This KHN story was produced in collaboration with

For decades, reformers have sought to change how doctors and hospitals are paid to reward quality and efficiency – efforts that accelerated as a result of the health care overhaul. But surprisingly little progress has been made to date, today.

Only 10.9 percent of health care spending last year by employer-sponsored plans was based on “value,” as opposed to “volume,” or the number of services performed, according to the study by Catalyst for Payment Reform (CPR), a nonprofit group which represents 21 U.S. employers, including Verizon, Walmart, eBay and Boeing.

“Nine of every ten dollars is paid into the health care system with no attention to whether the care provided was performed well or poorly, or whether it was appropriate in the first place,” said CPR Executive Director Suzanne Delbanco.

The other 89.1 percent was based largely on the traditional fee-for-service model that pays providers a fixed price for every service they deliver — in most cases with no limits on those services and without regard for results. This model rewards volume—more tests, more scans, more specialist examinations and more surgeries – an incentive that many experts blame for the unsustainable growth in U.S. health care spending.

What the business group is calling the National Scorecard on Payment Reform aims to “shine a light” on slow progress while prodding the health care industry to move faster.

“We need accountability on a national scale,” Delbanco said. “Otherwise, it’s easy to let anecdotes [about reform] make it feel like something is really happening.”

Employers teamed with health insurance companies, including the nation’s four largest — Aetna, Cigna, WellPoint, and UnitedHealthcare —  to analyze blinded payment data on 97 million commercially-insured individuals. The data represent 67% of all non-government health insurance payments.

The idea behind changing the payment system is to remove incentives for redundant and inappropriate care, now estimated to account for as much as a quarter of the nation’s $2.8 trillion in annual health spending, according to the Institutes of Medicine.

Cutting that waste has proven tough. Because the health care industry is regional and fragmented, it’s been difficult for buyers — even big employers — to have the clout to force change. CPR’s Delbanco said that publicizing the progress in payment reform — or lack thereof — can act as “a lever to get better value for every health care dollar.” To that end, she said her group would issue an annual report card on payments.

“Managed care” was the last major attempt at payment reform, back in the 1980s and early 1990s, when many providers got flat annual payments for each patient, known as capitation. Many consumers reacted negatively, perceiving a drop in quality, and the system gradually faded.

The dynamic may be different today, however, when more consumers are under pressure to consider prices because they are enrolled in high-deductible plans which require beneficiaries to pay more out of pocket before their coverage kicks in.

Steven Morgenstern, in charge of health plans for Dow Chemical Co., said that once-abstract notions of unsustainable health care costs are now reality as employees see wage gains eaten by health care inflation.

A lack of price transparency makes such shopping more difficult, however. CPR recently gave 29 states an “F” grade for a lack of laws that require health care systems to make their prices publicly available.

The lack of price information “is counterintuitive to any consumer,” said Robert Galvin. A former chief medical officer at General Electric, he now runs Equity Healthcare, which negotiates health plans for companies owned by private equity firms.

Today’s value-based payment schemes, many spurred by Medicare, come in different forms, including:

–bundled payments, where a hospital and doctors share a flat fee for an entire “episode of care”; –so-called “accountable care organizations,” which are encouraged by the health law, and which pay hospitals and doctors lump sums for covering a large group of individuals over a set period, sharing any savings;

— fee-for-service payments that offer incentives for meeting cost and quality targets.

Elizabeth Curran, head of national network strategy and program development at Aetna, says consumer participation is crucial to the success of these models. “Knowing that consumers may make choices based on whether or not you have transformed your practice” may spur providers to change.

Jill Hummell, vice president for payment innovation at health insurer WellPoint, said the pressure is unlikely to stop anytime soon.

“Paying for value is not …‘the new black,’” she said.

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A released today gives 29 states an “F” and seven states a “D” for policies that keep patients and their families in the dark on prices. The failing grade went to those with practically no transparency requirements.

Only two states, Massachusetts and New Hampshire, rate an “A,” and even they could improve their laws, according to by , a consortium of health care purchasers such as GE, Wal-Mart and The Boeing Company, and the , a nonprofit group seeking to improve health care with evidence-based incentive programs.

The high prices that American health care providers charge, often with little connection to actual costs, have been in the national spotlight since Time magazine devoted its entire March 4 issue to .

Most consumers are unaware of the tremendous variation in price. For instance, prices for knee replacement surgery in the same California market can range from $15,000 to more than $100,000, depending on the hospital, with no discernible difference in quality.

High deductible insurance plans are becoming more common, with employers hoping consumers with “skin in the game” will shop around to help keep prices down. But, the authors note, consumers cannot make informed decisions without being able to comparison shop on the basis of either price or quality.

“Consumers deserve to have as much information about the price of their health care as they do about restaurants, cars, and household appliances,” the report says.

The grades reflect the quality and scope of the pricing data that states require and how well they disseminate it — public websites gain high points, for example. The grades also discriminate between ‘charges,’ the prices that hospitals say they charge for services, and what a consumer and her insurance company actually pay for them. There is often little connection between the two. States that require disclosure of actual prices earned higher grades.

The groups plan to update the state report cards an annually.

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“What are we trying to do in our health care system?”

“Reduce costs!”

“Why?”

“Health care is too expensive.”

“The solution is going to come from Washington D.C., right?”

“Ha ha ha ha.”

“Sacramento then, right?”

“Ha.”

“The solution,” says Van Gorder, pumping an index figure toward his team, “is going to come from right here.”

Van Gorder, an ex-cop turned hospital executive, rescued troubled Scripps from near insolvency a dozen years ago as its new CEO. Now, he’s put Scripps in the middle of a cultural transformation aimed at saving hundreds of millions of dollars a year by — get this — coaxing physicians and managers at Scripps to work together, and standardizing care across every hospital in the system.

Corny? Yeah. But a health care industry so expensive it threatens to bankrupt the nation could use some corny, if that’s what it takes to get hospital management’s attention.

And they could use the attention. The health care industry is the worst managed in America. It wastes near $765 billion a year due to inefficiencies, mistakes, duplicative and unnecessary services and fraud, according to the Institute of Medicine. That’s nearly a third of total health care spending.

But the game is changing, and not just because of the health care law. Anxiety over the national debt is putting pressure on how much Medicare pays hospitals, while fed up employers, who pay the bulk of health care premiums, are negotiating tougher contracts with providers.

Van Gorder’s strategy is to root out what he calls “unnecessary variation” at each of Scripps’ four hospitals in five locations and 23 clinics in southern California, and then cut expenses that add nothing to patient outcomes. “There isn’t a doctor that doesn’t believe he’s doing the best thing” for the patient, he says. “But there’s enormous variation in the way physicians practice.”

