July 18, 2016 HCMatColumbia

Sherry Glied elaborates on organizational innovation on the Health Affairs blog

Editor’s note: This post is part of a series based on the 5th Forum: Learning from each other – Scaling ideas up to the next level. The forum was held in Berlin, Germany on June 9 and 10, 2016 and organized by the Center for Healthcare Management. For updates on the Forum’s results please check the Center for Healthcare Management’s website or follow on Twitter @HCMatColumbia.

How Policymakers Can Foster Organizational Innovation In Health Care
By Sherry Glied


Everyone wants a health system that produces better outcomes at lower cost, offers more person-centered care, and focuses on health rather than health care. After decades of trying, however, American health care, as well as health care in other countries, still seems distant from that vision. Better models of care, whether integrated delivery systems, hospitals, or clinics, do surface, but, so far, they have largely eluded systematic replication.

Instead, the success of these paragons stems from hard-to-copy factors, like local culture or exceptional leadership. To make rapid progress toward a higher value health system, health care needs organizational innovations—new models—that are less dependent on culture and leadership and can become the basis of readily replicable, sustainable, locally competitive health systems.

The 25:1 Rule

The development of a new form of business organization—think Starbucks—that reshapes an existing industry happens rarely anywhere, yet health care seems even more stagnant than many other sectors. One roadblock to change may be quite fundamental: the distribution of health care spending itself.

Spending in most sectors is governed by the 80:20 rule — 20 percent of customers account for 80 percent of expenditures. Accordingly, most businesses are organized to focus on that key 20 percent. The 80:20 rule holds true in health care as well, but it’s amplified by the 25:1 rule — just 1 percent of health care customers account for (about) 25 percent of expenditures. For health care insurers and providers, especially those paid case- or performance-based rates, avoiding (or in some payment systems, enticing) that 1 patient in 100 is the key to fiscal success. Unfortunately, this concentration of spending stands in the way of new, replicable organizations for at least three reasons.

Picking Winners, Custom-made Treatment, and Customer Loyalty

First, while it’s impossible to fully predict health spending, insurers, providers, and patients all have information that can improve their odds of predicting who the costliest cases will be. Despite decades of effort in the refinement of anti-selection mechanisms, there is still a bigger payoff to investing money and management attention in strategies to identify and avoid high-need cases or to do better coding of diagnoses in risk-adjustment systems than to managing care.

Second, the 1 percent are heterogenous and complex. They often need bespoke attention, not off-the-shelf, standardized processes. Insurers and providers are increasing their investments in programs that address these diverse needs, from hot-spotting strategies to complex case management. But the financial imperative (which reinforces a professional and clinical imperative) to focus on the 1 percent diverts management attention from developing and implementing the kinds of standardized processes that would enable the emergence of new, replicable organizational forms.

Finally, the 1 percent are typically very loyal customers. Once they have established a network of clinicians, they are unlikely to decamp for a new plan or organization. While many factors limit the entry of new health care insurers and providers, the stability of those patients with the greatest expenses and needs makes it even harder for a new entrant to build market share.

Ratchet-Down Incentives

These problems suggest two very modest directions policymakers might follow to stimulate the development of new organizational forms. The first is to modulate the use of high-powered incentives, such as pre-payment or capitation, in health care. To deflect attention from the 1 percent, policymakers might consider arrangements that would pool a small portion of the risks of the highest cost group through a reinsurance-like scheme, such as the outlier system in the Medicare Diagnosis Related Group program.

Such a scheme would, admittedly, reduce incentives to control costs in this high-cost group, but there’s limited evidence that high-powered incentives have substantially reduced spending among the costliest patients. Conversely, a reinsurance-like scheme would reduce risk selection, diagnostic upcoding, and manipulation of risk adjustment systems, and there is much evidence that high-powered incentives have spurred these pathologies. By reducing gaming around the top 1 percent, policymakers could encourage health care managers to develop standardized and replicable models that focus on the care of the rest of the population.

Decrease Frictions

Second, policymakers could take steps to reduce frictions in the system in ways that encourage patients to shop among health care providers. One such innovation might be to change the current meaningful use core measure that requires health care providers to give their patients an electronic copy of their health information upon request. Currently, this is an opt-in system, but it can and should be changed to an opt-out system in which patients automatically receive a copy of their information at each visit unless they affirmatively indicated they did not want it. The ability to present any provider with one’s health information might tip at least a few patients toward considering a new kind of health care organization.

Role of Policy

Organizational reinvention rarely works from the top down. Policymakers can set basic, simple rules and supply resources, but lasting innovation is likely to come from entrepreneurs with both ideas and the incentives and opportunity to put those ideas into action, as we discussed at the 5th Forum of the Center for Healthcare Management Forum in Berlin. In a more innovative health system, new organizations would emerge and compete with one another, with some succeeding and others failing. To make the process just a little more dynamic, health care policymakers should ensure that the rules of the health care system support the emergence of new forms from the bottom up.

For a detailed overview of topics and speakers please see the agenda.