It's been clear for some time that health care costs are growing at an unsustainable rate. Health care spending now constitutes 18 percent of the gross domestic product (up from 14 percent in 2000 and 5 percent in 1960) and is projected to reach 21 percent by 2023.

The United States spends about twice as much on health care per capita, and 50 percent more as a share of the gross domestic product, than other industrialized nations — and has shorter life spans, higher infant mortality and lower quality of care in many respects. With health care costs continuing to outpace the consumer price index and quality of care lagging behind other developed countries, significant changes to the incentives in health care are needed to achieve better health outcomes at lower cost.

The Focus on Value

Multiple factors drive health care costs, but there's now general agreement that a key driver of costs are payment systems that encourage and reward volume. Current payment systems are essentially piecework-oriented: Hospitals and physicians get paid for providing services to patients. The more services they provide, the more they get paid. Outcomes matter comparatively little. Research indicates that more services and higher spending do not result in better outcomes and may produce exactly the opposite result.

In fact, the American Board of Internal Medicine has worked with 25 other medical specialty societies to call into question the use of more than 130 tests and procedures. But while these societies can identify procedures or tests that often are overused or unnecessary, as long as reimbursement continues on a fee-for-service basis — without a connection to patient outcomes — the perverse incentive to do more will continue.

As a result, payers are actively engaged in changing the way physicians and hospitals are paid. All those who pay for care (including consumers or patients) are increasingly focused on the “value” they receive. The trend for payers and other stakeholders to require value for payment (e.g., pay-for-performance, bundled payment initiatives) is likely to become more and more prevalent, particularly as the Centers for Medicare & Medicaid Services try to get costs under control and private payers face more price resistance and public scrutiny.

Besides new payment models, non-reimbursement for never events and CMS's readmission penalties indicate that payment is increasingly dependent on demonstrated value. This development also marks the beginning of a shift toward more accountability.

In addition, an increasingly educated and information-driven generation is demanding and receiving more data about the quality and outcomes associated with specific institutions, procedures and even individual doctors. As data become more widely available through publications such as Consumer Reports, patients will use them to make decisions about their health care.

Currently, many health care systems remain successful despite the massive changes the industry is facing. As a result, some leaders are reluctant to take bold steps. But the wait-and-see tactic is extraordinarily risky. Health care delivery organizations that are slow to meet demands for better care at lower cost by shifting from a volume to value model will be left behind.

The transition is neither quick nor painless, and those who wait too long to start their engines may run out of runway. At some point, payers will drop or skip over providers that cannot demonstrate value and quality. Changing incentives to close the looming value gap between market expectations and what their organizations deliver is critical for health care leaders who want to ensure continued financial viability.

Meeting the Demand for Value

The challenges associated with meeting demands for value are many. Perhaps the greatest for health care leaders is creating cultural change within their organizations. The shift from volume to value will require administrators and clinicians to change their perspective on health care delivery and look at operations, financials, quality metrics, etc., differently. Health care leaders will need to look at care delivery from a broader perspective than in the past, focusing on costs and patient outcomes across the care continuum.

Leaders face major barriers to change from new technologies, changing business models and the need to engage and win over clinicians. Clinicians, who drive spending through treatment decisions (e.g., tests, treatments, hospital admissions, length of stay, etc.), will play a critical role in controlling costs and will be challenged to improve quality at the same time.

These two focal points — costs and quality — need to be looked at together. As a practical matter, health care leaders must be able to address new demands and specific challenges across their organization. For example, hospital leaders need to understand what care costs and how their organization charges and gets paid. As new payment systems are implemented, there will be an increased emphasis on links between payment and quality (for example, the refusal to reimburse never events). As payment is increasingly connected to quality, it's critical that health care leaders improve collaboration among the governing board, medical staff and administrators.

Both administrative and clinical leaders must improve their ability to reduce unnecessary variation in medical practice, both to improve care and manage costs more effectively. Value will require identifying and eliminating wasteful and unnecessary care, improving operational practices to reduce medical errors and complications, and examining activities to ensure both quality of care and cost-effectiveness. Strong physician leaders must ensure that clinicians understand the growing link between quality, payment and compliance (e.g., whether the care provided was necessary and appropriate). These efforts will be necessary to deal with increasing scrutiny by regulators and to be successful with new payment models such as bundled payment.

Improved coordination is another critical component of value-focused health care delivery. Payment systems must eliminate incentives that encourage care providers (hospital leaders, physicians, laboratory directors, etc.) to duplicate tests and services. In some instances, leaders may need to provide more care — such as hiring more individuals with the responsibility of care coordination, and paying for additional services (e.g., phone consultations) — to achieve better overall outcomes and prevent additional costs down the road.

Health care delivery organizations must be able to determine how effective they are at removing inefficiencies, reducing costs and improving outcomes. Unreliable or unnecessary care and medical errors are just too expensive. Leaders must ensure that their systems are effective in collecting and reporting quality data. For clinical leaders, that means ensuring that documentation, including charting and clinical documentation, is consistently accurate and complete.

Demands for value also will require developing and implementing new metrics to measure cost and outcomes, for an entire cycle of care, with fixed costs allocated to reflect actual use by patients. Even if a hospital has high marks in safety, clinical outcomes and patient satisfaction, it will need to collect and present compelling data that ensure payment under new models; impress payers, consumers and employers; and establish the basis for accountability. Health care delivery organizations must not underestimate the magnitude of change required.

Leading the Charge

Payment for health care is changing rapidly. Demands for better outcomes and lower costs are now taking the form of new payment models, non-reimbursement of never events, and increasing patient access to quality data. Provider organizations must move from their focus on volume to an approach that is based on value. The practical demands of demonstrating value are huge and require underlying cultural and operational shifts, but the sooner health care leaders get started, the more likely they will be to have a successful take-off.

Rita E. Numerof, Ph.D., is president, and Stephen Rothenberg, J.D., is a consultant at Numerof & Associates Inc., St. Louis.