Scripps isn’t the only hospital system trying to get control of health care costs, but it’s one of the leaders. “Scripps is on the cutting edge of health system management today,” says Chas Roades of The Advisory Board Company, a health care consultancy.

Fixing Unnecessary Variation

In most industries, uncovering useless spending and promoting cross-functional teams have been standard procedure for decades. In health care, where the relationship between price and costs can seem almost random, this counts as cutting-edge management innovation.

In California, for instance, the same routine joint replacement costs between $15,000 and $130,000 for the same procedure depending on the hospital, with no correlation between quality and price, according to the School of Public Health at the University of California-Berkeley.

Price variation among hospitals within the same system is even harder to explain. At Scripps, there was a cost difference of $6,000 between two Scripps hospitals performing the same cardiac procedures, using the same protocol, even with the same surgeon.

And that’s standard: Most health care systems still manage each hospital or clinic as its own silo — each with different management, operations and clinical procedures. Even vast national hospital chains are run this way, according to Roades. They might share back office operations like purchasing, but in terms of clinical care, they are largely islands unto themselves.

Van Gorder, 60, tells his staff that major change is inevitable. Political leaders, employers and patients themselves are fed up with health care costs. Given federal budget deficits and the calls for entitlement reform, Medicare margins will continue to be under pressure. Politicians fearing a backlash from cutting benefits to consumers will take aim at hospitals and other providers. The Advisory Board Company predicts the typical hospital will see its margins collapse by as much as 20 percent over the next 10 years as reimbursements drop.

“Hospitals that can’t find a way to deliver their product less expensively and with better quality are going to go out of business,” Van Gorder says. “It’s as simple as that.”

The $6,000 Cost Difference

Consider the $6,000 cost difference for the cardiac valve and coronary artery bypass graft procedures. No one paid attention to it, because there was no incentive to do so. When a cross-system team dissected hospital-to-hospital variations in 2010, they found that the Scripps Memorial Hospital in La Jolla required that nitric oxide be administered to the patient, ostensibly to boost oxygen intake in the blood.

Fourteen miles away, at Mercy Hospital in downtown San Diego, such patients received no nitric oxide. A look at the data showed the outcomes were the same. Today, a doctor at any hospital in the Scripps system can still order up nitric oxide, but it’s no longer required. Savings: $400,000 per year.

Some of the other savings that netted $150 million in the first year:

• The ER: Once, the wait could be as long as eight hours. Now, it averages 30 minutes. Scripps requires doctors and nurses to see patients at the same time, early in the process, instead of forcing them through a gauntlet of information-takers, where they’d repeat the same complaints over and over. Fewer handoffs mean better communications, fewer errors and more patients seen for a $29 million revenue boost.
• Radiology: For imaging tests, each hospital stocked its radiologist’s own favorite contrast agents — the iodine, barium, gadolinium and other chemicals used to highlight structures and fluids in a patient’s body. After doctors agreed to use a few brands, volume discounts saved $1.5 million a year.
• Surgery: OneScripps focused on three cardiac surgeons at one hospital and studied their work habits for needless variation. Voluntary best-practice protocols were established which have decreased length of hospital stay by almost a day and saved the system $3.6 million a year.

A Story With Twists And Turns

Van Gorder’s campaign has not been without challenges, but then, he has never been a stranger to conflict. Responding to a domestic disturbance in his squad car at age 25, a crazy driver intentionally rammed him head on. He saw it coming and threw the car into reverse, although he was still seriously injured. Suffering severe nerve damage (from which he has substantially recovered), in and out of hospitals for more than a year, he left the street beat and pursued a health care career, wrangling a security job at the hospital that was treating him. He liked hospital work. After grad school at the University of Southern California, with a master’s degree in health services administration, he quickly climbed the industry ladder.

By 1999, he was chief operating officer at Scripps, although initially, he thought he’d made a huge mistake. His first address to the physicians as new chief operating officer was interrupted when a doctor burst into the meeting room, yelling at another physician, who hollered back “I’m quitting” and stormed out. That night, he asked his wife and kids, “Should we really bother unpacking? Because this doesn’t sound like it’s going to go very well.” The doctors later kicked out the CEO (a physician) with a vote of no confidence, and the hospital board chose Van Gorder to replace him. Regaining doctors’ trust was the first order of business.

Historically, doctors have felt threatened by changes imposed from outside the profession, which they fear will undermine their autonomy and income. “You can’t force feed doctors,” says Brent Eastman, recently retired chief of medicine at Scripps, now president-elect of the American College of Surgeons.

Doctors do, however, trust hard evidence. An entire discipline, evidence-based medicine, has arisen to assemble and package data results and recommend treatment.

Sensitive to this culture, Van Gorder created what he called a Physician Leadership Cabinet “to share the responsibility of running this company together.” The board includes the medical staff and physician members elected by their peers because “We don’t want ‘yes people’ sitting on the group.” The key to cooperation, says Van Gorder, is transparency — sharing all information.

Early on he was tested. The doctors demanded $4 million to pay for on-call doctors for the emergency rooms. Van Gorder said he couldn’t afford it, and laid out the numbers. The doctors cut the demand in half.

Van Gorder trusts that sharing financial information, especially on costs, along with data on treatment and outcomes, will usually lead doctors to the best-outcome-at-lowest-cost decisions.

So far, that strategy has inspired buy-in. “Probably only once every hundred years will there be a generation that can truly change the way health care is delivered,” says Eastman, the physician. “We are that generation.”

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Sam Lewis, 65, had triple bypass surgery in late November. Just days before, when he first qualified for Medicare coverage, a checkup discovered three of his arteries were clogged with plaque (Photo by Alison Yin/For KHN).

The day after his birthday in October, when he qualified for Medicare, Lewis got a checkup. Days later, he went under the knife: open-heart surgery, a triple-bypass, three arteries blocked with plaque, one of them, 99 percent. “If I’d had to wait until 67 for Medicare,” Lewis said, “I’d be dead.”

A proposal to raise the Medicare eligibility age from 65 to 67 to ratchet down spending is one of the more explosive ideas in the fiscal talks between House Speaker John Boehner and the White House. The negotiations are aimed at a deficit deal to avert automatic tax increases and spending cuts slated to take effect Jan. 1.  Liberal Democrats say they loathe the Medicare proposal, but the White House has not taken a public position on it.

President Barack Obama was open to a similar proposal last year during his failed effort to reach a “grand bargain” with Republicans.  And many expect it to pop up again in next year’s discussions about curbing entitlement costs if it is not included in this year’s deal.

Whatever the politics, those approaching retirement are responding with anger and fear, while employers see themselves stuck holding the bag on long-ago social commitments made by the federal government.

“All they’re doing is shoving the cost onto the backs of business,” said Don Marks, president of Uesco Industries in Alsip, Ill., a family-owned company that assembles overhead cranes and hoists used in manufacturing plants. 

