At the Intersection of Health, Health Care and Policy Cite this article as: Mark V. Pauly The Trade-Off Among Quality, Quantity, And Cost: How To Make It−−If We Must Health Affairs, 30, no.4 (2011):574-580 doi: 10.1377/hlthaff.2011.0081 The online version of this article, along with updated information and services, is available at: http://content.healthaffairs.org/content/30/4/574.full.html For Reprints, Links & Permissions: http://healthaffairs.org/1340_reprints.php E-mail Alerts : http://content.healthaffairs.org/subscriptions/etoc.dtl To Subscribe: http://content.healthaffairs.org/subscriptions/online.shtml Health Affairs is published monthly by Project HOPE at 7500 Old Georgetown Road, Suite 600, Bethesda, MD 20814-6133. Copyright © 2011 by Project HOPE - The People-to-People Health Foundation. As provided by United States copyright law (Title 17, U.S. Code), no part of Health Affairs may be reproduced, displayed, or transmitted in any form or by any means, electronic or mechanical, including photocopying or by information storage or retrieval systems, without prior written permission from the Publisher. All rights reserved. Not for commercial use or unauthorized distribution Downloaded from content.healthaffairs.org by Health Affairs on September 22, 2014 by guest The Quality Journey By Mark V. Pauly 10.1377/hlthaff.2011.0081 HEALTH AFFAIRS 30, NO. 4 (2011): 574–580 ©2011 Project HOPE— The People-to-People Health Foundation, Inc. doi: Mark V. Pauly (pauly@ wharton.upenn.edu) is the Bendheim Professor in the Department of Health Care Management at the Wharton School, University of Pennsylvania, in Philadelphia. A N A LYSI S & C O M M E N TARY The Trade-Off Among Quality, Quantity, And Cost: How To Make It—If We Must The Affordable Care Act, with its subsidies, demonstrations, commissions, and study groups, embodies a considerable amount of regulatory and policy pressure on markets to improve the quality of health care. However, it is possible that this government-led movement will lead to a lot of talk about quality but not necessarily much improvement. A better strategy may be found through “disruptive innovation,” a market-driven approach that has balanced cost and quality in other industries. An example would be to provide lower-cost substitutes for some aspects of primary physician care, in the form of care at a retail clinic. Consumers might not perceive a clinic as a perfect substitute for physician care, but they might prefer the greater convenience and lower cost. Perhaps a little less quality for a lot less money might be acceptable to consumers and taxpayers, as we work to keep medical spending from siphoning off funds required for other needs. ABSTRACT C urrent public policy, as embodied in the Affordable Care Act of 2010, envisions using a combination of regulation and strong, externally imposed rewards and penalties as the way to move toward care of the highest possible quality.1 In this article I discuss alternative market-based arrangements as incentives for attaining a level of quality that balances benefits and costs, and I consider the potential value of such an approach in a future where it will be necessary to contain costs. This system can complement efforts to maximize quality for a given cost. I certainly do not oppose direct, cost-effective efforts to improve quality, but I want to consider whether improved quality at any cost should always be the only, or even the ideal, goal. Back To Basics As a preparation for the following discussion, let us consider what economic theory says about the role that markets play in producing appropriate 574 Health A ffairs A p r i l 20 1 1 30:4 levels of quality for consumers with varying preferences and resources. Services As Opposed To Goods The first thing to recognize is that medical care is different in several ways from many of the other things that we buy, although it is not different in every way from everything else. To begin with, medical care is largely a service, rather than a good. Services are “personalized” in a way that most goods are not. To receive a service, a consumer and a service provider must generally be in each other’s presence or have some other form of contact, and the specifics of their encounter will determine much about the quality of the service provided. This “personalization” can manifest itself both positively and negatively. For example, a service provider can tailor his or her service to the needs of a particular consumer, which may prove beneficial to the consumer. On the downside, other factors can lead to a lack of uniformity across encounters between providers and consumers that may not exist in the case of the provision of goods, since specifications for goods tend to be exact Downloaded from content.healthaffairs.org by Health Affairs on September 22, 2014 by guest and easily replicable. For example, a misunderstanding between a service provider and a customer or a service provider’s being distracted by personal problems can both lead to a customer’s needs not being met. It’s clear that providing services presents challenges to producing quality that are different from the challenges that confront a producer of goods. However, it’s worth noting that outside of medical care, concern about the quality of service in the great bulk of service-producing industries has not led to complex pay-for-performance