How do you create value in the Health care Sector

Health is a prime determinant of national well-being. Moreover, health is the foundation of economic progress. There are many determinant of health, including the environment and personal behavior, but in modern societies the systems of health care financing and delivery are important factors that contribute to health and therefore social and economic well being. Yet all modern health care systems have struggled with rising health care spending growth for decades. Paradoxically the medical innovations that are so prized because of their contribution to health, on average increase spending. For example new drugs, such as Sovaldi (a treatment for Hepatitis’s C), indisputable provide value, but comes at a high price. Other medications for conditions such as pain or cancer present similar challenges. Non drug innovations related to imaging or surgery also improve health but can lead to higher spending.

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The fiscal challenges presented by medical innovation can be addressed by, in part, by eliminating waste and promoting value. We know that considerable waste exists in the health care system because there is widespread variation in practice patterns with little evidence that the variation is related to outcomes. Yet, historically identifying waste has been difficult.  New initiatives have begun to make progress. For example, the American Board of Internal Medicines Choosing Wisely Campaign has challenged medical specialty societies to identify wasteful practice. New tools, such as Milliman’s Health Waste Calculator, allow firms to quantify waste. Such knowledge can help improve system efficiency.

One approach to eliminating waste involves population, episode or global payment. These models incent physicians, hospitals and other providers such as nursing homes to coordinate care. Evidence from a vanguard of payers such as Blue Cross Blue Shield of Massachusetts, suggest that population based payment models can reduce spending without sacrificing, and in some cased improving quality. Evidence from large public payers suggests that these models lead to a disproportionate reduction in waste. Episode based payment has been less well studies. Such payment allows better targeting of incentives to providers, but may be hard to implement when patients have multiple complex comorbidities. Global payment models, in which hospitals are given global budgets and physicians are paid salary can be used to control spending growth, but productivity and attention to patient satisfaction may suffer unless management is efficient.

Alternative strategies involve using benefit design to engage patients to reduce waste. Consumer engagement strategies are complex because consumers are not sufficiently informed to make complex medical decisions. Nuanced benefit designs, such as Value Based Insurance Design (VBID), can help mitigate the concerns associated with higher patient cost sharing. VBID argues that any patient cost sharing should be aligned with value. High value services should have low or no cost sharing, but lower value services should be subject to higher cost sharing. This approach can help align patient and provider incentives.


The appropriate blend of payment strategies and benefit design strategies depends on culture. Different systems will make different choices. Yet in all cases the goals must be the same, eliminate waste to support access to high value medical innovation.

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