Can the Value Proposition Work in Health Care?

The delivery of healthcare is one of the oldest human occupations, and as such, it has largely been foreign to the rules and understandings of commercial transactions. Health care pricing is artificial and opaque. In the modern United States, third party agents have inserted themselves into the health care transaction -- distancing buyer from seller, imposing price controls, and at times denying payment for services. The nature of the product in health care is poorly standardized and often unique, making market comparisons difficult. The very nature of quality in health care is poorly defined and resistant to measurement. The public understanding of the quality of health care services and delivery is generally basic. All of these factors impair traditional economic signaling and place health care delivery in a much distorted marketplace. Perhaps most importantly, policymakers may have misconstrued the fundamental conceptual model that consumers apply to value in health care. The particular characteristics of health care and its delivery and the variance in fundamental concepts of its value make the translation of a value proposition from the commercial marketplace into the health care system a very difficult prospect.

The Value Proposition and Concepts of Value

The value proposition is the idea that social utility is optimized when the relationship between quality and price is maximized in a commercial transaction. Although no doubt informally operating since the earliest sales in Neolithic times, the concept of the value proposition has only recently been formalized. In 1988 Lanning and Michaels proposed that “a business is a value delivery system” (Lanning & Michaels, 1988). They asserted that the buyer always has a desired benefit and that the seller always has a desired price—the essence of the commercial transaction—but that the effective business recognizes value as a third and essential component to the transaction. The most effective businesses would clearly understand benefits desired, clearly state their price, and then communicate their advantage in what Lanning and Michaels defined as “the value proposition”(Lanning & Michaels, 1988).

In their value proposal, Lanning and Michaels intuitively equated benefit with quality, though without expressly stating that relationship. Subsequent iterations have done so. In 1995 Treacy and Wiersema refined the value proposition to include price, time, premium service, and quality (Treacy & Wiersema, 1995) . Of quality, they said that “high quality is the cost of admission to the market” (Treacy & Wiersema, 1995, p. 8).

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Lanning and Michaels defined value as a marginal effect, with value as the difference between benefit (quality) and price (V = Q - P). In this model adding benefit (or quality) marginally increases value. Treacy and Wiersema recognized value as something much more fundamental—a functional relationship between quality and price that lies at the very essence of the product: “In years past, quality was something you could add to a product as an extra. Now, it’s a given in all products” (Treacy & Wiersema, 1995, p. 8). This concept establishes value as an intrinsic quality, characterized in a relative relationship expressed as the ratio of quality and price (V = Q/P). By 2004, Johnston and Weinstein began to write of “customer value maximization” as the blueprint for building a world-class company (Johnston & Weinstein, 2004).

These iterations of the value proposition are based on underling concepts of value. In a 1988 review, Zeithaml noted that the applied concept of value is highly variable among individuals and among products and services (Zeithaml, 1988). Zeithaml identified four core concepts of value – price-based, utilitarian, quality for price paid, and total benefit for total cost (Zeithaml, 1988, p. 13). The first is marginal and is similar to the concept espoused by Lanning and Michaels. The third and fourth are relative and are basically the concepts proffered by Treacy and Wiersema. The second is highly individualized and defies a mathematical reduction.

When a relational value proposition is considered, the consumer perception of value remains complex. Writing for the Federal Trade Commission, Murphy reported wide variability in the strength and direction of the correlation between price and quality among several service industries, with a tendency for repair industries to have significantly negative correlations (Murphy, 2002). Murphy noted that these findings could be due to factors such as qualitative and poorly defined nature of perceptions of quality in the service industry consumer, ineffective non-price signaling of quality, and unrecognized concurrent predictor variables affecting the price-quality relationship (Murphy, 2002). It seems that the value proposition as it may exist in health care is likely very complex and may be subject to significant potential covariates as well as errors in its most fundamental assumptions.

Most recently, value has been held as transcending its economic roots. Value is becoming a corporate social responsibility, and, at an even higher level, an ethical responsibility (Garriga & Domenec , 2004). These non-economic notions of value are taking root in health care. In modern health care, the social responsibility of the health care provider is demanded by the rights of the patient. The most recent update of the Declaration of Lisbon of the World Medical Association takes as a basic principle that a patient “has a right to medical care of good quality” (World Medical Association, 2015). Of note, the Declaration of Lisbon asserts these quality imperatives as entirely devoid of any mention of cost, essentially imposing on health care a value proposition of infinite reach.

