politics of health care reform: do doctors have too much power?

There are a lot of things I like in the health care reform bills passing through Congress.  Most importantly, all of them make it easier for individuals and small businesses to buy insurance.  But what is not clear is how the reforms will achieve the equally important goal of controlling costs.  President Obama gives a two-piece answer to this question.  The first is rationalizing care and eliminating wasted dollars, largely by digitizing medical records.  The second has to do with moving away from “fee-for-service” system, which provides incentives for doctors to over-treat illnesses, and toward the one where doctors are compensated based on a combination of cost reduction and quality.

To work, both of those fixes have to be effectively implemented at an organizational level.  They will require changing the way doctors, nurses and other medical care providers do their job.  And that means changing the organizational rules by which hospitals and doctors offices operate.  But what that organizational model will look like has not been specified.  It might look like the Mayo or the Cleveland Clinics which use computerized records, pay doctors salaries and reward them for patient outcomes rather than per service.  Yet as the New York Times points out, only one plan in Congress addresses the organizational model and that one is just a pilot program.  Massachusetts is looking at ways of urging doctors to shift into salary-based provider networks.  But there’s no discussion of a mandate or of anything with teeth that would move the medical industry in that direction.

How many reform movements have succeeded in winning legislation meant to change society, but then fail to actually change anything?  Too many to count.  Why?  Because the devil in achieving real change is in the details of organizational implementation.

Specifically: even if reforms are enacted, those who want to maintain the status quo can simply let reforms pass and then either comply only symbolically or make sure that the reforms are implemented in ways that  effectively maintain the system in place.  News that the American Medical Association has signed on to major elements of the reform process is important to getting reform passed through Congress.  But what really matters is how reforms are implemented inside hospitals and doctors offices.  In other words, in the absence of a specific plan for how to restructure the way medical care is organized, the endorsement doesn’t mean a whole lot.

In fact, I fear that it makes it more likely that history will repeat itself.

You need to look no further than to the 1990s and the last major effort at health care reform to see where we’re headed.  When the Clinton health care reform plan fell apart in 1995, there appeared to be a silver lining: Health Maintenance Organizations had emerged from the rubble of the political process as the market’s response to escalating health care costs.  HMOs were supposed to achieve everything that health care reformers want: they rationed procedures based on proven effectiveness, they shifted doctors toward a salary-based pay-for-performance model and they emphasized preventative care.  There’s even evidence that doctors like working for them more (Forrest Briscoe’s research shows that many doctors like working in large organizations for a salary because it allows them greater flexibility and control over their time).  HMOs had the added benefit of being market-based rather than government mandated.  On paper, they seemed like a win-win solution.

But, as the chart (below) shows, within just a few years, the movement toward HMOs lost momentum and was over-taken by a rival organizational form: Preferred Provider Organizations (PPOs).  PPOs look a little bit like HMOs except they don’t do any of the hard things HMOs do to control costs: they allow patients to have their own individual doctor and that doctor is generally paid for specific services, rather than a set per-patient annual payment.  As we consider fundamental reform of the health care system in the US, we need to ask why PPOs won out over HMOs and what lessons this might hold for the achieving meaningful health care reform this time around?

Enrollment by Type of Insurance Provider, 1988-2008

enrollment by type of plan1

Some blame Viagra for the downfall of the HMO.  The little Blue Pill emerged in 1998.  But the country’s largest HMO, Kaiser Permanente, initially refused to cover it.  A popular and media back-lash ensued that provided enough of a political opportunity to solidify PPOs as the heir to traditional indemnity coverage.  Since many employers offered a choice between HMOs and PPOs, people flocked.  But, while Viagra may have provided the spark, in truth, discontent had been percolating for some time.  Doctors had felt hamstrung by HMOs’ requirements and patients chafed at the idea of not having a personal primary care physician who has a holistic view of a patient’s health.

Popular wisdom holds that the Clinton health care reform effort failed because the Administration failed to manage the Congressional process.  But that’s only half of the story: it also failed because it didn’t have a coherent strategy for how to shape or manage the politics that unfolded within the industry once the political process concluded.  Regardless of whether any of the current bills in Congress pass or fail, I fear we are in the same boat.

Avoiding that fate requires recognizing that organizational change on an industrial scale is a highly contested political process.  But those politics don’t unfold inside the halls of Congress.  They happen inside and among the organizations charged with implementing reforms.  And shaping those politics means recognizing where real organizational power lays.  In the case of the medical industry, that leads to one place: doctors.  Doctors have an inordinate amount of latitude over how they organize and manage themselves.  As Forrest’s work shows, many of them would like to have the benefits of a large organization when it comes to stability and flexibility.  But when it comes down to it, they still don’t want to lose autonomy over how they do their jobs (sound familiar, my fellow professors?).  Yet that’s probably what needs to happen if we are going to achieve anything close to real cost controls.

Given that, it starts to make sense why President Obama has begun pointing toward the Mayo and Cleveland Clinics as role models.  They are high status examples of an organizational form that effectively controls doctors without making them feel like they’ve lost autonomy.  But one has to wonder: if they are so great, why hasn’t the organizational model diffused more widely already?  My guess is that those two particular clinics can make the model work precisely because of the high status they enjoy.  A doctor that works for either one of them may not be compensated any better than doctors elsewhere and they might lose some degree of autonomy.  But when they tell other doctors where they work, there is a moment of recognition and some degree of instant respect.  They enjoy status within the profession and that is worth something.  But without that status as a kind of compensation, doctors stand to lose in the bargain.  Unfortunately, that brings us back to square one.  In the end, I find it hard to see how any plan that has pretensions of controlling costs will succeed if it fails either to confront the power of doctors or else effectively co-opt that power in the service of achieving cost savings.

What to do?  Well, if anyone should have ideas for how to do this, its the readers of this blog.  So, I put it to you: What is your advice to the President and to the reformers in Congress on how to achieve the kinds of organizational changes that would be needed to effectively manage costs?  Can incentives shift doctors into a new organizational model?  If so, what kind of incentives would do the trick?  Are incentives alone enough to get the job done?  Are there good examples out there for influencing organizational change on the scale of an industry?  Do those examples provide lessons for how to achieve meaningful change in the health care industry?  Why hasn’t the Mayo/Cleveland Clinic model diffused more widely already?  What can or should public policy do to influence that process?


Written by seansafford

July 25, 2009 at 7:34 pm

19 Responses

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  1. You are right that the real work will be in the regulatory (as opposed to legislative) process. Even more so this time because the White House learned the “lesson” of the Clinton failure and we expect a law that is as vague as possible. We all have our lobbyists scrambling as hard as we can to be ready to move immediately to make sure the interpretation of the law meets our needs.

    One thing that illustrates how hard this can be is the idea of pay for performance, one of this year’s buzz words (along with reducing waste). We’re all for doctors being paid for prevention, but what the hell does that actually mean? My organization has been deeply involved in creating pay for performance measures, and this is incredibly difficult mind numbing detailed work (yes, we have economists involved). We could just pay primary care workers more (an essential thing), but actually being able to link it to pay for performance cannot currently be done in any rigorous way. If the law says that’s how it’s going to be done then something will be implemented, but I assure you that nothing is in place now.

    The funny thing is that the model no one talks about but seems to work best right now is the VA. It provides lifetime comprehensive national services at a lower cost and has better results than anyone. People talk about parts of the VA system (how to get the much lower VA prices for drugs, for example), but of course the problem is that it is a SYSTEM and you have to take it all as one piece. You use the doctors they give you, you take the drugs they will pay for, and you have procedures if they feel you need them. The aspect that most folks don’t like to say out loud is that this works partly (or largely) because the VA is health care of last resort — most of the people in the system do not have realistic alternatives. The VA does wonderful things, but I doubt that most people would tolerate it.

    So we’re all going to breakfasts and golf tournaments with as many Congresspeople as possible. It’s going to be a mess, but it’s pretty certain that the ones who have the most clout will win in the end.


