Curb Your Enthusiasm

Lawton Burns and Mark Pauly, economists at the Wharton School, just published an article that should be required reading for all policy makers and health services researchers. The article,  entitled “Transformation of the health care industry: Curb your enthusiasm,” appears in the latest edition of the Milbank Quarterly.

Burns and Pauly undertook an enormous task and executed it well. They first sought to explain the assumptions underlying Managed Care (MC) 2.0 – the proposals promoted by the managed care movement in the wake of the HMO backlash of the late 1990s. Then they evaluated the probability that the MC 2.0 proposals will work as advertised. To do that, they looked at the relevant research and then at the social conditions that are impeding the implementation of those proposals. That’s a lot to bite off.

This is an unusually valuable article because of its scope, organization, and documentation. I will summarize it first, then discuss it in more detail. I’ll close with a discussion of my one serious criticism of this excellent paper: The authors, having made it clear they think the current “value-based” approach to cost containment is doomed, profess to see no solutions to rising health care costs.

Testing a mantra

Burns and Pauly are among the small minority of health services researchers who seem to be curious about the powerful norms that influence their profession but which are rarely acknowledged and never studied. They do not come right out and say, “Our profession resembles a religion more than a scientific discipline,” but you get the feeling they might agree with that statement if you could talk to them over coffee. They communicate their interest in the undiscussed norms both in the way they treat health policy jargon (they view it with some skepticism) and in their willingness to declare that fundamental assumptions underlying MC 2.0 were never tested.

The opening sentence in their abstract illuminates their gestalt on their profession: “There is a widespread belief that the US health care system needs to move ‘from volume to value.’” Note the words “widespread belief” and the quote marks around “volume to value.” Belief and faith are appropriate descriptors of the motivation behind the slavish use of the “volume-to-value” slogan. The authors state, correctly, that this belief is based on assumptions that are (a) usually implicit rather than explicit, and (b) untested. (Isn’t that always how groupthink gets started?) These assumptions are:

  • When quality goes up, costs go down;
  • fee-for-service (FFS) is bad for cost and quality, and capitation and “alternative payment models” (APMs) are good; and
  • herding doctors into “integrated” structures such as ACOs will reduce the role of FFS, facilitate capitation and APMs, and thereby improve quality and lower costs.

They then propose to test these evidence-free assumptions by five methods: 

  • Comparing the current MC 2.0 nostrums to previous changes in the American health care system that truly were transformations, such as the rise of the insurance industry;
  • comparing MC 2.0 to MC 1.0 of the 1990s (these phrases “Managed Care 1.0” and “2.0” are mine, not theirs);
  • examining the evidence to determine whether cost goes south when quality goes north;
  • examining the evidence to determine whether ACOs and other APMs are having any impact on cost and quality; and
  • examining social forces working against ACOs and other APMs.

Burns and Pauly demonstrate that MC 2.0 fails all five tests. They conclude: “The transformation from ‘volume to value’ in health care … appears to be driven more by ideology and aspiration than by evidence. To date, APMs show limited improvements in quality and even more limited reduction in costs. If improving quality does not consistently lead to lower costs but only to better health outcomes, we need to rethink the triple aim….”

Below I discuss all but the first test.  I chose not to discuss the first test (comparing real transformations with superficial changes sought by the doomed “volume-to-value” campaign) because doing so gives the buzzword “transformation” far too much credence. Suffice it to say here that Burns and Pauly conclude that truly transformational changes take 50 to 80 years, and “volume to value” advocates imply “transformation” is just around the corner.

Tests 2 and 3: The Iron Triangle of the 1990s morphs into the Triple Aim of the 2000s

Burns and Pauly argue that the vaunted “transformation” has already been attempted, and it failed. Today’s MC 2.0 is not that different from the MC 1.0 of the 1990s, and we know how that turned out. If MC 1.0 (HMOs, closed provider panels, capitation, utilization review, profiling, and report cards) had worked, there would have been no need for Leapfrog, the Commonwealth Fund, and other managed care “thought leaders” to roll out the 2.0 version (pay-for-performance, “value-based purchasing,” ACOs, “medical homes,” bundled payments, and electronic medical records to facilitate all of the above). Despite the claims by MC 1.0 proponents that they were promoting a new and sophisticated solution, the HMO turned out to be nothing more than a vehicle for restricting patient choice and using the leverage of size and limited choice to lower provider fees and deny services to patients. This is how the authors put it: “The primary vehicles for cost containment were lower payment to providers … and saying no to patients.” The authors see no reason to believe that ACOs (which are merely HMOs on training wheels), the “medical home,” and bundled payments will work any better. [1]