Uesco employs 45 people and pays some medical expenses of retirees that are not picked up by Medicare. With no set retirement age, the company would pay health insurance costs for older, likely sicker workers who might no longer retire at 65 because they would not be eligible for Medicare.

“If I’d had to wait until 67 for Medicare, I’d be dead,” Lewis, 65, says (Photo by Alison Yin/For KHN).

In his business, Marks sees little good coming from that. “We are a heavy metal manufacturer,” he said. “It’s big and heavy pieces of steel that we move around, that we grind, that we weld, that we cut with torches. It’s heavy labor. The older (the workers) get, the more it costs for health insurance. And we have an aging workforce.”

Kevin Kelly, CEO at Emerald Packaging in Union City, Calif., is also unhappy about the proposal. “I don’t think the government or legislators are thinking about the impact this will have on business,” he said.

Emerald employs 225 workers to manufacture plastic bags for produce sold at grocery stores — five of them between the ages of 63 and 65.

Kelly figures it would cost him an extra $120,000 annually to pay for health insurance for those five workers for another two years. “It comes right out of profit,” he said. “It’s not like I can raise prices because the government decided not to cover people between 65 and 67. If I try to pass the cost to the retailers, it just gives them one more reason to look to China.”

Proponents of the idea such as Gail Wilensky, who oversaw Medicare and Medicaid for the first President George Bush, say people are living longer than when the program was enacted in 1965 and it’s important to raise the eligibility age gradually to change younger Americans’ perceptions about what they can expect from entitlement programs. 

“What we need is to try to find ways to try to encourage people to participate in the labor force longer, and not only for our sake but for their sake as well,” Wilensky said at a forum this week, noting the number of beneficiaries is expected to double over the next two decades as Baby Boomers retire.

The Congressional Budget Office  the potential net savings to the federal government from gradually raising the eligibility age to 67 beginning in 2014 at approximately $113 billion over 10 years, as older workers remain in the work force longer, and pay Medicare taxes while giving up benefits for two more years.

But cost shifting to workers and employers would increase out-of-pocket costs for 65- and 66-year-olds by $3.7 billion a year and boost employers’ health care costs by $4.5 billion, according to a  by the Kaiser Family Foundation (Kaiser Health News is an editorially independent program of the foundation).

The potential human toll is harder to figure. Like Sam Lewis says, many in their early sixties who lack insurance are “crossing fingers, walking on tiptoes, and making sure not to break any eggs,” until they turn 65.  Some may not be as lucky as him.

The left-leaning Center for American Progress  that raising the Medicare age could put up to 435,000 older people at risk of having no insurance at all, even with the protections afforded by the health care law – although the CBO’s estimate is far lower.

The health law changes the equation after 2014 since insurers will no longer be able to refuse applicants because of pre-existing health conditions, or charge older people more than three times what they charge young people.

In addition, the state and federal health insurance marketplaces planned for 2014 will offer subsidies to help those with low-incomes buy health insurance, and states that expand Medicaid will cover single adults.

But will it be enough to tide people over until they qualify for Medicare — especially since some governors say they won’t expand Medicaid and the effect of the exchanges on insurance affordability remains untested?

Realtor Mary Nishiyama, 57, a friend of Lewis, is not confident.  “There is going to be a big wave of us,” she warned.  “Don’t they know our parts aren’t working as well as they used to?”

Nishiyama pays $800 a month for coverage which she buys at group rates through her former employer, Chevron, and has recently started saving in case she has to wait another two years before qualifying for Medicare benefits. “If you don’t have money to put away, how are you going to pay for your health care?”

Even some who consider themselves physically and financially healthy say they’re furious about upending a social contract they’ve spent a lifetime paying into – and expecting to be there for them.

“They’d be pulling the rug out from under us,” said Chuck Hinkle, 56, a gas pipeline electrician in Oak Forest Ill., who points out he’s been paying into Medicare his whole working life.

The fact that increasing health costs are threatening to consume the federal budget, especially as people live longer and millions of Baby Boomers retire, is an abstraction. “I’m still planning to retire at 65,” Hinkle said. “I’m hoping to be in a financial position where I can just cough up the money for those two years.”

This article was produced by Kaiser Health News with support from .

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This story was produced in collaboration with 

Rarely is nurse Cindy Steckel possessed by fantasies of unspeakable revenge. Toilet design, however, does provoke her fury.  Whoever is responsible for the slim-doored, cramped configuration of patient bathrooms in most American hospitals draws her scorn. “I don’t know if there wasn’t such a thing as a walker back then,” she says. “But if I could get my hands on the guy who designed these…!”

Chuck Siconolfi, director of healthcare innovation, planning and design for HOK, standing before an architectural model of a recent hospital project (Photo courtesy of HOK).

To anyone not yet jaded by the American health-care system, the idea that a hospital would provide a bathroom too tiny for an old person with a walker seems inane. But for decades, American hospital architecture was based on crude, now-outdated notions of efficiency and economy. Hospitals were designed for the wants and needs of doctors and hospital administrators. Patients weren’t ignored—but they weren’t top priority, either.

Now, health care reform is fundamentally changing the way hospitals are run, and with it the way they look. A combination of crushing costs, government edicts, and fierce competition for the millions of newly insured patients that will result from federal health-care legislation has put the patient front and center.

In part the impetus for the new-look hospital is bureaucratic: Medicare and private insurers are moving away from the traditional fee-for-service model, in which they pay doctors and hospitals for each procedure they perform. Instead, they are beginning to adopt flat-fee payments that cover entire episodes of care—a knee replacement, say, or an arterial bypass operation. Such contracts long ago became standard practice is almost every other industry. Besides making the entire process more efficient, flat fees would put an end to long lists of billable items like $150 Tylenol tablets. Medicare has also begun paying bonuses for hospitals that provide effective, high-quality treatment and penalizing those that don’t meet basic standards or that have high rates of avoidable hospital readmissions.

Recently, Kaiser Health News analyzed Medicare data revealing that 2,217 hospitals—over a third of them—will face such penalties this year. Publicly available quality ratings, online and in publications such as Consumer Reports, add competitive pressure. What hospital wants to score “worse than average” for “bloodstream infection following surgery” on HealthGrades.com?

Designing For Healing

The changes dovetail with years of research showing that the color, shape, layout, and accoutrements of a hospital room have a direct effect on health. The typical hospital room, with its beige walls and stingy windows, carries a dim, funereal cast and works against patient well-being. The standard twin-bedded configuration doesn’t help, fostering the spread of infection, making sleep difficult, and giving people at their sickest the dignity of life in a freshman dorm. By contrast, rooms that allow patients to see light and nature can speed healing and reduce delirium, pain, and anxiety. In other words, pleasant rooms—particularly private rooms—aren’t only more comfortable; they’re therapeutic.

