7Expenditures, Cost Containment, and Quality of CareiSt.docx

7Expenditures, Cost Containment, and Quality
of Care
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Learning Objectives
After reading this chapter, you should be able to
1. Discuss the relationship between expenditures and quality of
care.
2. Explore the causes of inefficiency, waste, and cost overruns
in American health care.
3. Outline the legal methods used to control, monitor, and
remedy cost and quality problems in
American health care today.
4. Examine process improvement methods used by health care
facilities that are designed to
eliminate redundancy and waste.
© 2019 Bridgepoint Education, Inc. All rights reserved. Not for
resale or redistribution.
Section 7.1The Current State of Affairs
Introduction
During the past century or so, medical care in the United States

has shifted from individual
doctor–patient interactions, typically within an office setting, to
interactions in health care
facilities that continue to grow larger and more complex.
Modern American health care has
become more highly specialized, technology centered, and
fragmented—a phenomenon that
has been anticipated since the mid-19th century. The English
sociologist Herbert Spencer
(2004) observed that as society increases in complexity, so do
its social institutions. The
bureaucratic explosion within health care, therefore, seems less
a symptom of inefficiency
and institutionalized excess and more a part of the necessary,
long-term development of spe-
cialized sectors within advanced industrialized society
(Toulmin, 1990).
Today, early 20th-century forecasts seem to aptly describe the
current state of affairs. Physi-
cians increasingly work in large, complex medical centers and
practice settings and tend to
see their scope of professional discretion minimized and finitely
defined. The fear of going
beyond those clear limits frequently causes physicians to
practice medicine defensively,
sometimes forgoing the ends of patient care to do so. Practicing
under such constraints has its
advantages but can also distract physicians from their
professional duties. For many patients,
medical care has become akin to conveyer-belt production.
Continuity of care once meant
having the same health care professionals in a lifelong
relationship with the patient. In the
new era of medicine, care is more likely to involve patients
being scuttled between sometimes

dozens of different caregivers, very few of whom will even
remember the patient’s name or,
in some cases, even meet with the patient one on one. As a
result, patients may become suspi-
cious of their caretakers, sometimes even assuming an
adversarial stance where once there
would have been warm acceptance (Phillips & Benner, 1994).
Most health care administrators and managers enter the
profession with clear priorities on
patient care but soon feel incessant economic and regulatory
pressures to protect their insti-
tution’s finances and public image. This is certainly part of any
good health care administra-
tor’s job description, but too often the loyalty to this side of the
job wins out over the ultimate
aim of health care—caring for patients. “No margin, no
mission” has become a popular refrain
among modern health care leaders, and the statement is
certainly true. However, what often
gets misunderstood in this pithy slogan is that margin should
exist only to further the mis-
sion. No mission, no health care organization.
In this chapter we will look at how modern American health
care has succumbed to bureau-
cracy and how the resulting, unsustainable costs have not
translated into proportionately
improved quality of care. The chapter will also show how the
constraints of institutionalization
upon the moral practice of medicine should be a major concern
for health care professionals.
Finally, we will examine what American society has done to
address this major ethical issue.
7.1 The Current State of Affairs

American health care continues to be at the leading edge of
discovery and innovation. How-
ever, in order to get a realistic picture of the current state of
affairs, its performance must be
examined in comparison to that of other health care systems.
That is where the paradoxical
success–failure story of American health care comes to light. In
this section we will investi-
gate how American health care compares to that of other
countries and consider the impact
of expenditures on quality of care.
Do Expenditures Equate to Quality
of Care?
In 2016, the United States spent 17.2% of its annual
gross domestic product on health care (see Fig-
ure 7.1), almost one-and-a-half times as much as
Switzerland, which at 12.4% was the next biggest
spender that same year (Organisation for Eco-
nomic Co-operation and Development [OECD],
2018). However, despite this large expenditure, the
United States is the only high-income country that
does not guarantee health care coverage for all its
citizens (Schneider, Sarnak, Squires, Shah, & Doty,
2017). Combined with other indicators, it becomes
apparent that American health care dollars are not
well spent, nor do these dollars afford individuals a
greater benefit for this massive investment. When
compared to ten other high-income nations (Aus-

tralia, Canada, France, Germany, the Netherlands,
New Zealand, Norway, Sweden, Switzerland, and
the United Kingdom), the United States comes in
first in health care dollars spent per capita, but last
on nearly every other criterion, including access,
administrative efficiency, equity, and health care
outcomes (Schneider et al., 2017).
Figure 7.1: Health care expenditures as percentage of GDP,
selected countries,
1970–2016
Over the past 50 years, the amount of money countries spend on
health care for their citizens has
consistently risen. However, the increase is exceptionally high
in the United States. What do you think
has caused the country to spend so much of its GDP on health
care?
Source: Organisation for Economic Co-operation and
Development (OECD). (2018). Health expenditure and
financing. Retrieved
from http://stats.oecd.org/Index.aspx?DataSetCode=SHA#
Cusp/SuperStock
The United States spends four times
what the average high-income country
spends on health care. However,
studies have shown that this extra
spending is not leading to superior
care.

Although more than 20 million Americans gained insurance
coverage under the Affordable
Care Act, many still lack access even to basic health care, and
those with coverage “often face
far higher deductibles and out-of-pocket costs than citizens of
other countries” (Schneider et
al., 2017, p. 8). (See Figure 7.2 for a breakdown of the number
of Americans without health
insurance.) Rampant expenditures continually threaten to wreak
economic havoc, and exor-
bitant administrative costs further emphasize the
unsustainability of the current system.
Consumer satisfaction continues to dwindle as trust erodes
amidst constant news reports of
health care professionals and organizations committing
malfeasance. Meanwhile, health care
professionals have resorted to practicing medicine behind a
defensive barricade, guarding
against malpractice lawsuits from one side and economic
pressures from the other.
Figure 7.2: Americans under age 65 without health insurance
coverage, 2016
A significant number of Americans are currently without health
insurance, with the largest group
being men between the ages of 25 and 34. This chart shows the
percentage of persons in the United
States under age 65 without health insurance coverage at the
time of interview, broken down by age
group and gender.
Source: Clarke, T. C., Norris, T., Schiller, J. S. (2017). Early

