A “Third School” of Cost Containment?

By Bill Kramer

Is there a “Third School” of reformers that could help Bill Kramerus resolve the long debate about how to contain health care spending?  Drew Altman’s recent column describes the history of the debate between the “Regulators” and the “Marketeers”, and he suggests that a new school of thought – the “System Reformers” – is in the ascendance.  According to Altman:

The Systems Reformers believe that the best way to bend the cost curve is not through external market incentives or regulatory controls, but from the inside out, by creating a smarter health care system with the information base, new delivery models and payment incentives that will improve quality and lower costs. . . .

The Systems Reformers’ paradigm is reflected in the “bending the curve” elements of the health reform legislation currently in Congress, which mostly come in the form of pilot projects and experiments. These include tests of ideas like Accountable Care Organizations, “pay for performance” and “bundled payments,” as well as efforts to create a smarter, evidence-based health delivery system through comparative effectiveness research.

He describes the Systems Reformers’ approach as a  “third leg of the stool of cost containment strategies.”

While Altman is right about the importance of the Systems Reformers’ ideas, I don’t consider this to be a new paradigm.

We’re really talking about two different things.  The debate between the Regulators and the Marketeers is a philosophical disagreement about the fundamental political economy of the health care sector.  The use of System Reforms, however, is simply an issue of how deep we go into the health care system in order to bring about reforms.  The former issue is about which fork in the road we should take; the latter is about how far we can go down that road.

The debate about the merits of regulation and markets is very important, and we do need to make a choice.  This issue is not unique to health care; it’s been raging in other sectors as well – for example, regulatory limits vs. cap and trade mechanisms to reduce air pollution.  In health care, the Regulators point to the failure of markets to contain costs, and they advocate regulation of supply and prices.  In the U.S. political debate, the ultimate model of the Regulators’ approach is a single payer plan.  Marketeers, on the other hand, point to the failure of past regulatory approaches (e.g., price controls, certificate of need) and the fact that health care markets haven’t been structured in a way to provide incentives for cost containment.  Intelligent and well-intentioned people can find good reasons to support either approach.

In the current national debate, we’ve largely made the choice to go down the Marketeer path.  Despite the protests of disappointed single payer advocates, all five major bills in Congress are based on a market-based approach.  If we did a word count of Congressional speeches on health reform during the past six months, it’s likely that “competition” and “choice” would be near the top.  And even wonky phrases like “cost conscious consumers”, “financial incentives”, and “transparency” have leaked into Congressional speeches, demonstrating that the Marketeers are in ascendance.

How does the “System Reform” approach fit into this?  As Altman says, it looks at the health care system from the “inside out”, and the System Reformers deserve credit for helping us understand how the health insurance and medical care markets really work.  But the solutions that Altman points to are tools, not systemic solutions.  These tools, such as electronic health records, comparative effectiveness research, and alternative payment mechanisms, have been around for a long time.  The problem is that they haven’t been used widely within the health insurance and medical delivery system. For example, most physicians have not been quick to adopt electronic health records, since there is little reward for making improvements in efficiency and quality in the current system.  The solution to this lies outside, i.e., with the purchasers, consumers and/or regulators.  In order for the system reform tools to be used by health insurers and providers, there needs to be pressure from the outside.  One way to do this is a Regulatory approach, e.g., establishing a single payer plan and requiring all physicians to accept salaries or capitation rates set by the government.  Another way is with a Market approach, e.g., establishing health insurance exchanges and reforming the individual and small group market to encourage healthy competition and provide incentives for improved cost, quality and customer service.

The Congressional bills have used the work of the System Reformers to turn the Marketeer approach from a guiding principle into something meaningful and practical in the health care system.  For example, using the information that John Wennberg, Elliott Fisher and their colleagues have documented in their enormously important  Dartmouth Atlas, the bills in Congress include pilots for Medicare payment reforms, such as bundling and pay-for-quality, which should reduce the geographic variation in costs and the inflationary effects of the current fee-for-service payment system.  Another example: System Reformers have pointed out that much of the medical care provided is not supported by evidence-based research; many physicians rely instead on simple protocols, community norms and what they were taught in medical school decades ago.  The lack of good clinical information has led to overuse as well as underuse of medical services, creating high costs and inconsistent quality of care.  Based on this finding, the bills in Congress include funding for comparative effectiveness research.  In a well-functioning market, good information is essential; CER will nudge the system toward more efficiency and higher value.

The work of the System Reformers is tremendously valuable, since it shows us what specifically needs to be done to improve our health insurance and medical care system.  This doesn’t, however, make it a “third school” of cost containment.  The current direction for health reform in Congress can be best understood as a Marketeer approach that is more likely to be effective in containing costs because it incorporates the System Reformers’ deep understanding of health markets.

Bill Kramer is an independent health care consultant, focusing on health care management, finance and public policy. Bill served as a senior executive with Kaiser Permanente for over 20 years, most recently as Chief Financial Officer for Kaiser Permanente’s Northwest Region. More information about Bill may be found at his website. You can read more of his commentaries on health care management and policy at his blog, Now’s the Time, where this post first appeared.

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Alyn FordGary O.texas catheterizer108DAYSMD as HELL Recent comment authors
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Alyn Ford

I don’t believe the issues we face are a result of a lack of intent nor innovation on behalf of clinicians and concur with Jim Rosenblum’s blog “The absence of market capitalism broke healthcare”. Despite efforts to contain payments and costs… the system will continue to fight for the status quo and it’s survival in the costly state that it is… until we drive dramatically more efficient operating principles into the delivery system. Containing costs without addressing the fundamental efficiencies of the system will only drive up waiting times for elective procedures and cause fringe needs (those between being healthy… Read more »


Gary O. Physicians are not cruising the malls and road hijacking patients to make them have tests done. Patients are seeking care. This is not the chicken or the egg. Doctors exist because patients wanted them. Supply side reform is nothing more than rationing. You are not qualified to determine what care anyone else should have. You are qualified to determine how much care you personally want to buy and how much you can afford. And you could afford a lot more if the government had not skied the fees. Thanks to government price-fixing, you cannot affor d healthcare. Why… Read more »

Gary O.
Gary O.

MD as HELL, what a bunch of malarkey. The health care cost curve has not rocketed up due to patient demand. Rather, it’s because as stated in An Agenda for Change (The Dartmouth Institute, December 2008), “In the absence of evidence, the prevailing cultural assumption that more medical care is better takes hold, leading physicians unconsciously to use available resource capacity up to the point of exhaustion. This assumption is amplified in a fee-for-service environment that pays providers more for doing more.” (Emphasis added.) Health care costs have in great part been driven up by physicians who order unneeded and… Read more »

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texas catheterizer

The rationale for solving the Wennberg revelations or those Gawande in another region is flawed. Cost effective care will prevail when doctors are compensated to provide it. As long as there are the littany of laws and policies thast generate more volume of services, the conundrum will continue. If you were running a business and wanted to hire employees to work effectively and knowledgably, you hire smart ones and pay them to do the job right. This is not rocket science and it is not deserving of all of the space and verbiage allotted to the proposed schemes and gimmicks.… Read more »


MD as HELL, we aren’t seeking health care services, after paying our health care insurance premiums, we can’t afford to go to the doctor.


The patient’s cost curve needs to be bent. If not, his behavior does not change. All the other forces are in play once the patient seeks healthcare and has to decide how much he wants.


Bill, thanks for bringing the Altman paper to our attention. I think it an important contribution to this discussion and you are to be commended as well.