When Are We Going to Learn, and from Whom?

The Economics of Rehabilitation: The Difference between Efficiency and Value

By William G. Johnson, PhDThe mandate to "do no harm" and to "provide care so long as it improves a patient's health" has been replaced by appeals to "do no harm, but limit care to that which is efficient." It is also widely believed that increases in quality and reductions in costs can only be obtained by making health care markets more competitive.

The presumption that market competition will increase efficiency is based on an economic model that does not apply to health care. Careful examination of the theory on to which the presumption appeals clearly demonstrates that market competition for health care does not guarantee socially beneficial outcomes. The reasons that health care does not fit well into the market paradigm were enunciated in a classic article by Kenneth Arrow in the 1960s, and most recently in a book by Thomas Rice.

Unfortunately, the current debate ignores the contradictions that Arrow described and, as a result, many of the conclusions are misleading. Physicians, who are generally unaware of the principles on which the free market model is based, are often left to defend against "market-based" cost-reducing strategies that have a common sense appeal but are incorrect. Recognition of these differences is essential to physicians who are struggling with the conflicts between clinical imperatives and the pressures to reduce the costs of health care.

The distinctions are many, but a few examples should suffice. The free market model is one in which consumers express the value that they place on a service by the price they are willing to pay for it. This condition carries with it the proviso that consumers are aware of all the attributes of the products or services they might wish to buy. Commodities are allocated among consumers based on their ability to pay for them. Consumers learn about the quality of products and services by trial and error.

Producers in the model control such a small share of the market that their actions do not directly affect the market price of the products they sell. They can only hope to maximize their profits by finding ways to produce their products at a lower cost than their competitors. It is this incentive that brings about efficiency and low costs in a competitive market.

One of the great appeals of the competitive market model is that a socially beneficial result is produced without requiring the participants to be socially conscious. Free market consumers seek only to maximize their individual well-being, and free market producers seek only to maximize their profits. Competition between these conflicting goals leads as if, in the words of Adam Smith, "by an invisible hand, to increased efficiency." Put more succinctly and more recently by Gordon Gekko in the movie Wall Street: "Greed is good."

The contradictions between the conditions under which health care is delivered and the characteristics of a free market are obvious. Consumers are not expected to know the nature or quantity of the health care services that make them well. In fact, physicians (the sellers in the market model) are expected to tell the buyers what services they need. This obligation is based on ethical principles applied to physicians, backed by the more punitive provisions of malpractice laws. Society also asks that physicians not be solely motivated by their opportunities for personal profit.

The prevalence of health insurance, both public and private, also raises questions about who the consumer is in terms of the market. It is not obvious that the consumer, namely the entity that decides how much is to be paid for a service in the free market, is the patient who receives health care.

The existence of these differences is common knowledge, but too many discussions of competition in health care proceed as if the differences did not exist. It is ironic, for example, that appeals for market competition often include suggestions for increased use of cost effectiveness analysis and surveys of patient satisfaction. A competitive market has no need for such tools since efficiency is achieved by voluntary exchanges between informed consumers and profit seeking producers. The need for proxies for market-based outcomes reflects the fact that health care is fundamentally different from commodities, like champagne or football, whose production and consumption is directed by the operation of markets.

There are some uses of competition in the market for health care. If, however, competition is to serve a useful purpose in the delivery of health care, it must be understood to operate within a very carefully defined set of objectives. Chief among these is a clear definition of the value to society of the results that health care can produce. These values, unlike the consumers' returns from buying SUVs, cannot be obtained from market prices for health care for the reasons that I have described. The challenge and the opportunity that I offer to you as a professional group is to create a model of cost-based evaluation that includes well-defined measures of the value of the services that you provide.

Payers traditionally relied on physicians to guarantee that efficient methods of care were used. That reliance eroded when payers no longer accepted providers' explanations for large increases in health care costs. The challenge that you face is how to adequately express the value of the services that you provide, rather than simply reacting to strategies focused too much on costs and too little on value.