This is one of the political realities that proponents of the value proposition in health care must face. If 7.6 billion people have a fundamental right to quality health care without a bare mention of cost, and if that fundamental right places an ethical demand on society that must be satisfied, can any health system or can any society meet such a value proposition?

The Value Proposition in the United States Health Care System

In the United States we are just beginning to wrestle with the challenges of value in health care. Some in the political class promise health care as an entitlement guaranteed by a right such as the World Medical Association espouses, essentially endorsing the infinite value proposition. In the 2016 Presidential campaign Hillary Clinton stated that “affordable health care is a basic human right” (Hillary for America, 2016). Donald Trump made a case consistent with a less expansive value proposition, holding that sound public policy “will broaden healthcare access, make healthcare more affordable and improve the quality of the care available to all Americans” (Donald J. Trump for President, Inc., 2016).

In the United States, the government and corporate purchasers of health care act in an agency capacity for most patients, and are beginning to adopt policies relating quality of health care to cost of health care in a value-based imperative for the transformation of our health care delivery system. In this context, Porter has advocated for an intrinsic and relational concept of value, writing in the New England Journal of Medicine that “achieving high value for patients must become the overarching goal of health care delivery, with value defined as the health outcomes achieved per dollar spent” (Porter, 2010). However, the application of the value proposition to health care delivery in the United States will meet with difficulty for a myriad of reasons. Some of these are inherent to the very nature of health care itself. Others are more endemic to the United States.

The Nature of Health Care and the Value Proposition

Health Care in a Professional Context

Health care services are held in high regard in all societies. Plato took medicine and its care for the body to be the exemplary art by which moral philosophy should model its care for the soul (Moes, 2001). The Native American tribes of Louisiana held the medicine man as having received healing powers from the Deity, and worthy of great veneration (Kniffen, Gregory, & Stokes, 1987). The practitioners of medicine, having received special power and privilege, are usually recognized as having a duty to the ill. That duty is qualified, being obligatory in an emergency, but subject to the establishment of the physician-patient relationship otherwise. The Principles of Medical Ethics of the American Medical Association state that a physician “shall … be free to choose whom to serve…” (American Medical Association, 2017, pp. 1-2).

This limited duty founds the practice of medicine as a professional act subject to an implied contract (Howard, 2001). That contract establishes certain performance obligations but does not imply a guarantee of outcome. This peculiar mix of professional obligation and commercial contract makes medicine foreign territory for the strict application of a commercial code. Thus, the expectations of buyers as to quality of service are not as strictly construed. Breaches in quality are generally not recoverable unless they reach the fairly high bar of a failure to meet “the standard of care,” and even then are generally remedied as damages recoverable in tort rather than performance recoverable by contract (Howard, 2001). This limited ability to legally enforce performance distinguishes medicine from general commerce and establishes a significant hurdle for the value proposition.

Opaque Pricing in Health Care

Health care has rarely been subject to unfettered free market forces. This may reflect the societal presumption that, if not a basic right, then health care is certainly an essential service. Understanding the vulnerable status of the ill, societies generally frown upon excess profit taking by health care practitioners, and have often subjected those practitioners to price controls. In ancient Mesopotamia, the Code of Hammurabi regulated the fees for health care services:

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If a physician make a large incision with an operating knife and cure it, or if he open a tumor (over the eye) with an operating knife, and saves the eye, he shall receive ten shekels in money (King (trans.), 2008).

In 1808 in the Territory of Orleans, Louisiana, the legislature passed “An Act Concerning Physicians, Surgeons, and Apothecaries” which by law set the fee for a house call in the City of New Orleans at four bits (50 cents) and a call to the suburbs at one dollar.(Duffy (ed.) & Matas, 1958).

Price controls have continued to be an integral part of health care delivery in the United States until the present day, and have been integral to initial attempts to force the value proposition from a pricing perspective. In 1971, the Economic Stabilization Program of President Richard Nixon established a wage and price freeze as a measure to curb inflation. This program focused specific attention on physician and hospital charges, which were limited to a maximum increase of 6% annually (Ominkowski, Gaumer, Coit, & Gabay, 1994). These controls were phased out in 1974.