    John Feather

    July 25, 2009 at 8:40 pm

  2. There are two ways to lower costs: have the government lower them unilaterally, or use the market. A single-payer model along the lines of the British NHS will probably never work in this country. I say, push reform the demand side and go down the road of consumer-driven care.

    Your graph shows the start: expanding high-deductible plans. These are increasingly popular, especially among my age group (the young–I pay $15/month for coverage). Tie these to tax-deductible Health Savings Accounts, and roll-over unused money into an IRA account (instead of letting them expire, as is currently done). Eventually, people should be required to put money into these funds, but we can start off by *nudging* them and by default putting in x% of their salary.

    Then, encourage cost comparisons, shopping around, etc.; if necessary by government mandate (ie, force hospital to publish easily accessible lists of costs of treatment). End the employer insurance deduction, and use the money to expand catastrophic care. Now, people are not encouraged to purchase too much insurance as a result of the deduction, and face real costs everytime they go to a hospital (except for emergency treatments). This will drive them to do at least a little shopping around, and will push doctors from ordering so many useless procedures. Enacting tort reform could also remove the legal backstop driving them to do so. Meanwhile, the fact that people have a funded HSA means they aren’t forced to give up treatment for reasons of cost alone.

    Then, try to turn Medicare into more of Medical Home system (as North Carolina has done and Lousiana may do). Placing patients under the long-term responsibility of a given provider reduces incentives for fraud, while increasing incentives for preventative care.

    The debate shouldn’t just be about controlling costs–we should also consider how to tackle issues of preventative care, smoking, obesity, etc. that are major health concerns. Putting greater responsibility in the hands of consumers, and paying on care rather than treatments, seem like the way forward.

    By the way, Singapore makes enormous use of the HSAs/catastrophic insurance model, and it works very well at delivering care and lowering costs. Switzerland has a robust health insurance market, in which the government sets minimum requirements and companies compete on delivering care, rather than cutting treatment. It’s a tragedy that even as we are told to “look overseas” for solutions in healthcare, two of the most successful models–both of which are very market based–are almost totally ignored.



    July 26, 2009 at 12:34 am

  3. Thorfinn: Do you know how Singapore handles the problem of experience rating for individuals? The main argument against market based approaches is that it doesn’t really solve either of the two key problems of access and cost. Very sick people or people who are likely to be sick (e.g., older) can’t afford to buy insurance at market rates. Self-selection into different plans basically undermines one of the key benefits of insurance which is to spread risk across populations and over time.

    But more to the point, even if you moved to a market and/or patient-based approach to medical care, you’d still have organizational issues to contend with. I was trying to talk about doctors and hospitals… not how its paid for (thats a topic for a different post, for sure)

    Which brings me to John. First, for those who don’t know him, John is Executive Director and CEO of the American Society of Consultant Pharmacists and he used to be head of research for the AARP. You bring up a useful point which is that doctors are powerful in part because they have a powerful constituency: patients. Maybe the VA can get away with it because their patients don’t have the power to resist the way the VA works and then find (like my father actually who swears by the care he gets from the VA) that its actually pretty good.


    Sean Safford

    July 26, 2009 at 1:30 am

  4. Sean,

    Why is it that organizational problems are limited to healthcare? Why don’t we have similar problems with the market for TVs? It’s the separation of cost from service. Consumers don’t bear the cost of their treatment, because insurance is subsidized, and because insurance covers everything (like Viagra pills). So health providers develop an ‘organization’ problem to profit. What they do makes perfect sense given their incentives, so you need to change those incentives either directly (government) or through consumers. I’ve been in hospital billing–everything runs around charging expensive and unnecessary procedures, and the patients don’t care (as they would in any other industry).

    The self-selection problem seems to largely go away as insurance becomes universally mandated. In Singapore, you have a public plan which competes with private ones–so even if a private provider drops, you can go somewhere else. Switzerland actually has totally private insurance (mandated), with a basic plan which provides a given level of service (additional insurance can be purchased).

    Why don’t you think the market can’t combat cost? Switzerland and Singapore both have health costs below America (but above the level provided by more government-run care). When insurance companies must provide a given level of benefits, and must cover everyone, they compete on price and service, rather than on who to exclude. HMOs did well at saving costs too. Safeway has taken a consumer-focused approach, and held health spending flat while competitor costs rose on average 38%.

