Serious and costly performance problems riddle U.S. health care. Because of overuse, under use, and misuse of health care, researchers at the Juran Institute and elsewhere estimate that about 30 percent of health care costs are generated by poor quality. Therefore, poor quality medical care will cost about $720 billion in 2008 (30% of $2.4 trillion).

Poor quality also reduces productivity. For every dollar of health care spending caused by poor quality, poor care costs an estimated 50 cents in lost productivity. When applied to the $822 billion in care provided through employer-sponsored insurance, this translates to an additional $123 billion in costs.

A recent study by the Health Research Institute at PricewaterhouseCoopers estimates that wasteful health care spending costs $1.2 trillion annually. Analyzing findings from a wealth of published studies, the PwC researchers looked at the cost of waste from clinically inappropriate care and overt errors, individual behaviors leading to costly health problems, and antiquated operational processes that add costs without providing any value.

Making matters worse, research on the care patients receive from physicians, hospitals, and other providers paints a frustrating, even scary picture. For example, studies conducted by the respected RAND Corporation show that Americans receive clinically inadequate or inappropriate care at shockingly high rates.

Specifically, RAND's research shows that acute care for insured adults is appropriate only 53.5 percent of the time on average. In other words, about 46 percent of acute care is clinically incorrect. Similarly, about 43.9 percent of chronic care and 45.1 percent of preventive care is inappropriate according to accepted medical standards. Children receive 68 percent of recommended care for acute medical problems, 53 percent of recommended care for chronic medical conditions, and 41 percent of recommended preventive care.

The bottom line is health care - whether for adults or children - is inappropriate or unnecessary about half the time. Basically, it's a coin flip.

Root Causes of Poor Quality, High Costs:

Ultimately, three immutable laws of economics explain the underlying causes of this poor performance:

1. Price is what you pay but value is what you get:

Taking a page from Warren Buffet's playbook, buyers of health benefits must focus on value, not price. Price is an important part of the equation but meaningless if you don't know the value of what you are receiving for that price. Unfortunately, in health care we obsess on unit prices. In no other marketplace or domain of life do Americans - corporations, consumers, federal and state policymakers, news media - pay so much attention to price and so little to value.

2. You get what you pay for:

Today, we pay for quantity, not quality. Poor performers are sustained and rewarded. The best performers are financially penalized and professionally demoralized. The consequences are all too obvious.

3. You can't fix what you can't see:

In sharp contrast to virtually every other industry, health care is highly opaque. American health care is full of decision makers - consumers, physicians, and other providers, health plans, public officials - who lack the information needed to make decisions.

Five Steps to Higher Performance:

The problems are daunting but solvable. To improve the quality and cost effectiveness of health care delivery, purchasers and payors must tightly focus on strategies to expect, measure, disclose, reward, and support results:

1. Expect Results:

2. Measure Results:

3. Disclose Results:

4. Reward Results:

5. Support Results:

Support the infrastructure and processes essential to results-driven health care. These include:

As part of a larger, federal government-wide congressionally mandated initiative to reduce inappropriate payments, CMS has published its final rule on Medicaid / SCHIP payment error rate measurement. As expected, it represents a significant expansion of federal oversight of day-to-day state Medicaid operations and of the lives of Medicaid providers and Medicaid managed care organizations.

Medicaid Payment Error Rate Measurement:

The Medicaid Payment Error Rate Measurement (PERM) initiative is a complicated process but means that every state will undergo a detailed examination of paid claims, capitation payments, reimbursement and premium policies, coding, and more. States must turn over vast amounts of data every quarter, plus virtually everything else on rates, policies, and claims processing edits and audits.

CMS will hire a series of new contractors to examine all this, run samples, and identify errors. CMS will then set maximum acceptable error rates (based on what it or its contractors determine is an "error") and then state must take corrective action. These corrective actions could include recovering payments, changing reimbursement policies, and revising claims processing requirements.

States Targeted for Federal Review:

States will rotate, with each state going through the entire process every three years. The states selected for the first round (FY 2006) are Pennsylvania, Ohio, Illinois, Michigan, Missouri, Minnesota, Arkansas, Connecticut, New Mexico, Virginia, Wisconsin, Oklahoma, North Dakota, Wyoming, Kansas, Idaho, Delaware.

