The conundrum is now well-known -- how can the U.S. spend over $6,714 per capita a year on healthcare, the highest among OECD countries, and still lag on so many health indicators like infant mortality? While Americans enjoy access to the latest treatments and medical technologies, more and more Americans are unable to pay for such treatments due to the cost. As lawmakers and lobbyists are hashing out solutions in D.C., information that emerged in the past week indicates that there is a path for finding the solution of increasing coverage while also increasing quality of care.

President Obama and Cabinet staff at the White HouseThe various reform models being discussed in Washington have centered around who pays for the care (the government versus expanding private health insurance), with the goal being expanded coverage. Without cost-containment, President Obama knows that expanding coverage is simply not sustainable. President Obama managed to wrangle a public promise from various healhtcare providers that they would reduce the pace of healthcare cost increases in the next few years to the tune of $2 trillion in projected savings, but there were no details on how these promises would be enforced.

It is now increasingly clear that the fee-for-service structure itself of the U.S. healhtcare system is at least partially to blame. An article in the June 1st edition of The New Yorker examines how McAllen, TX, with a population of over 700,000, has become the second most expensive healthcare market in the country. Medicare expenditures average about $15,000, roughly double the expenditures in neighboring El Paso. After eliminating possible factors such as local health and disease patterns and quality of care factors, author Atul Gawande (a physician), attributed the cost variance to the culture of care in McAllen. He pointed to the case of Doctors Hospital at Renaissance, a physician-owned hospital, where physicians not only got paid a fee for their service but also a percentage of the hospital’s profits from the tests, surgery, or other care patients are given. Incentives like these resulted in the following:

Between 2001 and 2005, critically ill Medicare patients received almost fifty per cent more specialist visits in McAllen than in El Paso, and were two-thirds more likely to see ten or more specialists in a six-month period. In 2005 and 2006, patients in McAllen received twenty per cent more abdominal ultrasounds, thirty per cent more bone-density studies, sixty per cent more stress tests with echocardiography, two hundred per cent more nerve-conduction studies to diagnose carpal-tunnel syndrome, and five hundred and fifty per cent more urine-flow studies to diagnose prostate troubles. They received one-fifth to two-thirds more gallbladder operations, knee replacements, breast biopsies, and bladder scopes. They also received two to three times as many pacemakers, implantable defibrillators, cardiac-bypass operations, carotid endarterectomies, and coronary-artery stents. And Medicare paid for five times as many home-nurse visits. The primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine.

On the other hand, the article pointed to the example of the Mayo Clinic, which spent $6,688 per Medicare enrollee as a positive case study. The Mayo Clinic, a world class provider, pays physicians a salary (in order to remove inappropriate financial incentives) and he points to the collaborative nature of the care at Mayo, where doctors consult with each other about which tests make sense for a patient before ordering the tests. This collaboration can be critical since the Congressional Budget Office (CBO) found some evidence that variations in treatment can be attributed partially to the lack of consensus within the medical community about the best treatment to use. For instance, a hip fracture requires hospitalization but when to do a hip replacement is subject to more variation. Collaborating with other physicians provides physicians with a diagnosis and treatment support mechanism that may ultimately lower the overall cost of treating the patient.

On a national level, an important study published last week in the journal Health Affairs also indicated that we can begin to uncouple the link between overall spending and quality of care. The study looked at data from the Centers for Medicare and Medicaid Services (CMS) Hospital Compare database from 2004-2007 which tracked three major conditions for which treatments are supported by solid evidence: acute myocardial infarction (AMI), pneumonia, and congestive heart failure (CHF). The study involved 2,712 U.S. hospitals and results from the study "reveals the lack of positive association between quality and spending. Indeed, in our analysis the relationship was often negative--even within regions. This implies that the prevalence of hospitals with inefficient, fragmented care is not isolated to a few regions of the country."

As we look at the lessons from providers like Mayo, it becomes clear that reform measures will need to take into account a restructuring of the fee-for-service structure. In testimony provided by the CBO to Congress in March, Director Douglas W. Elmendorf suggested:

Many analysts would agree that more information is needed about which treat­ments work best for which patients and about what quality of care different doc­tors, hospitals, and other providers deliver. The broad benefits that such information provides suggest a role for the government in funding research on the comparative effectiveness of treatments, in generating measures of quality, and in disseminating the results to doctors and patients. Wider adoption of health infor­mation technology (IT) would facilitate all of those efforts. But absent stronger incentives to control costs and improve efficiency, the effect of information alone on spending will generally be limited.

Health reform legislation, due July 31, should include funding for treatment effectiveness, quality measures and communicating both to doctors and patients. Legislation must also tackle the framework for incentives to control costs for treatment. With several options on the table, including payment caps and episode-based payments, running pilot programs through Medicare may be the best option for understanding the effects of institutionalizing these changes. With Medicare insolvency projected at 2017, kicking the can down the road is no longer an option.