In 1983 the administration of President Ronald Reagan established a prospective payment system for hospitals, utilizing Diagnosis Related Groups (DRGs) to pay the hospital a fixed sum for each case (Scott, 1984). That program is still in effect today. In 1992 Medicare began to limit physician fees with the Resource Based Relative Value Scale (RBRVS) fee schedule, initially coupled to a global budget (United States General Accounting Office, 1999). A form of this physician fee schedule is still in effect today.

There is no doubt that these long-term price controls have significantly distorted the health care marketplace. Under the invisible hand principle dating to the writings of Adam Smith, price signaling is an integral function of the market, synthesizing jumbled and chaotic information on supply and demand, coordinating the actions of innumerable individuals, and providing a market clearing mechanism (Gwartney, Stroup, Sobel, & Macpherson, 2006). Price controls impair such signaling and decrease market efficiency. For the value proposition, price controls slow or freeze the denominator of the quality/price ratio as it attempts to respond to variability in quality. Quality can become disconnected from price, producing a quality/price mismatch which would not exist in an efficient market. This allows for non-equilibrium overcompensation of low quality, producing a surplus, and under compensation of high quality, producing a shortage. Unless current health care pricing controls are dramatically reformed, the value proposition will have a very difficult time overcoming attendant constraints on its most powerful engine for change—the invisible hand of the market.

Denial of Payment for Services

In 1971, just six years after the enactment of Medicare, President Richard Nixon declared that “costs have skyrocketed but values have not kept pace. We are investing more of our nation’s resources in the health of our people but we are not getting full return on our investment” (Nixon, 1971). He subsequently authorized the Professional Standards Review Organization (PSRO) program in 1972, empowering reviewers to deny payment for care determined to be medically unnecessary (Patel & Rushefsky, 1995).

Arising out of the Health Maintenance Organization Act of 1973, the managed care industry early on embraced the use of medical necessity determinations as a way to limit payment for health care services. In addition to the concept of proven benefit, medical necessity also began use of metrics of cost effectiveness (Bergthold, 1995). Today, in addition to ad hoc denials of coverage, post hoc denials of previously authorized payment and recoupments of previously made payments on the basis of medical necessity are becoming increasingly commonplace. The Medicare Recovery Audit Contractor (RAC) program was implemented by the administration of President George W. Bush in 2005 and reached national scope under the administration of President Barack Obama in in 2010. The RAC program demands repayment of funds for services already rendered by hospitals and physicians and then forces them to attempt to recover the funds through a lengthy administrative appeals system, constraining capital resources at multiple operational levels (The Advisory Board Company, 2015).

The unilateral ability of a powerful third party intermediary to stand between the patient as buyer and the health care provider as seller, and then to disrupt their transaction for services by denying a previously agreed payment or demanding recovery of a previously remitted payment, strikes at the very heart of the commerce of health care. Sellers are stripped of ability to enforce contractual performance. Buyers are impaired in their ability to seek effective purchase of services. The value proposition cannot meaningfully operate without the faith of the marketplace in the ability to agree to and complete a transaction, even if that transaction is suboptimally efficient. For the value proposition to become a change agent in health care, there must first be some balancing of power between the current monopsony third party buyer agents and the disenfranchised sellers.

Health Care as a Non-standardized Product

On October 3, 1908, the Saturday Evening Post carried a full page advertisement launching the Ford Motor Company Model T. Under the profile view of the automobile was the caption “high priced quality in a low priced car” (Nilsson, 2011). There is no doubt that Henry Ford understood the value proposition. The key to Ford’s success was the standardization of the manufacturing process, allowing a cost advantage in the production of a reliable and durable product (Alexandersson, 2015).

Standardization of product performs several functions for the market. It often allows lower cost of production, as in the Model T, allowing the value proposition to maximize value to a larger buyer base. But standardization also communicates a seller commitment to uniform quality. The buyer develops confidence in the predictability of the quality side of the equation, and increased buyer confidence becomes catalytic for the ultimate transaction.

Health care enjoys no such standardization. In part this is due to the very nature of the professional act. Health care service is largely the work of craftsmen working in a job shop model, laboring to create a one of a kind product with each episode of care. As Porter notes, “Outcomes, the numerator of the value equation, are inherently condition-specific and multidimensional” (Porter, 2010, p. 2477).