release of selected estimates based on data form the 2016
national health
interview survey. Retrieved from
https://www.cdc.gov/nchs/data/nhis/earlyrelease/earlyrelease20
1705.pdf
Do Standards Ensure Quality?
One of the ways that health care has attempted to identify and
resolve areas of low per-
formance and compromised quality is to develop and promote
practice guidelines. Profes-
sional organizations review the medical literature, undertake
empirical surveys of current
standards of care, and debate among their members and the
public what minimal standards
of acceptable care and professional performance should be
expected from their field. These
standards of acceptable care can be influential as public
assurances of minimal competencies
and thresholds of quality. They also can be used to help
determine when negligence has taken
place. Because standards of care are important for everyday
clinical practice, practitioners
must keep up-to-date about them. Why then do some ethicists
and health care practitioners
question the morality of using professional standards?
When managed care organizations (MCOs), including health

maintenance organizations
(HMOs) and preferred provider organizations (PPOs), first
gained prominence in the Ameri-
can health care system, many felt that the guidelines proposed
by various medical entities for
clinical care amounted to little more than an institutionalized
means to limit treatment and
maximize profit for providers and insurers (La Puma, 1995). In
some instances, compliance
with specific practice guidelines influenced physician
compensation, thereby creating finan-
cial incentives and disincentives for physicians’ clinical
decisions. For example, physicians
participating in a specific MCO might receive a bonus at the
end of the year if reduced patient
use of expensive medical services contributed to a positive
financial bottom line for the MCO
(Miles, 2005). (See Figure 7.3 for a breakdown of medical care
participants by plan type.)
Figure 7.3: Percentage of medical care participants by plan
type, private
industry, 2017
Sixty-eight percent of medical care participants receive
insurance through preferred provider
organizations (PPOs). Health maintenance organizations were
the second most popular plan. What
do you think creates the interest in PPOs?
Source: U.S. Bureau of Labor Statistics (BLS). (2017). NCS:
Health and retirement plan provisions in private industry in the
United
States, 2017. Retrieved from
https://www.bls.gov/ncs/ebs/detailedprovisions/2017/ownership/
private/table01a.pdf

Another potential problem with practice guidelines is that they
may be applied inflexibly.
There is no guarantee that strict adherence will always result in
better care. For example, a
physician following earlier guidelines that recommended annual
mammography screening
for older women might subject patients to radiation and the risk
of false positive results, lead-
ing to unnecessary and even harmful anxiety, follow-up testing,
or even aggressive surgical
intervention—all without a meaningful corresponding benefit
for the patient in terms of lon-
ger and enhanced quality of life.
Stop and Clarify: Managed Care Organizations
Managed care organizations take many different forms. The
common characteristic of all
MCOs, however, is that they combine the insurer and provider
functions into the same cor-
porate (for-profit or nonprofit) structure. This combination of
functions creates a financial
incentive for the MCO and its participating physicians to
deliver care as efficiently and cost-
effectively as possible. MCOs have been developed in reaction
to the traditional third-party
payment system, in which the health insurer, the patient, and the
provider all had their

own, often inconsistent, incentives—an inconsistency that
inevitably resulted in escalating
health care costs.
One type of MCO is the HMO. In return for the prepayment of a
prospectively set monthly
or annual premium, a closed-panel HMO provides
comprehensive health services to an
enrolled patient through physicians who are either employees of
the HMO (staff model)
or employees of a private physician group that contracts with
the HMO (group model). In a
closed-panel HMO, the patient must receive care from the
HMO’s employed or contracted
physicians; otherwise they must pay a non-HMO physician
directly out of pocket. In an
open-panel HMO (independent practice association), medical
care is provided by privately
practicing physicians who, in addition to treating their other
patients and billing insurance
companies for that treatment, also participate in the HMO’s
network. When a network phy-
sician treats a patient who is enrolled in the independent
practice association, the associa-
tion pays that physician for the treatment according to a
predetermined methodology that
varies considerably among independent practice associations.
The other main type of MCO is the PPO. Like the HMO, a PPO
promises comprehensive
coverage to enrolled patients in return for a monthly or annual
prepaid premium. The PPO
contracts with a network of physicians and other providers
(such as hospitals) to serve its
patients; to participate in the PPO, the provider must agree in
advance to accept an amount

of payment for specific services that the PPO is willing to pay.
In return for receiving the
provider’s best price, the PPO makes the provider “preferred”
by informing patients that
the full cost of their care will only be covered if the patient uses
one of the preferred provid-
ers. Otherwise, the patient will have to pay all or part of the
provider’s fee directly out of
pocket.
In a point of service plan, the patient gets to choose at the time
of service whether to use a
provider inside or outside the patient’s MCO. The patient then
accepts the financial conse-
quences of that choice.
Medical practice requires careful discernment and
discrimination; it takes many years for a
practitioner to develop genuine expertise. Professionals in any
field know the value of guide-
lines but also realize that true experts know when to judiciously
disregard them. On the other
hand, when standards of practice were vague and totally
individualistic, physicians often
tended to provide costly and unnecessary care either under the
guise of “thoughtful, careful
medical practice” (La Puma, 1995, p. 51) or in accordance with
the ethical principle of respect
for autonomy (since patients requested it). This total discretion

in treatment resulted in soar-
ing health care costs, waste, and often less than optimal health
care outcomes. It was not long
before the public began asking for a different kind of
accountability to be sought through
MCOs and for a way to distinguish good health care from bad.
What Defines Quality?
Though many would agree that quality is not mere compliance
with practice guidelines, it is
much more difficult to come up with a positive definition of the
term. Furthermore, quality is
inherently difficult to measure.
To help answer the question of what constitutes quality, the
Rand Corporation conducted its
“Medical Outcomes Study” in the 1990s (La Puma, 1995).
Health outcomes are defined as
“a change in the health status of an individual, group, or
population that is attributable to a
planned intervention or series of interventions, regardless of
whether such an intervention
was intended to change health status” (World Health
Organization, 1998). In this study, Rand
researchers came up with seven different components: financial
accessibility, organizational
accessibility, continuity, comprehensiveness, coordination,
intrapersonal accountability, and
technical accountability (Rand Corporation, 1990). This
enumeration of factors constituting
health outcomes is useful because it conforms to the common
belief that health care assess-
ments should focus on both the technical as well as the
interpersonal dimensions of care.
The Rand project built upon the seminal work of Avedis
Donabedian, a leader in the theory