    We have a huge healthcare industry, and changing the organization at even one hospital is a huge challenge, especially when all the incentives run towards running more procedures. We need to change how doctors and hospitals make money to change their behavior. That means consumers/insurers who care about the cost of treatment.

    The other big gripe about market-driven care is that people won’t be able to afford it. This is why it’s essential to establish HSAs (as Singapore has done), with some mandated level of contribution. People can still decide to be stingy, but not because they don’t have cash on hand. Switzerland ensures that no one spends more than some percentage of income on health charges–not a bad idea.

    I second that the VA offers excellent care (my father works there), but from the people I’ve talked to, they actually prefer the VA. One part of it is that people remain in the system, so it’s worth it to provide preventative care. This is also the thinking behind the ‘medical homes’ idea.



    July 26, 2009 at 7:59 am

  5. […] Safford gets it right on health care reform and, indeed, reform of just about any kind: To work, both of those fixes have […]


  6. I agree that the further or more indirect a cost is to the consumer, the less he or she cares, and the easier it is for the organizations in the middle to game the system. That’s especially so when the burden of costs and increases are absorbed by employers. Seems logical (and advantageous to employers, who have a lot of skin in the game) that consumers should feel those costs more. Simple economics, I guess.

    To Sean’s basic questions, though, I think John got it right: health care is a system, and it must be addressed systemically. Doctors are a part of the problem, but their status has already taken a hit through managed care, which has in turn done battle with pharma, which has faced greater challenges from government… It’s a little like a balloon–squeeze one part and the other side swells. What we need to do is let enough air out to make the thing smaller while leaving enough air in that it’s still fun to play with.

    Rather than torture that metaphor further, one recommendation I would have is to involve people who study and manage change in implementing health care reform. There’s no shortage of advice from economists and sociologists about how to define the change, but your point really gets to implementation. That’s where I fear it will fail.

    What is likely to happen is that Congress passes something, President signs it, and the affected organizations will scurry around trying to comply with federal regulations. Externally forced compliance is the opposite of planned organizational change. Rather than tossing law over the wall to the people who will implement it, the reform should be cooperative and carried out in stages. The organizational change should be an ongoing effort rather than an episodic activity. It’s going to take time, consistency, and negotiation.

    As to your question about reform at the industry level, we seem to be doing it across at least three right now: health care, automobiles, and banks. I’m not sure we know what we’re doing, but it’s likely to be a wave that launches a million dissertations.



    July 26, 2009 at 11:00 am

  7. Huge systems have huge vested interests, so the debate will be much less about models and their proven ability to create better outcomes and more about who gets what. There is a good article by AP today that the thing keeping the health care bill alive right now is not Congress by lobbyists who see this as a unique opportunity to fix a system that is broken (“Lobbyists the silver lining in health care storm? As lawmakers squabble, health care groups focus on how to get ahead” And yes, I have 5 people on the Hill every day trying to do this as well.

    One frustration for traditional economic theory is that ideas like rational choice based on best information don’t work. I have seen this up close and personal as the employer of 40 people. We provide health care coverage, even though half of groups our size have dropped it, and the cost is crushing us. Our average annual premium hikes have been 15-20% over the last 5 years, but I know that health insurance is THE most important issue for my employees. I could impose a 50% pay cut sooner than I could stop providing health insurance. The very idea of a major change in the traditional system is literally terrifying to many of them, no matter whether a high deductible policy or other options make more sense for them. For a single mother with 3 kids, the question is not “what is the best use of my resources in getting health care?” but “if my kid gets sick in the middle of the night and I go to the hospital, will they take my insurance card?” I have had LOTS of conversations about this and this is the one immovable object to changing the system.

    The attitude also changes with age. When you are 25 and in good health, lots of options seem possible. When you are 55 with diabetes and 5 medications you will take for the rest of your life, it’s a completely different story. You want stability in coverage over everything.