But that said, there are ongoing efforts to standardize the delivery of care. In 1990 the Institute of Medicine defined clinical practice guidelines as “systematically developed statements to assist practitioner and patient decisions about appropriate health care for specific clinical circumstances” (Committee to Advise the Public Health Service on Clinical Practice Guidelines, Institute of Medicine , 1990, p. 8). Guidelines have become ubiquitous in health care. The National Guideline Clearinghouse of the Agency for Healthcare Research and Quality (AHRQ) presently indexes 1,614 individual clinical guidelines (National Guideline Clearinghouse, 2017).

Some the earliest attempts to transform clinical practice guidelines into quality measures came from the patient safety movement. In 2001 critical care specialists at the Johns Hopkins Hospital pioneered the use of a checklist for a standardized procedure in the placement of central venous catheters. The results were not only a stunning reduction of infections and deaths, but also a remarkable savings in costs (Gawande, 2010). The surgical checklist thereafter became an early example of the transformation of process-of-care measures into quality assessment measures. Safe Surgery Checklists are now a part of the Hospital Outpatient Quality Reporting Program of The Centers for Medicare and Medicaid Services (The Joint Commission, 2012).

The value proposition is maximized when there is standardization of the product and its process of creation. Manufacturing is easily subject to standardization of both process of delivery and of product itself. For health care, some progress has been made in standardization of the delivery of services through process-based quality improvement efforts. But such efforts are limited in scope and are a far cry from the true overall standardization of process and product quality seen in manufacturing. It is the latter—the very nature of the quality of the health care service itself—that is the holy grail of the value proposition for health care.

The Nature of Quality in Health Care

Quality is the critical numerator in the value proposition. However, it is difficult to measure, even more difficult to define, and probably impossible to standardize. Standardization of processes of care is the low hanging fruit in health care quality improvement. But it is a much more difficult task to measure and then standardize outcomes of care. Porter wants us to try. He notes the following:

The concept of quality has itself become a source of confusion. In practice, quality usually means adherence to evidence-based guidelines, and quality measurement focuses overwhelmingly on care processes. Process measurement, though a useful internal strategy for health care institutions, is not a substitute for measuring outcomes. In any complex system, attempting to control behavior without measuring results will limit progress to incremental improvement. There is no substitute for measuring actual outcomes, whose principal purpose is not comparing providers but enabling innovations in care (Porter, 2010, p. 2478).

Initial efforts are underway. The Affordable Care Act of 2010 established a value based purchasing (VBP) program for hospital services in Medicare (Center for Medicare and Medicaid Services, Department of Health and Human Services, 2017). The Hospital VBP Program began to apply to hospital payments in fiscal year 2013, and established weighted quality measures for hospitals. For 2018 scoring of hospital performance, the CMS VBP Total Performance Score weighting places relativities of 25% to Clinical Care, 25% to Patient and Caregiver Centered Experience of Care/Care Coordination, 25% to Safety, and 25% to Efficiency and Cost Reduction. For FY 2018, CMS will withhold 2% of hospital operating Medicare severity diagnosis-related group (MS-DRG) payments and then make those funds available to hospitals as value based incentive payments based on their Total Performance Scores (Center for Medicare and Medicaid Services, Department of Health and Human Services, 2017). In 2014, Medicare as a payer was responsible for 40% of incurred hospital costs in the United States (American Hospital Association, 2016). Of U.S. hospitals, approximately 30 % have negative operating margins (American Hospital Association, 2016). It is very clear that the fiscal impact of the Medicare VBP program is meaningful.

However, the outcome measures of the VBP program have been widely criticized. The VBP program relies in part on hospital scoring by the AHRQ Patient Safety Indicator composite score (PSI-90). A scathing review from the Feinberg School of Medicine of the Northwestern Memorial Hospital and Northwestern University recently detailed flaws in PSI-90 component measures, clinical areas targeted, accuracy of adverse events identified, adequacy of risk adjustment, and formulation of the composite measure (Rajaram, Barnard, & Bilimoria, 2015). The authors asserted that “these flaws may incorrectly identify problem areas for hospitals to address, unfairly penalize hospitals financially, and adversely influence clinician engagement in quality improvement”(Rajaram, Barnard, & Bilimoria, 2015, p. 897) .

This is but one example of the difficulty in measuring quality in health care, and in the even greater difficulty of translating quality into meaningful measures of value. For the value based proposition to ever work in health care, much work is yet to be done to validate meaningful quality measures that take into account the extraordinary complexity of the essential nature of the health care service. In the meanwhile, there is substantial risk that current programs may have wide ranging unintended and unanticipated effects on our system of health care delivery.

