What should the ideal system look like and how can reimbursement mechanisms reward cost-effective care? This is a truly significant question, because although suggestions have been made, nobody has yet figured out how to turn any proposal into practical reality.

The Ideal System

The ideal system would take a book to describe, too much for a brief talk. Let me just sketch the general idea.

First, the ideal system would integrate financing and delivery, not necessarily as in common ownership, but in the sense of incentive alignment and collaboration and coordination. Providers would accept responsibility for managing resources and benefit from improving care processes. This has to mean per capita prepayment so that one can transfer resources smoothly from acute care to preventive services—when we can decide which preventive services will reduce needs for acute care. Also, the ideal system would integrate providers and populations, so that the providers could plan for or contract with the right resources to care for their defined populations and be able to practice population medicine. From this would emerge an appropriate emphasis on primary care and prevention. There should be an integration of the full spectrum or continuum of care—inpatient, outpatient, primary care, home care—to provide care in the least costly and most appropriate setting, so that care in the different settings is integrated. One organization would control and be responsible for all the processes so that quality lapses arising from missed handoffs could be addressed and corrected, rather than blaming them on the other party. The ideal system would integrate medical groups or associations to assure that the right specialty mix was there and that there is teamwork in referrals and care processes. And there would be optimum use of para-medicals. Doctors should be integrated with hospitals, so that the physicians could work to reduce the cost of hospital care. Hospitals should be integrated with each other into some kind of systematic relationship, so that there is appropriate regional concentration and sharing of resources. Information would be integrated, so that every caregiver has prompt, convenient access to comprehensive medical records of the patients they treat so that patterns of care can be studied conveniently and care processes improved.

In the ideal system, continuous quality improvement would be a way of life, including the study of practice variations, benchmarking, learning from experience, and process redesign to strive constantly to bring down costs. Also, the ideal system would innovate to become more and more patient friendly; it would include tertiary and experimental care referral centers, usually academic health centers, which would contract with the ideal delivery systems and also be supported for public goods they would provide.

Possible Reimbursement Mechanisms:

What kind of reimbursement mechanisms would help or encourage this to happen? Everyone should have a responsible, informed, individual, multiple choice of health care delivery system in a managed competition framework. This means there should be a framework that would create price elastic demand, so that people would move from one system to another to save money. The payment system should compensate for health risk selection and provide equitable rules and relevant information to consumers. There needs to be a wide choice, so that people are not forced into a restrictive HMO against their will; but, particularly, there needs to be a responsible choice so that those who choose more efficient systems would be able, personally, to enjoy the savings and so that such systems could attract members.

It is essential that if people join an efficient system, they should be able to keep the savings, or if they want to choose one that is not cost-effective, they should have to pay the full price difference from their own pocket. Individual choice is important, so that each person can get what he or she prefers, and informed choice is important so that people know what they are getting. To create competition, multiple choice should exist in those regions where the population can support it.

Indeed, there are a few models like this in this country. Of course, the Federal Employees Health Benefits Program is like that—it is a defined contribution with a very wide choice of plans. Others include The California Public Employees Retirement System, The University of California, Stanford University, and Harvard and Minnesota's Buyers' Health Care Action Group (BHCAG). Unfortunately, this is not widespread. However, with the exception of BHCAG, these competitive models mainly provide competition among alternative insurance carriers, usually not delivery systems. The competition that is needed is among delivery systems, because they produce most of the value added. So purchasers ought to foster alignment between delivery systems and carriers so that choice of delivery system becomes choice of the associated carrier.

A recent survey of the Fortune 500 companies defined "managed competition" as choices, responsible choices (as in the case of defined contributions), and information for consumers, and found that less than four percent of the Fortune 500 companies practice managed competition. Thus, this is not a market in which an ideal system practicing cost-effective medical care can sell itself to most employment groups.

Why Has This Failed to Happen?

Why have employers not adopted the model of rational incentives and one that was of demonstrated practicality? Understandably, employers wanted to use health insurance to attract and satisfy employees, to differentiate themselves in the labor market, and to attract and keep their employees.

Thus, the company's own health plan, as an attractive alternative vis-à-vis others, became more important than a vision of a pooled purchasing model in which everybody has choices and competition regardless of the identity of any individual's employer. Thus, the typical company started with one indemnity carrier, because with indemnity insurance there is no point to having multiple carriers. The company paid either the whole or a very high percentage (80-100 percent) of the premium, both to take advantage of the tax break and also to avoid creating targets for union organizers, or in those cases where the companies have unions, acceding to the union's demands to make the employer pay the whole cost.

Later, when cost containment was needed, they adopted Preferred Provider Networks as the least disruptive model for their employees; the employees would not have to change doctors, and it would appear as if little had changed. When Preferred Provider insurance proved to be inadequate, some employers imposed HMOs on whole groups. This was a disastrous mistake and a fundamental cause of the backlash. Also, it led employers to demand that HMOs include in their networks all the providers that their employees might wish to see, thus destroying their ability to select providers for quality, economy, and teamwork and to bargain for good terms. It is a great irony that so soon after employers and insurers won the right to contract selectively with providers, overthrowing "any willing provider," they reinvented it. Many employers offered some HMOs as a choice because some employees wanted them. Many did not offer choices, because of fear of administrative complexity or adverse selection against the company plan. Moreover, unlike today, institutions' ability to broker multiple choice economically did not exist in the private sector. (Now, there are companies that can help to do this.) However, a few employers did adopt defined contributions. American Express and a number of universities took that route and realized substantial savings from competition.

But, very few employers were willing to do defined contributions, because they were afraid it would seem like a take-away for some employees; or because it made things explicit that previously were implicit; and because making the employer pay the whole premium has high symbolic value for unions and for some firms with employees embodying high human capital. Thus, a great majority of employers did not find it in their interest to adopt the model that would give the ideal cost-effective system a fair shot at the market. They have no right to complain if their costs are running out of control again.

How to Reach the Goal

There is a public good at stake, and collective action is needed. It would help enormously if the medical profession accepted responsibility for resource management and cost containment as a moral necessity and incorporate that into its value system. Yet, that might not be possible, as the training programs become increasingly more dependent on sophisticated technology.

Also, it would help a great deal if large employers would take the lead in forming insurance exchanges to broker multiple choice of plan economically. It would also help if employers and unions could find a way to agree on defined contributions.

Somehow, there must be a limit on tax-free employer contributions to health insurance and some way of requiring defined contributions in tax-favored employer programs. This would result in a saving for the employees who choose cost-effective health systems, so that they have some reason to choose them and some reason to accept the limitations that often go with economizing.

There needs to be a realignment away from the dysfunctional, all-inclusive carrier HMO that insulates delivery systems from consumers. For instance, if a medical group in California is contracting with them and if it reduces its capitation, it loses money without attracting any new members because the premium is mediated through the HMO. The HMO squeezes them and still charges the customers what ever the traffic will bear. Thus, we need to transition away from that and to delivery systems that face the market directly in partnership with carriers that serve as their marketing arm. In a competitive market, delivery systems, rather than carriers, should decide what to charge There should be subsidies for starting exchanges and strong incentives for employers to join them. An "exchange" means an efficient mechanism to present multiple choice to every employee and to keep track of it and transmit the information promptly and accurately to carriers and employers. Finally, academic health centers should be supported for the public goods they provide with payment methods that reward efficiency and reward ways to reduce the costs. That would be an innovation. This would include such things as fixed dollar payments per resident for rational numbers of residents—perhaps 110 percent of U.S. medical graduates—with financial transparency and quality accountability.