Second round states (FY 2007) are North Carolina, Georgia, California, Massachusetts, Tennessee, New Jersey, Kentucky, West Virginia, Maryland, Alabama, South Carolina, Colorado, Utah, Vermont, Nebraska, New Hampshire, Rhode Island. Third round states (FY 2008) are New York, Florida, Texas, Louisiana, Indiana, Mississippi, Iowa, Maine, Oregon, Arizona, Washington, District of Columbia, Alaska, Hawaii, Montana, South Dakota, Nevada.

Opportunities and Challenges:

If CMS manages the process well and works cooperatively with states, the PERM may help (1) save taxpayer dollars, (2) improve the operations of the less sophisticated state Medicaid programs, (3) showcase the best run Medicaid shops and best fiscal agents, (4) help CMS develop greater respect for the hard work of states, (5) identify inappropriate provider practices across state lines, (6) facilitate comparative research and analysis of Medicaid, and (6) allow CMS and states identify, build, and share best practices.

However, PERM raises many practical concerns, especially given the enormous complexity of Medicaid and wide technical and programmatic variation among state Medicaid programs. Even if a state has a low error rate, the administrative burden could be intense, with a steep learning curve for CMS and the new federal contractors and endless arguments among the parties on what is or is not a genuine error. For states with high error rates, the implications include need to update systems, modernize procedures, redirect or replace fiscal agents, change payment and claims procedures, and much more. And add to this, controversial recoveries of federal dollars from states and providers.

In the Deficit Reduction Act (DRA), Congress authorized the new $150 million Medicaid Transformation Grant Program to help states design and implement reforms to increase quality and efficiency of Medicaid. This is a unique opportunity to help states restructure and modernize Medicaid, save taxpayer dollars, and improve services. But states must act fast to take advantage.

State Medicaid agencies may submit grant proposals to CMS by September 15, 2006. For grants, CMS has a total budget of $75 million in FFY 2007 and another $75 million in FFY 2008. The amount of each grant will vary and will depend on the number of applications received. State matching funds are not required.

While states have wide discretion in proposing projects and may propose multiple projects in a single grant application, CMS is encouraging states to look at ways to improve Medicaid program operations and efficiency.

In the area of improving Medicaid program efficiency, CMS is particularly interested in grant projects to:

CMS is also interested in projects to improve the effectiveness of Medicaid. Examples include projects on:

In the arena of improved care delivery, CMS is particularly interested in grant proposals to:

This is a unique, one-time opportunity for states but, with grant applications due in six weeks, the timeline is tight. States needing help or advice in writing an application may contact me or my friends at Sellers Feinberg for assistance.

It is an immutable truth of economics. Transparency is an essential ingredient for a market to function with any semblance of efficiency or effectiveness. Lack of transparency - what economists call asynchronous information - leads to rapid inflation, gross inefficiency, gaming and abuse, ignorant consumers, poor quality, rampant error rates, and misaligned resources. In other words, you get America's $1.9 trillion health care system.

After years of behind the scenes work by top health care thought leaders, the White House and key Congressional leaders are jumping on board and calling for reforms to ensure transparency (read public reporting) of health care provider prices. While prices are only part of the information needs of patients, purchasers, and payors, nationwide transparency of medical prices is essential. Health Savings Accounts and other consumer-driven health reforms such as Medicaid Health Opportunity Accounts are largely pointless in a health care system otherwise rooted in incomplete, inaccurate, and inaccessible information.

As leaders contemplate specific measures to promote transparency of prices, they should also consider sending every Medicaid and Medicare beneficiary a quarterly report on the cost of their care. (I am not talking about Explanation of Benefits [EOB] notices. EOBs don't give a picture of their overall costs or utilization and offer no comparative, trend, or historical information.)

Using simple, colorful charts and tables and an emphasis on decision relevant information, a well-designed report would show them what care they received, what providers charged, what public programs paid, how much they paid in cost sharing, and how their medical costs compare to their peers (age group, sex, health status, and geography).

