Archive for May, 2006

The Atomization of Healthcare

Thursday, May 4th, 2006

What We Expected in 1990

Back in 1990, the future of healthcare was clear. We were going to have a world of large, vertically integrated delivery systems competing head to head on the basis of price and quality, at risk for the care of a defined population. Capitation was going to spur investment in community health and prevention and would place greater strategic emphasis on primary care over specialty care.

This Enthovian* nirvana was the basis of the ill-fated Clinton health plan and was a vision that guided policy and strategy through the late 1980s and early 1990s. However, the vision never happened. The Clinton plan unraveled, the integrated systems disintegrated, capitation receded, and the healthcare world floundered in search of a new vision, or at least a new idea.

What We Got by 2006

We are in a world that is almost the inverse of the integrated vision. The healthcare trend of the moment is toward the atomization of healthcare. Individual patient/consumers, under heavy financial incentives, are now “empowered” to navigate among a diverse, pluralistic set of providers. Individual hospitals and physicians are increasingly rated and ranked on measures of quality and costs, competing aggressively for individual patients. Hyperspecialty care, such as complex and esoteric surgery, for a few well-insured, sick patients is celebrated and profitable, while preventive, community-based, public health and primary care is underfunded and unpopular with new doctors. Newly graduating physicians want to be dermatologists doing cosmetic procedures for cash, not primary care physicians doing internal medicine for capitation.

By driving healthcare to the atomic level, we may be further eroding the “systemness” of healthcare financing and delivery, especially in the face of an obesity epidemic and an aging baby boom that will create a tsunami of demand for chronic-care management over the next two decades.

How should hospitals respond? On the one hand, atomization provides incentives and opportunity to focus service delivery on a few areas of specialization at which hospitals and physicians can excel. On the other, we may be optimizing the care of the few and neglecting the health of the community. Where are we headed, and what should we do about it?

Atomization of Healthcare Financing

The most obvious dimension of atomization is in the area of healthcare financing, particularly in the private insurance market. The rise of Health Savings Accounts (HSAs) and so-called consumer-directed health plans (CDHPs) is really the beginning of a new world of high-deductible health plans (HDHPs). HSAs are tax-advantaged HDHPs that have obvious appeal to high-income earners. CDHPs bundle together features aimed at empowering consumers to spend their healthcare dollar more wisely; stripped of the euphemisms, however, they are another version of HDHP. The insurance market is moving toward retail medical care for primary care and catastrophic coverage beyond a $1,000 or $2,000 deductible.

HDHPs are cheaper for employers to offer, and represent an affordable alternative for individuals who buy their own insurance, but they place a financial burden on lower-income and chronically ill patients that causes them to forgo, defer, or trade down in the realm of primary care. Although tiered formularies in pharmaceutical benefits plans have caused a substantial shift toward generic and therapeutic substitution (much of which is positive for patients, payers, and policy), exposing patients to the full retail cost of medication, doctors’ visits, and routine services in HDHPs is beginning to have significant effects on patient compliance. Recently published Harris Interactive surveys show almost twice the rate of noncompliance among patients in HDHPs as in the commercially insured population on such measures as not filling a prescription or not visiting a doctor because of cost.

Atomization of the insurance market, in which individual consumers have a wide choice of plans and price points, in which insurance carriers have the choice of marketing, underwriting, and pricing patients at the individual level, and in which patients face “home-free” incentives when they have exceeded their maximum deductible, points to a turbocharging of the classic sources of market failure in health insurance. Scholars point to several sources of market failure, and respondents to the Futurescan survey see these trends as likely:

  • Cream skimming: Insurers marketing to and signing up only healthy patients.
  • Adverse selection: Sick patients left in the insurance products with lower deductibles, causing a death spiral in the insurance pool.
  • Moral hazard: “When you’ve got it, you use it,” particularly after you have reached catastrophic coverage.
  • Undermining of community rating: Health insurance rates based on the experience of individuals and small groups.

Atomization of Hospitals and Physicians

There is much to be positive about in the reimbursement environment. Pay for performance (P4P) and increasing transparency on quality and costs are trends with significant momentum that are described elsewhere in Futurescan. Together they will improve quality, and we should support these trends. However, they will also create winners and losers, perhaps widening existing disparities among rich and poor institutions and the patients they serve, and creating further atomization of healthcare delivery. For example, the trend toward transparency on cost and quality at the individual hospital and even the individual physician level could be a divisive force between providers and even within integrated groups.

