If ever an entire sector of the U.S. economy was guilty of committing one of Peter Drucker's greatest sins of mismanagement—confusing activity with results—it's health care.

As the Commonwealth Fund noted in a report last year, spending per hospital visit in the U.S. exceeds that of all other countries belonging to the Organization for Economic Co-operation & Development, and American patients count among the most likely to receive procedures requiring advanced technology. Yet at the same time, the U.S. now ranks in the bottom quartile in life expectancy among OECD countries and has seen the smallest gains in this metric over the past two decades.

This week, WellPointannounced that it's taking steps to counter these trends. In what experts have described as the most extensive effort of its kind, the giant insurer said it was revamping the way it reimburses about 1,500 hospitals across the nation, so that annual payment increases are pegged to WellPoint's definition of quality care rather than to the quantity of services delivered.

WellPoint's new formula—based 55 percent on health outcomes, 35 percent on patient-safety measures, and 10 percent on patient satisfaction—is one piece of a broader push to tie health-care compensation to effectiveness, not simply to volume. For its part, the Obama Administration is reworking how the government pays hospitals through Medicare so that the system becomes more results-oriented, a subject I've discusssed in this space.

On one level, these moves are designed to curb costs. And WellPoint, which policymakers and the media have slammed in recent years for denying coverage to people with illnesses and preexisting conditions, is certainly a company with its eye on the bottom line.

But if WellPoint's new reimbursement policy works, it should also prod doctors, nurses, and other medical personnel to make significant strides toward giving their “customers” (the sick) what they value most (a chance to return to health and stay well). In this broader sense, the company's actions can instruct all sorts of organizations hoping to measure and improve their performance.

Drucker pointed out that public-service institutions, including many hospitals, tend to have a particularly tough time in this area. Because of their inherent complexity, such enterprises “are prone to the deadly disease of bureaucracy; that is, toward mistaking rules, regulations, and the smooth functioning of the machinery for accomplishment,” Drucker wrote in Toward the Next Economics.

To combat this, Drucker advised, the organization must set explicit goals. “To say our objective is … 'health-care' is operationally a meaningless statement,” Drucker asserted. Instead, this grand sense of purpose must be “converted into specific … work assignments” that, in turn, can be analyzed and appraised.

Indeed, this process is what good management is all about: deliberately translating a lofty mission into a concrete series of tasks and feedback mechanisms that lead to smarter decisions. Drucker recalled, for example, that Sears, Roebuck defined its mission in the 1920s as being “the buyer for the American Family”—a “totally intangible” statement. But the ways in which “Sears then set to accomplish this mission (e.g., to develop a range of appliances that most nearly satisfy the largest number of homeowners at the most economical price),” Drucker added, “was an operational objective from which clear and measurable goals with respect to product line, service, assortment, price, and market penetration could be derived.”

Similarly, ” 'saving souls' as a mission of a church is totally intangible,” Drucker wrote. “ At least, the bookkeeping is not of this world.” But a church could easily define and assess the objective of doubling the number of people under the age of 35 who attend Sunday services.

Setting these sorts of measurable objectives is exactly what WellPoint seems to be driving at. The company has actually been piloting a “pay for performance” model for some time (a “start small” approach that Drucker also would have liked), and says that the initiative has already prompted behavior change.

For instance, by measuring how fast someone's blood vessel is opened during a cardiac event—and then compensating hospitals in Virginia accordingly—the company has witnessed “a reduction in variation” across different facilities, as well as “a more rapid response time, meaning that patients are receiving the proper care more quickly.” Other hospitals have been graded on whether they prohibit smoking on their campuses or whether they've generated discharge plans detailing how patients should take their medication.

Not everyone is pleased with the new arrangement. Critics maintain that hospitals in poor neighborhoods could face penalties because their discharged patients often get sick again for a host of reasons that have nothing to do with the quality of care.

But goals and measurements are not immutable; they should be monitored and adjusted continually. Meantime, with at least some guideposts in place, the administrator can “move from diagnosis to prognosis,” Drucker wrote. “He can now lay down what he expects will happen and take proper action to see whether it actually does happen.” Armed with this evidence, he can then act as a manager should, systematically reviewing “objectives, roles, priorities, and allocation of resources,” as Drucker put it.

At many hospitals, that would amount to a procedure that no one could object to: a much-needed transplant surgery, with results replacing activity and quality replacing quantity.

Bloomberg News.

Instant Insights /

Pegging Payments to Health Care

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