Burns and Pauly argue that the spread of the “volume-to-value” fantasy was aided and abetted by the widespread acceptance of the folklore that cost and quality are inversely related. This faith-based assumption contradicted a widespread belief in the “Iron Triangle,” which stood for the proposition that people and societies must choose between access, quality, and cost. The snappy “Triple Aim” jingle, first espoused by Donald Berwick et al. in 2008, symbolized the inexplicable victory of the belief that when quality goes north costs go south and, therefore, the Iron Triangle is not immutable. “Unlike the iron triangle, triple aim advocates did not view these three goals as irreconcilable,” the authors write, “but simultaneously possible in the presence of an ‘integrator’ (e.g., ACOs).” [2]

Burns and Pauly characterize the literature on the relationship between cost and quality as mixed, and conclude that the correlation between the two is probably zero. [3] They suggest that the most likely explanation for a very low correlation is that the return on investment of medical goods and services is not consistently positive or negative, but rather varies, ranging from positive to zero to negative. This is an extremely obvious hypothesis (after all, if it were true that most medical services have a positive ROI, total US health care spending would be a negative number), but it is routinely ignored by managed care proponents. To hear advocates of HMOs, ACOs, etc. tell it, the interventions undertaken by “integrators” are free or so cheap their costs can be ignored, and any savings (for example, fewer hospital admissions) can be chalked up as pure gravy (I have called this bad habit the “free lunch syndrome” )

Moreover, say the authors, the skills required to provide one service may not be the same skills required to deliver another service. For these and other reasons, they conclude it is not reasonable to expect any entity to produce lower costs across a wide range of services just by improving the quality of those services (as opposed, for example, to reducing the administrative costs associated with providing those services). But that’s precisely what “volume-to-value” buffs want us to believe.

Burns and Pauly’s review of the literature on the correlation of cost with quality should by itself put to rest the question of whether the “volume-to-value” mantra will work. If in fact it’s impossible to make costs go down by improving quality for the general population (as opposed to selected, narrow slices of the sickest members of a population), then the “volume-to-value” project is doomed.

Test 4: Prevalence and impact of ACOs and other APMs

Burns and Pauly’s fourth test asks, How widespread are APMs and are those that are in existence having any impact on cost or quality? Their answer to the first question is: Because the definition of “ACO” and other APMs is so vague, because APMs “nest” within each other (for example, “medical homes” exist within ACOs), and because it’s difficult to determine the extent to which doctors are aware of the financial incentives their APMs are exposed to, it’s difficult to determine the actual prevalence and penetration of ACOs and other APMs; but it appears the prevalence and penetration is low. Their answer to the second question is that ACOs and other APMs are having little effect on cost and quality.

The authors’ discussion of these questions is the densest portion of the paper. I will summarize it briefly. They define APMs as “every payment method that (1) differs from an FFS method that rewards only volume, and (2) seeks to reward providers for taking accountability for cost, quality, or both.” The vagueness of this definition is not the authors’ fault: This is how “volume-to-value” proponents talk.

The authors wade through numerous surveys designed to assess how widespread APMs are and how successful they have been at putting doctors’ incomes at risk. [4] The authors conclude: “In summary, it appears that APMs have had (1) relatively little impact on physician incomes …, and (2) a smaller impact on physician rewards than on rewards to the larger organization in which they practice.”

The authors’ discussion of the impact that APMs are having on cost and quality focuses on the three horsemen of MC 2.0 and MACRA – ACOs, “medical homes,” and bundled payments. They review the literature and conclude these “models” are having little impact on cost or quality. They criticize the dearth of information on the costs ACOs and “homes” incur to finance the interventions that allegedly improve value. [5] (Amen, I say. How are we supposed to know if the value of anything has gone up if we haven’t accounted for all the costs of producing the thing we’re talking about?)

