How to Design a Bundled Payment Around Value

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A pilot project shows how to align providers and insurers to improve health care delivery. (Bundled payments are coming to health care.

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T.R. Reid — Five Myths About Health Care in the Rest of the World

Found at

By T.R. Reid
Sunday, August 23, 2009

As Americans search for the cure to what ails our health-care system, we’ve overlooked an invaluable source of ideas and solutions: the rest of the world. All the other industrialized democracies have faced problems like ours, yet they’ve found ways to cover everybody — and still spend far less than we do.

I’ve traveled the world from Oslo to Osaka to see how other developed democracies provide health care. Instead of dismissing these models as “socialist,” we could adapt their solutions to fix our problems. To do that, we first have to dispel a few myths about health care abroad:

1. It’s all socialized medicine out there.

Not so. Some countries, such as Britain, New Zealand and Cuba, do provide health care in government hospitals, with the government paying the bills. Others — for instance, Canada and Taiwan — rely on private-sector providers, paid for by government-run insurance. But many wealthy countries — including Germany, the Netherlands, Japan and Switzerland — provide universal coverage using private doctors, private hospitals and private insurance plans.

In some ways, health care is less “socialized” overseas than in the United States. Almost all Americans sign up for government insurance (Medicare) at age 65. In Germany, Switzerland and the Netherlands, seniors stick with private insurance plans for life. Meanwhile, the U.S. Department of Veterans Affairs is one of the planet’s purest examples of government-run health care.

2. Overseas, care is rationed through limited choices or long lines.

Generally, no. Germans can sign up for any of the nation’s 200 private health insurance plans — a broader choice than any American has. If a German doesn’t like her insurance company, she can switch to another, with no increase in premium. The Swiss, too, can choose any insurance plan in the country.

In France and Japan, you don’t get a choice of insurance provider; you have to use the one designated for your company or your industry. But patients can go to any doctor, any hospital, any traditional healer. There are no U.S.-style limits such as “in-network” lists of doctors or “pre-authorization” for surgery. You pick any doctor, you get treatment — and insurance has to pay.

Canadians have their choice of providers. In Austria and Germany, if a doctor diagnoses a person as “stressed,” medical insurance pays for weekends at a health spa.

As for those notorious waiting lists, some countries are indeed plagued by them. Canada makes patients wait weeks or months for nonemergency care, as a way to keep costs down. But studies by the Commonwealth Fund and others report that many nations — Germany, Britain, Austria — outperform the United States on measures such as waiting times for appointments and for elective surgeries.

In Japan, waiting times are so short that most patients don’t bother to make an appointment. One Thursday morning in Tokyo, I called the prestigious orthopedic clinic at Keio University Hospital to schedule a consultation about my aching shoulder. “Why don’t you just drop by?” the receptionist said. That same afternoon, I was in the surgeon’s office. Dr. Nakamichi recommended an operation. “When could we do it?” I asked. The doctor checked his computer and said, “Tomorrow would be pretty difficult. Perhaps some day next week?”

3. Foreign health-care systems are inefficient, bloated bureaucracies.

Much less so than here. It may seem to Americans that U.S.-style free enterprise — private-sector, for-profit health insurance — is naturally the most cost-effective way to pay for health care. But in fact, all the other payment systems are more efficient than ours.

U.S. health insurance companies have the highest administrative costs in the world; they spend roughly 20 cents of every dollar for nonmedical costs, such as paperwork, reviewing claims and marketing. France’s health insurance industry, in contrast, covers everybody and spends about 4 percent on administration. Canada’s universal insurance system, run by government bureaucrats, spends 6 percent on administration. In Taiwan, a leaner version of the Canadian model has administrative costs of 1.5 percent; one year, this figure ballooned to 2 percent, and the opposition parties savaged the government for wasting money.

The world champion at controlling medical costs is Japan, even though its aging population is a profligate consumer of medical care. On average, the Japanese go to the doctor 15 times a year, three times the U.S. rate. They have twice as many MRI scans and X-rays. Quality is high; life expectancy and recovery rates for major diseases are better than in the United States. And yet Japan spends about $3,400 per person annually on health care; the United States spends more than $7,000.

4. Cost controls stifle innovation.

False. The United States is home to groundbreaking medical research, but so are other countries with much lower cost structures. Any American who’s had a hip or knee replacement is standing on French innovation. Deep-brain stimulation to treat depression is a Canadian breakthrough. Many of the wonder drugs promoted endlessly on American television, including Viagra, come from British, Swiss or Japanese labs.

