may 2010

California Task Force

on Affordable Care
Creating a High Value Healthcare
System for California

micah weinberg and leif wellington haase

california and health policy programs

New America Foundation

Task Force Members
This report is a product of the New America Foundation. It reflects the input of these California healthcare leaders who
were extraordinarily generous with their time and energy throughout the year.

John Arensmeyer, founder & CEO, Small Business Majority

Duane Dauner, president & CEO, California Hospital Association
Jean Fraser, health system chief, San Mateo County
Lisa Folberg, vice president for medical and regulatory policy, California Medical Association
Scott Hauge, president, Small Business California
Crystal Hayling, former president and CEO, Blue Shield of California Foundation
Daniel Herlinger, policy adviser, AARP
Al Hernandez-Santana, executive director, Latino Coalition for a Healthy California
David Lansky, CEO, Pacific Business Group on Health
Sharon Levine, MD, associate executive medical director, Permanente Medical Group
Robert Margolis, MD, CEO, HealthCare Partners Medical Group
Paul Markovich, chief operating officer, Blue Shield of California
Theodore Mazer, MD, board member, California Medical Association
Steve McDermott, CEO, Hill Physicians Medical Group
Sandra Newman, director of health policy, California Academy of Family Physicians
Maryann O’Sullivan, executive director, Campaign for Effective Patient Care
Richard Pan, MD, associate professor of pediatrics, University of California, Davis, Davis Children’s Hospital
Brenda Premo, director, Center for Disability Issues and the Health Professions
Thomas Priselac, president & CEO, Cedars-Sinai Health System
Gloria Rodriguez, president and CEO, Community Clinic Association of Los Angeles County
L. Wade Rose, vice president of external and government relations, Catholic Healthcare West
Ken Shachmut, senior vice president, Safeway
Tom Williams, executive director, Integrated Healthcare Association
Anthony Wright, executive director, Health Access
Lucien Wulsin, JD, executive director, Insure the Uninsured Project

Expert Committee Members

E. Richard Brown, PhD, director, University of California, Los Angeles, Center for Health Policy Research
Alain Enthoven, PhD, professor emeritus, Stanford University
David Hayes-Bautista, PhD, professor, UCLA School of Public Health
Harold Luft, PhD, executive director, Palo Alto Medical Foundation Research Institute
Elizabeth A. McGlynn, PhD, associate director, RAND Health
Ian Morrison, PhD, founding partner, Strategic Health Perspectives
Melissa Rodgers, JD, Ed.M., associate director, CHEFS Center, University of California, Berkeley
Stephen M. Shortell, PhD, MPH, dean, School of Public Health, University of California, Berkeley
Steven Wallace, PhD, associate director, professor, University of California, Los Angeles, School of Public Health
Walter Zelman, PhD, professor, University of California, Los Angeles, College of Health and Human Services

Executive Director Leif Wellington Haase, director, California Program, New America Foundation
Staff Director Micah Weinberg, PhD, senior research fellow, New America Foundation
CALIFORNIA TASK FORCE ON AFFORDABLE CARE
Creating a High Value Healthcare System for California

The passage of federal healthcare reform is a landmark achievement. It extends

insurance coverage to millions of Californians and sets the stage for transforming
how medical care is delivered. This legislation is an important first step toward
addressing ever-growing medical costs and making healthcare truly affordable.

It is vital to build quickly on the cost-controlling elements of federal legislation as California’s rising healthcare spending
has reached a tipping point. Thousands of Californian families are going bankrupt from medical expenses, thousands of
businesses are cutting healthcare benefits for their employees, and the state government is slashing funding for vital safety
net programs during an economic downturn when these services are needed most.

In response to this challenge, the New America Foundation, with the support of Blue Shield of California Foundation,
convened a California-based Task Force of high-level healthcare stakeholders from the hospital, physician, insurance, and
consumer sectors. This diverse group of California healthcare leaders met during 2009 in pursuit of one major goal: find-
ing concrete ways to vastly improve the value the state gets for its healthcare spending. This report reflects their collective
wisdom and highlights the best practices of the organizations they represent.

A Focus on Promoting Health

Getting good value for medical spending means purchasing healthcare of the highest possible quality for the lowest pos-
sible cost. The consensus that emerged from these conversations was that the surest path to better value is to change the
focus of healthcare systems from treating illnesses to promoting health.

To accomplish this goal, California must act in concert with federal efforts to:

1) Financially reward providers and payers for improving health outcomes;

2) Significantly reduce administrative expenses that do not improve health;
3) Create meaningful choices for health consumers, and;
4) Improve the environments in which Californians work, play, and socialize.

Successfully implementing policies consistent with these recommendations could save as much as $305 billion during the
next 10 years and help move us closer to the goal of guaranteed access to affordable high-quality healthcare for all Californians.

“To get better value for our medical spending, we need to build on the best of what’s
already working in California. These recommendations outline the path for doing
just that.”
—Steve McDermott, CEO, Hill Physicians Medical Group