arrangements or to a great deal of soulsearching about why quality varies and what, if anything, should be done about it from a public policy perspective. (The perceived decline in the quality of air travel, excused as a way of allowing buyers to lower costs by declining amenities such as meals, legroom, and checked baggage, may be an exception.) Thus, in most other sectors of the economy, things seem to have a way of working out with respect to obtaining quality without having to devise complex payment schemes to get it. But why is that the case? And what, if anything, stands in the way of things’ working out in the health care arena? A Restaurant Meal Think of a restaurant meal as an example to illustrate the range of factors that go into understanding quality, and how markets contribute to “things working out” in terms of adjusting quality and price to suit a range of preferences. For one thing, we know there is no uniform “restaurant meal.” Instead, there is a wide variety of both quality and the features and characteristics that contribute to that quality, and there is likely to be disagreement about exactly how those characteristics contribute to quality. Some qualities are hard to pin down—for example, how hot are the spices? There will be a range of options available to suit different preferences, and we wouldn’t expect any two people to agree on what level of spiciness is just right. Other qualities may lead to high levels of agreement about what’s better or worse, and may even be measurable. A fast-food hamburger ranks below a gourmet meal for almost everyone. For markets to function properly, consumers need information about the services or goods offered. In the case of restaurants, there are external sources of information about quality. These include government agencies to tell us about safety and nutrition, and restaurant guides and reviews to tell us about taste, dining experience, and price. To better understand the dynamics among quality, price, and demand, consider the following scenario. If a seller is able in some way to provide higher quality than other sellers who charge the same price, the initial effect is an increase in demand—in our restaurant example, reservations become hard to get—but that is usually followed by an increase in price. The basic message is that higher quality is automatically rewarded with higher price, to the extent that consumers perceive the higher quality and respond to it by choosing which service provider to use. Note that higher quality commands a higher price whether or not it requires higher cost. A brilliant chef or a charming maître d’ can lead to higher revenues just by doing what comes naturally. No artificial or external incentives need apply (except for the waiter’s tip). Whether higher quality will actually be supplied (and persist over time) thus depends on whether the additional revenue it can generate will cover the cost of improving quality. Sometimes it will, and so high quality will prevail in the market. But sometimes it will not—if consumers either do not value it or do not have the resources to pay a high additional cost— and then quality appropriately settles at a level below what is technically possible but that is economically efficient. The point is that there is a market-based mechanism to select and support an ideal level of quality, without the need for external control. Medical Services What distinguishes the case of medical services from the restaurant example? At least two things that are related to the basic market requirements noted above. First is the willingness and ability of consumers to “vote with their feet,” meaning that consumers of medical care don’t always respond to variations in price or quality in the way that one would expect. This may be because often there are only a few options (just one hospital in town) and because buyers are poorly informed and passive. Moreover, insurance confuses the process by which price influences consumers’ behavior in health care: The presence of insurance shields the consumer from the full effect of prices, which means that the party who decides what service to use (the patient) is not responsible for paying its full price. The upshot is that we must consider alternative strategies to determine and ensure appropriate medical quality to account for the peculiarities of the market for health care. We face a series of questions: Should we make a more vigorous attempt to replicate some of the competitive market story just told? Are there alternatives to the competitive market? And how will we know when we get closer to where we should be? April 2 011 3 0:4 Downloaded from content.healthaffairs.org by Health Affairs on September 22, 2014 by guest H e a lt h A f fai r s 575 The Quality Journey Quality At What Price? No one doubts that the quality of medical care has improved over the past 100 years. The chances that an American will benefit from a medical care encounter are now well above the 50 percent level for the average patient with the average illness treated by the average doctor that the Harvard University biologist L.J. Henderson allegedly said prevailed before 1910.2 But changing technology has been largely responsible for the growth in medical spending.3 The result is that modern care can work miracles, but only if one can afford to pay for it. Here is where