Atomization of measurement may create an illusion of excellence: that somehow brilliant physicians can rise above system failure, that the delivery system does not matter, only the performers themselves. What happens to the bottom-performing physicians in an otherwise top-performing medical group? Will they be economically ostracized, even though the group dynamic may be their best hope for performance salvation? We must be careful that our quest for fine-grain accountability does not create a wedge that divides organized systems of care.

Similarly, the two capital-intensive megatrends of information technology (IT) and hospital construction, each anticipated to consume between $15 billion and $20 billion per annum in capital over the next decade, while positive for the system, may further widen the gap between rich and poor institutions and create more atomization, not less. Hospitals with the capital for IT and new construction tend to be those with positive operating margins derived from high proportions of well-insured commercial patients and lower numbers of Medicaid and uninsured patients. These margin-enabled institutions may put further distance between themselves and the pack over the next decade, perversely rewarding the trend to focus on the rich and well-insured at the expense of the sick and poor.

Nowhere is the threat of atomization greater than in the creation of specialty hospitals and outpatient surgery centers that, left unfettered, could completely eviscerate the cost-shifting engine that powers the typical community hospital. Profitable service lines like cardiac catheterization and orthopedic surgery subsidize unprofitable services like general medicine and behavioral health. As medical entrepreneurs, fueled by technology and venture capital, extract the profitable lines to create specialty hospitals and clinics, the remaining community hospitals can spiral down economically, physically, and in their service to the community.

Consequences of Atomization

This trend toward atomization has a number of consequences – some positive, some negative. On the positive side, specialization may yield the kind of service excellence that focused factories have long promised. Atomic-level measurement and incentives will similarly increase the accountability of patient and provider alike. However, there are also worries: the administrative complexity of healthcare is going to increase; disparities will rise; there will be winners and losers at the atomic level, both among patients and providers; there will be greater challenges in the coordination of care; and there will be significant treatment compliance issues.

Implications for Hospital Leaders

There are a few obvious initial responses hospitals can make to capitalize on the trend toward the atomization of healthcare:

  • Focus on the individual patient experience. Hospitals should invest in physical plant, IT systems, and patient care and service processes to make the patient care experience positive and competitive for the motivated individual patient.
  • Attract the high-end, well-insured patients and focus on profitable service lines. Hospitals should be diligent in segmenting markets and creating service lines to cater to the well-insured.
  • Excel in measured performance. In a world of atomic measurement and transparency, hospitals and their medical staffs must deliver on that which is measured and reported.

To focus solely on the atomic self-interest, however, may backfire in the long run if hospitals do not think beyond their own individual economic success. Hospitals, individually and collectively, must:

  • Create meaningful new delivery platforms for coordinated chronic care. Hospitals can and should be active in designing new systems of care aimed at managing large populations of chronically ill patients.
  • Design new reimbursement systems to reward coordinated chronic care. We need a new system of reimbursement for chronic care that rewards such new delivery platforms. P4P initiatives are a starting point, not an end point.
  • Reinvigorate community. Hospitals need to revive their interest in community-based, population health initiatives; otherwise, chronic care will swamp us all. We cannot solve the obesity epidemic with bariatric surgery and dialysis alone.

The trend toward the individual, atomic level of healthcare needs to be balanced with a sense of community in both financing and healthcare delivery. Enlightened leaders must operate at both the atomic and system levels to truly succeed.


* Alain C. Enthoven, a Stanford University economist, designed and proposed the Consumer Choice Health Plan, a plan for universal health insurance based on managed competition in the private sector, in 1977, while serving as a consultant to Department of Health and Human Services Secretary Joseph Califano and the Carter Administration.

Futurescan Survey Results: Atomization of Healthcare

How likely is it that we will see the following on a widespread basis (i.e., in the majority of geographic marketplaces) by 2011?

Very Likely (%) Somewhat Likely (%) Somewhat Unlikely (%) Very Unlikely (%)
Cream-skimming by insurers (i.e., selecting individuals with expected losses below the premium charged in order to increase profits) 42 40 17 1
Adverse selection by patients (i.e., individuals with low expected expenses dropping out of the insurance pool, leaving only individuals with high expected expenses) 25 46 28 1
Disappearance of community rating (i.e., insurers setting the same premium for everyone in the community regardless of age, sex, or previous illness) 15 37 38 10