california task force on affordable care i

 The High Value Top 10
Pursuing the strategy outlined in the ten recommenda-
tions below could reduce the total health spending of
Californians by as much as $305 billion over the next ten
years.1 Most elements of this plan require a coordinated
effort on several fronts by public entities and private stake-
holders. This report describes these actions in detail.
I. Align Incentives to Promote Effective Patient Care
1. To promote effective patient care and encourage a culture
of wellness, insurers should pay providers for risk-adjusted
outcomes rather than for procedures. Public and private
payers should use consistent payment policies to provide
clear signals to the marketplace.
• Implement bundled payments while preserving
California’s models of accountable care: $211B.2
2. To promote efficient, evidence-based medicine, all payers
should link payment to progress on common and transpar-
ent measures of medical value. These measures should rely
on the best available science and incorporate professional
knowledge as well as patient priorities.
• Hold hospitals accountable for progress in reducing
utilization in targeted areas such as imaging: $21.5B.3
3. To immediately reduce medical costs and promote
patient safety during the transformation of the payment
and delivery systems, public and private initiatives should
focus on reducing preventable hospital readmissions and
healthcare-associated infections (HAIs).
• Directly act to reduce hospital readmissions: $16B.4
• Directly act to prevent the acquisition of HAIs: $19B.5
4. To reduce defensive medicine, providers should be pro-
tected from liability when using appropriate medical judg-
ments that improve patient outcomes.
• Develop best practice guidelines that protect pro-
viders who use appropriate medical judgments in
targeted high-cost areas: $15B.6
II. Reduce Administrative Costs Not
Directly Tied to Healthcare
5. To reduce administrative overhead, all public and pri-
vate payers in California should adopt a common set of
standards for claims processing, eligibility and benefit deter-
mination, and general contracting terms.
• Put in place common standards for billing, eligi-
bility, and contracting: $93B.7
ii new america foundation
6. To effectively protect consumers, the health insurance
wing of the Department of Insurance and the Department
of Managed Healthcare should be merged into a single
agency with consistent standards for all health insurance
products.
III. Create Meaningful Choices for
Healthcare Consumers
7. To promote value-based competition and enhance
affordability, California should design its state-based
insurance exchange for individuals and small businesses
to promote maximum participation and to avoid risk
selection.
• Create a sole-source insurance exchange for indi-
viduals and small businesses: $25B.8
8. To assure that patients’ values and circumstances are
taken into account in decisions that doctors and their
patients make together, unbiased, scientifically-based
patient decision aids should be made available when appro-
priate. Shared decision making often results in more conser-
vative courses of treatment.
• Increase support for shared decision making:
$2.3B.9
IV. Address the Social Determinants
of Poor Health Outcomes
9. To combat the high morbidity and cost of diabetes
and other conditions caused by obesity, California should
improve the affordability and accessibility of highly
nutritional foods through local tax-incentive programs,
revenue-generating disincentives to the consumption
of calorically sweetened beverages, and the removal of
high-calorie, low-nutrient foods from vending machines
and cafeterias in schools, and in healthcare and public
facilities.
• Improve the affordability and accessibility of
highly-nutritional foods and impose a tax on calo-
rically-sweetened beverages: $27B.10
10. To promote physical activity that prevents the onset
and mitigates the consequences of many chronic dis-
eases, state and local governments should alter trans-
portation and land-use policies to make walking, biking,
and the use of public transit viable, affordable, safe, and
attractive.
• Make walking, biking, and the use of public tran-
sit viable, affordable, safe, and attractive: $27B.11
Chart 1. The High Value Top 10
The effect of this ambitious yet achievable plan would be
to slow the growth of California’s healthcare spending
across 10 years to 1 percent above the historical rate of GDP
growth.12 This will require both political will and technical
expertise, but it represents the best and most feasible option
for controlling healthcare costs while preserving access and
quality. Since our aim is to improve the value of our spend-
ing rather than to simply reduce the amount of money we
spend, we must transform the medical delivery system by
adopting the best practices of care coordination, chronic dis-
ease management, and health information technology. But
these measures are likely to increase rather than to control
costs unless paired with the recommendations above.
Cost Control and Federal Reform
The passage of federal healthcare reform, which occurred as
this report went to press, is a substantial accomplishment.
Perhaps its most critical planks are reforming the insurance
marketplace to eliminate discrimination based on pre-exist-
ing conditions, providing subsidies to make coverage afford-
“If you’re going to survive in the new healthcare world, you will have to deliver value
commensurate with cost.”
—Paul Markovich, chief operating officer, Blue Shield of California
california task force on affordable care iii
able, and establishing ground rules for exchanges that will
facilitate this coverage. Federal reform also sets the stage for
transforming the delivery system though provisions such as
those related to transparency and payment reform.
However, many issues remain to be resolved through the
federal regulatory process. The legislation included sub-
stantial uncertainties in such critical areas as how the high
risk pools would effectively complement existing struc-
tures in the states. Access to such pools is intended as a
lifeline for those people awaiting the larger market reforms
and subsidies that do not begin until 2014.
More daunting than the uncertainties related to reform,
though, is the certain task ahead of us. Federal insurance
market reforms, over time, will improve access to care
and reduce the number of Californians who personally
are unable to purchase coverage. But without taking clear
aim at the underlying sources of rising costs, paying for
and implementing this bill over time will be difficult if
not impossible. In the current fiscal climate, California is
already struggling to preserve its current healthcare safety
net even before an expansion of coverage occurs.
The cost-controlling recommendations in this report
closely align with many of the key provisions of federal
reform, which will be phased in over several years. Our
deliberations were, in fact, shaped by the expectations of
what federal reform would contain. Passage of the bill will
help facilitate moving forward, in practical terms, with
these recommendations. But effective strategies for pro-
moting value in California’s healthcare spending must in
some cases go beyond what is in federal legislation.
Implementing reform will be a major challenge. This
report speaks to this challenge in many ways. It is vital
for the state to respond creatively to the provisions of
federal legislation. Covering the uninsured and provid-
ing greater access to care depends — both practically and
politically — on maximizing the value of every dollar of
healthcare spending.
Contents

Creating a High Value Healthcare System for California i

The High Value Top 10 ii

Controlling the Growth of Healthcare Costs in California 1

California’s State Budget: The Implications 3

I. Align Incentives to Promote Effective Patient Care 6

Prospective Payment 6
Californian Innovation 6
Bundled Payment 7
Accountable Care Organizations 8
Small and Solo Practices 9
Provider Consolidation and Market Power 9
Aligning Incentives Across Payers 10
Medi-Cal Waiver 11
A Coordinated Strategy to Align Incentives 12

Measures of Medical Value 14

Paying for Value, Not Just Performance 14
Transparency 16
Physician and Hospital Leadership 17

Rehospitalization and Readmissions 18

Avoiding Preventable Readmissions 18
Reducing Healthcare-Acquired Infections 19

Defensive Medicine 21
Medical Liability Reform in California 21
Medical Liability and Healthcare Costs 21
Best-Practice Guidelines and Other Strategies 22

II. Reduce Administrative Costs Not Directly Tied to Healthcare 23

Common Standards 23
Reducing Claims-Processing and Other Administrative Costs 23
Simplifying Enrollment in Public Programs 25

Rationalizing Regulation 26
The History of Insurance Regulation in California 26
Problems Relating to Dual-Regulatory Agencies 26
Merging the Agencies 27
III. Create Meaningful Choices for Health Consumers 28

Insurance Exchange 28
Exchanges in Federal Reform 28
Existing Choices for California Consumers 28
Sole-Source Exchange 28
Standardized Benefits 29
Risk Adjustment 30