Of all the summaries of the literature in this long article, the one I found the most useful was the authors’ summary of the research on economies of scale and scope in hospitals, clinics, and hospital-clinic chains. [6] They report that economies of scale in clinics peter out at about 10 doctors, economies of scale in hospitals peter out at about 300 beds, and there are no economies of scale or scope in horizontally merged entities (multi-specialty groups and hospital chains) or vertically merged entities (hospital-clinic systems). In fact, mergers usually raise prices, which makes it extremely unlikely “value” can be improved.

To recap, at this point in their article Burns and Pauly have identified two intractable obstacles to the “volume-to-value” fantasy: Costs do not go south when quality goes north; and the vertical and horizontal consolidation required to create ACOs has a negligible impact on cost and quality and, beyond a certain size, raises costs.

Test 5: Social conditions impeding ACOs and other APMs

Burns and Pauly review several political and social “headwinds” facing the “volume-to-value” campaign. The two most important obstacles they identify are total ignorance of the campaign among patients, and gross ignorance about and much apathy toward it among doctors. “There is no … nationwide movement of consumers asking for changes in how their doctors are paid or how their hospitals are organized,” they write.

They could have said exactly the same thing about doctors. They do note that most doctors have little knowledge of or respect for the mumbo jumbo invented by the “transformation” crusaders (one survey indicates half of specialists don’t know what MACRA is, and “one‐third of those know MACRA only by name”). “Physicians prefer FFS over any of the APMs promoted by payers and policymakers,” they write. “A large percentage of physicians are unaware of how much of their compensation is based on APMs, partly due to low awareness of their eligibility for shared savings and limited knowledge of which patients are attributed to an ACO. This is also partly because ACO financial incentives exist at the contract level, not at the individual physician level….” Burns and Pauly note that bundled payments cover only a few services, and the “movement to APMs may stall at the stage of bundled payments.”

Curb your ideology

Having completed their masterful tour of the evidence indicating we should not hold our breath waiting for the “volume-to-value transformation,” Burns and Pauly offer some useful advice and one piece of bad advice.

The good advice includes the suggestions that “we may need to stop bashing FFS models” and “analysts and advocates may need to come to terms with the likelihood that the triple aim cannot be achieved over the long term.” Their bad advice is that there are no solutions on the horizon and the best we can do is hope that “someone, somewhere, will invent a method of payment or management that can slow spending growth appreciably without harming quality.” They correctly dismiss high-deductible health plans (HDHPs). They note that “results from HDHPs indicate patients restrict all types of utilization (both high‐value and low‐value care) in order to reduce spending.” But they do not even mention the primary methods of cost-control used throughout the rest of the industrialized world, notably single-payer systems and price controls (aka all-payer systems), which are used in both multiple- and single-payer systems.

Their failure to at least mention price controls is hard to understand given the authors’ view that the giant cartels that dominate the American health care industry cannot be justified on efficiency grounds. The race to gigantism has long posed a serious threat to both competition and effective regulation of the health care industry. Anti-trust law has proven to be terribly ineffective at stopping consolidation, and it certainly can’t be expected to reverse it. Anti-trust law has been ineffective partly because anti-trust lawsuits are expensive to prosecute, and partly because anti-trust authorities and many judges have succumbed to the groupthink that mergers promote “coordination” and we wouldn’t want to keep the cartels from “coordinating.”

The fact is, mergers are done to give the merged entity more control over the prices it extracts from its customers and the prices it pays its labor force and suppliers. If price is the reason for gigantism, and if gigantism in turn drives up prices, then our search for a solution must focus on prices and the administrative waste and consolidation that drives prices up, not overuse allegedly induced by FFS payment. If uniform fees had been in place by the 1980s, the rise of the HMOs and the race to gigantism the HMOs set off might never have occurred. As Burns and Pauly noted, HMOs kept their premiums slightly below those of traditional insurers by squashing provider fees, something they couldn’t have done in an all-payer system where providers earned the same fees for the same work regardless of whether the payer is a 1,000-pound gorilla or a 50-pound gorilla.