For Medicare beneficiaries, the reports could help bust a core myth of Medicare financing by showing what Medicare has paid for their care compared to what as an individual they paid in Medicare taxes and cost-sharing to date. In Medicaid, the reports would be invaluable to state efforts to move toward consumer-directed models where chronically ill or disabled patients and their families take active control of their medical lives. It would also help low-income families better understand the health care system. For dual eligibles - the 6.3 million Americans with annual health costs of a quarter trillion dollars - these personalized reports would be truly eye opening for patients and their families.

Over time, the reports could help Medicaid and Medicare beneficiaries see how their providers, health plans, and drug plans compare on measures of quality, errors, and cost effectiveness. And they could include simple health reminders.

Of course, not every benie would read the reports much less change their behavior based on the information. But the vary act of creating the reports would require Medicare and Medicaid to modernize information systems, turn transaction data into genuine decision-relevant information, and begin thinking of program beneficiaries as consumers in need of more than monstrously dull doorstops masquerading as handbooks.

Americans, including Medicaid and Medicare beneficiaries, are not stupid. But when it comes to health care costs, they are too often ignorant or oblivious. That must stop. Yes, there is a learning curve and some people prefer the bliss of ignorance to the dilemmas of judgment. Nonetheless, as consumers, as Americans, as human beings we are entitled to the information we need to make decisions. Keeping Medicare and Medicaid beneficiaries and their families in the dark is as costly as it is insulting.

Since Medicaid is administered by the states, traditionally virtually all Medicaid anti-fraud efforts were managed by state Medicaid agencies, with civil enforcement and payment recoveries by the Medicaid agency and criminal prosecutions by the state attorney general and the AG's Medicaid fraud control unit (MFCU). States vary widely in their approaches, the relative sophistication of tools used, and staff resources dedicated. For example, Northern and Western states tend to focus on provider fraud and Southern states tend to focus more on beneficiary fraud.

The recently enacted Deficit Reduction Act of 2005 (DRA) significantly expands the federal government's role in combating Medicaid fraud and abuse. The new provisions have far-reaching implications for states, providers, and health plans as well as for the federal-state relationship. If managed well and in close coordination with the states, it could save taxpayers billions of dollars. If not, it could easily result in chaos and confusion for Medicaid providers and health plans and a time sink for state Medicaid agencies.

It also creates (1) significant new business opportunities for anti-fraud contractors and systems vendors, (2) new financial incentives for states to beef up their own systems and staff, and (3) new opportunities for whistleblowers and for qui tam suits.

The DRA creates a federal Medicaid Integrity Program, including new contractors, additional federal staff, and financial incentives for states to increase their own efforts at fraud detection and payment recovery. Congress is giving the Centers for Medicare & Medicaid Services (CMS) an additional 100 staff plus $50-$75 million a year for outside contractors. If a state enacts its own false claims act, it will be able to retain a larger share of any payment recoveries. (Only 15 states and DC now have some form of state false claims act.) The effect is that compliant states could increase their savings from anti-fraud efforts by as much as 20 percent.

The new law also requires organizations with more than $5 million in annual Medicaid payments to regularly train employees on Medicaid fraud laws and reporting. Across the country, this will apply to thousands of hospitals, nursing homes, home care providers, Medicaid managed care organizations, and counties, as well as many chain pharmacies, clinics, other providers, and the Medicaid fiscal agents like EDS and ACS.

Sophisticated health care purchasers and health plans know the value of prescription drug data. When analyzed with paid claims data from physicians and hospitals, data from pharmacy claims can be used to identify, understand, and track a wide range of issues.

Starting January 2006, when the 6.5 million dual eligibles move from Medicaid to Medicare for their prescription drug benefits, state Medicaid agencies will no longer have access to data on drug use by these extremely expensive, at-risk beneficiaries - patients who drive over 40 percent of Medicaid costs. As a result, Medicaid managers will lose an invaluable source of information, severely handicapping the ability of states to monitor quality, access, and costs and catch waste, fraud, and abuse.