Shared Decision Making 31

IV. Address the Social Determinants of Poor Health Outcomes 34

Improving the Food Environment 34

Soda Tax 36

Building Healthy Communities 37

Appendix 39

Endnotes 42
 Controlling the Growth of
Healthcare Costs in California
During the past decade, healthcare costs have spiraled
out of control, putting families, businesses, and the state
at risk of financial ruin. Overall healthcare spending by
Californians soared by 98 percent from $144 billion in
2000 to $241 billion in 2009 (See Chart 2). This cost
growth has caused health insurance premiums to increase
117 percent between 2002 to 2009. It is dramatically
higher than the 23 percent inflation that occurred during
that same period (See Chart 3).13
This enormous increase in premiums took place while
individuals and families, particularly those who depend on
small businesses for health coverage, had to bear a larger
share of costs through higher deductibles (See Chart 4).
In the last year alone, in response to the economic down-
turn, 15 percent of California businesses trimmed benefits
or increased copayments for their workers.
The growth in healthcare costs has also caused the ranks
of the uninsured to swell. During 2008 and 2009, nearly
2 million Californians lost their health insurance coverage,
bringing the number of uninsured in the state to more than
8 million or roughly one in four Californians younger than
65.14 A sharp rise in those eligible for public programs—even
before the worst of the economic downturn hit—added 1.75
million people to the rolls of Medi-Cal, the state’s Medicaid
Chart 2. California Healthcare Spending
(in Billions)
California Healthcare Spending (in billions)
300
250
$241
200
150
$122
100
$74
50
$26
0
1980 1990 2000 2009 (projected)
1 new america foundation
program, between 2000 and 2009. This accounts for a 34
percent increase in the rolls, fully twice the percentage that
the state’s population increased during this time.
If growing costs were primarily the result of
an increased demand for healthcare or rapid
advances in medical technology, we might
be paying more but still getting good value.
But the majority of increase in costs is due
to price inflation rather than new utilization
or advances in medical technology.
This increase contributed to the dramatic rise in overall
health spending in the state budget, from $13.5 billion from
2001-02 to $19.9 billion in 2007-08, a 47% increase over a
six-year span. In 2008, the state began to reduce its health-
care costs by slashing covered services and access to care.
These painful cuts are one way to control healthcare costs,
although some of these costs get shifted to private custom-
ers through increases in uncompensated care.15 Ultimately
such a strategy lowers costs to the state only at a great
human cost. Fortunately, there are better ways to control
health spending than service and benefit cuts.
If growing costs were primarily the result of an increased
demand for healthcare or rapid advances in medical tech-
nology, we might be paying more but still getting good
value. But the majority of increase in costs is due to price
inflation rather than new utilization or advances in medi-
cal technology.16 Californians are consuming only slightly
more medical care but they are paying significantly more
for it. And the state’s relatively low growth in medical
costs as compared to the rest of the nation is a thing of the
past: over the course of the past decade, hospital prices in
California have risen at an annualized rate of 10.6 percent
compared with 5.5 percent nationwide.17
According to the McKinsey Global Institute, the United
States had $650 billion in “excess spending” on health-
care in 2006.18 As the health economist Uwe Reinhardt
explains, “‘Excess health spending’ in this context refers to
the difference between what a country spends per person
on healthcare, and what the country’s GDP per person pre-
Chart 3. Cumulative Premium Increases Chart 4. Workers with a Large Deductible
Compared to Inflation, California, ($1,000+), Single Coverage, by Firm Size,
2002-2009 2006-2009

Source: California HealthCare Foundation * Statistical difference from previous year shown by firm size.
Source: California HealthCare Foundation

dicts that country would spend.”19 Such excess costs exist
in almost every aspect of our medical system (See Chart 5).
We pay more in administrative costs, more for doctors and
nurses, and more for drugs and devices. Nearly two-thirds
of the extra costs are for outpatient care, including emer-
gency room visits, imaging, and same-day surgery.
The U.S. health system does many things well, such as pro-
viding cutting-edge care for certain cancers and supporting
medical research. It does other things rather poorly, such
as effectively caring for chronic disease. The United States
lags on many key indicators of population health. Overall,
our system is roughly on par with those of the countries of
the rest of the world whether their systems are publicly-run
or primarily private. The extraordinary thing about it is
that it costs twice as much.
Since excess costs exist throughout the healthcare system,
the New America Foundation’s Task Force cast a wide net.
It reviewed the use of information technology; examined
potential cost savings from the treatment of chronic con-
ditions, disease prevention, and public health programs;
developed strategies for reducing the administrative costs of
insurance; evaluated how physician and hospital payment
policies and the supply of medical resources influence costs
and care; and identified ways to move California toward a
more coherent regulatory environment. The Task Force also
identified the state’s public policy approaches that improve
the value of healthcare and its approaches that are counter-
productive and costly.
Not Starting From Scratch
The “year of health reform” in California in 2007 cre-
ated momentum for change and began a dialogue
among healthcare stakeholders. It also demonstrated
that employers, consumer advocates, insurers, doctors,
and hospital administrators were willing to grapple with
these issues at the nuts-and-bolts level. The California

“We have to put the key players together such that their business imperatives are so
compelling that they will produce the high-value system that we seek. Until we do that,
we’ll just be pushing the edges of the balloon.”
—C. Duane Dauner, president and CEO, California Hospital Association

california task force on affordable care 2

 Task Force on Affordable Care has built on these conver-
sations to propose policy solutions that promote value in
California’s healthcare system.
California’s healthcare leaders have pioneered innovations
such as new care-coordination protocols and payment sys-
tems that reward high-quality performance. They have
done this independently as well as in partnership with
other stakeholders, with and without support from existing
public programs, and with and without the development
of new policies and regulations. Their findings provide a
guide to issues such as the appropriate regulatory frame-
work for an exchange through which individuals and small
businesses could purchase insurance, and the best ways to
coordinate care.
California has been a proving ground for models of deliver-
ing and paying for medical care. Its collective experience
shows that the right set of incentives can improve quality,
continuity, and coordination of care. The state is home to
some of the country’s largest and most enduring models
of integrated delivery systems as well as to businesses that
have pioneered value-based purchasing and have designed
insurance products to reward healthy behaviors.
California is unusual in having a high penetration of health-
maintenance organizations that have achieved and main-
tained a larger market share than in most other states.20
Statewide competition among models of care delivery,
therefore, is relatively robust. California also has many
diverse regions with distinct delivery systems and medical
cultures in addition to large communities of recent immi-
grants. Many of its counties have been laboratories for test-
ing systems of universal or expanded coverage, with both
public and private actors taking bold steps to address the
connection between poverty and poor health.
California’s State Budget: The Implications
This report includes many recommendations that address
the value of spending in public programs. One is to move

Chart 5. The U.S. Spends Nearly $650 Billion More Than Expected

1 Outpatient care includes physician and dentist offices, same-day visits to hospitals including Emergency Departments,
ambulatory surgery and diagnostic imaging centers, and other same-day care facilities.