Public Understanding of the Quality of Health Care

The public understanding of the quality of health care services and delivery is generally basic. Patients generally understand health care quality in this way—Did I have to wait? Did I have a complication? Did I get well? Did my loved one live through the operation? These understandings encompass both the process and outcome aspects of quality in health care.

There is fairly good evidence that patient perception of process quality is fairly accurate, but much less accurate as to granular measures of the outcomes of service quality. Isaac and coworkers found that when patients self-reported better experiences of care, they tended to be in hospitals with higher scores on processes of care (Isaac, Zaslavsky, Cleary, & Landon, 2010). The relationship was much less notable, and often not statistically significant, when patient perception was studied in relation to PSI scores (Isaac, Zaslavsky, Cleary, & Landon, 2010). In 2011, USA Today conducted an analysis of Medicare data and found that among the top 120 hospitals in patient perception of care, there were high death rates for heart attack, heart failure or pneumonia (Sternberg & Schnaars, 2011). The newspaper termed this “the perception gap” (Sternberg & Schnaars, 2011).

With patient and public perceptions being so poorly correlated to current quality measures of health care services, it is clear that problems exist for the value proposition. The outcome measures in some cases may be flawed, as had been asserted for PSI scores. But just as importantly, the meaningfulness of the measures to the ultimate consumers seems deficient. This may be due to poor communication of the importance of the measures by the third party agents, but it may also reflect a more fundamental disconnect between the consumers and their agents. This may be why the British have such affection for their National Health Service (NHS) despite its inherent limitations. When patients in 14 advanced nations were asked to rate satisfaction with their health care system, the British people ranked theirs highest, despite the concurrent reality that the NHS was the worst of all systems on multiple quality measures (Dalrymple, 2012).

The British experience is not unique. Zeithaml notes that across industries there may be a significant disconnect between the “objective quality” of managers using predetermined standards and the “perceived quality” of the consumer (Zeithaml, 1988). Further, Zeithaml notes that the choice of objective standards of quality by managers (or policy makers) also involves subjective judgment, and in a very real sense any measure of quality is perceptual (Zeithaml, 1988). A fundamental obstacle to the application of the value proposition is variability in the perceptual definitions of quality among the public, their third party agents, and policymakers. If the value proposition is to take hold in U.S. health care, then the consumers, their third party agents, and the policymakers need to have a talk.

Conclusion

There are multiple challenges to the translation of the commercial value-based proposition to our health care system. The nature of health care in a professional context, the opaque pricing of health care, the third party agent denial and recoupment of payment for services, the non-standardized nature of the heath care product, and the nature of quality in health care are all formidable obstacles. But it may be that the most powerful impediment is the public understanding of the quality of health care and the consumer choice of value model.

Patients understand health care services and delivery at a much more pragmatic level than the policy makers. Patients may be more understanding of the frailty of the human condition and the inevitability of disease and death, and may be more accepting of the reality that in the end no health care system with any magnitude of resources will ultimately defeat those enemies. Or, perhaps, the patients do not view disease and death as enemies at all, but rather as realities of life to be assimilated as best as possible.

Patients may be much more willing to tolerate what the policymakers define as lower quality if their benefit needs are met at the most fundamentally important levels—Was care available? Did I get well if I could have gotten well? Did my loved one survive if they could have survived? Patients seem to have an intuitively operant understanding of the numerator of the value proposition.

But patients also seem to truly understand the denominator as well. In ethics, health care is defined as extraordinary if it places an intolerable burden on either the patients or their loved ones. Patients seem to understand what is really important in health care, and to be able to draw a line between what can be done and what should be done. When patients and families are responsible for the burden of care, either at a personal level or an economic level, they have little difficulty in assessing costs and making rational cost–based decisions.

For the United States, it may well be that the currently proposed value proposition is a flawed solution. It may be that our people take value in health care in the older and more intuitive understandings of value—as a marginal benefit, something extra that is certainly desired but not of essential or preeminent importance. For our society, the true value proposition may lie at a more fundamental level than granular outcomes measures, and may be in addition rather than division. Health care consumers may simply not be interested in a complex transformation of the value proposition in health care. And if that is the case, then the wholesale pursuit of a new value proposition for health care may ultimately involve a set of very costly lessons.

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