The Centers for Medicare and Medicaid Services (CMS) lacks the legal authority to require Medicare prescription drug plans (PDPs and MA-PDs) share data with Medicaid. However, nothing precludes voluntary Rx data sharing between Medicare drug plans and states.

Voluntary data sharing would be an easy, inexpensive way for Medicare drug plans to gain goodwill among states and advocates, generate positive publicity, and differentiate themselves from the mass of competitor plans. In addition, because dual eligibles may switch plans any time and multiple times each year, two-way data exchanges with states would aide drug therapy transitions, utilization review, and medication therapy management. Stand-alone PDPs, which are at risk only for drug costs and therefore will not have access to any non-drug data, could greatly benefit from data from state Medicaid programs (e.g., diagnoses, prescription history, providers seen)

To help make this happen:

- A major pharmaceutical manufacturer should offer to fund a national initiative to show the business and clinical case for information exchange, develop data sharing agreements, iron out any technical obstacles (e.g., data safeguards), and cover the modest start-up costs (e.g., systems changes). In addition to generating goodwill, this would help minimize disruption in drug therapy, quality problems, and errors - and reduce lost revenue and bad publicity that will inevitably result if duals have problems accessing vital medications.

- In their standards for a Medicare drug plan to be designated as a preferred plan for low-income beneficiaries, State Pharmaceutical Assistance Programs (SPAPs) should require that preferred drug plans to exchange duals' Rx data with states.

The market dynamics, business models, and corporate strategies of pharma, biotech, genomics, medical device development, and health care information technology are converging. And you better get ready.

Written by business gurus at the Wharton School and health industry executives, The Business of Healthcare Innovation provides an invaluable analysis of key business trends in the manufacturing side of health care. Editor Lawton R. Burns, Ph.D. and contributors focus on the producer side of health care and demonstrate how manufacturers serve as the principal drivers of health care innovation.

Specifically, The Business of Healthcare Innovation:

· Provides an insightful, detailed overview of the most influential players - namely, the pharmaceutical, biotechnology, genomics/proteomics, medical device, and information technology sectors.

· Describes and assesses the market structures, business models, and corporate strategies of each of these six sectors.

· Shows how the six sectors are converging, drawing increasingly on the trends, tools, and solutions of each other.

A compelling, business-savvy look at the manufacturing side of health care, The Business of Healthcare Innovation is highly recommended for executives, policy makers, investors, and consultants to business and government decision makers.

There is ample evidence America has a serious problem with poor quality health care and high rates of preventable medical mistakes.

Thankfully, there is no shortage of caring professionals motivated to improve care and the problems are solvable. As with any effort to improve performance, measurement is the first step to improving care and reducing medical mistakes. As I often remind clients and colleagues: you can't fix what you can't see.

However, measuring hospital and physician quality is complex. And too often efforts to measure quality get bogged down - perfect becomes the enemy of good and analysis becomes the enemy of action.

Quality Health Care: A Guide to Developing and Using Indicators serves as an excellent, up-to-date guide on how to design and implement an effective quality measurement program, particularly in hospitals. While paying close attention to the importance of clinically sound measurement, this guide focuses on providing practical and actionable advice. Specifically, the book provides:

1. Helpful overview on quality measurement, the increasing demands of consumers and purchasers for public disclosure of provider quality, and the information consumers find most valuable in their decision making.

2. Practical advice on how to select quality indicators, collect and organize data, and create a dashboard to monitor progress.

3. Technical guidance on how to analyze data effectively, including how and when to accept limitations and variations.

4. Cases studies on how to use quality measurement to improve both clinical and operational performance.

The author, Robert Lloyd, PhD, is executive director of performance improvement at the Institute for Healthcare Improvement and a highly regarded expert in quality measurement.

In a new study, HealthGrades, a respected leader in measuring and reporting health care quality, estimates that preventable hospital mistakes kill 195,000 Americans each year. That's twice the Institute of Medicine's 1999 estimate, which many experts observed was conservative.

Fortunately, some courageous hospitals are showing their peers how to improve clinical outcomes at reasonable cost. A new report describes the key factors contributing to the success of four high-performing hospitals. In it, my friend Jack A. Meyer, Ph.D. and his colleagues at the Economic and Social Research Institute and The Severyn Group offer an outstanding blueprint for improving patient care and safety in hospitals.