Overseas, strict cost controls actually drive innovation. In the United States, an MRI scan of the neck region costs about $1,500. In Japan, the identical scan costs $98. Under the pressure of cost controls, Japanese researchers found ways to perform the same diagnostic technique for one-fifteenth the American price. (And Japanese labs still make a profit.)

5. Health insurance has to be cruel.

Not really. American health insurance companies routinely reject applicants with a “preexisting condition” — precisely the people most likely to need the insurers’ service. They employ armies of adjusters to deny claims. If a customer is hit by a truck and faces big medical bills, the insurer’s “rescission department” digs through the records looking for grounds to cancel the policy, often while the victim is still in the hospital. The companies say they have to do this stuff to survive in a tough business.

Foreign health insurance companies, in contrast, must accept all applicants, and they can’t cancel as long as you pay your premiums. The plans are required to pay any claim submitted by a doctor or hospital (or health spa), usually within tight time limits. The big Swiss insurer Groupe Mutuel promises to pay all claims within five days. “Our customers love it,” the group’s chief executive told me. The corollary is that everyone is mandated to buy insurance, to give the plans an adequate pool of rate-payers.

The key difference is that foreign health insurance plans exist only to pay people’s medical bills, not to make a profit. The United States is the only developed country that lets insurance companies profit from basic health coverage.

In many ways, foreign health-care models are not really “foreign” to America, because our crazy-quilt health-care system uses elements of all of them. For Native Americans or veterans, we’re Britain: The government provides health care, funding it through general taxes, and patients get no bills. For people who get insurance through their jobs, we’re Germany: Premiums are split between workers and employers, and private insurance plans pay private doctors and hospitals. For people over 65, we’re Canada: Everyone pays premiums for an insurance plan run by the government, and the public plan pays private doctors and hospitals according to a set fee schedule. And for the tens of millions without insurance coverage, we’re Burundi or Burma: In the world’s poor nations, sick people pay out of pocket for medical care; those who can’t pay stay sick or die.

This fragmentation is another reason that we spend more than anybody else and still leave millions without coverage. All the other developed countries have settled on one model for health-care delivery and finance; we’ve blended them all into a costly, confusing bureaucratic mess.

Which, in turn, punctures the most persistent myth of all: that America has “the finest health care” in the world. We don’t. In terms of results, almost all advanced countries have better national health statistics than the United States does. In terms of finance, we force 700,000 Americans into bankruptcy each year because of medical bills. In France, the number of medical bankruptcies is zero. Britain: zero. Japan: zero. Germany: zero.

Given our remarkable medical assets — the best-educated doctors and nurses, the most advanced hospitals, world-class research — the United States could be, and should be, the best in the world. To get there, though, we have to be willing to learn some lessons about health-care administration from the other industrialized democracies.

T.R. Reid, a former Washington Post reporter, is the author of “The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care,” to be published Monday.


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The cost of medical innovation

Some of my regular readers may have noticed that I work within the health care insurance industry. Being an adept of Michel Porter’s idea’s about the reforming of health care (competing on quality with regard to the medical condition) I regularly reflect on the cost/benefits of health care. This post was/is good food for thought for me!


Frank R. Lichtenberg
27 June 2009
Many healthcare policymakers and analysts are focused on controlling rising medical costs. Is attacking high-cost, low-benefit medical innovation a solution? This column estimates that medical innovation – the use of advanced diagnostic imaging, newer drugs, and higher-ranked physicians – significantly increases life expectancy without raising medical expenditures per capita.

The cost of medical care continues to rise rapidly in the US and other industrialised countries. According to a report from consulting firm PricewaterhouseCoopers, US employers who offer health insurance coverage could see a 9% cost increase between 2009 and 2010, and their workers may face an even larger increase.

Some observers argue that rapidly increasing health care expenditure is due, to an important extent, to medical innovation – the development and use of new drugs, diagnostics, and procedures. For example, the Kaiser Family Foundation (2007), citing Rettig (1994), claims that “advances in medical technology have contributed to rising overall US health care spending.”

Other observers argue that most medical innovations do not improve people’s health. Lexchin (2004), for example, claims that “at best one third of new drugs offer some additional clinical benefit and perhaps as few as 3% are major therapeutic advances.”