Source: OECD; McKinsey Global Institute analysis

3 new america foundation

more beneficiaries into systems based on prospective
payment, a recommendation that is consistent with the
approach of Governor Arnold Schwarzenegger’s admin-
istration to the renewal of the state’s Section 1115 Medi-Cal
waiver. Other recommendations to help state programs
get better value include proposals to curb healthcare-
acquired infections and unnecessary readmissions. A
broader effort to address the social determinants of poor
health outcomes also will reduce the rates of chronic dis-
ease among Medi-Cal recipients. Some recommendations
touch specifically on Medi-Cal administration, including
streamlining eligibility and mandating the use of auto-
mated systems in all counties to help reduce administra-
tive inefficiencies.
The Task Force further reviewed in detail the cost-saving
potential of patient-centered medical homes and disease-
management programs to reduce costs within public
programs. The conclusion was that although these pro-
grams are likely to improve the quality of care and quality
of life for Medi-Cal recipients and so are inherently worth
doing, they are unlikely to reduce Medi-Cal spending in
Leif Wellington Haase, Executive Director, California Task Force on Affordable Care
california task force on affordable care 4
the absence of payment reform. Efforts to reform the deliv-
ery system to provide higher-quality, better-coordinated
care—particularly to the population of senior and disabled
persons—go along with responsible cost containment. To
stem the growth of costs of providing medical care to these
populations will require improving the ability to provide
effective care in the most efficient manner.
However, implementing all of these recommendations is
not likely to significantly reduce the amount of money
that the state spends on healthcare. California has, for
many years, spent a comparatively small amount on
healthcare through its public programs, particularly in
terms of levels of compensation for physicians and hos-
pitals.21 Its Medicaid program is also efficient relative to
other states (See Chart 6). Spending per beneficiary is the
lowest among the nation’s 10 largest states, despite the
relatively generous benefits offered until recently.
Impossible but Absolutely Necessary
The goal of the Task Force was to move the market
toward better value for its medical spending. Doing so
© Phil Channing
 “California is not Massachusetts. We have at
least four entirely distinct regional
markets, all of which are unique. We have
many more publicly-funded or entirely
unfunded patents, so cost-shifting issues
are more difficult to overcome.”
—Tom Priselac, president and CEO,
Cedars-Sinai Health System
will improve the efficiency of care within public pro-
grams, but because care for many people who depend
on their fellow Californians—including the disabled,
children with special needs—will be costly, we must get
Chart 6. Annual State Spending per Beneficiary
Source: California HealthCare Foundation
5 new america foundation
© Phil Channing
better value for our overall medical spending. The Task
Force, therefore, was guided both by compassionate con-
cern and by a dispassionate evaluation of how to make
the business of health insurance and medical care more
efficient in California.
Changes will be difficult because every dollar of medical
spending represents someone’s income. Nevertheless,
the swelling ranks of the uninsured, the spiraling costs
to families, businesses, and the state, and cost-controlling
actions that limit access to healthcare rather than improve
its quality make change essential. To paraphrase the health
economist Len Nichols, controlling costs is impossible but
absolutely necessary. The cost-containing elements envi-
sioned in federal reform represent a promising start, but
they alone will not get us to where we need to be. This
report aims to augment and complement reform efforts in
California and is informed by a detailed knowledge of local
healthcare delivery systems and the needs of the state’s
many communities.
I. Align Incentives to Promote Effective Patient Care

Prospective Payment

1. To promote effective patient care and encourage a culture of wellness, insurers should pay providers for risk-adjusted
outcomes rather than for procedures. Public and private payers should use consistent payment policies to provide
clear signals to the marketplace.

• Prospective payments with shared savings can control costs by allowing providers to see a financial
return on investments in value.
• Aligning the financial incentives across payers can be accomplished through the use of bundled and
capitated payments and possibly through all-payer regulations.
• Action must be taken to ensure that California does not move away from its successful models for high-
quality, cost-effective care similar to the Accountable Care Organizations envisioned in federal reform.

High-Value Top 10: Implementing bundled payments while preserving California’s models of accountable care could
save the state as much as $211B across 10 years.

Controlling healthcare costs depends on creating incentives
for physicians and other providers to focus on the quality
and efficiency of the care they deliver. Unmanaged fee-for-
service payments (FFS)—which account for most payments
nationwide—do not distinguish between differences in
provider performance, quality, or efficiency. They thus con-
tribute to the overuse of well-reimbursed services, such as
imaging, and the underuse of services that are poorly reim-
bursed, such as primary care and the coordination of care.
All of this encourages the costly fragmentation of care.
For this reason, this report recommends adopting strategies
that encourage efficiency and integration, such as bundled
payment and the development of accountable-care organi-
zations (ACOs). These would be steps to better value, with
the ultimate goal being a system in which value-conscious
purchasers of healthcare compensate integrated delivery
systems for the health outcomes they produce. This would
place the emphasis firmly on health outcomes rather than
on the procedures used to treat illnesses.
Californian Innovation
California has led the country in adopting payment reforms
and building delivery systems that coordinate care. Kaiser
Permanente, the alliance of a nonprofit insurer and hos-
pital system with a for-profit medical group, has been the
principal model for an integrated delivery system. Kaiser
Permanente’s financial imperative to deliver care effec-
tively has made it a leader in implementing provider-led
quality standards, resource stewardship guidelines, and
health-information-technology applications designed to
improve the coordination of care.
In part because of the necessity of competing with Kaiser,
managed-care plans achieved widespread penetration in
California by the 1990s. Most plans signed contracts with
multi-specialty medical groups and independent practice
associations. Compared with their peers in other states,
California’s physicians have by far the most experience
at organizing patient care based on capitated payment.22
Groups such as Mullikin, HealthCare Partners, Palo Alto
Medical Clinic Foundation, Friendly Hills, and Bristol
Park grew from just 20,606 HMO enrollees in 1979
to 906,932 in 1994.23 These groups and others moved
toward full risk for their patients and global payments,
which facilitated the move toward higher-value care.
Capitated groups save money when healthcare costs go
down. Further, the peer pressure associated with working
in tandem encourages better care, and the scale of multi-
specialty groups allows protocols and quality guidelines
to be implemented more easily.
Ironically, as federal reforms attempt to move the coun-
try toward a system that builds on California’s experience