The study, which was commissioned by The Commonwealth Fund, recommends 18 specific actions hospitals should take to improve patient care and save lives.

In Consumer-Driven Health Care, Regina E. Herzlinger, a leading health care thought leader and a professor at the Harvard Business School, provides a thought-provoking look inside a new, powerful force transforming America's dysfunctional health care industry. Consumer-Driven Health Care builds on her popular 1997 book Market-Driven Health Care: Who Wins, Who Loses in the Transformation of America's Largest Service Industry.

In the first part of her new 900-page book, Dr. Herzlinger makes a convincing case about how and why health care is broken and why market-based solutions - which empower consumers - are best. She restates the case she made in Market-Driven Health Care for putting consumers directly in charge of their own decisions (picking insurance plans, making medical decisions).

Through transparency of information, a realignment of incentives, and new tools to support decision-making, the consumer-driven model gives individuals a clear stake in their own health care. While not unique to other parts of the US economy, the approach is a radical departure for the $1.7 trillion health care market. As Dr. Herzlinger makes clear in her energetic analysis, the absence of these proven market-based tools goes a long to explain how health care became our most inefficient, outdated, and error-prone industry.

The second part – 80 percent of the book - is a collection of 73 think pieces written by 92 other experts. With short introductions by Dr. Herzlinger, these articles serve as a useful initial knowledge base for a growing field with an uncertain future.

Consumer-Driven Health Care has its limitations. For example, Dr. Herzlinger's case for the consumer-driven model fails to address the Medicare and Medicaid systems. It also leaves a variety of practical transition and execution issues unaddressed, although these are beyond the purpose of this volume. Because articles were written several years ago as part of a conference and most of the writers lack purchaser-side experience, the book also does not deal with the growing list of market-based reforms underway by large employers and innovative health plans.

In addition, since the field is still in its infancy, Dr. Herzlinger is a business researcher, and the contributors are largely wide-eyed entrepreneurs, the book will likely frustrate health policy wonks and others stuck in the technical minutia and ideological fights that characterize most health care discussions. But then, that’s just as well. Too often analysts forget that health care is a business and operates as a market, albeit a flawed one insulated from tools proven to drive quality and efficiency.

Dr. Herzlinger also has her detractors. It reminds me of the old joke that there are two kinds of people in the world – people who like Wayne Newton and people who don’t. Well, it seems that health care wonkdom is divided by those who like Reggie Herzlinger’s ideas and those who don’t. However, given the massive problems in American health care, her contributions remain as useful as they are provocative.

For a primer on consumer-driven health care, I recommend Let's Put Consumers in Charge of Health Care, a concise article by Dr. Herzlinger in Harvard Business Review (July 2002 issue).

Preventable medication mistakes in hospitals is a leading causing of death. Top patient safety experts and The Leapfrog Group have called upon hospitals to replace risky, paper-based prescriptions with computerized physician order entry (CPOE) systems.

If installed in every major hospital, CPOE systems would save tens of thousands of lives each year. However, few hospitals have CPOE systems and few plan to get them any time soon. In addition to costing $3-10 million per facility, hospital execs often face stiff resistance from docs unwilling to learn, replace their Rx pads with Palm Pilots, and work as teams. Even worse, because facilities are paid for quantity and not quality, improved patient safety often lowers a hospital's revenue (fewer errors = fewer patient days = lower revenue).

Harvard Medical School researchers Eric G. Poon, David Blumenthal, and colleagues recently interviewed senior managers in 26 hospitals to identify ways to overcome barriers to adopting and implementing CPOE. Their thoughtful, on-target recommendations appear in the latest issue of Health Affairs.

Solutions, not unexpectedly, include financial incentives to hospitals, stronger hospital and physician leadership, greater public attention to patient safety, establishing more uniform data standards, and modernizing hospital IT infrastructures.

For further reading on savings lives through improved technology, check out my reading lists on:

- Health care quality.

- Medical errors.

- Health care information technology.

- Electronic medical records.