Note that I’m not criticizing Burns and Pauly for not writing another ten pages on the pros and cons of price controls and other possible solutions (and I don’t intend to discuss the pros and cons of all-payer and single-payer systems here either). I am criticizing them for their failure to even mention a system of uniform fees and prices.

There is in fact a way out of this mess. The first step is to understand that the current “volume-to-value” fad is making the mess worse. Burns and Pauly have helped us take that first step.


[1] In this article and at least one other, Burns and Pauly make an argument I agree with – that there is little difference between the managed care fads promoted in the 1990s and those promoted since about 2000. But in making that argument, they make a distinction I disagree with. They focus their criticism of the 1990s fads on physician and physician-hospital groups that sought to bear insurance risk rather than on the HMOs that rose to their peak influence in the 1990s. The HMO, not the fewer and smaller physician-run groups, was the hallmark of MC 1.0. Moreover, the authors claim HMOs were temporarily successful in lowering costs. I disagree. The brief respite from health care inflation of the mid-1990s was caused by the recession of the early 1990s, the record-breaking decline in economy-wide inflation that began in 1992, and the merger mania that broke out in 1993, not the spread of HMOs (see my article in Health Affairs  ) I don’t understand why Burns and Pauly would want to make the pointless distinction between HMOs and risk-bearing provider groups. Focusing on HMOs would have made their argument that MC 2.0 is just old wine in new bottles even more persuasive.

[2] Donald Berwick was deeply influenced by misleading research published by Elliott Fisher and his Dartmouth Atlas colleagues. Berwick, who coined the phrase “Triple Aim” in a 2008 Health Affairs paper, had said just three years earlier in the same journal, “Right from the start, it has been one of the great illusions … that quality and cost go in opposite directions. There remains very little evidence of that.” (“’A deficiency of will and ambition’: A conversation with Donald Berwick,” Web Exclusive, January-June 2005, W5 1-9, 7)

[3] I disagree with Burns and Pauly’s characterization of research done by Elliott Fisher and his colleagues at the Dartmouth Atlas. They state that that research demonstrated an inverse correlation between cost and quality. That’s not an accurate description of Fisher et al.’s research. Even Fisher et al. did not make that claim in their writings. They did make that claim during public appearances, and they were forced to walk it back by the New York Times.

[4] The terminology and methodology used in the surveys of APM prevalence and penetration were all over the map. Here is an example of the complex findings of one survey:  “A 2016 physician survey indicated that compensation is tied to quality or value among 43 percent of physicians; however, 77 percent said that only a fifth or less of compensation is linked, while 51 percent said it was less than a tenth.” What do we make of “tied to quality or value”? But we can discern a basic truth: Most physicians are not paid according to “value” and only a small fraction of the incomes of those who are is exposed to risk. Here is another example: The percent of hospitals reporting that any portion of their revenues were capitated fell from 13 percent to 8 percent between 2003 and 2014.

[5] Burns and Pauly illustrate the problem of the high cost of running an ACO with this anecdote: “Cornerstone Health Care … was … explicitly modeled on the premise of achieving the transformation from (1) volume to value and (2) FFS to population health. By December 2016, however, Cornerstone had ceased to operate as an independent entity, plagued by the amount of personal debt assumed by its physicians to finance the ACO’s infrastructure, as well as the defection of 70 of its specialists after HHS Secretary Sylvia Mathews Burwell announced her payment initiative in 2015.”

[6] Economies of scale occur when the growth in the size of a business reduces the cost of each unit of production. Economies of scope occur when a business expands into a new line of business, for example, a hospital buys a nursing home, and the expansion reduces per-unit costs.

Kip Sullivan is a long-term health policy expert based in Minnesota

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11 replies »

  1. Kip should not be surprised at their lack of enthusiasm for price controls. They don’t work, at least here in the states anyway. Maryland has had price controls on hospital services for thirty plus years, and has some of the highest per capita health spending in the nation.

    This is partly because they grandfather in existing excessive costs and concentrate on limiting the rate of increase. If you believe there are grossly overpriced services, or excessive utilization of some services, price controls are not the answer. And the growth occurs around the edges of the regulated enterprise. . . .