california task force on affordable care 6

 “The challenge is capturing the value of what we produce. If we produce higher quality
at lower costs the value doesn’t return to the people who generate the work. Physicians
try to do highest quality, but often don’t see a financial return that allows them to
further invest in it.”
—Dr. Richard Pan, University of California, Davis, Davis Children’s Hospital

with integrated and delegated models of managed care,
California has been slowly moving in a different direc-
tion.24 Still, nearly two-thirds of its residents in employer
coverage and Medi-Cal remain covered by managed care.
Its long experience with such payment structures means
that the state is well-suited to embark on a path that
focuses on wellness.
Bundled Payment
Under bundled payment models, providers receive a fee
for an entire episode of a patient’s care, rather than for
individual procedures, and then determine the best use of
medical resources to deliver the best care for that patient.
Such “bundles” could be managed by one of the enti-
ties involved or through a model that shares governance
among multiple actors.
Episode-based payments might involve an acute-care
facility plus emergency room, follow-up, or convalescent
care. For instance, treatment for a heart bypass or a hip
replacement would include the cost of the surgery, ambu-
latory care, and nursing care in a home setting. Much as
Medicare’s adoption of Diagnosis-Related Group (DRG)
payments for inpatient hospital care drove savings and pro-
moted efficiencies inside hospitals, finding ways to deliver
care more efficiently might result in higher overall pay-
ments to certain providers but lower payments to others,
with an overall reduction in costs.25 Integrated delivery sys-
tems, physician-hospital organizations, and multi-specialty
practices—all of which are more prevalent in California
than elsewhere in the nation—should be well positioned
to adapt to bundled payments because hospital staffs and
associated physicians already have ongoing relationships.
Many recent studies have shown that systems of epi-
sode-based bundled payment generate the largest sav-
ings—sometimes by as much as an order of magnitude
as compared to other cost controlling actions.26 Bundled
payments have been studied in demonstration programs
and are part of the proposals in recent federal legislation.
Medicare conducted demonstrations of bundled payments
with Coronary Artery Bypass Graft (CABG) surgery in the
1990s and acute lower-back pain (ACE demonstration) in
the last decade. Studies estimate that the CABG demon-
stration project reduced Medicare spending for such proce-
dures by as much as 15.5 percent.27 Beginning in 2013, the
Patient Protection and Affordable Care Act authorizes the
HHS Secretary to establish a national, voluntary five-year
pilot program in Medicare and Medicaid on bundling pay-
ments to providers around ten conditions in up to eight
states. If these pilots show promise, the pilots may be
expanded after 2015.28
In California, the Integrated Healthcare Association (IHA)
is developing a plan for bundled payment for knee and hip
replacement in partnership with several Southern California
hospitals, including Cedars-Sinai Medical Center, and with
health plans including Blue Shield of California. Both com-
mercial payers and academic sites are developing software
models to evaluate and compare clinical and economic per-

“Integration in itself is not the solution. Rather, it is the ability to exploit the opportuni-
ties integration presents that makes the difference.”
—Dr. Sharon Levine, associate executive medical director, Permanente Medical Group

7 new america foundation

formances. One advantage of bundled payment is that it
can be implemented gradually and can allow for some trial
and error. Episode-based payments can be relatively easy to
introduce into existing payment systems, and early imple-
mentation could involve bonuses for better care rather than
full-fledged negotiations about how to divvy up payment.
Clinical outcomes that are more directly under a provider’s
control could be tackled first, with global capitation strate-
gies, which would put providers at risk for the overall health
of plan enrollees, to come later.
Accountable Care Organizations
The impetus behind accountable care organizations
(ACOs) is to create a formal arrangement to encourage
local providers to work together to provide high-quality,
cost-effective care. ACOs tie payment to provider groups
that supply a set of services to a defined population, unlike
under fee-for-service arrangements.29 And while proposals
to create ACOs are often viewed as distinct from bundled-
payment policies, since ACOs would have incentives to
reduce both the volume of care as well as the efficiency of
a particular episode of care, the kinds of entities that would
form ACOs would be ideally positioned to accept bundled
payments as well.30
An ACO32 generally has three essential components: a pri-
mary-care practice, specialists, and one or more hospitals.
In an ACO, providers and doctors agree to take care of a
patient for a set fee and keep any money that doesn’t go
toward the patient’s care, which creates a strong financial
interest to control costs. The ACO payment system also
rewards quality. When providers meet or exceed quality-
of-care standards, they can earn financial rewards. Federal
legislation would allow ACOs that meet thresholds for
quality to share in any savings they generate for Medicare.
While some versions of ACOs would require formal
business relationships, others might be “virtual,” based
on retrospective analysis of claims data to evaluate care
of a single patient by multiple providers. In most of the
United States, ACOs remain theoretical, but California
has at least 25 years of ACO-like experience with alliances
between payers and providers. And California is home to
continuing innovation in this area such as the new part-

State Spotlight: Payment Reforms

Massachusetts—A Special Commission of public officials and healthcare sector leaders in this state recommended
that “global payments with adjustments to reward provision of accessible and high quality care become the pre-
dominant form of payment to providers.”31 The report detailed the legal and technical assistance that will be neces-
sary to help providers make the transition to global payments and the method through which the different sets of
stakeholders will share responsible for supporting this transition. Massachusetts was ahead of the curve in imple-
menting comprehensive healthcare reform. The Special Commission report was the most comprehensive payment
reform recommendation to be issued at a statewide level. Multiple members of our Task Force called attention to
these recommendations and urged California to follow suit.

Minnesota—The state of Minnesota included “baskets of care” in a 2008 health reform bill. The project has resulted
in the development of a framework for bundling payments for a set of health care services together. The baskets
are: acute episode of low back pain, asthma care for children, diabetes, pre-diabetes, preventive care for adults,
preventive care for children, obstetric, and total knee replacement. The technical work to design such baskets is
a precondition for establishing incentives for health care providers to cooperate and innovate on ways to improve
health care quality and reduce cost.

