Skip to content
Opinion Column

A New Cost Control Idea

When it comes to reducing or controlling rising health care costs, we face a problem called “the fierce urgency of NOW.”

We have learned from the Medicare and Medicaid budget proposals by Rep. Paul Ryan, R-Wis., that Republicans have no substantive ideas on how to address these costs beyond shifting the bill to consumers and states. We also know that Democrats embedded a lot of promising ideas to generate savings into the health law — concepts ranging from medical homes and accountable care organizations to payment bundling and value-based insurance design. But these ideas will take time before we know if and how well they work.

But time is something we don’t have.

The federal government, states, employers and consumers are all struggling under the pressure of rising health care costs. For them, solutions can’t come soon enough.

State governments are facing a “Medicaid desert” between the end this year of the stimulus package’s enhanced federal matching rate and the 2014 implementation of the health overhaul’s Medicaid expansions. Some worry the sorry choices to address the funding shortfall will come down to cutting benefits, shrinking provider payments, hiking cost sharing and shredding eligibility. Proposals to control spending within Medicare have put that program equally in peril.

It leads to a simple question: Is there a smart cost-control idea that can help N-O-W?


It is called “Paying for Outcomes” or “P-4-O.” And it has already been road tested.

Paying for Outcomes means encouraging hospitals, physicians and other provider groups to reduce potentially preventable events — PPEs — that harm patients and add costs. In other words, the approach rewards health care organizations that provide high-quality, effective care, and dings providers that deliver lower quality, less effective care.

There are five major types of PPEs – readmissions, admissions, complications such as infections, ER visits that lead to an inpatient admission, and outpatient procedures such as unnecessary imaging tests. The health law moves in the P-4-O direction by targeting hospitals with high rates of potentially preventable hospital readmissions. Beginning in 2012, these hospitals will need to adjust the quality of medical care they provide to match that of their peer hospitals or face financial penalties.

This approach has been pioneered and refined over many years by two researchers from 3M Health Information Systems, Dr. Norbert Goldfield and Richard Averill. Neither are Johnny-come-latelies and both were involved in establishing the Medicare hospital payment system in the mid-1980s, by far America’s most successful health care cost containment initiative ever.

Working with states such as New York and Maryland, as well as some private payers, Goldfield and Averill have shown that their approach is ready for prime time with predicted short-term savings as high as 3 percent from reducing preventable readmissions, 2 percent from reducing preventable complications, 8 percent from preventing unnecessary readmissions, 2 percent from preventing unneeded ER visits and 3 percent from deterring unnecessary outpatient procedures and ancillary treatments. One estimate projects that 9 percent of hospital costs are attributable to potentially preventable conditions, and even more to preventable readmissions.

Public or private payers — if they are ready to commit to the approach — can be up and running quickly. Maryland, for instance, implemented payment reforms based on rates of hospital inpatient complications in 2009, and saw the statewide rate of inpatient complications drop by 11.9 percent, eliminating $62.5 million in costs associated with these preventable complications in one year. New York estimates $47 million in first year savings using a similar approach.

Some disclosure is needed here. Goldfield and Averill’s company, 3M Health Information Systems, licenses and sells software to make this system work — and some dismiss their approach because of this commercial connection. Others recognize that they are not just talking theory, and they have tools and wherewithal to make theory a reality and enable payers to begin paying for outcomes quickly.

Because Goldfield is a practicing primary care physician — in a community health center in Springfield, Mass. — he has credibility with medical providers and speaks their language. He emphasizes that not all PPEs are preventable, hence the essential adverb, “potentially.” Under P-4-O, health care organizations are not penalized for specific cases, rather they are held accountable for their overall performance on each measure. How they fix their clinical issues is not mandated either — they figure out how to get to an acceptable level already achieved by their peers. And all performance measures are transparent, risk adjusted and uniform.
Some in the trenches are paying attention. Deborah Bachrach, former New York State Medicaid Commissioner, currently at the law firm Manatt, Phelps & Phillips, says that “payment policies may be the most important lever available to public and private payers to improve quality and contain costs. Sufficient data is available to pay for good outcomes and less for poor ones.” Robert Murray, head of Maryland’s Health Services Cost Review Commission, calls P-4-O a “data-driven approach which gives providers the right incentives to improve quality and efficiency.” They both emphasize that P-4-O is not a panacea and is only a first step toward broader payment bundling schemes.

Nonetheless, here is the real choice facing states and other payers today — cut eligibility, cut benefits, raise cost sharing, cut provider payments or fix medical care. Policy makers, consumers, providers and others should ask the question — before harming beneficiaries or cutting payments — shouldn’t we fix quality first? If the answer is “no” because “nobody knows how to do that,” here’s a suggested response:

“Why not pay for outcomes?”

John E. McDonough is a professor at the Harvard School of Public Health

Related Topics

Cost and Quality Medicaid Medicare The Health Law