    We’re not going to control costs any time soon, and nothing on the table currently would really do that, but if we can help the 50 million people without insurance who wake up in the middle of the night with a sick child wondering if they have enough in their checking account to pay for a $2,000 ER visit, we will have made real progress.


    John Feather

    July 26, 2009 at 2:39 pm

  8. how can you expect physicians to be more cost conscience and efficient and change the may they practice medicine, when this healthcare bill offers no tort reform?
    The reason hospitals and physicians order as many tests as they do in many instances is to cover butt from being sued. Yet you want them to change the way they practice medicine. sounds like the only ones who benefit from this bill is Lawyers and the insurance companies. Not surprising being that most lawmakers are attorney’s anyway.



    July 26, 2009 at 5:47 pm

  9. You raise a fair point Tim. Its true, this time around I haven’t heard nearly as much about tort reform as previously. I’m not sure why.

    But I’m also not sure that simply getting tort reform through would do the trick. Certainly, it would help. But the spending increases seem to be driven in part by a combination of doctors not having incentives to ration care, the ever increasing availability of new procedures and, it should be said, patients having more money to spend. That last point is not trivial: as wealth grows, so does people’s taste for better quality medicine. So, I’ll take your point, but assert that I don’t think it undermines mine: there will need to be some kind of organizational change in the way medicine is delivered if we’re going to see cost savings. Question on the table is how that can be achieved.

    To John’s point, I agree that my number 1 priority is getting everyone covered and, like Massachusetts, it may be the case that that will need to come first and then the cost cutting will come later. If its going to be a ‘market-based’ approach to cutting costs — i.e., that the cost cutting is going to come from adjustments in the market rather than some form of a mandate from DC — then I suppose that’s really the only way it could work anyhow. Still, I find it interesting that we lack ideas as organization scholars about how what levers the government has to shape the environment in ways that might influence organizational practices or design. Using the bully pulpit and pointing toward high status exemplars is one way. But are there others?


    Sean Safford

    July 26, 2009 at 5:55 pm

  10. And to Joseph, thanks for taking on the question directly. Regulation is one way, of course. Though, I’m not sure how we’d even regulate something like a shift toward a capitation scheme or compensation based on performance. It seems like the best idea anyone has come up with is to used medicare reimbursement to try and create incentives.

    A couple of ideas that I’ve seen bandied about in other contexts (and you rightly point out that we are living through some amazing industry-change processes in finance, autos, did we mention energy?):

    1. Social worker model – where government plays a more active role reaching out to parts of the industry. Rather than regulate, they provide information, data and urge movement toward a preferred policy outcome.

    2. Diffusion models – Obama is using the Mayo Clinic and Cleveland Clinic as models for diffusion. I would love it if someone who knows a lot about the health care industry would talk about why those models haven’t already diffused. This was something I thought about in the context of the car industry. There were some very good models out there for how to do a better job designing and manufacturing cars. But, they didn’t diffuse. We spend so much time in Org Theory talking about how stuff DOES diffuse. It seems to me that the much more pertinent question is why some apparently good ideas do NOT diffuse. From what I wrote here, it should be pretty clear that I think the answer has to do with power… But I see this as an area wide open for debate and research. Its also a place where we as org theorists could have a direct impact on policy: can government help to remove or mitigate barriers to diffusion? If so, how?


    Sean Safford

    July 26, 2009 at 6:02 pm

  11. We already have large chunks of the healthcare industry running on market models that supposedly ‘don’t work’: vet services, optometry, plastic surgery, dental care. In these sectors, patients are responsible for much of the cost of treatment. And while these sectors are not immune to organizational problems/cost increases, costs tend to be lower and the culture better than in the rest of the healthcare system.

    Fighting organizational problems without targeting incentives won’t work. The organization developed to finely exploit those incentives.

    In terms of legislation, there’s a bill out there–Wyden Bennett–that cuts the tax exemption for employer insurance, mandates coverage, and encourages competition between insurers. It ends employer-provided healthcare, and creates a market for healthcare. The bill has many bipartisan supporters, and the CBO rated it budget-neutral. It’s a flawed bill, but perhaps the best of the flawed ones. There have been no serious industry attacks on the bill; it’s market friendly, and insurers may gain. It’s personal rivalries in DC, not industry interests, that are holding this reform back.



