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:

  • Set actionable performance expectations for health care providers, particularly physicians, clinics, hospitals, pharmacies, and long-term care providers.
  • Ensure that expectations are clear, decision relevant, and supported by evidence.

2. Measure Results:

  • Rigorously measure clinical and economic performance compared to expectations.
  • Use consensus endorsed measures such as those adopted by the National Quality Forum.
  • However, don’t let the perfect be the enemy of the good or analysis be the enemy of action.

3. Disclose Results:

  • Publicly report the clinical and economic performance.
  • Ensure that reporting of performance is frequent and timely.
  • Use reader-friendly formats that support the differing decision making needs of consumers, providers, health plans, purchasers (employers, Medicare, Medicaid), and the media.

4. Reward Results:

  • Directly align coverage, reimbursement, cost sharing, market share, contracting, utilization management, and other key policies with performance expectations.
  • Specifically, reward higher performance through monetary incentives (pay-for-performance or P4P), greater market share, public recognition, and regulatory flexibility.
  • Reward positive consumer behaviors through incentives like differential co-pays (e.g., low or zero co-pay to see the best physicians, very high co-pay to see poor quality docs).

5. Support Results:

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