Is There a Business Case for Quality in U.S. Medical Care?: Response to Casalino

LAWRENCE CASALINO HAS ARGUED that at present there is no business case for quality because U.S. health care entities have neither the incentive nor the capability to improve quality. Central to his argument is the idea that the fragmented organizational structure of U.S. health care is an obstacle to developing a comprehensive approach to focusing quality of care. I am generally sympathetic to this argument.

To be sure, there are some situations in which the financial incentive structure for hospitals is aligned with providing high-quality care. Consider, for example, patients for whom the hospital is reimbursed on a diagnosis-related group (DRG) basis. Since the hospital gets a single payment for the entire inpatient hospitalization, it has a business incentive to practice high-quality medicine and to avoid iatrogenic complications. Adverse drug reactions, for instance, typically add costs but do not change the DRG classification, hence, they do not add revenue.

It is interesting to note, supporting Casalino's argument, that pursuing quality by avoiding iatrogenic complications may in some cases have a perverse economic effect. While half of our patients are paid for on a DRG basis, the other half are paid on some fee-for-service basis. Under fee-for-service payments, our payments increase as we give patients more service—whether or not these ser-vices were avoidable or even necessary.

Another major feature of the American health care scene is the lack of alignment between hospital and physician incentives. Most importantly, the physicians who practice in hospitals usually do not work for the hospitals. Indeed, the hospital's very existence requires that physicians be kept happy so that they continue to practice at a particular hospital, and this may make it difficult to institute reforms that would likely improve patient safety, such as standardized practices and strict quality controls. Moreover, physicians and hospitals often work under different financial incentives. The difficulties these structures create are compounded by the fact that each patient's treatment requires the interaction of multiple physicians whose incentives are not always aligned.

Hospitals are rarely reimbursed differently based on their quality. As a result, hospitals have not demanded or paid for the kind of information technology that could be developed to improve patient care. Moreover, even if a hospital had unlimited funds to purchase an information system, it would have a hard time finding an existing system that would be successful today and over the next five years. After years of budget restrictions by managed care, employers, and welfare reform, no hospitals in America have unlimited funds, and most are severely strapped for capital.

How should hospitals use their limited capital resources? I believe hospitals should use their limited capital in ways that meet consumers' preferences. To some extent, quality is what consumers demand. If consumer demand is for new imaging procedures over information systems that could reduce adverse drug reactions, why shouldn't any individual hospital spend its limited capital on things that satisfy its customers? Perhaps consumers have a different view of quality and base their judgments on readily accessible measures of quality—physician recommendation, technological sophistication, and even things as simple as convenience. While these are not traditional measures of quality, they represent consumer demands, and our business imperatives involve meeting those demands.

It is also important to keep in mind that the capacity to strengthen quality is distributed differentially in the health care communities of the country. Rural health care, for instance, may face real obstacles to playing at the same level as larger hospitals. Is society willing to pay what it would take to level the "quality playing field"? This is also an acute problem in the disadvantaged portions of our large cities. While there may be an aggregate oversupply of hospital beds and physicians, some communities face significant shortages. On the south...