These forces are turning the nearly $3 trillion health-care industry inside out. While few completely new hospitals are in the works—their number in the United States has remained at around 5,800 for nearly a decade—existing institutions are replacing old buildings and adding large wings, specialty centers, and outpatient clinics. Indeed, health care is one of the few sectors in the construction industry to be holding its own; in 2011, commercial construction in the United States declined 4%, while health care construction grew by 0.9% to $39.7 billion. VHA, a network of 1,350 non-profit hospitals, last year reported that 67% of its members had construction projects underway.

Patients and doctors will be able to have video consultations with other members of the medical team (Photo courtesy of HOK).

All those new facilities are giving designers a chance to remake the hospital to thrive amid disruption and flux. The most visible result: patient quarters that resemble hotel rooms more than depression-inducing sickrooms. The new rooms in the Scripps Prebys Cardiovascular Center designed by architecture firm HOK and now under construction in La Jolla, California, are a prime example. Painted sky-blue and aqua-green, trimmed with cherrywood panels and with windows filling the entire outside wall, the rooms (all of which will be private) are designed to evoke nature and invite sunlight. They will provide more space for friends and family, easier access for staff, and safer pathways for patients as they move about. And the toilets will be big enough not only for walkers but also for wheelchairs.

Tomorrow’s hospital rooms will also be fully wired to help patients engage with the outside world and their own treatment. At the Kaiserslautern Military Community Medical Center in Germany, which will serve soldiers returning from the Middle East, instead of a TV hanging from a metal bracket showing a ghostly soccer game no one is watching, the entire wall opposite the bed will be an interactive video screen. Patients will be able to look at photos of the grandkids, stream Netflix, surf the Web, and Skype with their friends. They will also be able to see schedules for doctors’ visits, call up staff bios, and hold video chats with teams of physicians.

The improvements don’t stop with the patient rooms. New nursing stations will let staff monitor their patients more efficiently, reducing mistakes. Operating theaters will be more flexible, allowing performance of multiple tests and procedures without moving patients around. Hallways and facades will feature works of art.

Modern medicine has produced an astounding cornucopia of technology: medical devices, pharmaceuticals, imaging equipment, surgical tools. The hospital itself will now be part of that arsenal.

A Hole In A Rock

The first hospital was a hole in a rock. Archeologists have uncovered signs of caregivers moving in and out of these quarantine chambers. The Egyptians and Greeks provided zones for the sick, but the approach was mainly palliative. Before the dawn of modern medicine in Europe, the burden fell on families to care for the sick in their homes; the homeless might find refuge in a hospital run by nuns or monks.

The early hospitals of the modern era were dark, dirty, nightmarish warehouses for the seriously ill. In the mid-19th century, Florence Nightingale created large hospital wards with high ceilings, clean air, and bright outside light, presaging today’s focus on light and nature. (She also professionalized nursing.) Europe stuck with the ward model well into the 20th century, but prosperous, individualistic America moved to four-bed and then two-bed hospital rooms. These rooms were cheap-to-build rectangles with beds, a sink, and a toilet. At the time, nobody considered that the room itself could affect a patient’s health, for better and for worse.

The last couple of decades, however, have produced a large body of research into the environmental and architectural effects on patient health, much of it peer-reviewed and appearing in scientific and medical journals. In 2005, a team at the University of Pittsburgh Medical Center studied the effect of sunlight on the recovery of patients who’d just had spinal surgery. Comparing patients on brighter and darker sides of a room, the experiment concluded that sunlight significantly reduced both pain and the need for analgesic medication. Dozens of other studies have reached similar conclusions on patient exposure to nature and art, classical music, colored walls, and the presence of family members. And starting in 2014 up to 30% of a hospital’s Medicare quality score, which influences a hospital’s payments, will be based on patient satisfaction.

Other recent research has looked at how hospitals contribute to patient harm. The most consequential study (it made the front page of the New York Times on Nov. 30, 1999) concluded that medical errors, along with falls and medication mistakes, were responsible for up to 98,000 deaths in American hospitals each year, making preventable hospital errors the fifth leading cause of death, behind only maladies like heart disease and cancer. The report, by the Institute of Medicine of the National Academy of Sciences, declared: “Health care is a decade or more behind many other high-risk industries in its attention to ensuring basic safety.”  In a recent op-ed piece in the Times, Dr. Sanjay Gupta said the death toll from these factors could now be 200,000 a year. Nor are better results beyond the realm of good practice. According to a report by the Institute of Medicine published this September, 75,000 needless deaths could have been averted in 2005 if every state had delivered care on par with the best-performing state.

Till recently, hospitals had little financial incentive to curb such outcomes. Under the fee-for-service model, the more procedures doctors and hospitals perform, the more revenue they accrue, whether the procedures are necessary or not. Perversely, hospitals have raked in extra income for treating conditions acquired at the hospital; if a patient gets a staph infection from, say, a dirty IV after a splenectomy, the hospital can charge both for removing the spleen and treating the infection. Starting in 2008, the federal Centers for Medicare & Medicaid Services began denying payments for certain infections, falls, and medication errors under rules developed during the George W. Bush administration. Private insurance companies are beginning to follow suit. Hospitals are finally giving patient safety its due.

What The Sickest Need

Innovation in architecture, says Chuck Siconolfi, begins by clarifying the problem. Whippet-thin, with a darkly mischievous look that recalls John Waters, but more handsome, Siconolfi is director of health-care innovation, planning, and design at HOK, one of the world’s largest architectural firms and a leading designer of health-care facilities. Hospital design in the new millennium, he says, starts with this question: “Who is in these hospital beds?”

The answer today is the sickest of the sick. Refinements in technology and surgical techniques allow millions of patients to be treated in outpatient clinics. “Fifteen years ago, you injured your knee skiing,” he says. “They’d have kept you overnight or a couple of days. Today they send you home that afternoon.”

With few admitted for minor surgery, hospitals now house mainly those suffering from serious heart problems, neurological issues, severe trauma, and a host of other risky, complicated maladies. They’re on a lot of meds. More than 60% of hospital admissions are for patients who are over 65 and hence particularly vulnerable to accidents and treatment errors. All of these factors are key issues in hospital design.

When HOK began creating the University Medical Center of Princeton at Plainsboro, in New Jersey, a replacement hospital building that opened this past May, fall prevention was a top priority. Nurses wanted clear sight lines into the room, so they could see if someone was struggling to get out of bed. Presenting the design problem was the usual culprit: the toilet. The safest place for the toilet is near the patient, along the wall on the same side of the room as the bed. But putting it there would obstruct the nurse’s view of the patient’s head.

