The American Journal of Managed Care March 2005
Achieving Value in Healthcare
In the United States, almost half of healthcare spending
is paid for by public funds, mostly by the
Medicare, Medicaid, and State Children's Health
Insurance programs. Since the 1960s, these programs
have become a crucial component of the social safety
net and an increasing burden on state and federal budgets.
Medicare spending is already approaching 2% of US
Gross Domestic Product (GDP), which is more than 10%
of federal outlays. By the end of 2080, Medicare spending
is projected to rise, under current law, to almost 14%
of GDP. Increased Medicaid spending has provoked even
more immediate financing concerns, as increased spending
growth contributes to state budgetary woes.
There are no easy solutions to the challenges posed
by rising public healthcare spending. Advances in medical
technology and the aging of the population will continue
to put financial pressure on Medicare and
Medicaid. Appropriate policy will balance program costs
with the benefits gained. This balancing act is complex
because the individuals paying (taxpayers) are generally
not the direct beneficiaries of the care. Ideally, we would
like to create a system that promotes value for each dollar
spent. To this end, the articles in this issue of the
Journal present research that informs managers of
interventions to improve the value of care and informs
policy makers of issues that may lead to more effective
benefit design for public programs.
In most economic sectors, we trust the market to
yield economically efficient outcomes (ie, ensure value).
Consumers are assumed to make purchasing decisions
that reflect the benefits of consumption, relative to costs,
and competition among producers is relied on to hold
prices to appropriate levels. Yet we've known at least
since Arrow's seminal 1963 study that healthcare markets
are different.1 Information problems and the prevalence
of insurance weaken, if not sever, the connection
between consumers'valuation of medical services and
the provision of care. These issues, as well other institutional
details such as consolidated provider networks in
some markets, also dampen the extent to which competition
Healthcare policy has largely attempted to mitigate
these problems while still fundamentally relying on a
system of markets (for medical services and insurance)
to allocate resources. Even our public system has moved
to incorporate market features. Yet considerable disagreement
exists regarding how best to make healthcare
markets work. One school of thought emphasizes competing
plans. The Medicare Modernization Act has
revamped and renamed the Medicare+Choice program
(now Medicare Advantage) and touts new choices for
consumers. Similarly, the new Medicare prescription
drug benefit relies on competition among Part D plans to
constrain costs. These systems require consumers to be
informed about health plans (or prescription drug plans)
and make their plan choice prior to making their specific
decisions regarding care. In these models, the plans
have at least some influence regarding the care delivery
process, and enrollees are at least to some extent locked
into the systems they have chosen. Once the plan choice
is made, consumers are constrained in their behavior.
Another model of competition relies on greater consumer
cost-sharing at the point of service delivery with
fewer nonfinancial constraints on their behavior. This
model relies on products such as consumer-driven plans
and health savings accounts. In some cases these products
rely on organized systems (eg, preferred provider
organizations), to bargain with providers for low prices,
but the systems have a considerably reduced role relative
to traditional models of managed care plans. Most
important decisions are made by patients, with whatever
advice they receive from their provider. In theory,
such a model could lead to more efficient outcomes
because consumers are not constrained by plans at the
time they consume care, and they can weigh the costs
and benefits of different treatment options or healthcare
providers themselves without distortions that plans may
generate. This model more closely resembles the functioning
of markets in other economic sectors.
Although we cannot be sure exactly which benefit
packages consumers will favor, a successful healthcare
system will promote care in cases when it yields sufficient
value to justify the expense and limit care in cases
when the costs outweigh the benefits. Systems that rely
on consumers to make choices assume that patients can
appropriately weigh costs and benefits of different care
options and different providers if faced with the full price
of care. Existing evidence gives us cause to doubt such
claims. When faced with cost-sharing, patients cut back
equally on care deemed appropriate and on care deemed
inappropriate.2-4 They are less likely to take critical preventive
medications.5 Essentially, when left on their
own, healthcare consumers do not ration well, at least in
the opinion of outside observers. Can these consumers
be informed? Will they make better decisions? The evidence
is not yet in.
It may be that cost-sharing provisions can be designed
in a more efficient manner such as that advocated in
Benefit-Based Copay (BBC) designs.6 In BBC models,
copays are kept low for patients who would receive the
most benefit from the intervention. Increases in copayments
for drugs are common in today's marketplace and
they typically exemplify the distinction between standard
models of increased copays and value-based models.