of health care assessment. Donabedian proposed that technical
care is “the application of the
science and technology of medicine, and of the other health
sciences, to the management of
a personal health problem” (1982, p. 4). He added that
managing the social and psychologi-
cal relationships between patients and practitioners is also a
part of technical care, although
it makes up the art of medicine facet of the term. According to
Donabedian (1980), quality
in technical care pertains to applying medical science and
technology in such a way so as to
increase health benefits without increasing health risks.
For Donabedian, quality in health care’s interpersonal
dimensions were more difficult to
define. Yet together with excellence in the medical-technical
aspects, quality of care is the
maximization of a patient’s overall well-being given the
attendant risks and benefits typically
present in the process of care (Donabedian, 1980). In other
words, measuring quality of care
must ultimately focus on the impact of care on patients’ quality
of life.
Donabedian’s definition of quality remains one of the earliest
and most influential holistic
attempts to clarify what is now more commonly referred to as
health outcomes—that is, the
actual impact of care on patients’ quality of life. Later
definitions—such as the IOM’s “degree
to which health services for individuals and populations
increase the likelihood of desired

Section 7.2Causes of Overspending
health outcomes and are consistent with current professional
knowledge” (Lohr, 1990, para.
11)—offer a clearer focus on desired results but also
incorporate the idea that professional
standards should still play a role in deciding what constitutes
quality care. This is because
achieving a desired result may not be indicative of the quality
of the care received. It may
be a coincidence that things turned out the way the patient or
health care provider wanted;
the result may have been good despite a poor quality of care, or
the result, while desired or
even good, may still pale in comparison to the result that might
have occurred had better-
quality care been rendered. The IOM definition also judges care
that does not conform to cur-
rent professional knowledge to be of poor quality, despite the
health outcomes obtained. For
instance, while unnecessary care that causes harm is obviously
of low quality, it is not clear
that unnecessary or even futile care will be considered low
quality if the patient or clinician
are pleased with the results. However, under the IOM
definition, these types of wasteful and
potentially harmful therapies are excluded from the definition
of quality care, regardless of
their outcome.
As the foregoing discussion indicates, the concepts of quality of
care and quality of life are
related but not synonymous. The former is concerned primarily

with professionally deter-
mined measures of the process of providing health care
services. Quality of life, by contrast,
is concerned, from the patient’s perspective, with the impact of
the process of care on the
patient’s functioning and enjoyment. So, for instance, a surgery
performed according to state-
of-the-art standards and techniques might be judged by
professionals to constitute excellent
quality of care, but the quality of life evaluation would be poor
if, despite the excellent process,
the surgery resulted in pain, other side effects, and poor
function on the part of the patient.
The quality of care/quality of life distinction is illustrated by
the old saying, “The operation
was a success, but the patient died.”
7.2 Causes of Overspending
The value of health care is a function of comparing the quality
of life outcomes for patients
with the costs of achieving those outcomes. Value can be
enhanced by improving outcomes—
that is, the impact of care on patients’ quality of life. Value may
also be enhanced by control-
ling the costs incurred in pursuing desired outcomes. Hence, we
must consider the question
of health care costs.
Overspending on health care threatens Americans’ and health
care organizations’ financial
well-being as well as the sustainability of any health care
delivery and payment model. Apart
from these very important economic concerns, overspending is a
moral issue, due to the cen-
tral importance of health care to human well-being. The fact
that the United States currently

does not possess the resources to meet the demand for
beneficial health care means that
some people do not receive the care they need and want. This
constitutes an ethical tragedy
that wasteful spending, greed, inefficiencies, and fraud
exacerbate by making it less likely that
the United States can maximize the health benefits and
minimize the harms for its people.
In this section, we will analyze the most prevalent and
important causes of overspending in
our health care system and investigate the different legal
avenues developed to keep costs at
acceptable levels. (See Figure 7.4 for a breakdown of U.S.
health care expenditures.)
Figure 7.4: Percentage of United States health care expenditures
by
source, 2016
In 2016, the majority of the health care expenditures in the
United States came from a combination of
Medicare and Medicaid (37%). Private insurance alone
comprised 34% of the nation’s health care
expenditures. The remaining came from out-of-pocket
payments.
Source: CMS. (2017). National health expenditures 2016
highlights. Retrieved from https://www.cms.gov/Research-
Statistics-

Data-and-Systems/Statistics-Trends-and-
Reports/NationalHealthExpendData/downloads/highlights.pdf
Differing Regional Practices and Medical Cultures
In his 2009 New Yorker essay, “The Cost
Conundrum: What a Texas Town Can
Teach Us About Health Care,” Dr. Atul
Gawande told a story of two similar coun-
ties in Texas. Both counties rest on the
border with Mexico and have very simi-
lar patient demographics and socioeco-
nomic characteristics. In Hidalgo County,
where the city of McAllen sits nestled
between the rugged deserts of Mexico and
Texas vacation destinations on the Gulf of
Mexico, Medicare spending per capita is
greater than nearly anywhere else in the
country—about $15,000 per enrollee in
2006 (Gawande, 2009b; Dartmouth Insti-
tute for Health Policy & Clinical Practice &
Commonwealth Fund, 2010).
Fuse/Thinkstock
Studying two border cities in Texas, researchers
found that overspending on health care was
due to a culture of overtreatment and lack of
effective caregiver assessments.
There is nothing particular about El Paso County, which lies

