Making the Case for a ‘Health Care Fed’: Should Uncle Sam Decide What Works?

A U.S. government agency, some argue, should be created to rule on usefulness of medications, equipment, and procedures. Britain has just instituted such a system.

Frank Diamond

Senior Editor

Last June, Paul Wallace, MD, the executive director of Kaiser Permanente’s care management institute, and two other representatives of that organization boarded a jet at San Francisco International Airport to take a 10-hour trip to London.

There, they were met by other Kaiser Permanente officials who had flown from elsewhere in the U.S. to take part in a fact-finding mission on a newly launched British agency called NICE — the National Institute for Clinical Excellence.

Established in 1999, NICE aims to provide patients, health professionals, and the public with authoritative, “robust,” and reliable guidance on best clinical practices. Its mission is to rule on what new medications should be covered under national health insurance and to attempt to ensure that local health authorities adhere to common guidelines.

Sir Michael Rawlins, NICE’s chairman, says that many officials in the public and private domains of U.S. health care have expressed interest in NICE.

“We have had a lot of contacts with all sorts of people,” he says.

John M. Eisenberg, MD, MBA, director of the federal Agency for Healthcare Research and Quality, and executives at the Rand Corp. also have conducted their own fact-finding tours.

In some ways, NICE represents the Holy Grail, a real-world example of a vision of a health care agency that some would like to see launched in the U.S. This agency — this “health care Fed,” as some call it — would oversee standards and quality.

Just what would a health care Fed do that state insurance departments, AHRQ, the Centers for Medicare and Medicaid Services (CMS, formerly HCFA), and the National Committee for Quality Assurance (NCQA) don’t already do?

Is it necessary?

Regina Herzlinger, PhD, professor of business administration at Harvard Business School, says her vision is of a “health care Securities and Exchange Commission.” She insists that there exists as much need for such an organization in health care now as existed for financial markets in the 1930s, when President Franklin D. Roosevelt created the SEC. Roosevelt, she says, wasn’t sidetracked from his efforts just because states had their own SECs, which he viewed as ineffectual (see “Health Care Should Be More Transparent”). She adds that no organization today does what her health care SEC would do.

“AHRQ is a research agency, and a research agency cannot act as a regulator,” Herzlinger says. “CMS is a purchaser of services. It cannot simultaneously act as an overseer and as a purchaser. It would have too much power and it might use that power to favor its own purchases rather than the purchases of everybody.

“NCQA is a creation of the industry and it has, to date, not provided data that consumers want. Whether it can provide them or not, I don’t know, but there are countless studies that NCQA findings are not used by consumers and there is doubt about their use by employers.”

Uwe Reinhardt, PhD, professor of political economy at Princeton University, says his health care Fed would issue reporting standards that HMOs must adhere to: “Standards for reporting quality, standards for reporting customer satisfaction” (see “Harness Information To Make Health Care Work”).

Jonathan P. Weiner, DrPH, professor of health policy and management at Johns Hopkins University, envisions a body that would make spending decisions — especially regarding new technologies.

“Almost always, they are added on top of old technologies,” he says. “Almost always, they lead to greater expense, not savings. This is going to become more important, not less important” (see “Something ‘NICE’ Can Come out of This”).

Bureaucracy alert

Despite these calls, a health care Fed (for our purposes, a term that’s interchangeable with Herzlinger’s health care SEC) would be a difficult sell in today’s environment when expanding government’s role, except for the purposes of waging war on terrorists or protecting citizens, is not a desired goal for either legislators or the public.

Even academia does not speak as one in favor of such an agency.

“For many, that would just be much too much government intrusion,” says Mark Pauly, PhD, in the department of health care systems at the Wharton School of the University of Pennsylvania.

Richard Culbertson, PhD, director of the Institute for Health Services Research at Tulane University in New Orleans, adds: “Our history is not good with this type of activity. There is a great deal of variability throughout the United States in the way plans are organized and care is delivered.”

Unless there are “egregious problems” in certain regions, Culbertson views this as positive. “I think health care is understood better as a local phenomenon and subject to pressures of local markets, patterns of organization, of care, and professional groups.”

It should also be noted that Wallace’s fact-finding mission to NICE was undertaken to bring ideas back to Kaiser Permanente, not to view a prototype for an American health care Fed. Wallace doubts that such an agency could be launched, though he does believe that the federal government can perhaps redefine its role in health care.

