Friday, December 4, 2009

Model Health Systems

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As broken as the American health system is, there truly are pockets of amazing systems that we can look to: Intermountain Healthcare (Utah), Geisinger Health System (PA), Kaiser Permanente (primarily CA). These guys deliver technologically advanced care with better outcomes, lower costs, and happy employees. It is worthy to note that they’re all non-profit entities as well. I’ll be honest – I haven’t personally visited any of these systems, so my information is admittedly second hand. I have, however, spoken to key figures in some of these systems and read numerous studies and anecdotes about these systems, but the point isn’t whether or not these systems are better – the question is HOW are they better. So what’s the secret sauce?

The crucial pieces of their success are cooperation and motivation. Normally, a patient’s care can be done in numerous settings – a hospital, a primary care physician, multiple specialists all in different places, and possibly even other places like a long-term care facility or nursing home. These entities bring together the key elements of care – the hospital, the primary care physician, the specialists, and the payor (ie. the insurance piece). Instead of shuffling the patient back and forth among provider settings with disparate patient records and an inherent dependence on patient’s memory, understanding, and effort, these places bring the care TO the patient. With the patient’s primary care physician always nearby, a full team of specialists can communicate with each other to discuss a patient’s issues and treatment. Think about that – each physician gets to see a variety of cases and gets more experience than the average individual specialist can, and they get the benefits of practicing together as a team and pooling their knowledge. Now the cardiologist can speak directly with the radiologist and primary care physician to get a quick, efficient understand of the issue on top of knowing the patient’s history and current medication. Just avoiding the common errors alone (conflicting medicines, mis-diagnoses, repeated tests, etc.), these systems easily give care that is better, faster, and more cost-efficient. Of course, we’d all love if all healthcare delivery systems could do that, but how do the physicians get the motivation in place?

Remember that most physicians get paid on a per-service basis. Each test they order, each service performed means more revenue. There is no pecuniary motivation to spend extra time speaking with the patient to ensure they completely understand the instructions or taking extra time to speak with other specialists to double check themselves etc. What these systems do is to employ the physicians. The physicians get paid more than the average physician would earn on their own, and they are given the freedom to practice the way they want to – to give the patient the best care without an eye on how it impacts their own financial situation. Essentially, the financial motivation for more services is taken away from the physician. The pursuit for the intellectually-correct care is the main goal for most of these guys.

For the hospital, the motivation is different as well. Instead of a fee for service basis, this ultimately boils down to a single basic principle – capitation. These systems are given a fixed amount of money to care for their patients. The more money they save, the more money they get to keep. That means that they’ll be very mindful of waste, inappropriate uses of services, and long-term health of the patient. In short, they are taking on insurance-type risk.

So why is this system the El Paso rather than the McAllen? Can it be transported elsewhere?

1) It takes a certain type of physician to be successful in this environment. They’ll do well financially by hitting doubles, but they won’t be given the opportunity to swing for the fences.
2) Patients need to buy into the program. They need to accept that they’ll be funneled into a specific hospital system and only get to see a specific set of physicians. They won’t be given a vast choice of doctors to choose from.
3) Employers need to be small-mid sized companies that are either local or regional employers. National employers have no use for such a narrow network, so the addressable market is much smaller.
4) Hospitals will need to redesign themselves. Integrating physicians into the entity, spending more money than ever on information technology and capital expenditures, renegotiating the fundamental way they are compensated.

In short, it is pretty hard for a system like this to start up, but it’s certainly possible. Some of the Medicare Advantage health insurers have some pretty deep and integrated HMOs, so perhaps we’re seeing advanced health systems in their nascent stages. Or perhaps that’s wishful thinking – after all the promise of HMOs as the savior to the health system has been around since the 1990s.


  1. From an outsider's perspective, this sounds like vertical integration and "industry consolidation" is the clear way to go to leverage fixed costs in the system... but is the reason we're not moving that direction due to the different incentive structures between physicians and hospitals? I.e. independent practitioners don't want to give up the per-service potential and cap their salary? Why do the hospitals have to be non-profit? Sounds like it would be in everyone's interest to have a for-profit hospital system in which doctors would have equity in the LT performance of the 'system'?

  2. great post as usual andy. keep'em coming!

  3. @KF
    Vertical integration is much more than just leveraging the fixed costs in the system (although that is certainly an aspect of it). It's changing the incentives of the players involved. I mentioned the non-profit status because these systems (and doctors) can actually make more money if they focused on the revenue of the per-service rather than delivering integrated care. I'm certainly no enemy of the for-profit incentive system, but that's not how the system is setup today.

  4. What exactly does for-profit in health care mean? Does it mean that the hospital system has public investors and its shares can be publicly traded on the market?