farther up the Rio Grande, that
would lead observers to expect Medicare spending there to be
much different than in McAl-
len. However, while Medicare enrollee patient outcomes were
virtually the same in El Paso as
they were in McAllen, Medicare spending in El Paso was only
half of what was being spent in
McAllen (Gawande, 2009b).
Wondering what might account for such a poor return on
investment in McAllen versus other
parts of the country, Gawande went to Texas to investigate. He
did not find health care execu-
tives, professionals, and organizations willfully defrauding
Medicare. He did not find large-
scale unscrupulous behavior or collusion to run up costs or
other nefarious conduct. What
he found was a culture in health care organizations and among
professionals to test, treat,
and spend at a demonstrably higher rate than elsewhere.
Without comparative effectiveness
assessments to keep them in check, relatively insular systems
like McAllen tend to overtreat
patients and hence waste scarce health care resources and tax
dollars.
It is unclear whether communities such as McAllen outspend
other communities in an effort
to provide the best possible patient care or if its clinicians have
succumbed to the financial
incentives that overtreatment and waste provide in fee-for-
service health care. What is clear
is that the unnecessary care rendered in places such as McAllen
means there is less to spend
on necessary care everywhere. Besides overtreating some people
at the expense of providing

the basic minimum of care to others, unnecessary treatment can
also present unnecessary
risks to patients.
Web Field Trip: Statistical Comparisons
The purpose of this exercise is to demonstrate and emphasize
the wide variations among
different parts of the United States in health care practices and
therefore in health expendi-
tures. As you work through this activity, you will be asked to
think about potential explana-
tions for these wide variations.
1. Locate a reputable online source for comparative statistical
data related to health
care costs or health outcomes (see Table 7.1 for sample sources
to help get you
started).
2. Choose one index of health care cost or quality represented in
the data sets you choose.
This can be anything for which data is available (try to find data
collected no more than
six years ago) and need not be from the United States. Some
possible indices include:
• Median Medicare costs per enrollee for specific regions in the
United States
• What percentage of the total population accounts for 50% of
federal health care
reimbursements?
• Infant death rate by populations
• Rate of emergency department use as primary and preventive
care outlets
• Patient perceptions of quality care

3. Compare the measurement rates of total, average, and median
incidence outcomes
with the same figures from a different geographic location,
patient population, or
(continued on next page)
Web Field Trip: Statistical Comparisons
(continued)
time period. If you cannot find a valid comparison group, then
look at different sta-
tistics for comparison.
4. Are the statistics noticeably different between the two
groups? Do they, for instance, dif-
fer by more than you would have expected?
5. If the statistics do not differ appreciably, look for a starker
contrast in health care costs
or quality measures elsewhere.
6. If the statistics differ by an amount that surprises you,
attempt to find plausible expla-
nations that would account for these differences by
investigating the statistical reports
and articles that accompany the results. If these do not account
for the difference, do an

Internet search (on PubMed, for example) for journal articles
that attempt to explain
the statistical variation you found (or an explanation of a
variation that is close enough
to the phenomenon you have witnessed that its findings might
be generalizable to your
findings).
7. Write a short (less than one page) paper that explains the
variation you found.
Write your essay with an eye toward identifying possible ethical
issues. For exam-
ple, does the variation amount to a justice issue? If it is found
that the statistical
variation cannot be explained by observed differences between
the two groups, can
it be explained by differential access, disparate treatment, or
illegitimate discrimi-
nation? Use the ethics framework from Chapter 1 to help you
organize your essay
and spot the potential ethical issues.
Table 7.1: Sample online sources for comparative statistical
data related to
health care cost and quality
Publication title Source
“Data, Statistics & Tools” Agency for Health Care Research and
Quality
http://www.ahrq.gov
“Health-Care Costs: A State-by-State
Comparison”
Wall Street Journal

http://www.wsj.com
“Snapshots: Health Care Spending in the
United States & Selected OECD Countries”
Kaiser Family Foundation http://www.kff
.org
“Interactive Map: Health Care Costs Vary
Widely Across U.S.”
NBC News http://www.nbcnews.com
“Why American Health-Care Costs So Much” Washington Post
http://www.washingtonpost.com
“The Dartmouth Atlas of Health Care” Dartmouth, the
Commonwealth Fund
http://www.dartmouthatlas.org
Fraud and Abuse
In addition to regional differences in how
health care professionals manage particu-
lar patient cases, another reason for the
exorbitant cost of health care in the United
States is inappropriate billing conduct by
health care organizations and practitio-
ners. In any health care financing system,
competing financial incentives and disin-

centives will always create a potential for
fraud and abuse. In some of the more pub-
lic and egregious cases, major health care
organizations have engaged in broad, sys-
tematic fraud. For example, some hospital
corporations have billed Medicare and
Medicaid for patient services that were
never provided, and a few notorious nurs-
ing homes have billed those government programs for the care
of patients long after those
patients had died.
Such conduct removes finite financial resources (more than $80
billion per year, according
to Federal Bureau of Investigation estimates [FBI, n.d.]) from a
system that could put those
resources to much better use purchasing care for individuals
otherwise lacking access to
health services. To counter this sort of fraudulent and abusive
provider conduct, the United
States has compiled an array of statutes, regulations, and case
decisions. The three main legal
avenues for combating health care fraud and abuse, Stark law,
false claims statutes, and anti-
kickback provisions, are discussed in the sections that follow.
Stark Law on Physician Self-Referral
The Ethics in Patient Referrals Act, or Stark law, governs
physician referrals for Medicare-
and Medicaid-reimbursed services in which the physician (or
close family member) has a
financial conflict of interest. Faced with increasing evidence
that health care practitioners
were referring patients to other businesses owned or co-owned
by the referring physician
or a close family member, Representative Fortney Stark

