Health care competition redefined: Value vs. cost

July 1, 2007

Positive sum competition can be a solution for the current system's ills.

Key Points

Focus on value, not costs

The U.S. health care system has registered unsatisfactory performance in both costs and quality in the last 2 decades. We have tried managed care and capitated care, both with abysmal results. In a capitalistic society, healthy competition produces improvements in results and methods, enhances efficiencies, and ultimately drives down costs. Quality increases and innovation leads to new and better approaches to the goods or services delivered.

Unfortunately, health care has not followed market dynamics that affect so many other industries. The cost of health care is high and continues to rise, despite efforts to reduce it, and there hasn't been a tradeoff in improvements in the quality of care we provide our patients. As a matter of fact, medical services are rationed and many patients are receiving care that lags behind the current standard of care. High rates of preventable medical errors persist.

Drs. Porter and Teisberg point out that the answer is not a state-controlled system or a single-payer system, but, rather, that competition is ultimately the best solution. They suggest that competition in health care occurs at the wrong level, over the wrong things, in the wrong geographic markets, and at the wrong time. The culprits, the say, are poor public policy choices and bad choices made by health plans, hospitals, and employers who buy health care services.

In any industry, competition should result in increased value for customers, improvement in quality, and reduction in costs. With zero-sum competition (ZSC), the players-doctors, payers, employers, and hospitals-divide value, instead of increasing it. They may even diminish value by creating unnecessary costs, such as bloated administrative expenses. ZSC motivates players to concentrate bargaining power by forming large groups to gain clout and cut better deals with payers and hospitals. But the quality and efficiency gains from such consolidations are modest.

ZSC also restricts choices and access to services, rather than making care better and more efficient. It relies on the legal system to settle disputes, which actually raises costs through expensive legal fees and, indirectly, through the practice of defensive medicine, neither of which creates value for patients.

Drs. Porter and Teisberg suggest that competition at the level of diseases and treatments become the focus of progress and reform. They recommend placing measured value of care at the top of the list for determining who gets patients in their practices and in the hospitals. This would require significant changes in the strategies of physicians and payers and in the purchasing habits of employers.

Currently, most of our colleagues retain a wide array of services and try to be all things to everyone. Under PSC, physicians and hospitals would create exceptional services that create unique value.