the painful but crucial trade-off comes in. There is no doubt that if it is feasible to improve quality without using more resources, efforts should be made to do so (assuming that the efforts themselves do not cost too much). There is equally no doubt that health improvement has come at the cost of a higher level of total spending and of a higher per unit price for many goods and services. These higher prices have served to limit many Americans’ access to high-quality care (if it is not covered under their preferred provider organization or health maintenance organization) and even to insurance itself.4 Perhaps for most consumers and taxpayers, a little less quality at a much lower cost might be both a better balance and a necessary alternative to a future in which medical spending crowds out paying for other needs. But how might a transition to that approach occur? Why Settling For A Little Less Is So Hard To Do For other services, people accept lower quality at lower prices if their incomes are low or their desire for quality is not strong. But few people are willing to accept, or even discuss having, anything but the best in health care. Ironically, this taboo has probably led to worse outcomes— including unaffordable increases in Medicare costs and limits on access to, and denial of eligibility for, Medicaid—than would have occurred if we could had frankly faced the possibility and the desirability of having explicitly “multipleclass” quality levels in health care, such as highest-quality, medium-quality, and lower-quality care. Let us begin with a very useful puzzle: Why has technological change in other industries not been associated with the same kind of cost explosion that we have seen in health care? One reason is that in other industries, competition based on new technology has taken the form of so-called disruptive innovation.5 This process typically involves a market dominated by expen576 H e a lt h A f fai r s A pril 2 011 30:4 Few people are willing to accept, or even discuss having, anything but the best in health care. sive, high-quality technology until the introduction of a simpler alternative—which, because of that simplification, has somewhat lower quality along some dimensions and a much lower price. The archetypal example is the replacement of the complex, multifunction Xerox copier with the simpler and cheaper Canon alternative.6 The key concept is that even if the alternative is lower-quality or lacks some function, it is a better “value proposition”: the perceived value of what it could do for its price is greater than the perceived value of the dominant technology for its greater price.7 The strategy of increasing “net value” substantially while reducing some dimensions of quality has often been blocked in medical markets by legal restrictions, rules about scope of practice, accreditation procedures, and, as discussed below, political sensitivity to the provision of lower-quality care or coverage. And even Clayton Christensen, the originator of the concept of disruptive innovation, could not identify areas in health care where this strategy might work, offering instead only conventional exhortations to greater efficiency.8 The closest approximation we have had to what we might describe as health care that was “a lot cheaper and only a little bit worse” was aggressive managed care in the 1990s. However, a combination of political and market pressures eventually reduced the effectiveness of managed care so that it failed to contain costs—its chief purpose. The provider networks that succeeded it have achieved only modest price discounting.9 There have been some less drastic changes that have accomplished little beyond inconveniencing some patients and doctors: formularies and triple-tier insurance plans for drugs to push consumers away from high-price brands; the movement from inpatient to outpatient care to reduce costs from hospitalization; and the limited provider networks now prevalent in private insurance, but not Medicare, to narrow consumers’ access to a group of providers who agree to observe particular practice standards, accept Downloaded from content.healthaffairs.org by Health Affairs on September 22, 2014 by guest The challenge in health care is to develop quality measures that motivate consumers to make proper tradeoffs. lower reimbursement, or both. These changes all mean that health care is not what it used to be. But they have not caused so much as a blip in the rate of growth of health spending, even in the subsectors on which they were concentrated. Is there any way to link concerns about quality in health care more tightly to concerns about value, and to go beyond platitudes to identify better alternatives that could make a difference? Even more to the point, would such efforts be politically and culturally sustainable, or would they go the way of aggressive managed care, after it was associated in the public’s mind with socalled death panels? The Way Forward In spite of the reluctance of politicians and policy makers to explicitly offer products with slight reductions in quality in medical care, disruptive innovation might have a real chance if it were pursued with sufficient vigor and grace. One approach involves the use of retail clinics to provide limited services by nonphysician professionals in a more convenient and lower-cost setting. Such