Pennsylvania—The Pennsylvania Chronic Care Management, Reimbursement and Cost Reduction Commission was
established in May 2007 to develop a strategic plan for improving the treatment of chronic disease while reducing
avoidable illnesses and their costs. The Pennsylvania Chronic Care Initiative is testing four different payment models
for chronic disease care management that include infrastructure and practice development grants as well as incentive
payments. These projects have yet to be fully evaluated for their potential to improve quality while controlling costs.

california task force on affordable care 8

 nership between Hill Physicians Medical Group, Catholic
Healthcare West, and Blue Shield of California, described
in greater detail below.
ACO-type innovations have shown some success. The
Medicare Physician Group Practice Demonstration,33
mandated by the federal Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000,
showed that multi-specialty physician groups could
improve outcomes for beneficiaries with chronic illness
and co-morbidities when given incentives to share savings
of greater than 2 percent of their expected Medicare spend-
ing. Community Care of North Carolina, a state Medicaid
program, self-reported a savings for the state of $231 mil-
lion across two years through use of an ACO-like model,
although the certainty of these savings and the extent to
which they could be replicated elsewhere are in some dis-
pute.34 Federal legislation establishes a voluntary, national
pilot program in 2012 that will allow groups of providers to
be recognized as ACOs, with some of the potential savings
from improved care management permitted to be shared
with providers.
Moving in the direction of greater integration as a result
of payment reforms, either through bundled payment
or ACOs, is an obvious way to rein in health costs. But,
says Dr. Sharon Levine, associate executive director of the
Permanente Medical Group and a member of the Task
Force, “Integration in itself is not the solution. Rather, it is
the ability to exploit the opportunities integration presents
that makes the difference. Integration is irrelevant unless it
results in value that is greater than the sum of the parts can
deliver.” For example, simply working for the same orga-
nization will not force doctors to interact in meaningful
ways that improve a patient’s health and the efficiency of
service delivery. But it can provide the structure in which
this coordination can occur more seamlessly.
Small and Solo Practices
One of the challenges of moving to a system in which
physicians are compensated in a manner other than fee-
for-service—whether it is capitated payments, bundled
payments, or prepaid service—is that physicians must be
able to manage medical risk or unpredictable outcomes. As
Sandy Newman, director of health policy for the California
Association of Family Physicians, points out, “Small pri-
vate practices have trouble navigating regulations that are
already out there. There needs to be a logical way for phy-
9 new america foundation
sicians to access information and incorporate it into their
medical practice.”
Large medical groups and some large hospital systems
in California have shown that they can manage this risk.
However, small practices, particularly those in rural areas,
face tremendous barriers to moving away from a system
of service-based fees. Roughly two-thirds of the practic-
ing physicians in California are members of small or solo
practices, and they treat nearly 50 percent of the state’s
population. Unless a particular practice has a large enough
patient population, managing the risk associated with the
uncertain outcomes of medical care, even when risks are
adjusted to reflect the acuity of a particular case, is difficult.
Physicians in rural and urban areas also face challenges
related to the high incidence of obesity, diabetes, and other
chronic conditions. Poverty and isolation also can make it
harder for patients to follow doctors’ instructions.
Provider Consolidation and Market Power
The claim that bundled payments or ACOs or even fully
integrated delivery systems are effective in controlling
costs in California comes with another caveat: such strat-
egies may not reduce spending if the market power of
providers is so strong that they can set payment rates. In
such cases, any efficiencies providers produce will sim-
ply return to the providers rather than resulting in lower
overall spending. Robert Berenson, Paul Ginsburg, and
Nicole Kemper are the latest to raise this concern in a
recent article in Health Affairs.35
They cite a study that shows that, though there is tremen-
dous variation throughout the state,36 hospital prices in
California have risen at an annualized rate of 10.6 per-
cent compared with 5.5 percent nationwide.37 They exam-
ine several causes for this trend: providers consolidating
into large physician groups or hospital systems; consumer
demand for broad networks and “must have” facilities; a
decline in provider capacity; and a regulatory environment
that works to the detriment of HMOs. They found that “the
greater strength that physicians have in negotiating HMO
contracts outweighs the theoretical advantages of HMOs,
such as more integrated care and avoidance of perverse
incentives presented by fee-for-service PPO payments that
promote increased service volume.”38
However, within markets where value-conscious consum-
ers are represented by purchasers who have reasonable
 “Public and private payers need to move
towards systems that have comparable
incentives rather than ones that
counteract each other. If some of your
patients are capitated, others fee-for-service,
what’s your incentive?”
—Lucien Wulsin, executive director,
Insure the Uninsured Project
market leverage, integration of services is a tool that can
be used to compete on cost while still preserving quality
care. In California, for instance, the state employees’ health
insurance exchange, which is administered by CalPERS,
has partnered with Blue Shield of California, Catholic
Healthcare West, and Hill Physicians Medical Group in
a pilot program designed to produce a “virtual integrated
delivery system.” Under this arrangement, the insurer,
the hospital system and the independent practice asso-
ciations are redesigning their systems of care delivery to
promote coordination and efficiency. For example, they are
eliminating redundancies, such as having the same patient
participate in multiple chronic-disease-management pro-
grams. In return for this autonomy, Blue Shield will not
be raising premiums for 2010 for more than 40,000
CalPERS members in the pilot program. This means that
the insurer and providers have a strong financial motiva-
tion to produce efficiencies because they will have to cover
any cost increases.
Payment reforms and integration are necessary to improve
the quality and efficiency of healthcare in California, but
they may not be sufficient to control costs in this market
or nationwide.39 Certainly, they will be most effective in
reducing spending when they are deployed in a market
in which providers have an incentive to compete on price.
The section of this report on health insurance exchanges
discusses in detail the characteristics of such a market.
One Task Force member described himself as “an invis-
ible wholesaler” who has no incentive to lower his prices
because these prices are not transparent to the con-
sumer. There is currently very little to no incentive in
the California market for providers to lower their prices.
california task force on affordable care 10
© Phil Channing
Bundled payment or ACOs will not change that and may
even exacerbate the upward trend in spending if not paired
with other market reforms. The plea from the “invisible”
provider group was “make our prices have consequences
in the market. Let us compete on quality and price.”
Aligning Incentives Across Payers
In their article on provider clout Berenson and his coauthors
conclude that “unless market mechanisms can be found
to discipline providers’ use of their growing market share,
it seems inevitable that policymakers will need to turn to
regulatory approaches, such as putting price caps on negoti-
ated private-sector rates and adopting all-payer rate setting.”
Such an approach has advantages. Maryland has a system
in which reimbursements for hospital services for all payers
are set by an independent regulatory agency. The result is
that “Maryland hospital costs per discharge went from 25
percent above the national average to 4 percent below the
national average over a 30-year period.”40 Even less-formal
systems that equalize prices across most payers, such as
one in Grand Junction, Colorado,41 remove the incentive to
cherry-pick patients while reducing the undue influence of
method of payment on treatment.42 They also reduce cost-
shifting from public to private payers, which is a substantial
