True health reform must pick best services, change incentives

By Kevin A. Schulman and Frank A. Sloan


In his opening remarks at last week’s news conference, President Barack Obama spelled out why reforming our health care system is so important.

“If we do not control these costs, we will not be able to control our deficit. If we do not reform health care, your premiums and out-of-pocket costs will continue to skyrocket. If we don’t act, 14,000 Americans will continue to lose their health insurance every single day.”

As professors who study health management issues, we believe any serious plan to control health care costs must address the following three issues:

First, the health reform plan should reduce variations in how medicine is practiced. These variations account for as much as 30 percent of the costs in our health care system while providing no documented benefit to patients. Finding out which therapies work for which patients and which do not is central to eliminating waste. We should use this information to identify services that don’t provide value and eliminate them.

There are two proposed approaches, and either might work. One proposal is to create an independent health review board with federal oversight that would use the best scientific evidence to decide which services provide value and which do not.

The second proposal is to create an oversight group that will analyze the payment practices of health insurance plans and make recommendations for changing them. Either of these groups can help lower health care costs if their recommendations are voted into law by Congress annually. Second, we need to change the incentives in the health care system. Public and private insurers pay physicians and hospitals to provide more services, with little consideration of quality and necessity. The best health care comes from systems that provide high-quality care, not more care.

For example, the Mayo Clinic is arguably one of the best health systems in the world. Mayo’s physicians are on salary but are accountable to patients and the system for their performance. They’ve thought through every level of their system to improve performance.

Mayo is one of the few systems to accomplish this level of performance under the current incentive structure. By changing the incentives to reward hospitals and physicians that perform at a high level, we can achieve this level of performance nationwide. Third, we will have to make hospitals, physician offices and insurance companies more efficient. After we reduce practice variations and change incentives, we will find ourselves with a health care system that is unprofitable because it was built for the current wasteful system. For example, we may find that hospitals need fewer MRI machines because we now provide too many MRI scans unnecessarily.

There will be two ways to approach this problem: Let inefficient hospitals and insurance companies fail (think Lehman Brothers here) or provide limited grants or loans to allow inefficient hospitals and insurance companies to restructure their businesses for the new, more efficient health care system (think General Motors).

Congress can learn from recent experiences in Massachusetts, which passed a health care reform plan a few years ago much like the current national proposals. The state had simply increased access to health care without implementing major cost controls. The result was an acceleration in health care spending that is threatening the state economy, and a special commission has recommended major changes in payments and incentives for providers.

The U.S. health care system already consumes more resources than any other health care system in the world. This cost is borne in reduced wages, increased prices and lost jobs in this country. Current reform efforts should lead to a better system, not a more expensive one.

Kevin A. Schulman is a professor of medicine and business administration at Duke University, and the director of the Health Sector Management Program at Duke’s Fuqua School of Business. Frank A. Sloan is the J. Alexander McMahon Professor of Health Policy and Management and professor of economics at Duke.