indicate that anywhere from $1.5 billion to $22 billion could be saved annually from changes in practice patterns.20 The wide range of uncertainty is because the high estimates may fail to account for potential cost increases associated with practice guidelines. Such costs would come from alternative treatments that might be provided in place of procedures found to be inappropriate, or from increased use of services and procedures that are not now provided as often as they should be. Regardless of their impact on dollars spent, guidelines would enhance payers' confidence that they are purchasing necessary and valuable services.

2. The Commission recommends development and implementation of a uniform data system that covers all health care encounters, regardless of payment source or setting. These data would provide a common foundation for all payers' quality assessment activities and for examining the effectiveness of medical care, and identifying health policy and research concerns.

The Commission recognizes that better data collection is needed to support both the development of guidelines and the effective evaluation and oversight of health care across settings and providers. For ex

ample, evaluating the outcome of a surgical intervention requires knowing what happened to the patient after he or she left the hospital. An enhanced data base would also allow for the profiling of individual provider practice patterns based on care paid for by all purchasers rather than by a single purchaser. Currently, these types of analyses are often not possible.

3. The Commission recommends development and testing of new, more effective methods of quality assurance and assessment.

Enhancement of quality assurance mechanisms is another important component of a national quality assurance strategy. Quality assurance mechanisms are found throughout the health care system. Under the Medicare program, for example, the Health Care Financing Administration (HCFA) contracts with private organizations called Peer Review Organizations to review hospital and some outpatient services. PRO reviews are designed to ensure that Medicare pays for services that are medically necessary, provided in the appropriate setting, and of acceptable quality. Many states contract with the PROS to do quality assurance for their Medicaid programs. And private payers, such as large employers, are increasingly instituting utilization management and quality assurance programs to improve the value of services obtained for their investments.

These quality assurance programs generally emphasize utilization review. They seek to ensure that the care for which payment is made is medically necessary and reflects an appropriate claim. The review of quality tends to be limited to inspection and monitoring. Feedback to the provider is usually triggered by the finding of a problem; good quality is rarely recognized. The inspections are also generally done away from the actual site in which care was delivered. Rarely is there an attempt to track the entire episode of care, without which the reviewer cannot determine whether an identified quality problem stemmed from the most recent care episode or from care provided in a previous setting.

Existing quality assurance programs also lack adequate accountability. The current system involves "a mixture of public and private mechanisms that have developed along separate paths. The result is jurisdictional competition for turf, suspicion about motives, and questions about the sources and validity of criteria, standards, and data." 21 Physicians and other providers are uneasy about the reviewers. Reviewers, in turn, worry about their exposure to lawsuits by physicians and others who are adversely affected by the reviews.22 Medicare PROs in some areas have been criticized by providers, for example, for ignoring the norms and standards of local practice. Conflicts like

this tend to limit the effectiveness of PROS and other quality assurance programs in fulfilling their inspection and monitoring responsibilities.

Finally, there is little evidence to indicate that the existing quality assurance programs are in fact improving quality of care. The PRO program, for example, although its impact on quality has yet to be systematically evaluated, seems to have major weaknesses. According to a GAO study, the SuperPRO (a private organization that contracts with the Health Care Financing Administration) "regularly reviews a random sample of Medicare cases previously reviewed by PROS and typically questions the appropriateness of hospital admissions in almost six times as many cases as the PROs." 23 GAO studies of care provided by other government programs, such as military hospitals, reveal similar failings on the part of the quality assurance process to detect problems. 24 Less is known about quality assurance systems in the private sector. 25

4. The Commission recommends development and oversight of local review organizations that have skills in data integration and analysis, quality assessment, and quality assurance.

The Commission's recommended improvements in review techniques are designed to enhance the performance of quality assurance programs while making their reviewers more accountable for their performance. 26 First, quality assurance activities need to be conducted by local review entities that are held accountable for identifying instances of poor quality and improving overall patterns of care within their geographical area. Such organizations should be close enough to the local community to enable their unique circumstances to be appropriately recognized. Physicians in rural communities, for example, should not be held to the same practice criteria as those providing care in urban, teaching hospitals. Yet rural and urban patients should be afforded care that is of the highest possible quality. Second, local review entities should have available a uniform set of methods for reviewing care (including practice guidelines and standards), developing and implementing interventions, and reporting information on the results of reviews and interventions.

Overall, the Commission views quality assurance as something more than quality assessment. Quality assurance requires identification and confirmation of problems in the quality of medical care. The process must also include intervention plans to lessen or eliminate the problems, track the effectiveness of the interventions, and institute additional changes and monitoring where warranted. To accomplish effective quality assurance requires the generation, compilation,

and analysis of quality-related data, dissemination of those data back to providers and consumers, and accountability by those who do the monitoring.

5. The Commission recommends that the Physician Payment Review Commission study and conduct demonstration projects related to medical malpractice reform in order to make recommendations to Congress on actions to be taken on the federal level. The appropriate committees of jurisdiction in Congress should also hold hearings on the malpractice issue, and the access legislation should incorporate professional liability reform.

The Commission believes it essential to address the problems raised by malpractice and malpractice litigation. Despite growing concern, however, there is no consensus on how to resolve these problems. 27 Therefore, the Commission recommends neither the list of tort reforms that was put before it nor any other specific legislative actions.

To date, the major response to the malpractice situation has been actions by the states, both to modify the current tort system through reforms intended to reduce the amount both of litigation and of damages paid, and to provide for alternative dispute resolution (ADR) procedures. State action has included caps on damages for pain and suffering, periodic payments for damages, limits on lawyers' contingency fees, limiting joint and several liability, permitting or mandating the offset of collateral benefits (that is, benefits from another source), and shortening statutes of limitation.

Certain of the tort reforms-including caps on awards, mandating the offset of collateral benefits, and shortening the statutes of limitation-have reduced claims frequency or severity. However, limited information exists on the impact of such reforms on malpractice premiums.

State analysis and experimentation with alternatives to conventional tort reform have been undertaken with the policy aim of dealing not just with the concerns felt by doctors about the specter of high malpractice premiums or litigation, but also with the need of injured patients for accessible and adequate compensation for their losses, and of future patients for safer and higher quality medical care.

Several ADR mechanisms have been proposed or are being implemented. Arbitration is a process for resolving disputes outside the traditional judicial system. Statutes set forth procedures under which parties may agree to submit specific disputes for resolution by an impartial third party. Arbitration may be either voluntary or mandatory. Proponents of this approach suggest that it accelerates handling of claims and permits the use of decisionmakers who are experts in the field.

Pretrial screening panels are designed to screen out nonmeritorious claims prior to trial. The purpose is to discourage baseless claims and encourage settlement of claims.

No-fault compensation, which does not require proof of negligence, is designed to speed up the process leading to compensation. Both arbitration and pretrial screening panels operate within the fault system for determining liability for malpractice actions. Proponents of the no-fault alternative note that both the provider and patient are spared the anxiety of the fault determination or litigation process, and that prompt compensation may be made to a larger number of injured persons.

Replacing the existing judicial system with an alternative set of administrative procedures for handling malpractice claims is the final approach that has been suggested. Under this approach medical liability claims would be adjudicated by an administrative agency, with liability still established on the basis of fault. This plan would also expand the disciplinary process for physicians, strengthen physician credentialing, and mandate risk prevention programs and medical education. Proponents suggest that it should permit compensating more injured parties while at the same time eliminating windfall damage awards.

These ADR proposals offer the potential for improving the current malpractice situation. However, two concerns remain. The alternative approaches, while addressing some of the current concerns, may increase total compensation costs. Further, some have opposed eliminating the current fault-based system on the ground that this system may help deter medical negligence.

Given the general lack of success of conventional tort reform, and the fact that effects of these quite different methods of handling medical injuries, some of which may add costs to the system, are still being studied, it would be premature at this time to endorse specific legislative proposals. The malpractice problem has traditionally been under the jurisdiction of the states. However, concern about the connection between malpractice and rising costs, quality of care, and the well-being of patients is gaining attention at the federal level. What is needed now is careful analysis of the growing body of data and the design, implementation, and evaluation of demonstration projects involving one or more of these alternative ideas to design a national strategy for reform.

Cost Containment

Universal health care coverage can work effec

tively only if it buys high-quality services in an efficient and effective health care system. Because of the critical importance of linking increased health care access with improved service and financing efficiency, the Commission's recommendations have major cost containment implications. They would also reduce the current cost inequities among groups.

Controlling Costs-Health care cost containment alternatives have been researched and debated for at least two decades. Most proposals have relied on one of three basic approaches:

• Changing the behavior of consumers by holding them directly responsible for a larger portion of the costs of their own care,

Changing the behavior of both providers and consumers by encouraging consumers to choose from among multiple health plans that compete on the basis of their ability to develop structured and efficient delivery systems,

Changing provider behavior through reimbursement systems that provide incentives for greater efficiency.

The Commission believes that each of these three basic approaches has an important role to play in a comprehensive and multifaceted cost containment initiative. Policy discussion in this area often assumes that these approaches are mutually exclusive and that there is one best way of controlling costs. The Commission rejects this point of view. Use of all three approaches allows flexibility in pursuing the fundamental goal of modifying the incentives that govern decisions about the use of medical services.

1. Cost sharing in the Commission's recommended minimum benefit package would make consumers sensitive to price.

The Commission's recommendations would ensure that health insurance coverage is available for every American. While health insurance is an essential guarantor of access to care, there is also evidence that "first-dollar" coverage of medical costs leads to higher service use by freeing consumers of any need to consider the utility or price of the services they are consuming. Consumer demand is not the only factor propelling growth in health care costs. Still, there is widespread agreement that health insurance plans should include measures to encourage consumers to become more conscious of the price and utility of the medical services they use.

For this reason, the minimum benefit package recommended by the Commission includes cost sharing requirements. Deductibles are $250 for an individual

and $500 for a family. Coinsurance is 20 percent for all services except prenatal care, well child care, and other preventive services, which are paid in full, and outpatient mental health care, for which 50 percent coinsurance applies.

Findings from a major health insurance experiment, however, raise a critical concern in the design of cost sharing requirements: their potential effect on the enrollees with the least income. 28

Low-income enrollees in the cost sharing plans under the Health Insurance Experiment (HIE) responded to coinsurance requirements by delaying both necessary and unnecessary care. They had worse outcomes for a few specific conditions (such as hypertension) that can be improved by medical treatment. The Commission's plan exempts low-income enrollees from cost sharing requirements in order to ensure that the requirements would not deter necessary care. In addition, the plan waives cost sharing for preventive care, regardless of enrollee income, in order to avoid any disincentive for enrollees to obtain these potentially cost-effective services.

A second concern is that cost sharing without limits would create catastrophic burdens even for higherincome individuals, in the event of a high-cost illness. For this reason, the Commission's plan includes a $3,000 limit on out-of-pocket costs for individuals or families, in order to protect the most severely ill.

2. The Commission's recommended insurance reforms would lead insurers to compete around efficient service delivery, rather than for good risks.

The idea of reducing health care costs by promoting competition in the health care marketplace was first advanced in the 1970s. Proponents of competition contemplate a marketplace in which insurers develop structured delivery systems, with the highest profits going to those whose networks are most efficient.

The prototype for these new managed care systems is the health maintenance organization, a form of health insurer that accepts financial responsibility for a defined set of health care benefits in return for a fixed monthly per capita premium. Unlike other types of insurers, HMOs directly provide or arrange for health care services through affiliated physicians, hospitals, and other providers. They seek to reduce costs by managing the overall care of the patient. More recently, some insurers have been experimenting with hybrid programs, such as "point-of-service plans," which are less structured and provide somewhat greater flexibility for enrollees. These plans, too, aim to control overall service delivery to enrollees. As a

result, HMOs and their competitors are often grouped under the single name of managed care.

While there is evidence that managed care can achieve real savings, the competitive strategy has been hampered by the tendency of the current insurance market to discourage competition on the basis of real efficiency.29 Instead, competition often turns on such factors as the insurer's ability to screen out highrisk applicants or the consumer's inability to compare the values of different benefit packages. 30

The Commission's insurance reform package seeks to lay the groundwork for real competition among insurers at the same time as it seeks to make insurance available to all. The requirements that insurers accept all group applicants and use comparable rating systems for all covered groups would ensure that the greatest rewards no longer go to the insurers who are most adept in attracting low-risk clients. The further requirement that insurers quote a premium rate for the standard minimum benefit package would establish a benchmark to be used by consumers in price comparisons. In addition, the collection and dissemination of data about quality would give consumers the knowledge needed to assess the price/quality trade-offs in competing insurance plans. The power of the market could then gradually induce all providers to make steady improvements in both quality and efficiency.

3. Extending managed care to small employers and including managed care as a means to provide the minimum benefit package in private insurance and the public plan would encourage efficient service delivery.

While the basic insurance reforms proposed by the Commission can help create the playing field on which real competition can occur, there is another barrier to be overcome before the benefits of market competition and managed care can reach all purchasers: the reluctance of insurers to make managed care plans available to small groups. Insurers who routinely include such managed care features as preadmission review and outpatient surgery programs in their large group contracts may not offer the same provisions to smaller firms. The effect is that small groups do not have access to the potential savings from these provisions. The smallest insured firms (one to nine employees) are only half as likely to have outpatient surgery or second surgical opinion programs as the largest firms (500 or more employees), and only one-eighth as likely to use preadmission review. 31

Along with managed care options in job-based and public coverage, the Commission's recommendations

include requirements that insurers who offer managed care provisions in large group contracts and who choose to enter the small group market offer the same provisions to smaller groups.

4. The Commission's recommended extension of Medicare payment rules to the public program would extend its increasingly effective payment controls and serve as a model for private insurance.

Traditional medical payment systems, under which providers receive their full costs or charges for whatever services they choose to furnish, may encourage inefficiency and the delivery of unnecessary care. In recent years, Medicare and some other third-party payers have moved to systems that give providers incentives to control both the volume of the services they furnish and the unit cost of those services.

Under Medicare's prospective payment system, a hospital receives a fixed predetermined payment for each case, with the amount of the payment varying by diagnosis and some other factors. If the hospital can furnish care for less than the payment amount, it may keep the difference; if it cannot, it may suffer a loss. The hospital is thus encouraged to provide care more efficiently.

Medicare's new payment system for physician services, which bases fees on the relative value of services rather than on physicians' historic charges, similarly aims to change the financial incentives that affect medical decision making. The old system paid more for surgery and other hands-on treatments than for such services as office consultations, thus encouraging physicians to adopt more aggressive treatments. The new system reverses these incentives and also provides, through "volume performance standards," for a general reassessment of payment rates if the volume of services provided grows too rapidly.

Medicare reforms are already serving as a model for the reimbursement systems of other payers. For example, many Blue Cross plans and state Medicaid programs have already adopted prospective hospital payment systems comparable to Medicare's. The Commission's plan would give a further impetus to this movement by requiring that the new public program that replaces and expands Medicaid would adopt Medicare payment methodologies, instead of the whole range of methods now used by the state Medicaid programs.

Adoption of the Medicare payment systems by the public program would have several potential effects on medical costs. First, by increasing the percentage of the total patient population covered under these

systems, it would intensify the pressure on providers to respond with real increases in efficiency, rather than by cost shifting. Second, use of Medicare principles by a program serving a younger population might encourage use of similar methodologies by insurers who had previously rejected them as applicable only to seniors. Finally, replacement of the current state Medicaid payment systems would reduce the cost shifting that may now be occurring in states whose Medicaid reimbursement levels are below providers' actual costs.

5. Adoption of a comprehensive quality assurance strategy, ultimately including reform of the medical malpractice system, would ensure greater value for the dollar in the delivery of health care services.

The United States spends proportionately more on health care than any other country, yet does worse than many countries on standard health status measures such as infant mortality and life expectancy. The Commission believes that costs cannot be contained without far greater knowledge about the value of the health care services our expenditures buy.

The Commission believes that its recommendations for quality assurance will provide that knowledge and put it to use-fundamentally reforming the nation's health care system.

The Commission's recommendation that uniform data be collected on the services rendered by all health care providers and that research be conducted on the outcomes of those services will permit comparative evaluations to be made of the efficacy of different medical practices and the performance of different providers. These comparative evaluationsin conjunction with payment incentives just described-would allow providers to control costs by choosing the most cost-effective treatment mode. And they would further promote cost control by enabling payers and consumers to make rational purchasing decisions in the health care market-essential for the efficient operation of private and public insurance.

Reducing Cost Inequities Among Groups-At least part of the concern about health care costs stems from unequal cost burdens among different groups in society. Three aspects of the Commission's recommendations would reduce the health care costs of groups that now bear a disproportionate share of the health care financing burden:

1. Reducing the cost shift that now occurs from the uninsured to the insured population would reduce costs for the employers and insurers currently paying indirectly for uncompensated care.