NICE try

NICE’s creation was a result of the British people not liking the direction their health care system had taken, according to Rawlins, its chairman.

“There was a recognition that during the previous 15 to 20 years — while there had been all this concern and interest for the finances of our health care system — nobody was looking at the quality of care, and there was no mechanism by which there was a common way of developing standards for the National Health Service as a whole,” he says. “So NICE really arose from a desire to promote quality of care. That was the primary reason for its being established.”

Much of what NICE does is rule on which medications should be covered everywhere in the country by national health insurance.

“Some treatments were available in some parts of the country but not in others because the local health authority had decided that it couldn’t afford it and it had other priorities,” says Rawlins.

As the British Medical Journal put it in a 1999 editorial in 1999, the public “doesn’t like … the fact that you can get new expensive treatments if you live on one side of a street in one health authority, but not if you live on the other side in another health authority.” Adds Rawlins: “It was causing real trouble. National standards are a big part of what we’re trying to do.”

The way NICE operates has drawn international interest. There are 40 staff members of what Rawlins describes as a “virtual institute.” Much of the work is contracted out.

“Although only 40 work in the institute itself, we have many hundreds working outside the institute,” says Rawlins. “Our Web site gets about 15,000 hits a day; of those, about 20 percent come from servers based in the U.S. We’re very much a virtual organization, very deliberately so. We don’t want to create a large bureaucracy in the middle of London.”

This does not mean that NICE’s decisions are accepted with equanimity by everybody all the time. Rawlins says that “at the end of the day” the way in which NICE’s effectiveness will be measured is if there’s a noticeable improvement in quality.

“You can look at the quality of care that’s delivered. You can look at outcomes, for example.”

There’s much that U.S. health officials can learn from NICE, even if the goal isn’t the creation of a health care Fed, says Kaiser Permanente’s Wallace.

“We were impressed by the rigor of the process used within NICE, as well as the insights and commitment of the folks with whom we met,” he recalls. “We did sense potential value from sharing elements of guideline development, including problem formulations and systematic reviews of the literature. We also intend to continue a process we initiated of sharing completed guidelines and similar work, such as technology reviews.” A follow-up meeting may result, he adds.

Whether NICE is in fact the prototype of a health care Fed remains to be seen. It must be noted that Rawlins does not echo the sentiment — so often expressed by U.S. health care officials — that high quality care is less expensive care.

“I think good quality care costs a lot of money,” he says. “If you want good quality care, you’re going to have to pay for it. But what you do want to make sure is that the money is used effectively.”

Arbiter of effectiveness

An agency is sorely needed in the U.S. to make those determinations, says Weiner. “There’s just no infrastructure for this. There really isn’t anyone out there looking at it from a societal perspective.”

Even Pauly, of the Wharton School — while doubting that a health care Fed would fly in the current political climate — admits to finding something attractive about the idea. For instance, it would be one agency that would have to tell consumers about the reality of finances.

“If this is used as a device for validating increasing cost by telling people (some of whom need to be told): ‘Sure, your insurance premiums are rising by 12 percent, but the great stuff you’re getting is worth it’ — I think I’d endorse that.”

Health Care Should Be More ‘Transparent’

Regina Herzlinger, PhD

When Franklin D. Roosevelt created the federal Securities and Exchange Commission to require regular, audited disclosure and broad dissemination of corporate financial performance, he was blanketed by a blizzard of criticism from the business community.

After all, business people contended, there was no need for the government to require disclosure. The American way was to provide voluntary, not mandatory, disclosure. And why federalize it? “We are the U.S., not the U.S.S.R.”

There were state commissions in place to regulate capital markets. And the costs of compiling the information would surely outweigh its benefits. No generally accepted accounting procedures (GAAP) existed at that time, so the measurement task would be Herculean. And what would all the dumb bunny investors who did not know a debit from a credit do with all that info?

Roosevelt was not dissuaded. He felt that many state commissions were ineffectual and had frequently overlapping requirements. Companies went crazy trying to comply; at least, those that bothered to try did.

Westinghouse, which no longer exists but which at one time was a great industrial player, went for 10 years without reporting to its stockholders.

When FDR — through the SEC — made such reporting mandatory, he was viewed as somebody who would bring down the entire system because the cost of compiling this information would be too great.