introduced a bill that would make
these “self-referrals” illegal. Self-dealing by physicians had
become common and was a major
source of unnecessary testing and treatment, as well as an added
risk for patients. The law
covers the following 11 designated health services: laboratory
tests, physical or occupational
therapy, imaging services, radiation treatment, home health
care, pharmaceuticals, medical
devices and supplies, and hospital services. The Stark law
provides a nearly complete ban on
any Medicare or Medicaid payments for services falling under
the statute in which the refer-
ring physician has a close, personal financial stake.
While some of the other fraud and abuse laws require that the
offending conduct be knowing
and willful, the Stark law does not require knowledge,
unlawfulness, or intent to defraud. To
LM Otero/AP Images
W. Rick Copeland, director of the Medicaid Fraud
Control Unit of the Office of the Texas Attorney
General, outlines a medical fraud scheme. The
FBI estimates that medical fraud costs upward of
$80 billion per year.
help providers distinguish prospectively between illegal and
permissible conduct, the Cen-

ters for Medicare and Medicaid Services has published a
nonexhaustive list of “safe harbors”
illustrating permissible conduct.
Additionally, there are several exceptions to Stark Law based
on by whom and under what
circumstances certain services are rendered. An exhaustive list
of these exceptions can be
found at http://www.starklaw.org/PDF/Stark411.355.pdf.
Case Study: A Violation of Stark Law
While conducting routine audits of hospital-owned physician
practices, a compliance offi-
cer noticed that the staff, including the physician, at one of the
busier practices was having
vendor-funded lunches brought into the office every day. The
compliance officer noted that
vendors were not in the office providing services that would
allow for these lunches, such
as presenting new products or providing educational training to
the staff. It appeared that
vendors were simply funding the delivery of free daily lunches.
The compliance officer asked the practice’s office manager
about receiving the lunches
and she stated that it happens every weekday of the year and
that the staff loves it, espe-
cially since they do not need to bring or go out for lunch
anymore. The compliance officer
informed the office manager that this practice could no longer
take place as it violated the
Stark law. The compliance officer explained that, without the
vendors providing any train-
ing or education each time lunch was brought in, it looked as
though they were buying the

lunches as a way to entice the physicians to purchase supplies
from them. The compliance
officer further explained that, although there is a $300-per-
physician annual limit on what
physicians can receive from vendors, free lunches Monday
through Friday for an entire year
far exceeds that limit, even with three physicians in the office.
One of the head physicians was furious when he was informed
that there would no longer
be free lunches on a daily basis. However, after the compliance
officer explained the Stark
law, as well as the consequences of violating it, to all of the
physicians and staff in the office,
they acquiesced.
However, three months later, while the compliance officer was
visiting the same physician’s
office as a patient, a vendor walked in with free lunches. He
dropped off the lunches and left
while the compliance officer was still in the waiting room.
Before reading on, consider the following questions as if you
were the compliance officer
in this case:
1. Since you were in the office as a patient, and not on official
business, would you do
anything about what you observed?
a. If so, what would you do?
b. If not, why?
Continue reading to find out how the compliance officer
handled this situation.
Even though the compliance officer was not in the office on

official business, she had a
responsibility to report this issue. After the compliance officer
saw her physician that day,
she again met with the office manager and asked why vendors
were still delivering free
False Claims Statutes
Estimates from fiscal year 2017 by the Centers for Medicare and
Medicaid Services put the
bill for improper payments of false claims at $36.21 billion.
False claims are claims submit-
ted to the government for payment that is not really deserved by
the provider submitting the
claim, usually because the service for which the claim was made
was not actually provided to
an eligible beneficiary.
Several federal and state false claim statutes make the knowing
and willful submission of
a false claim or statement to Medicare or a state Medicaid
program a felony (Medicare and
Medicaid Antifraud and Abuse Act, 1977). Submission of
multiple false claims by a business
(a health care organization or an independent contractor)
engaged in interstate commerce
may additionally be prosecuted under the Racketeer Influenced
and Corrupt Organizations

statute commonly used against organized crime families (RICO,
1970). Violation of the Civil
False Claims Act carries a penalty from between $5,500 to
$11,000 per claim plus damages
Case Study: A Violation of Stark Law (continued)
lunches. The office manager told her that the head physician
said they did not have to listen
to the administrative people and to allow vendors to continue
providing daily lunches. The
compliance officer asked why this had not been reported to her,
and the office manager
stated that she was afraid she would get in trouble with the
physician. The compliance
officer determined the incident needed to be dealt with at a
higher level, so she lodged a
formal report to the medical staff board and the hospital’s board
of directors. The physician
was written up by the hospital’s medical ethics committee for
not complying with Stark law
and the office manager was fired for not reporting the issue
once she was informed of the
consequences of violating Stark law.
Stop and Clarify: Reporting Fraud and Abuse
There are several ways to report fraud and abuse.
Medicare Fraud
Call Medicare at 1-800-633-4227 or search for “reporting fraud”
at https://www
.medicare.gov.
Stark Law Violations

Report a Stark violation to the Office of the Inspector General
(OIG). Go to the OIG website
(https://oig.hhs.gov) and select “report fraud” to report a Stark
violation online. Or call the
OIG hotline at 1-800-447-8477. The OIG accepts any tips on
Stark violations.
Section 7.3Cost Containment
equaling three times the amount of the false claim or claims
(Civil False Claims Act, 1863).
Further, the Medicare and Medicaid Anti-fraud and Abuse
statute, in addition to prohibiting
false claims and representations, forbids knowing and willful
solicitation or receipt of any
illegal remunerations, including kickbacks, bribes, unlawful
rebates, or self-referrals (Medi-
care and Medicaid Antifraud and Abuse Act, 1977).
States have adopted their own versions of the federal Civil
False Claims Act. The Civil False
Claims Act allows states to recover damages plus a bonus in a
federal fraud case involving
Medicaid claims if the state’s law facilitates the bringing of qui
tam actions by the public. Qui
tam actions allow private citizen whistleblowers, suing either
individually or through the
state, to bring legal actions against entities and individuals who
break a federal law. The qui
tam initiators (“relators”) are allowed to keep a portion of the

