VIEWPOINT

Health Care Cost and Value

The Way Forward
Laurence F. McMahon Jr, MD, MPH
Vineet Chopra, MD, MSc

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HE INCREASING COST OF HEALTH CARE HAS BEEN A

focal policy issue since the 1970s. During this

period, many interventions aimed at moderating
health care costs, including the managed-care
movement and reforms in hospital and physician payment, have failed. It is estimated that by 2019, 19.3% of
the US gross domestic product (GDP) will be devoted to
health care.1 An increasing proportion of GDP committed
to health is simply unsustainable.
Although there is no more contentious area than the
interface between health care delivery and public policy,
the fundamental precepts of the health care cost conundrum are simple. Health care cost is merely the sum of services delivered multiplied by their price. To decrease overall health expenditure, either the cost, number of services,
or both must decrease. However, this formula must be
moderated by clinical value. Although it is easy to measure
cost, quantifying value is problematic because it varies by
patient preference and clinical circumstance. As the debate
regarding the definition of valuable health care continues,
a more fundamental problem has developed: the inability
to eliminate services that offer little or no clinical value.2,3
Any rational attempt to address health care cost must first
address these services.

sumes that organizations will collaborate to improve the

health of populations, that waste and inefficiencies will be
eliminated, and that physician groups will right-size themselves for the good of the population.
History has shown this to be a naive perspective. Rather,
when faced with a global payment, members of the health
care system often respond in ways that protect their own
interests. For example, in a lawsuit naming Health and
Human Services Secretary Kathleen Sibelius and then Centers for Medicare & Medicaid Services Director Don Berwick, 6 physicians allege that primary care physicians have
been harmed by the agencys overreliance on an opaque,
imbalanced, and financially conflicted payment structure
informed by special interests in the American Medical
Associations Relative Value Update Committee.4 In a tangible example of the tragedy of the commons, certain
specialties have increased their spending at the expense of
others, contributing, in part, to the current sustained
growth rate (SGR) impasse in Medicare.5 There were concerns that the Boston-based, not-for-profit Partners Healthcare system used its market power to limit trade or artificially increase prices.6 The large pharmaceutical company
Pfizer paid a record $2.3 billion fine and pleaded guilty to
1 felony count in settling federal criminal and civil charges
related to Bextra and other drugs.7 Taken together, ample
evidence suggests that major members of the health care
system are unable to self-regulate for the good of society.
In distinction to the cost-centric approach, proponents
of the value-centric approach contend that only high-value
services should be reimbursed. Accordingly, this approach
rests on dichotomous interpretations of value for pay-forperformance measures. Although this approach is noble in
construct, it fails to recognize that value is a continuum and
not an absolute. For example, results from a randomized
controlled trial represent an average across a continuum of
risk. Thus, an intervention designed to reduce mortality in
acute myocardial infarction will provide the greatest benefit to those at highest risk of death compared with those at
lowest risk of death. This spectrum of value is blurred when
results are presented as an average across a group with hierarchical risk because those at highest risk of death who

Existing Approaches to Control Health Care Cost

Two approaches have been attempted to control health
care expenditure: a cost-centric approach, which emphasizes constraining the cost of care vs a value-centric
approach, which accentuates enhancing net value delivered for a given price.
The cost-centric approach is frequently promulgated by
nonclinicians and represents the motivation behind the development of health maintenance organizations and accountable care organizations. The goal of this model is to
control cost by providing a global payment for health care
services. Proponents of this approach rely on the assumption that global payments will lead to either a decrease in
the number of services provided or a decrease in the price
of services. Consequently, this construct hinges on the professional integrity of hospitals and physicians because it as2012 American Medical Association. All rights reserved.

Author Affiliations: Division of General Medicine, Department of Internal Medicine, University of Michigan Health System. Ann Arbor.
Corresponding Author: Laurence F. McMahon Jr, MD, MPH, 300 N Ingalls St,
Room 7C27, Ann Arbor, MI 48109-5429 (lmcmahon@umich.edu).
JAMA, February 15, 2012Vol 307, No. 7 671

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VIEWPOINT

this approach would preserve medical decision making and

patient autonomy because it would only influence insurance or government payment. In every instance, patients and
their physicians may elect services deemed to have a low
clinical value, but patients would have to pay for them out
of pocket.
The creation of a value-based payment system cannot occur overnight. This proposal merely outlines the process of
migrating to such a payment system. A credible first step,
however, may be to immediately lower payment to both clinicians and hospitals for procedures, for which ample evidence has failed to demonstrate clinical benefit to patients,
such as vertebroplasty.10

stand to receive the most benefit from the intervention will

appear to exhibit lesser benefit due to averaging. Conversely, those at lowest risk are perceived to have significantly greater benefit than they actually receive. Because more
patients tend to have lower-risk conditions, this approach
overestimates the net value of an intervention and erroneously justifies costs associated with often marginal improvement in outcomes.

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Conclusion
The United States can no longer afford to allow its health
priorities to be set by the vagaries of a payment system disconnected from clinical value. The health care system must
evolve to provide the care that the population needs, supported by a payment system that reinforces this care. A medical market that is focused on physicians and health care organizations and based on providing clinical value to patients
can enhance care and potentially reduce cost. This is the
way forward.

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Conflict of Interest Disclosures: All authors have completed and submitted the
ICMJE Form for Disclosure of Potential Conflicts of Interest. Dr McMahon reported pending institutional grants from the Blue Cross Foundation of Michigan
and the Agency for Healthcare Research and Quality. Dr Chopra reported no conflicts of interest.

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The Way Forward

In the current US health care system, patients are tasked with
determining the value of a test, drug, or procedure. Third
parties externally moderate this decision through copayments, deductibles, noncoverage, and other such mechanisms. Physicians and hospitals are paid regardless of whether
the services delivered are of high- or low-clinical value. This
model is flawed and a new exemplar is necessary.
The way forward is a new system in which payment for
any test or procedure is directly linked to the clinical value
it provides to an individual patient. Consequently, physicians would no longer receive the same payment for an intervention but rather, a tiered-payment based on the demonstrated value of the service. For example, placement of
an elective cardiac stent in a patient with stable coronary
artery disease who did not undergo noninvasive testing to
demonstrate ischemia would receive significantly less payment than would the same stent placed in the setting of an
acute myocardial infarction.8 Similarly, surveillance endoscopy performed before the recommended 10-year interval
in a patient who previously had a normal colonoscopy would
receive less payment than an appropriately timed follow-up examination.9 In this manner, physicians and health
organizations would be motivated via higher payment to provide clinically valuable interventions. In relation to the ongoing health care debate, there is no rationing of care or
intrusion into medical decision making. Rather, the introduction of clinical value-based incentives engenders a medical marketplace in which these domains become aligned at
the level of the clinician providing the service.
Although a systematic way to gauge value in health care
is lacking, this model would offer several ways to promote
this understanding while controlling health care costs. First,
because payment is linked to the clinical value of services,
an incentive would be generated for comparative effectiveness studies needed to enhance and inform future payment. Second, the medical marketplace would become inherently autoregulated as those most able to make clinically
appropriate judgments (eg, physicians, health care organizations), would be placed at economic risk. Third, because
both physician and facility payment would be affected, capital investment and workforce expansion would become inextricably linked to interventions of proven value. Fourth,

672 JAMA, February 15, 2012Vol 307, No. 7

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2012 American Medical Association. All rights reserved.

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