issue in California.43
In California’s current budget environment, it would be
impossible to equalize payment among public payers, let
alone between public and private programs. However,
improving outcomes is not simply a matter of realign-
ing incentives created by any given payer’s reimburse-
ment policies. It also requires aligning incentives across
payers. Doctors and hospital systems generally interact
with many private insurance companies and with pub-
 lic programs. Often providers’ reimbursement rates and
structure—and hence their financial incentives—are
quite variable, which blunts the effect of any incentives
created by an individual payer. The difficulty of managing
spending across many payers would have been rendered
moot under the single-payer healthcare bill passed by the
California legislature in 2006 and 2008 but vetoed by
Gov. Schwarzenegger.
Medicare accounts for 19 percent of healthcare spending
in California, and Medi-Cal (the state’s Medicaid program)
for another 17 percent.44 No other single actor in the system
accounts for as large a proportion of spending; therefore,
no other actors have nearly the leverage as public programs.
This makes it crucial to enroll public programs in any
effort to align incentives to value. Fortunately, California is
working to achieve this goal for Medi-Cal.
In California’s current budget environment,
it would be impossible to equalize payment
among public payers, let alone between
public and private programs. However,
improving outcomes is not simply a mat-
ter of realigning incentives created by any
given payer’s reimbursement policies. It
also requires aligning incentives across pay-
ers. Doctors and hospital systems generally
interact with many private insurance com-
panies and with public programs.
Medi-Cal Waiver
Since 2005, the state of California has received a federal
Medicaid (Section 1115) waiver that changed how designated
public hospitals and other private and public hospitals are
paid, as well as supporting a new coverage initiative for the
uninsured. This waiver expires on August 31, 2010 and a
renewal process is underway. The Schwarzenegger admin-
istration’s concept paper for the renewal of this waiver
includes multiple recommendations for those interested
in increasing the value that the state gets for its medical
spending, most of which goes for the care of seniors and
persons with disabilities, people eligible for both Medicare
11 new america foundation
and Medi-Cal, and children with serious medical issues.
The paper calls for “a restructuring of the organization and
delivery of healthcare for these populations to promote
more coordinated, organized, and accountable care-deliv-
ery models.” It clearly acknowledges that the fee-for-service
system not only drives higher costs but has failed to pro-
vide high-quality care to the state’s most vulnerable popu-
lations. Its solution is aligned with many of the proposals
in this document. The concept paper states that “through
mandatory enrollment of…medically vulnerable popula-
tions in more coordinated, accountable systems of care,
[the waiver] seeks to improve access and care coordination
and slow the long-term growth rate of the Medi-Cal pro-
gram costs leading to significant savings to the State and
federal governments.”45
It is unclear whether the final waiver agreement will
incorporate those elements of the concept paper that
would be most effective in constraining the growth of
Medi-Cal costs while preserving or improving the qual-
ity of care for seniors and persons with disabilities, dual
eligibles, and children with serious medical issues. The
waiver paper does propose to mandate the participation
of these populations in systems with a greater degree of
coordination of care, and improving the integration of
care among providers is a laudable goal. But unless these
systems have financial incentives that encourage the pro-
vision of efficient and effective care, costs are unlikely
to be contained. For example, under the heading “value-
based purchasing strategies,” the paper states that the
waiver development will explore “transitioning private
hospital inpatient services from the current per diem
system to a diagnosis or acuity based payment system
such as the diagnosis-related group (DRG) system.” This
could have the advantages of bundled payment, but the
concept may not be included in the final waiver request.
Nevertheless, because the Medi-Cal waiver request could
lead to more beneficiaries being enrolled in managed
care, it still could improve outcomes and reduce costs.46
The California HealthCare Foundation, for instance, has
documented that “fee-for-service (FFS) beneficiaries are
much more likely to be hospitalized for ambulatory-sensi-
tive conditions, such as asthma or diabetes that generally
can be managed on an outpatient basis.”47
The initial concept paper does not recommend the enroll-
ment of all Medi-Cal recipients into systems of formally
managed care. Some advocates for disabled adults and
children with special medical needs have reservations
about the adequacy of access and quality of care under
managed-care programs. However, a recent comprehen-
sive analysis of the experience of children with special
needs in managed-care Medicaid programs found that
“care access demonstrates a positive effect of [managed
care]; findings concerning care utilization were mixed.”
According to the study, “Caution should be exercised in
implementing [managed care] for [children with special
needs]” and “greater emphasis on health outcomes and
cost evaluations is warranted.”48
Healthcare providers, both on their own and
through their professional and trade asso-
ciations, should engage constructively in
the larger project of realigning incentives,
helping to guarantee that we do not sacrifice
medical value in the name of efficiency but
acknowledging that more substantial steps
must be taken to constrain the growth of
medical costs.
A Coordinated Strategy to Align Incentives
A coordinated strategy to align provider incentives in
California would have several critical components:
• Healthcare providers, both on their own and
through their professional and trade associations,
should engage constructively in the larger project
of realigning incentives, helping to guarantee that
we do not sacrifice medical value in the name of
efficiency but acknowledging that more substan-
tial steps must be taken to constrain the growth of
medical costs.
• Federal reform changes the business model of
health insurance to the advantage of those insur-
ers with the capacity to purchase more efficient
care on behalf of their enrollees and to the detri-
ment of those that merely act as a pass-through
for rising medical costs and make their money
through aggressive risk selection. In anticipa-
california task force on affordable care 12
tion of the ban on discrimination based on pre-
existing conditions and the opening of a statewide
insurance exchange with an established structure
that includes risk adjustment, insurers should
continue to scale up their initiatives to effectively
promote efficiency in healthcare delivery in part-
nership with medical providers.
• Large businesses, whose self-insured plans are
largely untouched by federal reform, should con-
tinue their efforts to drive efficiency in the delivery
of medical services. Among the most influential
purchasers of medical care is the state employees
retirement system. This system should continue to
expand its efforts to use its market leverage to pur-
chase higher value care on behalf of its members.
• The Administration, through its Medi-Cal
waiver request as well as the day-to-day adminis-
tration of public programs, should promote care
integration and a move away from fee-for-service
reimbursement for the state’s highest-cost ben-
eficiaries. It will be particularly important to
maintain the continuity of this effort between the
administrations of Governor Schwarzenegger
and his successor.
• The Health Committees of the California State
Legislature should focus their efforts on facilitat-
ing the implementation of federal reform, aug-
menting and accelerating pilot programs when
appropriate. Given the extent to which the focus
is on improving the efficiency of public programs
and therefore reducing the prospective burden
on taxpayers, this should be a bipartisan effort.
One centerpiece of this work will be structuring
California’s state-based insurance exchange.
• The larger network of foundations, policy
research organizations, healthcare-focused non-
profits, and academic research centers should for-
mally coordinate among each other and with the
state government to conduct primary research,
provide technical assistance, expand administra-
tive capacity, and educate the public. These steps
will facilitate the cost-controlling elements of fed-
eral legislation, particularly those that relate to
payment reform.
 Measures of Medical Value

