed had “an extensive, fully functional electronic-record system,” and only 13 percent had a basic system setup. When doctors do not have a complete record of each patient’s history—with reminders of conditions they should be aware of before determining the treatment—they are more likely to make decisions that are bad for the patient and costly to the payer. Indeed, IT systems have been shown to reduce the demand for office visits; that may not be quite what the solo doctor wants.

The main alternative to this costly, dysfunctional, and dangerous state of affairs is an integrated delivery system, which coordinates care by using comprehensive electronic medical records. Accountability and affordability are explicit values of such a system. It stresses quality, efficiency, and teamwork in the doctors it chooses, schools them in evidence-based practice guidelines, and monitors their performance. Moreover, it can monitor variations in treatments and outcomes, analyze them, and feed back the results into better medical decisions. Doctors are typically paid salaries (rather than being paid for services), so their treatment decisions are not biased, even unconsciously, by financial factors. Instead, there are bonuses for patient satisfaction and quality.

There are many examples of excellent integrated systems.¹ Many of these have their own affiliated insurance plans so that they can pass the savings from their economical practices back to their enrolled members. They provide hopeful shoots of change. But they exist in an overall health care financing system that does not reward economy and encourage their growth. And so today there aren’t enough of them. We need a national system that provides strong incentives for all doctors and care systems to emulate these leaders. Competition among systems would produce more value, lower costs, and improve quality.

Why isn’t this model spreading faster? The status quo is tough to budge. For a century or more, the medical profession fought for individual “free choice of a doctor” at all times, rather than a system where patients opt to limit their choices to one plan for a year at a time in exchange for better care at lower cost. The notion that “if it costs less, it must be inferior” is deeply rooted. Medicare might never have passed in the 1960s if it required, or even encouraged, a different payment system. Forty years later, fee-for-service is deeply entrenched in Medicare. Another barrier to change is the employment-based health insurance model. The key problem here is that most employers do not offer their workers cost-conscious choices of delivery systems. Small companies feel constrained by their size; large ones typically pay 80 to 100 percent of the premium of the insurance plan of the employee’s choice. So there is little incentive for an employee to switch to a less costly plan, or for an insurer to offer one.

There is some bipartisan political support for nudging the system toward a more competitive national market for health care. In January 2007, Senators Ron Wyden (D-OR) and Bob Bennett (R-UT) introduced the Healthy Americans Act (S.334). The bill is based on the essential principle of choice of plan by cost-conscious individuals, such as a universal individual mandate to buy coverage, the same price for same coverage regardless of health status, subsidies for low-income people, and a cap on the exclusion of employer contributions from employee taxable income that would be phased out with income. The nonpartisan Congressional Budget Office has estimated that the federal government would break even on this plan by 2014.

The Committee for Economic Development (CED), a nonpartisan, nonprofit, Washington-based policy research unit sponsored by business and education organizations, has offered a plan that resembles S.334 but with a different framework. In the CED plan,² a new federal agency (akin to the Federal Reserve in expertise and political independence) would create “exchanges”—where sellers and buyers of health insurance would meet and make transactions—under a regulatory regime created by the agency. The exchanges would provide comparable and sufficient information on quality and consumer satisfaction, and such information, along with prices, would be readily available for participants to make informed choices. Starting with small employers, eventually all tax-favored employee health insurance would be purchased through these exchanges. Individuals would be fully responsible for premium differences, and there would be limits to tax exclusions for employer contributions. Government could use the large budget savings from this cap to expand subsidies for low-income people. Eventually, government would pay everyone’s way into the low-priced plan. In addition, the CED has recommended the creation of a well-funded, independent institute, well insulated from political pressures, to conduct comparative studies of the cost-effectiveness of technologies and treatments—information that will improve decisions for all players.

In the long run, creating value-conscious competition among health systems could drive United States health expenditures down to half what they will be if the current model continues. There will always be costly new technologies—and this can be a good thing if there is real value added. Innovation can indeed be expensive, but the ultimate goal should be to provide better and affordable health care for everyone, not to stop progress. Steady productivity improvements can help offset these costs. The United States can have it all—medical innovation, higher-quality care, and broader coverage, but not with a system based on the traditional model. The problem is not finding the right answers; it is finding the political will to coax them off the drawing boards and into practice.

¹ A study by RAND found that the Group Health Cooperative of Puget Sound produced care as good as that of its fee-for-service competitors—at a 28 percent lower cost. The Geisinger Health System (Pennsylvania), the Marshfield clinic and the Dean Health System (Wisconsin), the Park Nicollet and Mayo clinics (Minnesota), the Ochsner Health System (Louisiana), and Scott & White (Texas) are other examples of excellent integrated systems. The leading example is Kaiser Permanente, operating in nine states and the District of Columbia.
² Quality, Affordable Health Care for All: Moving Beyond the Employer-Based Health-Insurance System, Committee for Economic Development, November 2007.

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