Case for transparency

What happened? We now have the most efficient capital markets in the world. The cost of dealing with money has steadily decreased and it’s much easier to raise money in the U.S. in the publicly traded financial markets than in any other country.

One of the reasons is because the SEC’S reporting requirements increased the so-called transparency of the market. Once the SEC kicked into gear, a parallel process for generating GAAP went into effect, leading to auditable measures of performance.

Ordinary people have a fair degree of trust in the veracity of the financial data that are being used to measure performance. So we put our money into the stock market, vastly swelling the availability of capital to be reinvested in the economy. For the dumb bunnies, mutual funds that invest money on our behalf were created. Mutual fund performance is also regularly measured and broadly available.

Right now, health care information is an oxymoron. What do you know about the performance of the surgeon and hospital that are going to do your open-heart surgery? In contrast, how much do you know about the performance of the company in which you own 1,000 shares of stock?

See what I mean? Health care, too, is in need of transparency. Health insurance products clearly do not meet consumers’ needs, in part because they are so standardized. An SEC for health care would enforce the sort of transparency that helped free up financial markets with mutual funds that were tailored to the needs of individual investors.

Take the 57-year-old woman who is very interested in having long-term care insurance as part of her benefits. If she were let loose on a truly open market, a number of insurers would figure out ways to offer such a policy. For instance, they might invent one that includes a higher deductible in exchange for more coverage at the tail end.

Insurers wouldn’t be the only ones affected. Physicians and other deliverers of health care services would have to report their performance as well.

Resistance guaranteed

Providers and insurers are no more eager to have their performance measured than businessmen were in the 1930s. The existing players will, of course, resist change.

They already complain of the difficulty of measurement. Some, for example, note that some primary care physicians contracted with HMOs treat fewer than 60 diabetics out of their panel of 1,500 to 2,000 patients. They ask: “How can you hold this person responsible for performance in diabetes?”

My response is that a doctor who sees so few diabetics probably should not be treating them at all. The transparency that a health care SEC creates would ensure that diabetics find their way to those who best treat the disease.

It’s interesting to look at what happened in the mutual fund industry.

Many people thought John C. Bogle was crazy because, about 25 years ago, he started a mutual fund, indexed it, and sold it to the public. The smart money laughed that no American would buy that product. That crazy man started the Vanguard Group.

So while the existing players are saying “It’s not going to work,” there’s another John C. Bogle out there who right now is saying “This is going to change.”

Information required by the SEC was key to revolutionizing our capital markets. A similar sort of SEC is key to transforming health care.

Regina Herzlinger, PhD, is professor of business administration at Harvard Business School.

Harness Information To Make Health Care Work

Uwe Reinhardt, PhD

From the perspective of those who pay for health care and of those who use it, our health system remains one of the most opaque sectors in the economy. Many folks must prefer it that way, or it would not be so.

Suppose, for example, purchases of shirts by individuals were partly prepaid from collective funds assembled for large groups of shirt purchasers, although the individual buyer might also have to pay a part of the price.

Suppose next that prospective buyers of shirts were led into a store stocked with boxes marked “Shirt.” The consumer would have free choice of boxes, although only the most vague idea of what actually was in each of the myriad of boxes. One might at most let buyers know the size and color of the shirt inside the box, although that would be considered avant garde and probably annoy the shirt vendors.

If the shirt fits…

Once a box with a shirt in it had been accepted by the consumer, he could not return it for a refund. A month or so after having received the box, the buyer would be sent a nearly indecipherable statement whose only comprehensible line is: Pay $56.95. It is only then that the buyer knows what the shirt has cost him or her. The shirt, by the way, may or may not fit.

You now have, by simple analogy, a description of what “prudent purchasing” means for the overwhelming number of American recipients of health care. Are we really quite proud of it — enough to tout it as the best health system in the world? Are we really surprised that this system is a source of rancor, suspicion, and dissatisfaction all around?

Needed is a federal institution that would be a reliable assembler and purveyor of structured, useful information about the quality, prices, and benefit-cost ratios of alternative forms of health care available to a prospective patient.

Unlike the Federal Reserve System, which actually regulates the size of the nation’s money supply and, with it, real and financial resource flows, a health care Fed (HCF) would not need to be that interventionist.

However, like the Financial Accounting Standards Board (FASB), the HCF would set the standard methodology by which relevant information about health care would be assembled and in what form it would be reported.