    The other reason they are ineffective is that they are prone to capture by the regulated.
    Johns Hopkins and the Univ of Maryland are immensely powerful (as well as the largest employers in Baltimore) and have had, at least until very recently, a great deal of influence over the rate setting agency. A former Hopkins health system exec used to run it. Rate controls had the felicitous effect of confiscating suburban hospital profits to prop up care for the poor in central city Baltimore.

    Pauly wouldn’t be caught dead advocating price controls. He is a realist and perhaps our leading living health economist. (And Burns was my student in the University of Chicago’s Graduate School of Business back during the Jurassic period). They do their homework.
    Too bad the dreamers in the Transformation business are so little interested in the evidence.

  2. I think you are correct here, pj. There is a talk at the Grand Rounds of UCSF that says essentially: “The developed world is all doing the same thing in health care; the only difference is that we have high prices and are paying everyone much more.”

  3. We are getting so close to having miraculous outcomes in health care–e.g. cure of beta thalassemia using crispr/cas9–such that public demand will force correct policy.[I think]. We can’t charge $300,000 per patient to do this. There are too many folks with beta thal. Same with sickle cell. Same with malignancies and arthritis and COPD and CHF. We have to get it right else the voters will sweep up. Interventions here have to be reasonable and easy. It’s going to be like our WWII military production.

    Thus, something is going to come along soon that is so seductive and so useful such that spoiled providers and administrators and policy wonks and drug manufacturers and PBMs are going to have to knuckle under and stop playing rich in the golden soup of premiums from the patients. [I hope].

  4. Paul, you are spot on as usual. Those pushing an ideology keep forgetting that their studies are incomplete and poor while they disregard the broad economic proof that markets function to provide the buyer with the best price available for his needs. Their complaint is generally the outlier who if needed can be subsidized from general revenues that need not be federal revenues.

  5. Steve2, thanks for the reference.
    A few things to note about it:
    1. It was published in 2005, and the study they cite to show poor outcomes is from 1986.
    2. They say “Since enrollment in high-deductible health plans is just starting to increase, data on whether enrollees are getting better or worse care are fragmentary at best. ”
    For me to believe the self interested naysayers or the genuinely disinterested doubters i need some better evidence before we throw away the only approach that has good evidence that it reduces/slows health care spending without imposing severe restrictions designed by bureaucrats and politicians.

  6. There are a lot of papers showing worse outcomes when deductibles are high. Don’t recall specifically one on mortality, expensive long term studies, but several note worse BP control and stopping medications that would lead to worse outcomes and death over the long term. IIRC, most of the RAND studies didn’t look at mortality either.



  7. As most likely chosen by Barbara Bush, I would also chose a rapidly evolving episode of pneumonia to say good-by.

  8. I don’t agree with the idea of an all payer system. We don’t expect law firms to require their most experienced senior partners to bill clients at the same hourly rate as their greenest junior associates just out of law school. There needs to be payment differentiation for experience and reputation. Even Maryland’s all payer system for hospital costs pays Johns Hopkins more than community hospitals receive for the same work to reflect the inherently higher costs of an academic medical center.

    I think the U.S. has significantly higher healthcare costs as a percentage of GDP due to several cultural reasons. The first is our litigious society. When the medical specialty societies develop practice patterns that define the standard of care, they are probably more testing intensive than comparable practice patterns in other developed countries.

    The second is attitudes around end of life care that result in much more futile or marginally useful care being delivered at the end of life than in other countries. In the socialist countries, people are more accepting of death when the time comes and they don’t believe in imposing unreasonable costs and expectations on their fellow citizens. In the U.S., family members often can’t let go emotionally even when the patient wants to and doctors like to be able to offer as much hope as possible for as long as possible often at high financial cost to society and low quality of life for the patient.

    Our market based system imposes confidentiality agreements between payers and providers that make it close to impossible to discover what anything actually costs in real time and there are usually significant price / cost differences among providers even in the same city or region.

    While I don’t know for certain, my impression is that there is more of a fraud culture in the United States, especially in nursing home care, home healthcare, physical therapy and durable medical equipment.