Solving the problem, says Siconolfi, involved a lot of iterative discovery. After polling the client about the scope of the job, the architects generated drawings and then got feedback from users—patients, doctors, nurses, orderlies, food workers, family. Put the toilet near the window? It cuts into the view, reduces natural light, and cramps visitor space. Putting it on the wall opposite the bed forces the patient to cross the room, the leading cause of nasty falls (and leaves less room for a media screen.) The architects translated their revisions into virtual mockups on a computer screen, then 3D full-size models built with foam walls and furniture, finally a mock-up of a room containing the real goods.

The solution to the toilet-sightline problem at Princeton: the parallelogram. By canting the room at angles like a diamond on a playing card, the toilet can go near the patient, along the same wall as the patient’s head and near the front door, but recessed so that the nurse can see the patient from head to toe. The arrangement also gives the patient better views of the window and the video screen.

The room’s layout is novel, too. The space is divided into three zones: family, patient, and clinical staff. The entire window area is given over to the family and other visitors, with extended seating below the window, transformable into a bed. The patient zone includes the bed, the toilet, and the media wall. A remote control gives the patient power over the TV and Internet, as well as the window shades, light, and temperature controls; no more calling for the nurse to turn the heat down a notch. The staff zone has a dedicated sink separate from the patient’s bathroom, a computer screen for electronic records, and a medicine supply cabinet refillable from the hall, allowing for accurate, timely deliveries and minimizing patient exposure to microbes.

Shift To Private Rooms

For all the architectural innovation, the most significant change is the shift to private rooms, which will both improve care and save money. As numerous studies show, sharing a hospital room significantly increases the chance of acquiring a life-threatening infection. The infection rate for those in private rooms is far lower. “It should be obvious that when two patients are separated in different rooms, you have much less cross-contamination,” says Dr. George Tingwald at Stanford University Medical Center. Tingwald, a gray-haired man with the friendly face of a family practitioner, directs medical planning at the center. A former executive at the architecture firm Skidmore, Owings & Merrell, he’s one of a handful of professionals licensed both as an architect and a doctor. A major upgrade and expansion now underway at Stanford will add 144 hospital beds—all in single, private rooms. “It costs less to operate a private room hospital,” says Tingwald, “so everyone is doing it.” In fact, almost no one in the United States is building two-bed rooms now, and in some states, health codes require that all rooms be private.

That private rooms can curb infection is easy to understand, but to say they save money seems counterintuitive. And indeed, a private-room hospital is costlier to build, with more square feet per patient. But hospitals are able to recover those costs, and then some. One way is through higher occupancy rates—potentially 90% to 95% at an all-private hospital compared with 75% or so for a double-room facility. The reason for the difference is that anybody can be assigned to a private room; for double rooms, hospitals must consider gender and age. The main costs savings, however, will come from avoiding penalties (and earning bonuses) as Medicare and private insurers boost quality requirements.

Finding hard numbers to show the payback on design improvements is tough without access to hospitals’ internal financial records. Blair Sadler, a senior fellow at the Institute for Healthcare Improvement and a former hospital CEO, led a team in 2011 that evaluated the costs and benefits of the best “evidence based” hospital design, including larger single patient rooms, bigger windows, cleaner air systems, and decentralized nurse stations placed closer to the rooms. For a typical 300-bed hospital with a $350 million price tag, such amenities cost an additional $30 million. But the changes yielded annual savings of about $10 million, giving a payback of only three years. “The rooms we have now are way outdated,” says nurse Steckel, who is the chief nursing and operations officer at Scripps Memorial La Jolla. “Now, the rooms for patients will look and feel rich, but don’t cost rich.”

New hospital design isn’t limited to patient rooms. The operating theater is changing too.

Lauren McKenna is a space programmer. Nothing to do with NASA or Elon Musk’s SpaceX. Her job, at HOK, is figuring out how much floor space a hospital needs, with the help of published research.

McKenna’s background is in finance, but she looks all-architect: black outfit, black stockings, dark hair in a bun, rectangular glasses with a muted black and gray tortoise-shell finish. Her job is unusual in architecture. She crunches through databanks packed with peer-reviewed medical studies from scientific journals and devises ways for health-care systems to boost quality while reducing costly square footage.

Consider medical robots, which are fast becoming standard assistants in surgery. Their micro-movements make for smaller and more accurate incisions that heal faster than cuts made by even the most skilled human hands. Younger, tech-savvy surgeons are especially enthusiastic about robot surgery. The precision of robots in operations like heart-valve replacement and ovarian tumor removal can trim two full days off a hospital stay. Faster healing means quicker discharge. And with patient days reduced, fewer rooms are needed, saving big on both construction and operational costs. Hospitals can opt to use that freed-up space for planned expansions in service. McKenna works with clients to choose the best tradeoffs. Her software program has bar graphs that rise or fall depending on the square footage that a technology or treatment requires. “It gives hospitals the choice,” she says.

Making facilities flexible can also save both lives and space. At the Prebys heart center in La Jolla, HOK designed hybrid operating rooms. The time needed to get a heart attack victim from the emergency room to the surgical table is critical for survival. New Medicare standards introduced under the ACA reward hospitals that shorten the lag time between the decision to treat with heart surgery and the surgery itself. Rushing doesn’t help. A well-thought-out process does.

In a typical hospital, a heart-attack patient first goes to a room for catheterization, where a long probe is sent through blood vessels to the heart for X-rays. If surgery is warranted, a trip down the hall to the operating room comes next. Each room visited entails additional transfers between gurney and table, increasing the chance of infection and falls; the delays hurt too. HOK’s hybrid ORs contain versatile, mobile gear that lets the staff conduct both diagnostic procedures and surgery without having to move the patient from place to place. “You do a cath, and if that’s not enough, you can open up [the patient] to do more,” says Steckel. “The patient is already on an operating table. You have the equipment right there.”

No one pretends hospital architecture can solve all the ills plaguing U.S. health care. Given an aging population and a culture expecting high levels of medical service that someone else pays for, the problems run deep. Better-designed hospitals, though, save money by reducing hospital stays; they keep patients safer; they help them feel better about their experience, speeding their recovery. Intelligent building design isn’t a cure by itself, but truly efficient health care will be impossible without it.

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Consumers “have the right to know the price and quality of their health care choices,” the consortium said in a statement — especially as health care costs continue to rise and high-deductible health care plans become more common.

For decades, consumers have been effectively blocked from learning the true price of medical procedures until the bill came due, with no chance to shop for a better deal, according to the consortium, which is represented by the nonprofit Catalyst for Payment Reform (CPR). Even employers with access to claims records still struggle through data thickets to learn what individual procedures cost at different hospitals and clinics. High-deductible insurance plans — often set at $1,000 or $2,000 — are increasing the demand for greater transparency.

In response, insurance companies have created online “tools” to help consumers compare medical providers based on price and quality.