The HCF also would have auditing power, to assure the reliability of the structured information made available to prospective users of health care.

Finally, the HCF could be the umbrella for a set of well and permanently endowed health care cost-benefit research institutes that could finance, with the returns to their own endowments, study into best clinical practices and conduct benefit-cost analyses for alternative therapeutic approaches, including pharmacological therapy.

Much of the information that would be structured and made available by the HCF is already being assembled in bits and pieces by bodies such as the Agency for Healthcare Research and Quality (AHRQ) and the National Committee for Quality Assurance (NCQA).

Dearth of resources

Unfortunately, these innovative institutions literally have been strangled for want of resources. The private NCQA relies mainly on fees from those it audits. The federal AHRQ’s annual budget of about $250 million is 0.0192 percent (yes, less than 2 hundredths of 1 percent!) of total national health spending in this country.

Given what is at stake, would asking a HCF to be funded with, say, 1 percent of total health spending be that outrageous?

Uwe Reinhardt, PhD, is the James Madison Professor of Political Economy at Princeton University.

Something ‘NICE’ Can Come Out Of This

Jonathan P. Weiner, DrPH

No industrialized nation spends more than America on medical care, excludes more of its citizens from coverage, and is less rational in the way it sets its spending priorities.

Health care costs cannot be harnessed, nor can coverage become universal, until we come to grips with the unpleasant but manifest truth that there will never be enough resources to provide every possible medical technology to every American who might benefit from it. Though thorny, this challenge is not insurmountable.

Our politicians and employers have deputized managed care organizations to make these types of tough decisions. Because the MCOs did their job perhaps a bit too well and because their motivation was suspect, they were told to back off. This retrenchment, coupled with the exponential growth of available medical technology and aging of the patient population, assures that cost-vs.-care conflicts will get worse, not better.

Time is right for change

The country needs an accountable, transparent mechanism that makes use of scientific evidence, ethics, and consumer values to collectively decide what we can and cannot afford to cover as part of a basic insurance package. We might call this organization the National Institute of Clinical Effectiveness or “NICE.”

The NICE must be well respected, independent, and powerful, much like the U.S. Federal Reserve Board. The Institute’s board of governors should be comprised of health care evaluation experts, clinicians, ethicists, and consumers. Like the Federal Reserve, the board must be protected from political and corporate pressures — of which there will be many.

The first task of this health care Fed would be to grade all major medical technologies, procedures, and services. The lowest grade would go to ineffective technologies, the highest to those where significant patient benefit has been scientifically proven.

Phase two would be more difficult. For every technology, a benefit-to-cost ratio would be determined for each prevalent clinical condition. Using a common denominator, such as dollars per quality-adjusted life year gained, the relative value of each intervention would be determined. This type of process was used as part of the Oregon Medicaid “experiment” and it is standard in most nations.

Based on the available resources and the number of people to be covered, a line would then be drawn. Above this line, services would be included in the market basket of basic coverage provided to all. Below the line, less effective services or prohibitively expensive ones with very low benefit-to-cost ratios would not be part of the plan. But it would always be possible for persons to obtain these “marginal” services via optional coverage or through out-of-pocket payment.

Nothing’s perfect

Yes, this process would generate tremendous friction and it would never be perfect or complete. But it would be far more rational and legitimate than what we do now. In time, the institute’s ranking system should become part of a fully integrated IT-based clinical decision support system that both providers and consumers would use to inform their choices from available options.

In building this health care Fed, we do not need to start from scratch. The models from abroad are numerous and much of the technology assessment research is already available. Legislation for the National Institute for Clinical Effectiveness should be linked to expanded coverage for the uninsured, and along with this new population, Medicare, Medicaid, CHIP, and federal employees should come under its aegis immediately. A few years thereafter, coverage decisions for all Americans in all private plans should also come under its umbrella.

Regardless of whether you are a proponent of defined contribution plans, managed competition, or a single payer, if universal health care and reasonable levels of health care cost growth are ever to be achieved, there is no other way. The longer we avoid this truth, the longer we support a status quo that is unjust for many and inefficient for all.

Jonathan P. Weiner, PhD is a professor of health policy and management at the Johns Hopkins Bloomberg School of Public Health. He can be reached at

MANAGED CARE January 2002. ©MediMedia USA

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