"Cost-effective" does not, for example, mean "cheaper." It considers the value of a service per dollar spent, not a measure of total dollars spent on a service. High value services can, therefore, bear high costs. You, as physicians, are best qualified to measure and to present the value of the care that you provide. To be convincing to employers, insurers and public agencies, however, you must be willing to present the information in the context of the cost-based evaluations that payers seek.

My experience in working with large corporations and national insurers is that they are interested in value per dollar spent, and not simply in reducing costs. They, however, also struggle with uncertain information on the costs and outcomes of health care. I think that there is an opportunity to switch the emphasis on cost reduction to a more balanced consideration of both the value and costs of care by reducing that uncertainty.

The limits of pure cost reduction are in sight, and the reactions to the methods are not all positive. If physicians can provide convincing evidence of the value of the care they provide, they can create a more balanced environment for health care in the future.

The task cannot be performed by individual physicians as part of their practices. It requires the full weight of the Academy to be credible and its full resources to ensure validity. The adoption of a consensus model of the costs and values of rehabilitative care would be further improved if the Academy made representative, responsible payers an integral part of the process used to develop the model. A cooperative model would do much to eliminate much of the uncertainty and suspicion that can exist between payers and providers.

I would like to suggest a few characteristics of an approach that the academy could use to achieve these objectives. It is, in many ways, analogous to the concept of practice guidelines. It consists of at least three elements, namely:

1. adoption of standard measures of outcomes;
2. adoption of standard measures of costs;
3. cooperation with responsible payers.

The obstacles to measuring outcomes include uncertainty regarding the links between care and certain types of results, and the difficulty of assigning dollar values to some outcomes, however well measured. Let me address the uncertainty question first.

Rehabilitation services can improve functionality, which promotes the ability to perform activities, of which work is the most important to many payers. There are, however, important influences on returns to work following illnesses that cannot be affected by even the most effective health care. The large research literature on these influences is not available in the journals read by most physicians, and its implications are ignored in most studies of medical rehabilitation. Unless these influences are recognized, the evaluation of the effectiveness of rehabilitation can be seriously compromised.

I suggest, therefore, that the Academy establish some agreed-upon measures of functionality that can be understood by non-physicians, which can be used to measure the outcomes of rehabilitation without making an unnecessarily broad leap to outcomes that are subject to other influences.

Costs

The methods for measuring direct and indirect costs of health conditions are well established, but they are too often not correctly applied. A recent survey of articles published in clinical journals found that only three of more than 60 studies met even the simplest criteria for methodological validity. To be convincing, evaluations of rehabilitation must avoid these errors.

I would suggest, therefore, that the Academy adopt the standards published by the PHS and others for cost-based evaluations of health care, and encourage their use by the journals that address rehabilitation.

Cooperation

Improvements in cost-based evaluations of rehabilitation will, however, be of limited value in the debate on health care unless the results are credible and understandable to payers. I suggest that the Academy include payers in the creation of these standards. The object is not a negotiation over pricing, but a common understanding of what can be reasonably expected as an outcome of rehabilitation. A cooperative process offers at least the possibility of reducing misunderstandings concerning the values of outcomes that are not easily priced. Success in cooperation requires thoughtful responses on both sides, and a frank sharing of the different problems and incentives that the different parties face. Just as the Academy can represent many professionals, so representatives of payers should represent a broader community than a single company or insurer.

Professional journals should be encouraged to apply the the Academy model in evaluating reports of cost-based studies of rehabilitation. Rehabilitation professionals should be informed of the origins and uses of the information as part of their continuing education. The model can also serve as a standard that can be introduced into public policy debates as a safeguard against conventional, but erroneous judgments and unsubstantiated opinions.

Summary

Some parties on the provider and payer sides may argue that the "other folks" are untrustworthy. If the market were truly competitive in the classical sense, strategies based on competition, rather than cooperation, would produce beneficial results. Without the "invisible hand" in full operation, the full benefits of health care, efficiently produced can only be obtained by cooperation among the parties to the bargain. The cooperation need not exclude competition, nor would that necessarily be beneficial. It should, however, define the boundaries within which the potential value of rehabilitation can be obtained in an efficient manner.

William G. Johnson, PhD

Without agreement on the value of rehabilitation services, discussions of efficiency or costs are meaningless.