If both of these claims were true, medical innovation would result in the worst of both worlds – a large increase in cost and little or no increase in benefit (in the form of improved health outcomes). However, a study that I have recently performed casts considerable doubt on both of these claims. My findings indicate that medical innovation has yielded significant increases in life expectancy without increasing medical expenditure.

My study (Lichtenberg 2009) examines the effect of the quality of medical care, behavioural risk factors, and other variables on life expectancy and medical expenditure using longitudinal state-level data. As shown in Figure 1, the rate of increase of longevity has varied considerably across US states since 1991.

Figure 1. Increase in life expectancy at birth 1991-2004, by state

I examined the effects of three different measures of the quality of medical care. The first is the average quality of diagnostic imaging procedures, defined as the fraction of procedures that are advanced procedures. The second is the mean vintage (FDA approval year) of outpatient and inpatient prescription drugs. The third is the average quality of practicing physicians, defined as the fraction of physicians that were trained at top-ranked medical schools.

I also examined the effects on longevity of three important behavioural risk factors – obesity, smoking, and AIDS incidence – and other variables – education, income, and health insurance coverage – that might be expected to influence longevity growth. My econometric approach controlled for the effects of unobserved factors that vary across states but are relatively stable over time (e.g. climate and environmental quality), and unobserved factors that change over time but are invariant across states (e.g. changes in federal government policies).

The gains from medical innovation

The indicators of the quality of diagnostic imaging procedures, drugs, and physicians almost always had positive and statistically significant effects on life expectancy. Life expectancy increased more rapidly in states where (1) the fraction of Medicare diagnostic imaging procedures that were advanced procedures increased more rapidly, (2) the vintage of self- and provider-administered drugs increased more rapidly, and (3) the quality of medical schools previously attended by physicians increased more rapidly.

Between 1991 and 2004, life expectancy at birth increased 2.37 years. The estimates imply that, during this period, the increased use of advanced imaging technology increased life expectancy by 0.62-0.71 years, use of newer outpatient prescription drugs increased life expectancy by 0.96-1.26 years, and use of newer provider-administered drugs increased life expectancy by 0.48-0.54 years. The decline in the average quality of medical schools previously attended by physicians reduced life expectancy by 0.28-0.47 years.

The availability of data from Australia’s universal health care system, Medicare Australia, allowed me to provide some additional evidence about the impact of advanced imaging technology on mortality. I estimated difference-in-difference models of the effect of advanced imaging innovation on age-specific mortality rates. Demographic groups that had above-average increases in the number of advanced imaging procedures per capita had above-average declines in mortality rates, but changes in mortality rates were uncorrelated across demographic groups with changes in the number of standard imaging procedures per capita. Estimates of the effect of diagnostic imaging innovation on longevity based on Australian data are quite consistent with estimates based on US data.

The increased fraction of the population that was overweight or obese, rising from 44% to 59%, reduced the increase in life expectancy by .58-.68 years. The decline in the incidence of AIDS is estimated to have increased life expectancy by .18-.20 years. The small decline in smoking prevalence may have increased life expectancy by about 0.10 years.

Growth in life expectancy was uncorrelated across states with health insurance coverage and education, and inversely correlated with per capita income growth. The 19% increase in real per capita income is estimated to have reduced life expectancy by .34-.43 years. The sum of the contributions of all of the factors to the increase in life expectancy is in the 0.85-1.32 year range. Consequently, between 1.05 and 1.52 years of the 2.37-year increase in life expectancy is unexplained.

Greater coverage, lower costs

Although states with larger increases in the quality of diagnostic procedures, drugs, and physicians had larger increases in life expectancy, they did not have larger increases in per capita medical expenditure. This may be the case because, while newer diagnostic procedures and drugs are more expensive than their older counterparts, they may reduce the need for costly additional medical treatment. The absence of a correlation across states between medical innovation and expenditure growth is inconsistent with the view that advances in medical technology have contributed to rising overall US health care spending. Increased health insurance coverage is associated with lower growth in per capita medical expenditure.


Kaiser Family Foundation (2007) “How Changes in Medical Technology Affect Health Care Costs,” March.

Lexchin, Joel (2004), “Are new drugs as good as they claim to be?,” Australian Prescriber.

Lichtenberg, Frank, “The Quality of Medical Care, Behavioral Risk Factors, and Longevity Growth,” NBER WP 15068.

Rettig, Richard A.(2007), “Medical Innovation Duels Cost Containment,” Health Affairs (Summer 1994): 15.

This article may be reproduced with appropriate attribution. See Copyright (below).

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