But CPR Executive Director Suzanne Delbanco said employers find many of those tools “clunky” to use and lacking sufficient price and quality data. In addition, many insurance contracts with employers ban them from sending data for analysis to a third party, who might also offer advice or build better tools. Thus far, the insurance companies, which she declined to name, have not budged on the ban.

Delbanco said it’s time to “make a stink about this” because the third-party ban is stifling innovation that could help consumers shop for medical care based on price and quality. More innovative tools, she said, “might even inspire the (insurance companies) to work harder on their own tools.”

Another group representing corporate health care payers and working with CPR, the Pacific Business Group on Health, has of insurance company shopping tools, with suggestions for improvement.  CPR on Thursday released to help employers and consumer groups make their own assessments.

Self-insured employers, which includes most large companies, also “have the right to use their claims data to develop benefit designs and tools that meet their needs,” the statement said.

Besides large corporations, the consortium includes government entities like the California pension provider, CalPERS. The AARP also signed on to the statement.

“If you get enough critical mass of customers all asking for something at the same time, it helps create a business case for the health plans to change the way they’ve been doing things,” Delbanco said.

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Peter Lee, charged with creating California’s online state insurance market, says his goal is to make shopping for health insurance as easy “as buying a book on Amazon or shoes on Zappos.”

At a time when only 14 states and the District of Columbia have even authorized the legal framework for the state-based insurance markets called for in the law, California is sprinting towards the law’s October 2013 deadline to begin enrolling the uninsured. Along the way, state officials are betting they’ll become a national role model.

Lee has already hired 36 employees, awarded a $359 million information technology contract and begun a marketing push to an estimated five million eligible uninsured.

“California is in the vanguard,” said Bill Kramer, executive director of national health policy for the Pacific Business Group on Health, a business forum to help employers figure out how to provide affordable health.

Much is at stake in the nation’s most populous state where almost one in five people is uninsured, and the legislation is projected to bring more than $3.4 billion a year in new health care spending,  by the Bay Area Council Economic Institute.

The online markets, called exchanges, are the place where individuals without employer coverage would determine their eligibility for subsidies and then compare plans and purchase a policy. And anyone who’s visited a state government website in California (try , for instance) knows that making one easy to use will be no small feat.

As required by the federal law, California’s exchange offerings will be classified as gold, silver or bronze to signify the level of coverage. A family of four headed by mid-40s adults earning $35,157 a year might choose a $14,245 silver plan costing $1,187 a month; after subsidies, they would pay $117 a month, according to an . With $70,275 in income, the same plan would cost that family $556 monthly, after subsidies. Subsidies top out at about $93,700, where a family of four would pay $740 a month.

As called for in the federal law, California plans to open its shopping portal on Oct. 1, 2013, with insurance coverage available Jan. 1, 2014. By 2016, the state expects more than 2 million people to have purchased insurance through the exchange.

Lee knows other states will be watching how he does with this exchange. Whether he and his staff reach the promised land, or catch arrows in the back remains to be seen.

There is plenty of work to be done. The exchange’s governing body, which has held for months, still must decide which insurance companies will participate in the exchange and how much the policies will cost.

The organization has already begun a major , to encourage people to sign up.

Lee says his organization will be meeting with everyone from church groups to Hollywood executives to get the word out. (“You’ve heard of product placement?” he asked. “How about movies and TV shows telling stories about how people get insurance coverage.”) He said retailers and social media sites — Google, Facebook, Target — will also be approached.

Marketing materials are being prepared in at least a dozen languages, from English to Spanish to Farsi to Mandarin to Hmong. “We have 600,000 Asian Californians eligible in the exchange,” said Lee. “That’s more than the entire uninsured population of many states.” He added: “We’ll share with other states. Connecticut might have only 10,000 people who speak Farsi. They’re welcome to use our material.”

Asked about the state’s health and human services websites, Lee paused. “Our charge is ‘make this work,'” he said.  “Our frame of reference isn’t a government website. Our frame of reference really is Zappos. It really is Amazon.”

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New York hookers spreading HIV. Killer mosquitos.  An anthrax-toting terrorist. An urban-scape rife with the sick and poor.  These are just some of the challenges tackled by , a Yale-educated physician, epidemiologist and self-confessed computer nerd.  His current mission: moving doctors from the Age of Gutenberg into the 21st century.  For starters, he’d like them to use e-mail at the office.

It’s a tough nut. The U.S. leads the world in advanced medical technologies, but when it comes to electronic communication, American medicine remains a backward culture.  The percentage of private-practice doctors with “fully functional” electronic health record systems was in the low double digits in 2010, according to . Less than half of solo practitioners keep computer records for anything other than billing. An eBay merchant who sells funny barbecue aprons out of his living room is better equipped for computer communication than many physicians. For real.

“Data is power,” says Farzad Mostashari, who wants to use data to improve care and cut costs. (Photo by Mark Finkenstaedt for KHN)

American industry learned decades ago that costs could be more efficiently controlled and quality improved with digitized data — information that is gathered electronically, fed into a computer, analyzed, shared and used to offer goods and services at lower cost, better quality and higher margins. Those businesses have joined the Information Age. Not health care, though. Health care costs continue to rise toward the unaffordable, even as quality lags. Meantime, health care’s most essential data — millions of patient health records, trillions of data points — remain isolated on paper stuffed into manila envelopes and stacked on shelves, or locked in proprietary computer systems programmed in incompatible software codes, making them difficult, if not impossible to share.

As head of the federal office charged with leading the digitization effort, Mostashari, 43, aims to change that. “Data is power,” he likes to say.  A shaved-head, bow-tied bundle of enthusiasm, he radiates a good-salesman vibe, fist-bumping and high-fiving through conversations. While personality helps, Mostashari’s trump card is money. He is distributing $27 billion in federal stimulus funds as an incentive to doctors and hospitals who install electronic record systems and demonstrate they are meaningfully using them—  that could work out to as much as $64,000 per physician over six years.  Eligible hospitals will receive payments in the millions.

‘A Social Change Project’

Mostashari believes the benefits will go well beyond improved individual care. Rich stores of population data could be monitored to warn of disease outbreaks, find evidence for which procedures are most effective and help discover innovative approaches to care. Hospitals, managed care clinics, and even small doctor offices could analyze agglomerated data to carve out unnecessary costs and to help keep a lid on health price inflation.

“He’s trying to change a health care system,” says David Blumenthal, a Harvard professor and Mostashari’s predecessor in the HHS job. “It’s not a technology project, it’s a social change project.”

A proud nerd in childhood, Mostashari at age 14 moved from Iran to upstate New York to live with an aunt. He made a mistake thinking his prowess in science, math and computers — a trait revered in his native land — would also be considered cool in the U.S. Classmates mocked him, but he persevered.