options have been growing and show promise, although their aggregate effects on total spending growth must be modest. A larger impact on cost could come from increased use of specially trained nurses and other professionals as providers of the full range of primary care services. On almost all of the observable dimensions that anyone can identify, nurse practitioners, physician assistants, and other similarly trained professionals can provide primary care that equals the average quality of primary care provided by physicians,10 but consumers in general need to become aware of this option. In any case, the physician alternatives have one unequivocal advantage: their lower cost. And even when the care they provide is of tech- nically equivalent quality to the care provided by a physician, the “disruptive innovation” model suggests that care by a physician alternative should enter the market at a lower price. This is generally how a new product of yet-to-bedetermined quality succeeds. It gains a foothold in the market based on a lower price, in the hope that consumers’ experience will convince them that it is nearly equal to its established competitors in quality, or at least of high enough quality that its lower cost makes it a bargain. Is The Market Ready ? One policy question is whether health care markets and their regulation are set up to try this kind of model. At the level of the individual consumer or patient, the answer is clearly negative, given the structure of most insurance plans. Under Medicare’s fee schedule, for example, a patient will pay less for a lower-price but roughly equivalent alternative only if he or she has to pay the 20 percent Part B coinsurance. Even this incentive is not large, and it is often canceled out by Medigap— supplemental insurance that Medicare beneficiaries can buy—or Medicaid for people who are eligible for both federal programs. Patients who have private insurance and belong to a preferred provider organization or face higher cost sharing have stronger incentives to choose a lower-price alternative. For them, the difference in price can translate into lower premiums, and lower premiums are definitely in the interest of an insurance plan trying to capture a larger market share. However, there has to be competition among insurers for this mechanism to work. In many small and medium-size cities, hospital consolidation and the formation of large specialty groups mean that competitive alternatives are hard for insurers to find, and even in large cities multiple insurers can be hard to find. In the current health care environment, there is no ready-to-use market model that would permit disruptive innovation through lower prices with modestly reduced quality. The obvious policy implication: Encourage competition. Are We Making Progress ? Another policy question is how to measure improvement in value relative to cost, in order to be able to tell if we are making progress. One of the beauties of the market system is that it does not require that external observers develop, argue about, and pay for elaborate ways to measure value: Consumers ultimately do that themselves and signal what they have concluded with their choices in the market. But precisely because health care markets are imperfect, consumers may think they are getting good value when they really are not. Thus, they need help in choosing, and policy makers need some way of knowing whether conApril 2011 30:4 Downloaded from content.healthaffairs.org by Health Affairs on September 22, 2014 by guest H ea lt h A f fai r s 5 77 The Quality Journey sumers’ choices really are appropriate. The challenge in health care is to develop quality measures that motivate consumers to make proper trade-offs. And that means the measure must be both accurate and capable of motivating the expected behavior. Moreover, even to imply that quality could be lower in some aspects—and that lower quality at lower price could be desirable—is challenging in health care because that idea has been taboo for so long. But there is always an appropriate skepticism about asserting the negative or zero value of more resource-intensive care. Some fully insured consumers just do not want to take chances, and this attitude seriously impedes change for everyone. There is always some possible case, no matter how rare or hypothetical, in which advanced capabilities or advanced training might have avoided a mistake and saved a life—and who would want to risk the chance of being that case for no gain? A Possible Peril Assuming that we can get the health care system to offer a better value proposition, even at the cost of some amount of quality, would we be happy with the results? There are a number of risks. For instance, we have not yet ensured that competitive markets will translate lower costs into lower spending,11 or that changes in health insurance that increase consumers’ responsiveness to price differences or outcome-based payments to medical homes will provide effective payment incentives.12,13 But the most serious risk has to do with the fact that different people value quality differently. This is true even among members of the middle and upper classes, where there is considerable evidence that the value of quality—and the willingness to sacrifice money, time, and distance traveled to obtain higher quality—varies considerably.14,15 Some