damages, with the rest going
to the state. Qui tam legal actions are meant to facilitate the
policing of false claims by provid-
ing financial incentives for those citizens who witness the
illegal conduct to blow the whistle.
While overpayments by Medicare and Medicaid for false claims
result from federal and state
crimes that can be seen as outright theft, a few well-meaning
health care professionals char-
acterize their intentional overbilling or falsified claims as
motivated by their devotion to the
moral practice of medicine (Jost, Davies, & Gosfield, 2007).
Given that standardized rates
of reimbursement by Medicare and Medicaid often fail to cover
the treatment expenses of
enrollees and claims for rendered care are sometimes denied by
Medicare fiscal intermediar-
ies and state Medicaid agencies, some health care professionals
knowingly falsify reimburse-
ment claims in order to receive the reimbursements to which
these physicians feel they are
otherwise entitled. It is difficult to say what percentage of false
claims are motivated by greed,
and amount to theft, and what percentage amounts to a health
care practitioner trying to
maximize reimbursement to make ends meet and provide
continuing service to Medicare and
Medicaid patients who could not otherwise afford their services.
Anti-Kickback Provisions
A third approach to trying to prevent fraud and abuse is found
in the Medicare anti-kick-
back statute (AKS), 42 United States Code section 1320a–
1327b(b). According to the Medical
Learning Network (2017), “[t]he AKS makes it a crime to

knowingly and willfully offer, pay,
solicit, or receive any remuneration directly or indirectly to
induce or reward referrals of
items or services reimbursable by a Federal health care
program” (p. 6). Certain “safe har-
bors” of permissible activity are defined in 42 Code of Federal
Regulations section 1001.952.
Violation of this law subjects the payer or recipient of the illicit
kickback to criminal penalties
consisting of fines or imprisonment.
7.3 Cost Containment
Escalating health care expenditures pose a variety of ethical and
legal challenges when they
are the result of legitimate services, but especially when they
are the product of fraudulent or
abusive conduct by providers. Thus, it is a social imperative to
contain those escalating costs
so that finite resources can be used more efficiently and
equitably.
Modern American biomedicine, like every other major segment
of the economy, is very much
concerned with keeping costs at manageable levels, providing
reasonable returns on invest-
ment, and maintaining a financially sustainable business model.
However, the successes of
some of the other major sectors of the economy in keeping costs
within acceptable param-

eters have thus far proved unattainable in health care. Excessive
spending on services, drugs,
and technologies that provide little or no additional benefit over
less-expensive treatments;
unnecessary care; and lavish compensation in some health care
professional sectors all con-
tribute to the runaway costs in medicine.
Each of these factors provides tremendous financial rewards for
various parties who then have
enormous incentives to continue the status quo. For example,
physicians are often rewarded
financially for the quantity of medical services they render. The
typically high incomes earned
by physicians also make possible one of the most powerful and
well-organized special-inter-
est lobbies in American history (Starr, 1982). While American
physicians and health care
executives are generally highly motivated to have a well-
functioning and sustainable health
care system that provides the best quality care, these groups can
also find it difficult to rally
behind cost-control reforms when doing so would likely mean
cutting their incomes.
Medical practices are also often immune to the factors found in
most markets that keep prices
for services and salaries in check. Although private commercial
sectors are usually good at
self- controlling their costs, the American health care system is
by no means a typical mar-
ket system. American medicine is set up so that the costs of
medical services and products
are often hidden from consumers and the health care staff that
render them. Consumers are
typically removed from purchasing decisions, although it is

reasonable to expect the cost of a
proposed treatment to be discussed with the patient as part of
the informed consent process.
That rarely happens, however—due at least in part to the
pervasive myth that when the direct
payment comes from an insurer or other third-party payer the
service is somehow “free of
charge” to patients.
American employers, who often end up paying for increasing
insurance costs or services
directly, have belatedly become a major force for cost
containment, as exemplified by the
Washington Business Group on Health. Until recently, though,
employers generally opted to
pass rising costs on to the American workforce in the form of
lower wages, smaller cost-of-
living raises, and flat hiring trends.
All of these factors contribute to a cost-containment problem
that has proved relatively
immune to large-scale reform. Yet, some changes have given
some health policy experts hope.
The biggest change involves the Affordable Care Act.
The Affordable Care Act
The Patient Protection and Affordable Care Act (ACA) of 2010
contains several provisions
aimed at health care cost containment. First, the ACA is aimed
at curbing the incentives that
encourage workers and employers to use health insurance
policies as a means to grow tax-
free investments. The so-called “Cadillac tax” is a means to
address the fact that, while the
federal government taxes employees’ earnings, it does not tax
the money used by employers

or unions to pay for their insurance. This policy has the
unintended result of allowing employ-
ees to use health insurance as a shelter to avoid paying income
taxes on a large piece of their
compensation package. Not only does the federal government
lose tax revenue that it would
otherwise receive were it not for this pro-
vision, but the advantage gets dispropor-
tionately bigger the wealthier the wage
earner is. This means that bigger health
insurance tax breaks go to help the rich-
est people buy health insurance, which in
turn encourages more unnecessary health
care spending. Over time, the Cadillac tax
would attempt to counteract the nega-
tive effects of this subsidy. In theory, tak-
ing away the use of health insurance as a
means of tax-free compensation should
both control health insurance costs and
increase wages for American workers.
In January 2018, Congress passed, and
President Trump signed, a two-year delay
of this tax, pushing its start date to 2022
(Cigna, 2018).
Another provision in the ACA allowed for the formation of
insurance exchanges at the state
level. For Americans who lack employer-provided insurance and

