To achieve a more efficient healthcare system as well as improve quality of care, providers and health plans must compete on quality, not just price.
Some brand-name competition over quality does exist among a handful of academic medical centers and prestigious organizations such as Mayo Clinic and Memorial Sloan-Kettering, but those are exceptions. Physicians, meanwhile, rarely compete by disseminating information on outcomes, leaving patients to rely on uncertain Internet-based physician quality rankings. And health plans generally do not compete on quality-of-care attributes of their services or the performance of physicians and hospitals in their networks. This failure to compete is a driving factor behind the statistics on poor quality of care across the U.S. healthcare system.
Nobel Prize winning economist George Akerlof has shown that incentives are necessary for organizations to compete on quality. In his famous example of the used car market, buyers who aren't given information on the quality of the cars will focus only on cost, unwilling to pay more for used automobiles of unknown quality.
In healthcare, three main failures account for the lack of competition on quality. They are:
* The failure to tax employer-paid health benefits. If taxed, employer-paid health insurance would begin to be less common. An individual-based health insurance system without the involvement of employers would be much more conducive to the introduction of quality of care in the marketplace. That's because with today's highly mobile workforce, where job turnover is between 12% and 16% per year (higher in agriculture, construction and personal services), there is little incentive for employers to invest in health plans that provide good preventive care and superior treatment that may result in lower costs later on. With high turnover, subsequent payers would reap the benefits of improved quality of care, taking advantage of the greater investment of the initial employer and health plan. Furthermore, employers have little incentive to invest in individuals who are about to retire due to disability or age.
In contrast, if there were an individual-based health insurance system people would retain their health plan whether employed with a firm, self-employed, unemployed, retired or disabled. Individuals would choose a health plan during a yearly open-enrollment period. They would buy health coverage in the same way that they purchase automobile insurance, without regard to employment status. Income-adjusted premiums may be needed to help those with lesser incomes if universal coverage is desired.
Individual-based health insurance is frequently found in many European countries and Israel. In an individual-based system, individuals might belong to a healthcare plan for many years or decades. There would be greater incentives for the health plan to invest in quality of care to save in the long run. Precautions will be needed, however, to ensure that health plans are not avoiding high-risk enrollees.
* Adverse risk selection. If health plans were to compete on a quality-of-care basis, the plans that provided the highest quality of care would attract the highest-risk enrollees in the open-enrollment period, increasing their costs. Therefore, a risk-adjusted payment should be applied to each competing health plan. Such payments have been used to prevent cream-skimming, including through the Medicare and Medicaid programs. Plans seeking higher payment will have incentives to improve quality of care for high-risk individuals.
However, achieving a perfect risk-adjustment payment has been difficult. Most such mechanisms have been able to account for only some two-thirds of the maximum predictable variance of about 15% to 20% in individual health expenditures. Most variance is unpredictable. The Medicare program uses the "principal inpatient diagnostic cost groups" approach, which includes the principal diagnosis that has the highest predictable future costs. The measure also includes age, gender and original reasons for Medicare entitlement.
Whatever the approach, health plans would be reimbursed by a neutral party (such as the government) based on the number and severity of risk of individuals enrolled. Each health plan would be required to pay into a pool to finance payments to plans with relatively high shares of high-risk individuals.
With adverse risk selection neutralized, competition will begin to take the form of the department store-style competition suggested by economics Nobel laureate George Stigler more than 40 years ago. Brand names will begin to develop for health plans in ways that Saks Fifth Avenue, Bloomingdale's, K-Mart and Wal-Mart have developed in retailing. That is, some health plans will begin to develop a reputation for quality of care, some will emphasize price, some will compete on amenities such as convenience and well-maintained facilities, and some will compete on a mix of quality and price. In this way, one could select a health plan without the need to evaluate extensively its local physicians and hospitals because it would deliver an expected level of service. Boutique health plans may even enter the market to appeal to those with special health needs. Akin to department stores, one might find health plans guaranteeing the quality of services delivered such as the accuracy of blood tests, imaging or other procedures.
Health plans would be reimbursed retrospectively while individuals would choose health plans based on their premiums and their perceived quality. Premiums may vary among health plans; plans that have experienced lower costs and can provide healthcare services more efficiently would have lower premiums.
* "Any willing provider" laws. Many states have passed laws that prohibit selective provider contracting by health plans. In the system I am describing, these laws would detract a health plan's ability to market itself emphasizing cost and/or quality. Reduced costs may be achieved by playing providers off against one another in order to achieve increased volume and lower costs. Improved quality can be maintained by contracting only with a limited number of hospitals and physicians whose increased volume may translate into higher quality.
Recently, the Supreme Court ruled that state any-willing-provider laws are constitutional. So far 17 states have enacted such laws to prevent selective contracting with physicians, while 13 states have passed such laws in regard to hospitals. Healthcare expenditures have been shown to be much higher in these states, all things held constant. No studies have shown the effects of selective contracting on quality, but there are a large number of studies which have shown a negative relationship between increased volume of surgical procedures and case-mix adjusted mortality rates.
Eliminating each of these three problems is essential to achieving true competition in healthcare, which in turn will make providing high quality of care a reality. Each is interrelated with the others, so all must be fixed.
Warren Greenberg is a professor of health economics in the Department of Health Policy at George Washington University, Washington.