He graduated as an epidemiologist from the Harvard School of Public Health, then medical school at Yale. His intent: combine on-the-ground medical experience with epidemiology’s more abstract pursuit of pattern recognition. In an early project, he tallied the prevalence of HIV among intravenous drug users, including prostitutes. Hired by the New York City Department of Health and Mental Hygiene, he rose quickly, getting named lead investigator in the West Nile virus outbreak. In 2001, he applied data patterns to develop early terror warning signals in the wake of the anthrax-by-mail attacks that terrorized the nation.

New York City Trial Run

New York Mayor Michael Bloomberg put him on his current path: bringing information technology to a large group of have-nots — desperately poor patients. In 2005, Mostashari headed a city program to help doctors’ offices, community health centers and hospitals set up digital record systems that now cover more than 2 million patients, three quarters of whom are on Medicaid or uninsured. 

Now he is attempting to apply those lessons nationally. Remarkably, in an era of partisan government, Mostashari’s program enjoys bipartisan support — or, at least, bipartisan tolerance. While only three Republicans voted for the stimulus bill in 2009, which provided the program’s funding, few have spoken out against it. The fact that the information technology industry is a big supporter — giants such as IBM, Microsoft, General Electric, Hewlett-Packard and a host of smaller health-care specialty technology companies — doesn’t hurt. The $27 billion will flow their way, and plenty of high-priced lobbyists are working hard to keep it flowing.

As of Feb. 17, the government had disbursed $3.1 billion in  to nearly 2,000 hospitals and more than 41,000 doctors, and Mostashari expects that number will balloon in the coming year.

One Doctor’s Transition

Dr. Gustin Ho, whose community clinic in San Francisco’s Chinatown is crammed with elderly men and women, was among the early converts. In an office lined with paper files, the only evidence of Ho’s new electronic health record system is a few Samsung flat-panel monitors in each of three examining rooms. “Before it was ‘copy this,’ ‘fax that,’” Dr. Ho says, stethoscope dangling from a lab coat pocket. “Now, I just hit a button and send the whole thing.” 

The adjustment, however, was tough. For starters, Ho says he used to regard patient records as proprietary.  “You don’t know how I struggled,” he says. “It’s my chart. It’s my patient.  Why let other people look at it?” It came as a revelation, he says, when another doctor persuaded him the records are his patients’, not his.

Then, he had to figure out a way to integrate note-taking in his consultations with patients.  “I was an amateur,” Ho admits. “In the beginning I used a laptop. It physically got in the way between me and my patient. I seemed to be paying more attention to the computer than to the patients.” After he switched to flat panel monitors, however, attaching them on wall swivels, patient complaints ceased. Entering an exam room to greet a middle-aged patient with heart problems, Ho pulls out the screen while both wheel their chairs together to go over the results of a recent test. 

For such an effort to succeed, “you’ve got to make it simple,” Mostashari says. “Simple enough for the little guy. It has to work not just for the biggest, deep-pocketed organizations, but for the small docs as well.”

Foot-Draggers Face Penalties

Not everyone is on board, and some may pay a price. Physicians who fail to convert to digital records will see their already low Medicare and Medicaid  1 percent a year, beginning in 2015, to a maximum 5 percent reduction.  

Mostashari (Photo by Mark Finkenstaedt for KHN)

There’s also friction between those who want system standards to be open and some large companies trying to steer standards to benefit their own products. “It’s often in a company’s best interest to make sure you can’t get the data from other sources,” says Aaron E. Carroll, a physician and professor at Indiana University. “They want you to buy their products. Easily compatible systems hurt their bottom line.” 

²Ñ´Ç²õ³Ù²¹²õ³ó²¹°ù¾±Ìý for foot-dragging late last year.  “Push!,” he said. “There is a sense in which not moving on anything is a greater risk than moving forward on something that may be imperfect. We can’t afford to wait another five years before we have (health care data) exchange in this country.”

His biggest challenge may be something over which he has less control: safeguarding patient privacy. Every week, it seems, another hospital reports a , such as last year’s posting of the names and diagnosis codes of 20,000  on a commercial website. 

And it’s not just breaches that worry some consumer and privacy advocates. Many companies would love to get their hands on patient data, says Lee Tien, senior staff attorney at the Electronic Frontier Foundation. “Big data is big business,” Tien says. 

‘Speed of Trust’

Mostashari counts privacy protection as a top priority and says the program will only move forward “at the speed of trust,” as physicians implement data-sharing systems in increments, with special attention to encryption and rules on access, password protection and audit trails.  for the second stage of meaningful use, released in February,  put a stronger emphasis on encryption of patient records, for instance.

While the tasks ahead are daunting, Mostashari’s office last year celebrated the first transmission of electronic health records sent securely over the Internet via e-mail using an industry-government standard available to doctors for free. In the annals of communications history, the event won’t rank with “Mr. Watson, come here, I want to see you,” but for doctors, it’s a start.

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After New Hampshire’s legislature severely cut their Medicaid funding last summer, hospitals throughout the state began shedding jobs. Exeter Health Resources, which runs a 100-bed hospital near the coast, lopped off 110, almost 5 percent of its workforce, many of them nurses and other care givers.

Allie Woods had several job offers before she’d even completed her pharmaceutical residency. She chose to move to Portland, Ore., to work at Oregon Health & Science University, customizing computer programs to help with drug issues. (Photo by Thomas Patterson)

Yet Exeter is still hiring — mainly administrative workers. “We’re trying to balance the need to cut costs with the need to grow,” says Mark Whitney, Exeter’s vice president for strategy. “It’s an interesting balance.”

It’s a paradox, too. Even as cutbacks in Medicaid and other programs gouge hospital budgets, and overall health care demand slackens as penny-pitching patients put off procedures in a bad economy, hospitals are creating new jobs: a net gain of 95,000 this year, 13,000 of them in September and 6,600 in October, according to the Bureau of Labor Statistics. 

In fact, the health care sector is not only the nation’s top job generator, but it’s also one of the few major industries producing new jobs at all. Of the 80,000 net new U.S. jobs created in October, 12,000 of them were in health care —  hospitals, doctor’s offices, clinics, labs, home health care agencies and nursing homes all are creating net new jobs. Over the past 12 months, health care has created .

What’s up? The new jobs appear to be driven not by patient demand as much as a general restructuring of the health care industry that includes changes mandated by the 2010 federal health care law, the 2009 federal stimulus funding, new government regulations and increasing use of information technology. Strong anecdotal evidence — hospital job listings, interviews with health care employers, analysis by health care economists — indicates the attention now is on hiring clerks and administrators.

“We need to deal with new technology, new services, new regulations, electronic health records, government reporting requirements on quality,” says Exeter’s Whitney. “A lot of this is related to the new federal health law.”

Hospitals are also preparing to compete for tens of millions of now-uninsured patients the federal law will make eligible for health coverage beginning in 2014. So even as budgets are cut, the competition for patients will become more intense. 