people prefer the more restrictive and lower-cost health maintenance organizations (the type of plan that Kaiser Permanente offers, for instance), but many do not, even when they are well informed about what access they give up and what they could save. These may be true low values, reflecting the fact that a family with a very limited budget may have more important needs than high-quality primary care, say, or hospitals that make almost no errors. There is also evidence that the public sector behaves in the same heterogeneous way: Medicare is willing to pay more for quality for its beneficiaries than are many state Medicaid programs.16 Perhaps the world should not be like this, but it is—and it will remain so for as long 578 Health A ffairs April 2011 30:4 Our kit of remedies to treat low quality and rapid spending growth is not richly stocked. as we as a society tolerate wide variations in the distribution of income and wealth. There is no point in imagining that a health care system that provided for everyone care of the quality desired by upper-middle-class people who can afford the best would be economically feasible. If all we can afford to provide for some portions of the population is care of somewhat lower quality than the care other portions can buy for themselves, what do we do? We first need to note that the goal of uniform quality for all might not be feasible even if there were no limits on cost. To the extent that quality depends on the skills and motivations of a limited number of health professionals, there may necessarily be a difference in outcome. The best neurosurgeon in town can handle only a fraction of the neurosurgery cases; some patients will have to be treated by surgeons who are not the best. There will inevitably be disparities that we cannot avoid. Furthermore, even if it were possible for everyone to have as good an outcome as everyone else, using more resources to improve outcomes for those who place a low value on those improvements would not be efficient. For example, patients who have to choose between somewhat poorer outcomes at a lower cost and better outcomes but no money left after paying for them would understandably prefer the poorer outcomes. There will be discomfort with two-class or multiple-class medicine. Fairness may sometimes come to matter more than efficiency and cost containment in policy decisions. Still, frank acknowledgment now of the inevitability of twoclass medicine may be better than papering over current problems for the time being. Using Markets To Get Quality Right It is easy to understand the general economic rules that we would need to follow to establish an efficient market in health care: Distribute income or purchasing power as equitably as you want; provide good information about the quality levels of different providers and insurers; and allow vigorous competition among providers Downloaded from content.healthaffairs.org by Health Affairs on September 22, 2014 by guest and insurers in order to limit the higher-thancompetitive prices that monopoly power—in the cases of insurance or care markets—permits. But is this model really acceptable and feasible? Would we prefer to continue to use regulated settings over which we may be able to exert— or at least appear to exert—more control? Must we make a choice between efficiency and regulation? With its array of subsidies, demonstration projects, commissions, and study groups, the Affordable Care Act includes a considerable amount of regulatory and policy pressure on the health care market in an attempt to improve quality. Despite professed concern about the lack of competition in health insurance, it is fair to say that the act does not rely heavily on the concept of a competitive market. In fact, in the case of accountable care organizations and some other provisions, it takes quite the opposite approach. My concern in this article is that moving away from market models without replacing them with anything that has been proved to be effective in improving quality will lead to a large volume of talk about quality, along with considerable recrimination and finger-pointing, but not much improvement. One part of the problem is that we have partially misdiagnosed our current situation, making the assumption that quality that is less than the best we can provide is always a problem in design, to be corrected by redesigning the health care system. The other part of the problem is that our kit of remedies to treat low quality and rapid spending growth is not that richly stocked. Perhaps greater attention to increasing competition in the long term, and getting incentives for consumers right in the short term, is what we should emphasize. But the most important point to make is that disruptive innovation can, paradoxically, improve the effectiveness of efforts to maximize quality.With little competition, even monopolies choosing or required by regulation to provide the highest quality can become not only inefficient (using more resources than they need) but also misleading (because there is no solid criterion for better quality, let alone a way to assess differing quality). If we make an effort to foster reasonable alternatives with different combinations of quality levels and costs, combined with as good information as we can muster about how they compare to established services and providers, the outcome may be acceptable. ▪ NOTES 1 Lavizzo-Mourey R. Communities’ readiness to commit to high-quality health care. Health Aff (Millwood). 