    July 26, 2009 at 6:40 pm

  12. I’m with you on the demand side (i.e., patients and insurers). But are you are really saying that you think the supply side (providers) would simply adjust? They have a vested interest in the statys quo (don’t tell me dentists and vets wouldn’t prefer to work under the rules doctors do… when it comes to how they are paid. I’m sure they would not want to work under the same currently onerous organizational schemes). My point is the organizational model is robust because the interests are vested.


    Safford, Sean

    July 26, 2009 at 7:00 pm

  13. Sean,

    Yes, I think the supply-side would adjust rapidly if the demand-side changed–if company-provided insurance was no longer tax-exempt and consumers had to pay for some health costs out of pocket.

    The experience from airline deregulation, for one, suggests that corporate organizations are anything but set, but adjust fluidly to changes in market structure.

    The NYT has a good article on the health care system at Bassett, a coordinated system where doctors are paid by salary rather than by procedure. Changing Medicare and federal disbursements to encourage that would be nice, and as you say some doctors would prefer the security.



    July 26, 2009 at 7:38 pm

  14. […] but once you dig, these nations controlled costs by changing the nature of the profession (e.g., see Sean’s discussion of shifting doctors from free floating contractors to salaried employees). This isn’t to say that no one ever saves on administrative costs, or that no one has any […]


  15. […] low by a combination of massive borrowing and artificially low exchange rates. That’s why I continue to believe that the way to address costs must come down to a set of organizational innovations.  The […]


  16. For these Clinics using a Salary Model to work there needs to be incentive for doctors to work there. They would almost certainly be giving up some autonomy and earning potential, so my theory is the only way to attract them is by offsetting medical school debt, and providing an ongoing tax break to doctors who work in this scenario.



    July 30, 2009 at 2:40 pm

  17. I was born in 1951, the middle child of seven. My father worked and my mom stayed at home. My father had only an eighth grade education and was a carpenter, so as you can guess money was NOT abundant, in fact it was always scarce.

    We were taken to the rural family doctor (Gen. Prac.) when we were sick, when we needed immunizations we went to the county health clinic. We never were left sick, or denied a necessary doctor’s visit because the doctor evidently charged reasonable rates.

    We all had our tonsils and adenoids removed, I had eye surgery at the age of 5, etc. So, while we didn’t have any catastrophic illnesses, we did have all of the normal childhood ailments. I am pretty sure that my parents did NOT have health insurance.

    I give this as background only to point out that the cost of health care has now risen to a point where a family with 7 children with a modest or low income could not possiblly provide this level of care for their children.

    In my humble opinion, the insurance industry as a whole has only contributed to the steady rise in cost. What started as “major or catastrophic insurance”, then graduated to HMO’s in the 70’s and PPO’s has gotten out of hand. Perhaps, wiping the slate clean and starting over would be a better situation.

    I do not advocate getting rid of Medicare or Medicad, but I am an advocate for better measuresures to stop the fraud and waste in these two systems.


    child of the 50's

    July 31, 2009 at 9:05 pm

  18. All your arguments are very valid and noteworthy. But as cruel as it may seen, my idea revolves around the supply and demand principle. For example, India has so many physicians / family practitioners – that darwinism takes over and it is the survival of the fittest. The one charging the lowest rates (which is usually out of pocket) is the one attracting most of the patients. Now, for the US, take the insurance companies out of the equation so that the market fosters healthy competition amongst family practitioners without any preferential treatment. The costs will come crashing down and every citizen gets a fair shot at preventative medicine. Trust me, the doctors who know nothing else other than to treat patients will NOT be running away from their practices to take over a cashier’s job from you or me at a retail outlet. Secretly, they adore the practice of medicine and will stick by it even if they re making mere pennies on the dollar.
    As for any other specialities other than family practice – eg. Emergency / ICU / long term / diagnostics – this model will never work.



    May 30, 2010 at 3:59 am

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