Exeter is seeking billing specialists, information technology experts and program managers at the same time it is cutting nurse positions. Job listings at hospitals around the U.S. show the same trend.

Those who study the link between jobs and health care overhaul aren’t surprised. “What we’re experiencing right now (around the country) is similar to what we experienced in Massachusetts,” says Douglas Staiger, an economist at Dartmouth University. He co-authored a recent  on job growth in the state between 2005 and 2010, in the wake of the health law signed by Mitt Romney when he was governor.

Health care jobs grew in Massachusetts 9.5 percent, cumulatively — almost twice as fast as in the U.S. as a whole. The growth was driven by administrative jobs. “Most of it was from enrolling patients who were previously uninsured,” says Staiger. Doctor and nurse hiring grew as well, but not as fast.

When the federal health care law passed in 2010, economists and other health care analysts expected a similar pattern to emerge, says Staiger. In addition, as states begin work to meet the federal law’s provision for computerized health exchanges employment is growing. “But how all this turns out is very speculative, because we don’t know how the health care law will evolve,” Staiger says. 

In fact, the health law and the jobs that come with it could be jeopardized in 2012 if the Supreme Court rules against the law or Republicans take the White House. The Republican presidential candidates are competing over who would kill the law fastest.

Polls show jobs and the economy as voters’ top issue. In one debate, Rep. Michele Bachmann lambasted the health law, asserting that “Obamacare is killing jobs.”

“The same (political) forces that have been creating these jobs could end them very quickly,” says Craig Garner, a health care attorney who served as CEO at Coast Plaza Hospital in Norwalk, Calif., until his family sold it earlier this year. Garner notes the health law provides major spending for pilot preventive care programs that, supporters say, could save money in the long run by keeping people healthier. “I’m afraid they’re going to cut the legs out from these programs before they’ve shown whether or not they can work,” he says. 

Also vulnerable: at least $20 billion in federal funds to help doctors and others upgrade computer and communications technology for electronic health records. Federal funds are also helping Alameda County Medical Center in Oakland, Calif., to deploy a major new electronic health record system. “One of our big needs is IT people,” says Jeanette Louden-Corbett, head of human resources there. Hiring hasn’t been easy: “Many of them are in high demand from other organizations.”

Unlike most industries, health care is under-computerized, with institutions poorly linked to one another electronically. Some of the stimulus money is meant to help counteract cultural resistance and financial disincentives to modernize. It’s impossible to determine how many health IT jobs are being created: the Bureau of Labor Statistics doesn’t count those jobs specifically. Nor are those who make and sell the computer and software systems counted as health care workers, although Hewlett-Packard, IBM and others regard health care as a high-growth business. 

At least for now, workers like Allie Woods, 29, are in the driver’s seat.  “I didn’t even have to look for a job,” says Woods, who had several offers more than a year before she graduated from her pharmaceutical residency last June with advanced training in “informatics,” which qualifies her to be the liaison between the pharmacy department and the IT department.

Today she works at the Oregon Health Sciences University hospital in Portland, customizing computer programs to prevent adverse drug interactions and identify patient-drug trouble spots before they occur.

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In a wide-ranging interview at the company’s San Francisco headquarters, Bodaken spoke with Russ Mitchell about the future, the impact of the cap and criticism of his last year. Among his favorite subjects: the “accountable care organization” that Blue Shield is partnering with CalPERS, which administers pension funds and health care benefits for public employees. The federal health overhaul law encourages the formation of ACOs as a means of restraining costs and improving quality.

Edited excerpts follow.

Q: Beyond the health care law, how might medical costs be reduced?

A: The key is to start with prevention, at both the individual and provider level. We have (at Blue Shield) a program called . There are serious incentives to work on smoking cessation, stress management, weight loss, all the sorts of things that often end up resulting in chronic disease — which especially with the boomers are going to be the big dollars as we go forward.

The other piece is the kind of collaboration within the ACO environment where we have physicians and hospitals and ourselves and our members all being focused on providing the best health care at the lowest costs.

In Sacramento, in our ACO partnership with CalPERS, we’ve seen a 15 percent reduction in hospital readmissions, and a reduction in admissions as well. We committed to CalPERS that we would seek a zero percent trend. They received a zero premium increase for 41,500 members in the ACO; their premium was the same in 2009 as in 2010. We did it by becoming more efficient, so it’s not a function of losing money. Blue Shield, Catholic Healthcare West and Hill Physicians agreed to share the risk to deliver promised savings, and all of us were able to achieve a modest bottom line.

Q: One challenge for ACOs will be avoiding the mistakes of the HMOs in the 1990s, which sparked a major consumer backlash.

A: I think we’ve learned a lot since the ’90s and we understand that not working through the physician is a huge mistake. We’ve got to have a collaboration so as we make determinations from medical policy, physicians are going to support and can tell the members “we think this is the best care possible you can get.” Saying that your HMO won’t let you have it or prescribe it, obviously that’s not a recipe for success with the consumer.

Q: Some critics point to a clause in your announcement that says you can end the profit cap if necessary for investment. That seems to leave a lot of wiggle room.

A: I believe what we said is that our board of directors would only change it if they were to deem it necessary for our margins to increase, either as a result of concerns over solvency or the level of investment necessary was much greater than we think 2 percent would be sufficient to provide. We don’t see that happening, certainly over the next couple of years.

Q: Your annual salary was criticized in media reports after your announcement. How do you respond to the criticisms?

A: Obviously as a not-for-profit company, we do not have stock options. We are in a national market for top talent and consequently our compensation needs to be be market-based, and it is. My compensation in particular is well within the market standard for organizations our size. I’m not talking about organizations the size of WellPoint or United Healthcare, but for organizations our size, we’re at the low end of that curve.

Q: Insurers use their reserves not only for financial stability but also to buy other companies. What are your plans, in a consolidating industry, for mergers and acquisitions?

A: One of the things we’ve said when asked about why we have the reserves we have, is that we certainly need to be well capitalized to get (a good rating from credit rating agencies). We also want to have sufficient funds available to acquire other businesses that could be in the health care business or could be in other businesses that would be supportive of what we do as a health plan.

We’re not in a position to buy certainly the largest organizations but we do think we have enough financial flexibility to make acquisitions as necessary. We have nothing currently in discussion and if I did I wouldn’t tell you. The fact of the matter is we want to be prepared for the kind of increasing capabilities and increasing talent (we need) as we go forward.

Q: What about another company buying Blue Shield of California?

A: The board and I have discussed the independence of Blue Shield on a couple of occasions, and as we look around we believe that we are offering a very high quality competitive service. I think we are a catalyst for positive change in the market. As long as we continue to play that role, we think our independence is the best thing for our board, for our customers, for the state of California.

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