Improving Value

Who’s the primary target of the intervention? It matters!

While better health care value for consumers is the intended goal of most policy interventions, its important to understand the primary stakeholder being acted upon.  For example, many interventions such as high-deductible health plans, target the consumer seeking to make them better at identifying health care value. But a comprehensive approach would have to go far beyond just targeting consumers as they direct a minority of our health care dollars.

Consumers Direct a Small Portion of Our Spending

Consumers’ out-of-pocket spending amounts to 15 percent or less of our nation’s health care bill and only 7 percent of total spending is out of pocket on shoppable services.

Furthermore, this must be considered an outer bound. Adding a requirement that widely accepted quality metrics be available would narrow the range of shoppable services substantially.

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A shoppable health care service must typically be scheduled in advance, there must be more than one provider in a market that can perform the service, and there has to be price data available for the different providers. Ideally, the patient also would have some information on each provider’s quality of care, or at least some reasonable assurance that quality does not vary much.

White and Eguchi, Reference Pricing: A Small Piece of the Healthcare Price and Quality Puzzle, Research Brief No. 18, National Institute for Healthcare Reform (October, 2014).

What’s more, studies show that once a consumer initiates care with a provider, the following course of treatment doesn’t vary much regardless of financial incentives—presumably because the provider is directing the treatment.

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Hospital Payments Represent 38% of Spending

As major players, hospitals are a key partner in terms of finding more value in our health care system. Further, hospitals have an important role in terms of the overall cost trend as there is strong evidence that in markets where hospitals have a lot of market power, prices are higher.


Exhibit: Spending by Type of Provider


Source: National Health Expenditures from CMS, Table 4


Doctors Account for 32 Percent of Spending but Their Impact is Much Greater

Physician and other professional services account for about one-third of our health care spending. But doctors actually direct most spending, regardless of who’s footing the bill. Physicians order the tests, prescribe the drugs and select the medical devices.  Consumers rely heavily on their recommendations when they have to escalate their care and find a specialist or select from among alternative medical treatments. As such, reforming our delivery system to provide better value will require physician leadership, broad support for practice transformation, enhanced spending on comparative effectiveness research, better transparency and better alignment of financial (and non-financial) incentives facing clinicians.

"The most expensive piece of medical equipment is a doctor's pen."

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Drugs Spending Likely to Grow

Spending on drugs accounts for 11 percent of overall spending but this share is expected to rise steeply in the near future due increased spending on specialty drugs and rising prices for generics. Patent protection and periods of “exclusivity” grant tremendous market power to drug manufacturers.  Bringing about better value for our dollar will require separate interventions that directly target drug manufacturers.   

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Medical Device Manufacturers

Medical device manufacturers and other equipment makers represent a relatively small share of overall spending—about 4 percent. These manufacturers provide critical products to patients... and they are also incredible profitable industries. In part, this is because of fragmented and complex payment structures that have traditionally placed payers (e.g., insurers and self insured businesses) at an arms length from the negotiating process with manufacturers.  Because of confidentiality agreements that manufacturers require hospitals to sign, the prices of the devices are cloaked in secrecy. This lack of transparency impedes hospitals from knowing whether they are getting a good deal. Again, this is a sector which will require its own targeted interventions  in order to identify and obtain better value for health care consumers.

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Insurers are also a Target

Insurers and other large payers wield enormous leverage over providers through their contracting practices, although the relative market power between insurers and providers can place limits on their ability to extract concessions. There is good evidence that additional pressure on insurers to address cost and quality problems can yield results for consumers over and above what happens in the absence of these interventions.

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Key Studies & Resources: