U.S. Healthcare System

JOEL I. SHALOWITZ, MD, MBA, FACP, was Clinical Professor and Director of the Health Industry Management Program at the Kellogg School of Management for 28 years. In addition to practicing internal medicine, he has also been on Northwestern's Feinberg Medical School's faculty for more than 35 years, most recently as Professor of Preventive Medicine. He teaches and consults internationally, was the recipient of three Fulbright awards, and is currently a Senior Fellow at ETLA (the Research Institute of the Finnish Economy) and an Affiliate Professor at the Institute of Management of the Scuola Superiore Sant'Anna in Pisa.

Students of American health care’s history, structure, organization, management, regulation, and financing face a daunting challenge, confounded by the complexity and scale of that industry.  Until now, a modern comprehensive source book covering all of that terrain and more has been missing. The wait is over.  In The U.S. Healthcare System: Origins, Organization, and Opportunities, Professor Joel Shalowitz has provided a stunningly ambitious compendium with an unequaled combination of both scope and detail.  It covers both the current shape and the historical background of payment, classical and emerging organizational forms, professional roles, regulation, technology, efforts to measure, control, and improve the quality of care, and more.  It takes deep dives into the epidemiology of both disease and the utilization of care – important scientific foundations for proper health care policy and management.  Throughout it makes generous use of helpful figures and tables, as well as copious citations that mark this as a work of authentic scholarship.Professor Shalowitz’s book is a must-have resource for the library of any health care scholar who wants to have ready and efficient access to the fundamental facts that shape American health care today.Donald M. Berwick, MD, MPPFormer CMS AdministratorProfessor of Health Policy and Management, Harvard School of Public Health President Emeritus and Senior Fellow, Institute for Healthcare Improvement, Boston, Massachusetts  For anyone who picks up Joel Shalowitz’s book, The U.S. Healthcare System: Origins, Organization, and Opportunities, do NOT make the common mistake of skipping the prefatory material. The first two paragraphs of the “Foreword” (p. xxi) are worth the price of admission. As far as I am concerned, anyone teaching or taking an introductory survey course on our healthcare system needs to embrace and internalize the nuggets of wisdom here, obviously gleaned over thirty years of laboring on this topic.What are some these nuggets? First, we do not have a healthcare system. Rather, we have a series of inter-related parts that are not aligned in their goals and incentives. That means the parts don’t work together and are not meant to work together. What that means is abandon efforts to try to “align the incentives” of all the parties using payment changes and structural models; the divides go deeper than this. The lack of a system also means that the parts impact one another in sometimes opaque ways. This means that efforts to change this monster with simplistic, top-down programs that only address one part are likely to fail. Trying to get all parties to participate in some reform might resemble the idealistic scene depicted in Edward Hicks’ painting, “The Peaceable Kingdom” (with William Penn in the background!).Second, there is nothing new in our healthcare system. As Yogi Berra reputedly said, “it is déjà vu all over again”. Many of the problems we are trying to tackle today (improving quality, increasing access, controlling cost increases) are similar to problems we have tried to tackle in the past. The fact that we are still tackling them - - without realizing that we have been down this road before, unsuccessfully - - should send out warning signs to everyone. These problems are intractable. The only problem is that managers, policy-makers, and students of U.S. healthcare don’t know the history and the lessons learned from the last time we tried to tackle these issues, and thus don’t know (to quote an old management text) “the ropes to skip and the ropes to know”.These words are meant as praise for what Joel Shalowitz has achieved in this hefty tome. He takes nearly 700 pages to (a) present several important frameworks for understanding the U.S. healthcare system, (b) trace the history of this system, and (c) present the relevant fact base on its major sectors - - but with an emphasis on “understanding” how this system really works (or doesn’t work). Unlike other introductory texts, Joel has avoided the mindless presentation of statistics and charts. I do not think those help anyone; moreover, it is boring. Instead, his book is designed to be thoughtful and thought-provoking - - i.e., to help improve your critical thinking about our healthcare system through some important lessons.The lessons come quickly in this book. Chapter 1 introduces the reader to the three main policy goals pursued by the U.S. (and every other country) for decades: higher quality, improved access, and restrained rate of growth in healthcare costs. This framework needs to be on everyone’s learning agenda, since every country endorses it as their strategic aim (but have not yet solved it). Joel immediately gets to the task of explaining what each of these complex goals consists of - - not an easy task, since they are multi-dimensional in nature. More importantly, he correctly (I think) characterizes this tripartite set of goals as inherently contradictory and involving tradeoffs in their accomplishment. This will come as unwelcome news to many people who want to have it all and/or do not want to make tough choices. This is critical thinking that challenges many widely-held beliefs.Chapter 1 also introduces you to the many stakeholders in the U.S. healthcare system. This analysis should sober readers that “alignment” - - one of the most overused words in our field - - is going to be difficult given the plurality of interests involved. Anyone one who has studied plural societies (those with many, different ethnic or religious groups) should understand the difficulties of bringing all parties together for a common goal. Indeed, one of the strengths of this book is to emphasize the presence of stakeholders and their plurality in our healthcare system. Their mere existence tells the reader that, as far as “alignment” goes, “we have trouble in River City”. Efforts to cut costs in one area of healthcare are likely to “gore someone else’s ox” (e.g., income) and therefore be opposed and perhaps thwarted.And this is just the Foreword and Chapter 1! I could go on further about why this book makes an enormous contribution. Chapters 2 and 3 deal with epidemiology - - a topic worthy of a physician author, but also important for an MBA business school audience that is interested in marketing (the managerial version of epidemiology). This should come as no surprise since Joel has co-authored another major text with Phil Kotler. Subsequent chapters (4 and 5) deal ably with the two biggest sources of spending in our healthcare system: hospitals (and hospital systems) and healthcare professionals. Chapters 6-8 then cover the multitude of payers, the multitude of technologies that need to be paid for, and (in particular) the advances in information technology. The final chapter does a deep-dive into the whole issue of quality - - how to measure it, how to manage it, and the tradeoffs necessitated in doing so.I should acknowledge my biases. Like Joel, I have been teaching an introductory survey course on the U.S. healthcare system for over 30 years. It may take us that long to really appreciate what working in this non-system means. And, like Joel, I believe an understanding of the history of the system is important for anyone trying to work within it, let along trying to change it. And, like Joel, I have labored at this task in major business schools trying to teach MBA students about the importance of this all. So, I am already predisposed to like this book. I wish I had written it.Lawton R. Burns, PhD, MBAJames Joo-Jin Kim Professor; Director, Wharton Center for Health Management and Economics; and Chairperson, Health Care Systems Department, Wharton School, University of Pennsylvania  The U.S. Healthcare System: Origins, Organization and Opportunities is a tour de force— a must use textbook for those seeking to solve the problems of the U.S. health care system.It discusses each of the major stakeholders in an accessible, detailed, and authoritative voice and presents a compelling framework for understanding how they function.Coupled with Professor Shalowitz’s daily blog, https://www.healthcareinsights.md, which discussed current healthcare issues, this book will make for the lively, informed discussions that students of U.S. healthcare have been looking for.Regina E. Herzlinger, PhDNancy R. McPherson Professor of Business Administration, Harvard Business School  This remarkably well-documented text provides important information and knowledge about the U.S. healthcare system within the context of historical developments and interpretative frameworks. The chapter on Managerial Epidemiology distinguishes [the book] from many other texts in the field, and there are particularly strong chapters on Payers, Technology, and Information Technology. The text will help readers understand and navigate the complexity of the U.S. healthcare system, why it has developed the way that it has, and some of the implications for its future evolution.Stephen M. Shortell, PhD, MBA, MPHDistinguished Professor of Health Policy and Management EmeritusDean Emeritus School of Public HealthUniversity of California, Berkeley  No matter if you’re a seasoned executive or just entering the health care workforce, this book provides critical context about the history of care delivery and payment methodologies. This understanding is essential as we consider our health care future as a country, and the author has some fascinating ideas about possible paths forward for our industry. Susan Turney, MD, MS, FACP, FACPMECEO of Marshfield Clinic Health System  To anyone who wants to really  understand the U.S. healthcare system, Dr.  Shalowitz’s book is a “must read”. Having participated in the healthcare industry for 40 years, this is the first time I have found a book that is comprehensive, factual and well-written.”Harry Kraemer, Jr., MBAFormer Chairman & CEO, Baxter International Clinical Professor of Leadership, Kellogg School of Management, Northwestern UniversityExecutive Partner at Madison Dearborn Partners

• List of Exhibits xiiiForeword xxiAcknowledgments xxiiiOne: Understanding and Managing Complex Healthcare Systems 1Definitions 2Health System Structure and Features 7Who Pays? 8How Much Is Paid? 11Who and What Is Covered? 12Where Is Care Provided? 13Who Provides the Services and Products? 14Strategic Planning 17Stakeholders 17Health System Trade-offs and Value Propositions 20Putting It All Together 30Summary 32Two: Determinants of Utilization of Healthcare Services 33Reasons Stakeholders Seek Healthcare 34Patient Characteristics That Influence Care-Seeking 36Age 37Gender/Sex 37Race 39Income 41Social Status 42Education 43Culture and Beliefs 44Multifactorial Causes 46Reducing Patient Demand for Healthcare 47Increase Out-of-Pocket Expenses 47Prevention 51Eliminate/Reduce Risky Behaviors 51End-of-Life Issues 52Healthy Lifestyle Promotion 54Consumer Behavior—Healthcare Market Segmentation 54Provider-Induced Demand for Healthcare 56Local (Small Area) Variations 61Summary 63Three: Managerial Epidemiology 65Introduction 66What Is Epidemiology? 66Why Is It Important to Learn about Epidemiology? 66Definitions and Uses of Principles 67Morbidity and Mortality 67Incidence and Prevalence 67Validity 67Reliability 68Sensitivity, Specificity, Positive Predictive Value, and Negative Predictive Value 68Clinical Study Designs 70Case Control Studies 70Problems with Observational Research 72Benefits to Employing Observational Research 73Cohort Study 74Randomized Controlled Trial 78Summary 80Four: Hospitals and Healthcare Systems 81A Brief History of Western Hospitals 82American Hospital Expansion in the 20th Century 88Hospital Definition and Classifications 94Definition 94Ways Hospitals May Be Classified and Special Related Issues 96Hospital Inpatient Payment Methods 137Organized (Integrated) Delivery Systems/Accountable Care Organizations 139Origins and Definition 139Eligibility 143Financial Arrangements 143Hospital Governance 153Definition and Purpose 153Legal Requirements 154Responsibilities 156Board Structure and Activities 159Summary 161Five: Healthcare Professionals 163Physicians 164History of Western Medical Care 164History of American Medical Care 177Current Status of Medical Training 190Licensure 197Shortage of Physicians 199Employment Status 204Summary 206Nurses 206Registered Nurses 206Nurse Practitioners 208Nurse Anesthetists 209Midwives 210Education and Certification 212Physician Assistants 213Education and Certification 214Physician versus NP/PA Care 215Summary 216Six: Payers 219Principles of Health Insurance 220The Loss Must Have Some Nontrivial Value Upon Which Both Insured and Insurer Agree 222The Peril Must Occur Randomly and Be Out of the Control of the Insured 222The Event Must Occur Neither Too Frequently Nor Too Rarely 225The Insurer Must Be Able to Write Large Numbers of Contracts to Indemnify Similar Risks 226Background and Current Status of Health Insurance in the United States 229Private Health Insurance 229Medicare 264Medicaid 318Children’s Health Insurance Program: Social Security Title XXI 335Other Federally Sponsored Programs 337Managed Care 357Principles 361Quality and Safety 361Summary 381Seven: Healthcare Technology 385Definition and Frameworks for Study 386Major Trends in Healthcare Technology 388Safety 388History of Safety Problems and Corrective Legislation 390What Is Substantial Equivalence 404When a 510(k) Is Required 404Bringing Healthcare Technology to Market 435Evolving Industry Structure 438Globalization 444Generics 444Specialty Pharmaceuticals 446Patents 453Genomics and Precision Medicine 453Disruptive Innovation 458Healthcare Technology’s Contribution to Costs by Stage of Care 460Overview 460Quality-Adjusted Life Years 460Core Cost Issues 462Prevention 463Screening 464Diagnosis 464Treatment 466Other Considerations 470Religious Issues 470Ethical Issues 470End-of-Life Costs 471Media’s Role in Increasing Technology Costs 472Malpractice and Defensive Medicine 473Summary 474Eight: Information Technology 475Introduction 476Definitions 477Background and Key Issues in Health Information Technology 479Collection, Classification, and Ordering of Data 479Terminology/Coding 486Interoperability 492Lessons Learned 529Challenges 529Sustainability 529Certification 534Privacy and Security of Information 537Management Considerations 547Other Issues and Trends 549Summary 563Nine: Quality 565Introduction 566History of Healthcare Quality and Development of Key Concepts and Institutions 567Ancient Origins 5671900–1950 5681950–1970s 5741980s and Total Quality Management 5801990s 5892000–2010 5922010–Present 605Quality of Care and the Public’s Health 623The Centers for Disease Control and Prevention 623Healthy People 626Definition of Quality 630Key Questions for Successful Evaluation and Implementation of Quality Measures 632Choosing Standards 633Monitoring Standards 637Evaluating Results 639Volume/Quality Relationship 644Managing Quality Improvement 646Value Propositions 646Cost–Quality Trade-off 648Cost–Access Trade-off 648Quality–Access Trade-off 649Summary 649Index 651