do not qualify for govern-
ment insurance programs, the opportunity to shop around for
health insurance in a new sys-
tem with more controls against abuse comes close to
approximating a competitive market
environment. For possibly the first time, Americans have been
given the tools to become the
kind of rational consumers that market theory envisions.
The ACA also created the Independent Payment Advisory Board
(IPAB), which was intended
to bring oversight to Medicare spending. Partly in response to
Gawande’s 2009 story on the
disproportionately high Medicare and Medicaid spending in
McAllen, Texas, the ACA proposed
the creation of a nonpartisan group of experts tasked with
improving health care quality and
efficiency while controlling costs for Medicare beneficiaries.
This group would only be offi-
cially convened if Medicare costs grew a percentage point faster
than the rest of the economy
(Kliff, 2017). However, as part of the Bipartisan Budget Act of
2018, IPAB was repealed before
it was ever actually utilized.
An additional cost-containment strategy contained in the ACA
is the creation of Accountable
Care Organizations (ACOs). The ACA authorizes the Centers
for Medicare and Medicaid Ser-
vices to contract with ACOs in the Medicare Shared Savings
Program. ACOs are coordinated
groups of health care providers who join together to provide
comprehensive health care to
Medicare beneficiaries in return for bundled payments that
financially incentivize the various
provider participants to deliver cost-effective health care as

efficiently as possible.
Possibly the most important cost-control measure that the ACA
introduced was the forma-
tion of a new agency to fund research on the comparative
effectiveness of different clinical
approaches to particular medical problems. The Patient-
Centered Outcomes Research
Institute (PCORI) is funded by a fee imposed on health insurers
and plan sponsors. The
PCORI is an essential part of the market approach because it
sponsors the production of data
needed to discriminate between effective and ineffective
treatments, along with their rela-
tive costs. It has been difficult to use the small amount of
existing data to effectively reduce
AP Photo/Jacquelyn Martin
In 2010, President Barack Obama signed the
Affordable Care Act into law, which contains
several provisions aimed at health care cost
containment.
Section 7.4Current Quality-Improvement Methods
waste and unnecessary care, even when damning information
about the relative costs, risks,
and benefits of popular modes of treatment, drugs, and
technologies surfaces. Powerful
interest groups and skillful public relations have often proved
more effective at perpetuat-

ing the underperforming treatments than the research has been
at changing practice hab-
its. However, the research sponsored by the PCORI and the fact
that the ACA forbids health
insurers from using PCORI research to restrict health insurance
benefits are expected to aid
health care consumers and physicians in making more informed
decisions about what treat-
ments work. For treatments that fall within the gray area of
discretion, the cost-comparison
data is intended to help consumers and physicians make finer
distinctions and better health
care choices.
Utilization Review
Another important mechanism in cost containment is utilization
review. Utilization review
strategies include various methods used by health care
organizations to verify the necessity
and appropriateness of services provided to patients and the
expenditures related to patient
care. Utilization review has been an everyday part of health care
administration since it was
mandated by the Medicare law as a prerequisite for
reimbursement.
Many health care organizations and larger physician practices
have internal utilization
review processes, sometimes known as case management. While
unable to unilaterally
change a patient’s treatment plan or order a patient’s discharge
or transfer, these internal
processes play a vital role in the ethical management and
financial stewardship of the orga-
nization. This strategy for ensuring medically necessary and
appropriate care and limiting

the risk of waste is included in the work of quality-improvement
organizations. These orga-
nizations set benchmarks for the reduction of inappropriate
care, investigate potential devi-
ations, and have the authority to deny Medicare payment for
unnecessary or inappropriate
claims (Showalter, 2012).
7.4 Current Quality-Improvement Methods
While the strategies we have investigated in this chapter have
dealt with the issue of cost
containment, some strategies are more specifically aimed at
maintaining and improving the
quality of care. In this section, we will take a closer look at
some of these strategies.
Error Reporting and Surveillance
Since the publication of the 1999 IOM report “To Err Is
Human” (see Chapter 6), numerous
initiatives for error tracking have been instituted through
regulatory and professional over-
sight. The Joint Commission enforces a sentinel event policy
that encourages the reporting
of errors to the Joint Commission, as well as to patients. A
sentinel event is “a patient safety
event (not primarily related to the natural course of the patient’s
illness or underlying condi-
tion) that reaches a patient and results in any of the following:
death, permanent harm, severe
temporary harm” (Joint Commission, 2017, p. 1). The Joint
Commission’s sentinel event policy

Section 7.4Current Quality-Improvement Methods
requires that patients—and when appropriate, their families—be
informed about sentinel
events, as well as “unanticipated outcomes of the care,
treatment, or services that relate to
sentinel events” (Joint Commission, 2017, p. 5).
Lean Methodologies
Apart from complying with requirements imposed by influential
accreditation agencies, lean
methodologies taught in popular management texts have also
proved influential in promot-
ing health care management cultures and policies that foster
quality improvement. Although
there is a general lack of empirical comparative effectiveness
research on many of these busi-
ness management–improvement methods, they have spawned
some welcomed attention to
continuing quality improvement and waste and cost reduction.
The lean methodologies com-
mon in today’s health care systems are based on reducing waste
originating from practices
of overproduction (that is, overproducing inventory that goes to
waste); motion and trans-
portation inefficiencies (when health care workers spend too
much time and energy moving
themselves from place to place as part of their job); static
inventory (having too much inven-
tory on hand); and any processes or costs that do not produce
patient benefit or some other
recognized value to the organization (Rubino, Esparza, &
Chassiakos, 2014). Lean method-
ologies, though primarily concerned with trimming the fat from
health care organizations to

help them more swiftly and nimbly navigate the realities of
modern health care, are supposed
to define value from the perspective of health care consumers
(Longest & Darr, 2008). This
allows the creation of lean processes that are less likely to
promote some secondary or instru-
mental end (or the arguably illegitimate end of profit
maximization) over the primary goal of
patient care and benefit.
Coupled with the lean philosophy, Six Sigma, a popular
efficiency maximization method,
focuses on producing the best possible products and services as
measured through outcomes
and improved consumer satisfaction (Rubino et al., 2014). The
Six Sigma methodology focuses
on the reduction of errors, or defects per million opportunities.
These programs have become
comprehensive and complex systems whose suggestions and
guidelines, when implemented
judiciously and not overzealously, can prove a useful adjunct to
the other quality-improve-
ment and cost-reduction strategies we have looked at so far.
Like other well-meaning methodologies intended to ease the
hard work of managing health
care, lean philosophies lend themselves to being misused.
Taiichi Ohno, who developed a pro-
duction system at Toyota that is now the basis for most lean
approaches used in health care,
saw the first task of any cost-containment and quality-
improvement strategy to be a thor-
ough, ongoing study of the underlying system (Seddon, 2005).
The resulting practical wis-
dom is more likely to ensure that the tough decisions regarding
cost containment and quality