    Drug companies go along with price controls in other countries because marginal production costs are usually extremely low and the U.S. drug market is unfettered. If we tried to use price controls too, there could be an enormous adverse impact on medical innovation to the detriment of patients.

    None of these issues have anything at all to do with whether we have HMO’s, ACO’s, bundled payments, capitation or fee for service.

    The good news is that more people have living wills or advance directives now than 20 or 30 years ago and more people are choosing hospice care at the end of life as well so maybe there is hope for at least some positive changes in our culture. High profile citizens like Barbara Bush are also setting a positive example, in my opinion, by stopping treatment for her COPD and CHF at 92 and focusing on comfort care instead despite having full access to the most sophisticated medical care available.

  9. Excellent!
    Re ” They correctly dismiss high-deductible health plans (HDHPs). They note that “results from HDHPs indicate patients restrict all types of utilization (both high‐value and low‐value care) in order to reduce spending.”…. Can you point to any studies of that show worse mortality comes with the big cost savings (Rand).? Much of current practice is useless or harmful (see Hadler)….and rather than patients “restricting” use, they are freely “choosing”. Predictably, many interested parties deem the forgone visits as “high value.”

  10. Also, the Burns and Pauly piece seems to ignore the existence of our nation’s worsening social determinants of HEALTH. No matter what we do about the lasting legacy of Ewe Reinhardt (“Its the prices”), we can not continue our Nation’s band-aid strategy to maternal mortality, child abuse/neglect, adolescent suicide/homicide, pedestrian motor-vehicle mortality, childhood onset obesity, homelessness, mid-life chemical addiction and loss of social mobility from entrenched poverty. All of the requirements for the healthcare of these issues are linked to the progressive decline of our nation’s level of Social Capital, community by community. The last two books of Robert D. Putnam, “Bowling Alone” and “Our Kids” succinctly describe the “metastatic” social dilemma that is increasingly eroding our nation’s autonomy within the world-wide community.

    Returning to Professor Reinhardt and “prices,” the lack of transparency within healthcare is likely related to an institutional co-dependency between the payers of healthcare and the providers of Complex Healthcare, especially by the dominant payers and providers in each community. Since 1960, health spending as a portion of our nation’s economy has increased 5.0% compounded annually, as corrected for economic growth and inflation. The March 13, 2018 edition JAMA published a Special Communication by Irene Papanicolas, Ph.D. et al “Health Spending in the United States and Other High-Income Countries.” It really is the prices.
    Parenthetically and with ominous national comparisons, she listed (page 1030) our nation’s maternal mortality ratio data for 2016. With 4 million live births annually, a maternal mortality ratio of 26.4 indicates 1056 maternal deaths in 2016. Denmark, Sweden, Australia, Switzerland and Japan collectively had an average maternal mortality ratio of 5.3 deaths per 100,000 live births. Plausibly, 750 of our nation’s maternal deaths in 2016 occurred because each woman did not live in either Denmark, Sweden, Australia, Switzerland or Japan when they first became pregnant.
    I cite the Conclusion of the JAMA piece: “The United States spent approximately twice as much as the other high-income countries on medical care, yet utilization rates in the United States were largely similar to those of the other nations. Prices of labor and goods, including pharmaceuticals and administrative costs appeared to be the major drivers of the difference in the overall cost between the United States and the other high-income countries.” Succinctly stated by our colleague from the London School of Economics.

  11. I think that not enough noise is made of the fact that the US has been dancing around what is proven to work in the rest of the industrialized world.

    This piece isn’t alone in glossing over the answers overseas (or even domestically among public payers) that are staring us in the face. Practically every paper or presentation on health care costs I’ve seen over the past decade has done the same. All this does point to a ‘religious,’ or belief-based set of policy choices that avoid the difficult politics.

    In the end, I just can’t see how a managed care belief system that markets, data, and integration absent a much stronger state role will somehow convince a wealthy, entrenched interest to pay themselves less.

    Without getting into the morass of advocating for single-payer or all-payer, I think it’s enough to say that the problem of health care costs will likely only be solved with a heavier regulatory approach than we’ve been willing to allow since at least the 1980s. At a minimum, this should be a serious area of debate within the health services research community.