2010;29(6):1208–10. 2 Shalowitz JI. Implementing successful quality outcome programs in ambulatory care: key questions and recommendations. J Ambul Care Manage. 2010;33(2):117–23. 3 Pauly MV. Should we be worried about high real medical spending growth in the United States? Health Aff (Millwood). 2003:w3-15–27. DOI: 10.1377/hlthaff.w3.15. 4 Pauly MV. The tax subsidy to employment-based health insurance and the distribution of well-being. Law Contemp Probl. 2006;69(4): 83–101. 5 Hwang J, Christensen CM. Disruptive innovation in health care delivery: a framework for business-model innovation. Health Aff (Millwood). 2008;27(5):1329–35. 6 Euchner J. Managing disruption: an interview with Clayton Christensen. 7 8 9 10 11 Research-Technology Management. 2011;54(1):11–17. Porter ME, Teisberg EO. Redefining health care: creating value-based competition on results. Cambridge (MA): Harvard Business School Press; 2006. Pauly MV. “We aren’t quite as good, but we sure are cheap”: prospects for disruptive innovation in medical care and insurance markets. Health Aff (Millwood). 2008;27(5): 1349–52. Dranove D. The economic evolution of American health care: from Marcus Welby to managed care. Princeton (NJ): Princeton University Press; 2000. Committee on the Robert Wood Johnson Foundation Initiative on the Future of Nursing, Institute of Medicine. The future of nursing: leading change, advancing health. Washington (DC): National Academies Press; 2011. Pauly MV. Is it time to reexamine the 12 13 14 15 16 patent system’s role in spending growth? Health Aff (Millwood). 2009;28(5):1466–74. Rosenthal MB, Dudley RA. Pay-forperformance: will the latest payment trend improve care? JAMA. 2007; 297(7):740–3. Rosenthal MB, Frank RG, Li Z, Epstein AM. From concept to practice: early experience with pay-forperformance. JAMA. 2005;294(14): 1788–93. Gawande AA, Blendon R, Broide M, Benson JM, Levitt L, Hugick L. Does dissatisfaction with health plans stem from having no choices? Health Aff (Millwood). 1998;17(5):184–94. Braunstein JM, Morrissey MA. Determinants of rural travel distance for obstetrics care. Med Care. 1990; 28(9):853–66. Zuckerman S, Williams AF, Stockley KE. Trends in Medicaid physician fees, 2003–2008. Health Aff (Millwood). 2009;28(3):w510–19. DOI: 10.1377/hlthaff.28.3.w510. A pril 2011 30:4 Downloaded from content.healthaffairs.org by Health Affairs on September 22, 2014 by guest Health Affa irs 579 The Quality Journey ABOUT THE AUTHOR: MARK V. PAULY Mark V. Pauly is the Bendheim Professor in the Department of Health Care Management at the Wharton School. Mark Pauly stresses in this commentary that to make serious inroads in health care cost containment, we may have to give up some quality—a strategy that has been used in many other industries, from airlines to copiers and the grocery store meat counter. Pauly, an economist, says he was surprised that we have tried this to some extent in health care— aggressive managed care being exhibit A—but that so far political backlash or unacceptability in the market has blocked this approach. “As long as we continue to believe that there are ways out there to reduce costs enough to matter, while sustaining quality, I believe we will mistarget our efforts,” he 580 Health Affairs A pril 2 011 says. Pauly, who is on the faculty of the University of Pennsylvania, is one of the nation’s leading health economists and has made important contributions to the fields of medical economics and health insurance. His classic study on the economics of moral hazard, published in 1968, was the first to point out how health insurance coverage may affect patients’ use of medical services. Most recently, he has examined the topics of national health care reform, the individual insurance market, the effects of poor health on workers’ productivity, and the market for voluntary health insurance in developing countries. Pauly is an active member of the Institute of Medicine. At the University of Pennsylvania’s Wharton School, he is the Bendheim Professor in the Department of Health Care Management, as well as a professor of health care management, insurance and risk management, and business and public policy. In 30:4 addition, he is a professor of economics in the university’s School of Arts and Sciences. A former member of the nowdefunct Physician Payment Review Commission, Pauly has served on an advisory committee to the Agency for Healthcare Research and Quality and on the Medicare Technical Advisory Panel. He has been a consultant to the Congressional Budget Office, the Office of the Secretary of the Department of Health and Human Services (which supported some of his work on individual health insurance), and health trade associations. He has served on Institute of Medicine panels on public accountability for health insurers under Medicare and on improving the financing of vaccines. Pauly is a coeditor-in-chief of the International Journal of Health Care Finance and Economics and an associate editor of the Journal of Risk and Uncertainty. He received a doctorate in economics from the University of Virginia. Downloaded from content.healthaffairs.org by Health Affairs on September 22, 2014 by guest
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