assurance are effective and sustainable.
A successful cost-containment and quality-improvement
strategy requires careful crafting
and implementation. The good health care leader needs an
awareness of the limits of tools
such as Six Sigma, a practical wisdom that comes from a deep
familiarity with the culture of
the specific health care organization, and an unwavering
orientation toward the organiza-
tion’s mission and vision.
Chapter Highlights
Chapter Highlights
• Waste, inefficiencies, inflated costs, fraud, and abuse not only
have an effect on the
economic stability and sustainability of the American medical
system, but they also
compromise the quality of care received by patients.
• The inertia of the current system makes change difficult
because the current system
benefits politically powerful and influential interest groups.
This, however, does not
mean that strides toward improvement cannot be made.
• There are a variety of complicated and fragmented ways in
which health care policy
makers attempt to mitigate and remedy issues of quality and

cost. Among the vari-
ous legislative, administrative, regulatory, professional
oversight, and managerial
methods used to try to control costs and pursue the best quality
possible, the Afford-
able Care Act of 2010 has been most prominent in introducing
several outcomes-
based initiatives that target and control cost and quality.
Web Field Trip: The Group Health Cooperative of
Puget Sound and the University of Pittsburgh Medical
Center
For this web field trip, you will investigate two large health
care organizations that have
somewhat different approaches to utilization review and assess
their relative merits.
The University of Pittsburgh Medical Center (UPMC) Health
Plan can be characterized by
a laissez-faire quality-improvement philosophy. The UPMC
Health Plan’s quality-improve-
ment statement says, in part, “We believe that if we give
doctors the right information, they
will make the right choices. We continually supply clinical
education tools and guidelines to
help doctors streamline costs while delivering top-quality care”
(UPMC Health Plan, 2018,
para. 2). While the UPMC Health Plan uses clinical guidelines,
they are used only as educa-
tional tools rather than strict rules for determining medical
necessity or appropriateness.
Clinical decisions are left to the wide discretion of
practitioners. There are lists of specific
products and services that are covered by the health plan, but
discretion is given to physi-

cians and other health care professionals such that coverage
decisions can be made by the
plan on an ad hoc basis, as long as the practitioner makes a
reasonable argument for why
a service that is not ordinarily covered is indicated for the
particular patient. The UPMC
Health Plan emphasizes trust in the medical expertise of
physicians and instills fiduciary
duties that are seen as the only needed safeguard of appropriate
and efficient health care
utilization.
In contrast, the Group Health Cooperative of Puget Sound
(GHCPS) is characterized by
much tighter controls over utilization, using empirically based,
prescriptive guidelines
for medical treatment. This approach emphasizes trust in health
outcomes evidence. The
GHCPS Group Health Roadmaps are prescriptive guidelines
reflecting the latest in out-
comes research. However, the GHCPS is aware that overly strict
constraints on the practice
of medicine can fail to be responsive to a patient’s individual
needs and disrespectful of pro-
fessional expertise. This is why the GHCPS, although driven by
statistical data and outcomes
research, allows some flexibility in individual cases.
Chapter Highlights

Critical Thinking and Discussion Questions
1. Why is health care so expensive in the United States?
2. Can health care costs be controlled without sacrificing
quality of care or access
to care?
3. How effective do you think the Affordable Care Act has been
in achieving its health
care access and affordability objectives?
4. Whose responsibility is it to control health care
expenditures?
5. Do you think other countries do a better (more ethical) job of
balancing health care
access, quality, and affordability?
Key Terms
case management A health care organiza-
tion’s internal utilization review process
that assesses treatments for medical neces-
sity and appropriateness.
false claims Demands for government pay-
ments for the provision of goods or services
when those payments are not deserved.
Patient-Centered Outcomes Research
Institute (PCORI) An institute established
by the Affordable Care Act to fund research
on the comparative effectiveness of differ-
ent medical treatments.
qui tam Legislative authorization for pri-

vate citizen whistleblowers to bring suits,
either individually or through the govern-
ment, against entities and individuals who
have collected monies from the government
based on the filing of false claims.
sentinel event policy The Joint Commis-
sion policy that encourages health care
organizations to report any incidents that
involve death or severe physical or psycho-
logical injury or the risk thereof (“sentinel
events”) to the Joint Commission and to
patients.
Web Field Trip: The Group Health Cooperative of
Puget Sound and the University of Pittsburgh Medical
Center (continued)
1. Explore the online presence of both the GHCPS Health Plan
(http://www.ghc.org)
and the UPMC Health Plan (http://www.upmchealthplan.com),
as well as other
online resources that might help you better understand their
respective utilization
review philosophies.
2. Write a short analysis paper (less than one page) in which
you compare and con-
trast the utilization review philosophies of both organizations.
Identify any ethi-
cal problems that you anticipate under both systems and answer
the following
questions.
Under which health plan would you prefer to be:

a. A patient? Why?
b. A health care provider? Why?
c. A health plan administrator? Why?
d. An investor? Why?
e. An employer? Under which model would the employer feel
premium dollars were best
spent?
Chapter Highlights
Six Sigma An efficiency maximization
philosophy and method that focuses on
producing the best possible products and
services as measured through outcomes
and improved consumer satisfaction.
Stark law The Ethics in Patient Referrals
Act, more commonly known as the Stark
law, outlaws physician referrals of patients
for Medicare- and Medicaid-reimbursed
services to facilities in which the physician
(or a close family member) has a financial
conflict of interest. The law prohibits self-
referrals for 11 designated health services,
including laboratory tests, physical or occu-
pational therapy, imaging services, radiation
treatment, home health care, pharmaceu-
ticals, medical devices and supplies, and
hospital services.

utilization review The various methods
used by health care organizations to verify
the necessity and appropriateness of ser-
vices provided to patients.

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