If copays are raised for all drugs for all patients, some
will undoubtedly opt not to adhere to clinically appropriate
prescription regimens, the benefit of which would
be deemed by many to justify the cost. A better value
creation strategy would shield subsets of patients from
At the same time as these new high deductible plans
have been evolving, organized systems of care that
actively intervene to promote delivery of beneficial care
have become much better at targeting care, which in
turn contributes to value. Disease management companies
typically stratify consumers based on risk. Interventions
such as that outlined by Stankaitis et al in this
issue of the Journal involve stratification and management
of a subset of high-risk patients.7 This report illustrates
the potential that intensive use of information
technology and intervention can have on improving
care and generating value. Information systems implemented
at a systems level, such as that explored by
Rask et al, attempt to identify situations in which system
level interventions can prevent harm (adverse drug
reactions) and create value.8 Coverage policy, discussed
by Foote et al, although a blunt tool, can also
help target care.9
Organized systems of care can also offer advantages
in terms of price negotiations. If left on their own, healthcare
consumers would likely face much higher prices
than those received by large care systems. Even many
consumer-driven plans, in which patients face the cost of
care at the time of service, rely on systems to negotiate
prices. Given the importance of the institutional details
surrounding payment systems, research that investigates
the ramifications of different payment systems, such as
that by Danzon and Wilensky, is crucial.10
Ultimately, we will likely end up with a combination
of the high-deductible plans and more traditional managed
care plans. The ideal situation may be one in
which consumers can choose the approach they prefer,
although the institutional details governing choice of
plan types and the spillovers between plan types will be
important. For example, if consumers can choose
between different types of plans (or even different plans
of similar types), we must worry about adverse selection.
If we move away from pooling, some individuals
will benefit and others will lose. More generally, because
patients with different benefit designs or covered by different
managed care organizations will be seeking care
from a similar set of providers, we must also understand
better how different systems of care affect each other.
For example, as Avery et al note in this issue, when
physicians serve patients from different systems, the
actions of one system may affect care delivered to
enrollees of another system.11 This may be good or bad,
but understanding the extent of spillovers is important.
One strength of competition is the immense creativity
that it allows regarding plan design and product creation.
New types of firms, such as disease management companies,
will emerge when the need and profit opportunities
arise. Similarly, new products will be developed that experiment
with how the basic building blocks of the system are
combined. They will determine how risk is apportioned
across individuals and firms, how prices are negotiated,
and how care is managed. They will establish how much
autonomy patients and physicians will have and when individuals
must commit to different care networks.
Because new systems of care are likely to have a crucial
role in the future of our healthcare system, we must
have a better understanding of what information consumers
need to make their choices. The Agency for
Healthcare Research and Quality has been a leader in
funding development of plan performance measures,
funding work to examine methods of disseminating
information, and funding evaluations of responses to
information. Support for research is crucial if we are to
understand how to inform consumers, improve the
functioning of markets, and promote value.
Given the march of medical progress and an aging
population, these issues are only going to become more
salient over time. The clinical, economic, and distributional
consequences of different choices could be staggering.
Hopefully research such as that presented in this
and other issues of the Journal can contribute to better
decision making at all levels of the healthcare system.
From the School of Public Health, University of Michigan, Ann Arbor, Mich.
Address correspondence to: Michael E. Chernew, PhD, Health Management and Policy, University of Michigan, 109 South Observatory, Room M3118, Ann Arbor, MI 48109-2029. E-mail: firstname.lastname@example.org.
1. Arrow K. Uncertainty and the welfare economics of medical care. Am Econ Rev. 1963;53:941-973.
2. Sui AL, Sonnenberg WG, Manning WG et al. Inappropriate use of hospitals in a randomized trial of health insurance plans. N Engl J Med. 1986;315:1259-1266.
3. Rice T, Lohr KN, Brook RH, et al. Effect of cost sharing on use of medically effective and less effective care. Med Care. 1986;24(suppl):S31-S38.
4. Heisler M, Langa KM, Eby EL, Fendrick AM, Kabeto MU, Piette JD. The health effects of restricting prescription medication use because of cost. Med Care. 2004;42:626-634.
5. Ellis JJ, Erickson SR, Stevenson JG, Bernstein SJ, Stiles RA, Fendrick AM. Suboptimal statin adherence and discontinuation in primary and secondary prevention populations. J Gen Intern Med. 2004;19:639-646.
6. Fendrick AM, Smith DG, Chernew ME, Shah SN. A benefit-based copay for prescription drugs: patient contribution based on total benefits, not drug acquisition cost. Am J Manag Care. 2001;7:861-867.
7. Stankaitis JA, Brill HR, Walker DM. Reduction in neonatal intensive care unit admission rates in a Medicaid managed care program. Am J Manag Care. 2005;11:166-172.
8. Rask KJ, Wells KJ, Teitel GS Hawley JN, Richards C, Gazmararian JA. Can an algorithm for appropriate prescribing predict the incidence of adverse drug events? Am J Manag Care. 2005;11:145-151.
9. Foote SB, Halpern R, Wholey DR. Variation in Medicare's local coverage policies: cost analysis of local medical review policies. Am J Manag Care. 2005;11:181-187.
10. Danzon PM, Wilensky GR, Means KE. Alternative strategies for Medicare payment of outpatient prescription drugs - Part B and beyond. Am J Manag Care. 2005;11:173-180.
11. Avery G, Wholey DR, Christianson JB. Physician evaluations of care management practices in Medicaid programs. Am J Manag Care. 2005;11:156-164.