System changes in healthcare

One of the largest and most interesting processes of change going on in the United States today is the rapid redesign and adjustment of the American healthcare system. A key driver is this spring’s passage of the Patient Protection and Affordable Care Act (PPACA), but the more fundamental causes are the twin crises we face for access and rising cost for health coverage. Somehow the country needs to find a way of including the whole population within the insured population, and we need to find ways of reducing the rate of growth of aggregate and per capita healthcare expenditures. PPACA is aimed at addressing both crises, and they are urgent.

Healthcare in the United States is provided through doctors, physician groups, and hospitals, organized into regional health systems. A given region typically has a number of hospital systems, non-profit and profit, and physician groups ranging in size from one to hundreds of physicians. And many experts describe existing health systems and hospitals as homebrew organizations that haven’t changed fundamentally in thirty years. The current environment is forcing change for quality, health outcomes, and cost.

So who is forcing the changes? The requirements of the healthcare reform legislation (PPACA) are part of the answer. But other change drivers are large employers who are purchasers of healthcare services for their employees and the insurers who directly pay for services. A particularly important player is the Voluntary Employee Benefits Association trust (VEBA), a type of organization created by Federal law to administer large benefit pools. The United Auto Workers VEBA itself expends $4.6 billion annually in support of healthcare for its retirees, and it is actively managing plans and contracts so as to achieve sustainable spending for the 800,000 retirees in its pool (link). Health systems, hospital administrators, and physician group leaders are actively seeking ways of adjusting to the imminent future in the healthcare space.

The diagnoses of failure in the healthcare system often focus on a cluster of problems.

  • Poorly aligned incentives for patients, physicians, and hospitals
  • Incentives don’t create behavior of all parties leading to greater health and lower cost
  • Lack of focus on health rather than illness
  • Lack of focus on the health of a population rather than a group of clients
  • Lack of standardization of process within healthcare systems
  • Lack of Electronic Medical Records
  • Failure to involve the patient in responsibility for his/her health

The problem from the health system’s point of view often comes down to reimbursement and revenue. Medicare and Medicaid reimbursement levels don’t cover the costs of care, and hospital systems have large obligations for indigent (non-reimbursed) care. So hospital administrators and physician leaders face the imperative of squeezing costs out of their system while maintaining and enhancing quality and patient safety.  More and more urban hospitals are approaching a critical financial status as a result.

Payers — basically, the companies that pay for health insurance for their employees — see the problem as one of rapidly rising costs and assuring quality. So their effort is to place pressure on providers and insurers to contain costs, to shift part of the cost to the employee, and to create effective wellness plans that incentivize employees to adopt healthier lifestyles. Payers and insurers are attempting to make highly focused use of data about providers, cost, and health outcomes to permit evaluation of health systems and doctors and their practices. That data is available in voluminous quantities, and it will allow payers to distinguish strongly between more and less efficient health systems.

So what are some of the strategies currently being pursued by system administrators to allow their systems to survive in the new fiscal and regulatory environment? The mantra is the patient-centered medical home. Systems are seeking improvements in coordination of health care for the patient, quarterbacked by the primary care physician; a shift of emphasis towards wellness for the population rather than disease intervention; improvements in process efficiency; close attention to cost centers; competition for patients and referrals within the region; development of recognized specialty areas with higher margins and reimbursement rates; and implementation of the Electronic Medical Record and all the processes that need to surround this technology. Another visible strategy around the country is consolidation, as more successful hospitals absorb or merge with less successful ones. The goal is to create a system of “integrated and accountable care,” achieving both goals of quality and cost effectiveness.

One of the current areas of focus is the concept of an “Accountable Care Organization,” a concept introduced through the PPACA legislation but not explicitly defined. (Here is a 2009 discussion paper by the Urban Institute.)  It is a level of organization that will figure crucially in the administration of future payment systems and regulations, and health systems are attempting to formulate their own ACOs. Here is a working definition:

An ACO is a group of providers working as a team taking fiscal responsibility for outcomes and costs for a defined population.

If one is interested in the fate of a particular regional healthcare system or hospital, now is the time to be paying close attention to the planning and reform its leaders and physicians are currently carrying out. The stakes are very high. Tthe business environment is changing rapidly and abruptly, and some community hospitals and health systems will not survive. Moreover, some experts expect a significant decline in the percentage of employers who offer health coverage — bad news for currently insured workers.

So the next few years portend some very deep changes for almost all Americans when it comes to healthcare.

(Here’s a link to a position paper by the Robert Wood Johnson Foundation.  Thanks to Maxine for the link.)

4 Replies to “System changes in healthcare”

  1. If we take the population growth of US into consideration, the reform of the American healthcare system might be redesigned. The population of US in 1980 is 220 million, now 300 million, and estimated to be 392 million in 2050 according to US census bureau. As economic structure of the world is changing, more and more low-tech jobs are moving out of US. Simultaneously it seems that high-tech jobs will increase by 92 million within the next forty years. If there are 92 million high-tech jobs in the next forty years, it seems that the current American education system will not provide that many qualified workers. So most of the 92 million people might have no choice but work in service industry. Then income disparity might become an issue to challenge the new healthcare system. We can see that the healthcare system is in a dilemma between cost and quality of service. But please do not forget another powerful factor: the uncontrolled population growth.


  2. "The problem from the health system's point of view often comes down to reimbursement and revenue. Medicare and Medicaid reimbursement levels don't cover the costs of care, and hospital systems have large obligations for indigent (non-reimbursed) care."Under PPACA (at least in theory) the number of uninsured indigent will decline from nearly 50 million to around 16 million, reducing the burden of uncompensated care. In other words, hospitals (and other providers) will gain income by being paid for care they now deliver for free.Medicare payments are lower than private insurance payments, but they generally DO cover the costs of care. Remember, too, that PPACA actually INCREASES payments to primary care providers, funded by decreases in payments to specialists. At the same time, the legislation contains many new rules or extensions of old rules aimed at increasing payments to rural hospitals and other rural providers who often have disproportionately large shares of elderly and poor patients. This has the effect of protecting them somewhat from cuts to Medicare payment rates.The increase in payments to primary care docs is coupled with financial incentives for them to increase preventive services and to improve quality. This in combination with increased payments should create much-needed incentives that will shift us away from high cost, high tech, financially lucrative, after-the-fact (and sometimes not beneficial in the elderly) curative care to lower cost chronic disease prevention and health promotion. At a minimum, the latter should lower costs by reducing the future high costs that result from the negative sequelae of unmanaged disease and disability.PPACA also contains more stringent provisions for detecting fraud. I'm probably a cynic, but when I hear that a specialist is dropping Medicare patients because of a small cut in a small fraction of his/her practice I find myself wondering if that's the real reason.


  3. Thanks, Maxine — this is really helpful. There is a real paucity of understanding among us non-specialists about what the details are in the healthcare reform legislation, and how the new incentives and regulations are likely to shape behavior. More knowledge about this is better!


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: