Charlie:

Do what you have to to fix the mess with the Computer Division. Our aim at CI is to work as a team—not to shift problems from one business to another!

Alan

Charles Newman put down the letter and rubbed his eyes. He could not believe how high in Conglomerate, Inc. (CI), the problems resulting from his healthcare strategy had risen. The letter was from the company’s CEO, Alan Cole, and had instructed Mr. Newman to have a plan “to fix the mess” within one week.

BACKGROUND

Mr. Newman was the Health Care Manager for the Northeast region of Conglomerate, Inc., a Fortune-10 Company. He had been faced with a challenge of managing his region’s healthcare costs to a zero percent increase. This had meant designing an approach that would take an expected $11 million in cost increases out of the CI system.

After a thorough investigation of alternatives, Mr. Newman had decided to change the reimbursement system for physicians. Along with Yankee Health, the HMO that administered CI’s self-funded plan, and with the assistance of a healthcare consultant, he had devised a payment system that tied physician reimbursement to outcomes.

The way this system worked was as follows: for the top ten diagnostic groups which accounted for 70 percent of CI’s costs, physicians worked together in groups to review all available outcome studies. They then designed a practice guideline for each diagnosis. The payment system was adjusted so that only “approved” services were reimbursed.

Mr. Newman had been surprised at how well the system was working. He had been concerned that the physicians would see the system as a threat to their professional autonomy and income, and would resist the changes. In fact, just the opposite had occurred. The doctors were grateful to Mr. Newman for having influenced Yankee Health to let them create the guidelines themselves. Although Mr. Newman had worried that the doctors would see participation in the guideline process as an invitation to “design their own guillotine,” they had seen it as a way to improve quality.

Mr. Newman had also been concerned that if the guidelines changed the way his employees received healthcare services, they would feel that CI was putting costs in front of quality. As of September, however, he had received no employee complaints. And the best news was that through the first two quarters of the year, health care costs were actually down by 1 percent.

THE PROBLEM

One of the guidelines that was created dealt with the diagnosis of low back pain. This diagnosis alone accounted for 15 percent of CI’s healthcare costs in the Northeast, and was characterized by wide variation in practice and treatment patterns.

As part of their review of outcome studies, the physician group studying low back pain noticed that treatment with expensive medications was used frequently. The class of medication, anti-inflammatory drugs, was clearly indicated in the treatment of this problem, but depending on the brand of drug chosen, the average annual drug cost per patient diagnosed ranged from. . . .

Assignment

1. What should Mr. Newman do? Is there a way to include the physicians in the solution?
2. What other conflicts of this sort can be expected to arise as cost pressures are applied to the healthcare system?