2. To promote efficient, evidence-based medicine, all payers should link payment to progress on common and trans-
parent measures of medical value. These measures should rely on the best available science and incorporate profes-
sional knowledge as well as patient priorities.

• California has a history of multi-stakeholder collaboration to incentivize quality healthcare.

• New efforts to measure and reward efficiency should be expanded as quickly as possible.
• State regulatory action will be required to promote greater transparency in the healthcare market.

High-Value Top 10: Hold hospitals accountable for progress in reducing utilization in targeted areas such as imaging: $21.5B.

California has a long history of multi-stakeholder collabo-
ration to develop measures of medical quality and, more
recently, medical value. One of the most enduring and
effective is the Integrated Healthcare Association (IHA),
a statewide group that promotes coordination to improve
the quality and efficiency of healthcare in California. The
IHA counts among its members health plans, physician
groups, and hospital systems, as well as academic, con-
sumer, purchaser, pharmaceutical, and technology rep-
resentatives. Its activities and that of other influential
groups, such as the Pacific Business Group on Health
(PBGH), have increasingly focused not only on the qual-
ity of the care, but on considerations about the optimal
allocation of medical resources.
Paying for Value, Not Just Performance
The signature effort of the IHA has been its pay-for-per-
formance (P4P) initiative that involves physician compen-
sation. This effort has improved clinical quality, patient
experience, and IT-enabled “systemness.”49 Its efforts
mirror those of the national programs such as Bridges
to Excellence that rely on partnerships among healthcare
sector stakeholders to drive quality improvement and cost
effectiveness.50 In California, P4P has been part of a state-
wide push during the past several years to develop and dis-
seminate data on the quality of care provided by medical
facilities and physicians in the state. This includes efforts
that resulted in projects such as CalHospitalCompare,51
which measures quality of care, patient experience,
and safety measures, and the California Physician
Performance Initiative, which assesses physician perfor-
mance “using clinical quality measures that are evidence-
based, nationally standardized, and endorsed by major
standard-setting bodies.”52 The state government offers
quality ratings online through its Office of the Patient
Advocate (OPA).53 All of these efforts are works in prog-
ress, and providers have been supplying feedback about
how they could be improved.
But even if perfect measures of medical quality existed,
at least two critical questions would remain. The first is
whether payers—individuals, governments, insurers, and
employers—will use them. Individuals, in particular, may
not be well-equipped to understand measures of medical
quality or may not rely on quality indicators when mak-
ing choices among providers. They may be more likely to
rely on the type of information in which they traditionally
have expressed interest, including diagnostic accuracy;
symptom relief; functional improvements; reduction of
side effects and complications; disease recurrence; access
to and the convenience of services; and patient safety.54
The Connection Between Quality and Value
The second critical question about measurements
of quality is that such measurements do not inher-
ently combine evaluations of both quality and cost.
Quantifying value for any given consumer or payer
presents challenges. Most publicly available cost data
is exposed to the public only as the price of an insur-
ance premium. This works against any value analysis
because costs are measured at the population level,
even though quality is measured and experienced at the
individual level (HbA1c, immunization, CABG mortal-
ity, etc). Premiums paid by employers also are affected
by local factors such as the number of cases, the risk
mix, and geography. According to Tom Priselac, pres-

13 new america foundation

 “The work of the Integrated Healthcare Association shows that California can lead the
way in creating value metrics that improve overall delivery system performance and
that showcase the best performers in quality, access, and efficiency.”
—Dr. Robert Margolis, CEO, HealthCare Partners

ident and CEO of the Cedars-Sinai Health System, it
may be “more productive if value questions are focused
on utilization as distinct from price since the price, par-
ticularly in a hospital, is determined by so many differ-
ent variables including mission and payer mix.”
Despite the difficulties of such a project, the IHA is devel-
oping a plan to use the structure it established for its P4P
project to begin measuring and paying for efficiency. In
this project, IHA reports that “quality performance [w]ould
be used as a threshold and multiplier for efficiency incen-
tive payments. Quality performance would continue to be
measured and publicly reported, but the stand-alone qual-
ity incentive would be eliminated.”
This is a project that builds on an established and effec-
tive collaboration and holds great potential for reducing
the growth of healthcare costs. The P4P initiative already
includes “appropriate resource-use” measures that will be
“expanded and harmonized across health plans and rep-
resent, in total, significant healthcare-cost drivers.” These
measurements will be supplemented with measurements
of the total cost of care. One issue is that the performance
bonus under the P4P project was not large enough to cre-
ate enduring changes to physician behavior. Therefore,
an expanded plan envisions that rewards for efficiency
will increase annually from 3 percent of compensation to
about 10 percent of compensation by 2016. This initiative
may reward medical groups serving patients with HMO
coverage, where significant incentives for efficiency
already exist because of capitated payments. The chal-
lenge will be implementing a similar reward system in
fee-for-service arrangements.
In addition to this broader project, savings might be real-
ized by enforcing quality standards that pertain to the effi-
cient use of medical resources in subspecialties. A major
new project by James C. Robinson of the Berkeley Center
for Health Technology will “examine patterns and deter-
minants of costs, complications, insurance payments,
and other factors for approximately 80,000 patients
undergoing any of 14 orthopedic or cardiac procedures in
California hospitals in 2008.”55 This project will use data
from the IHA’s value-purchasing initiative.
The Pacific Business Group on Health also is launch-
ing three initiatives—in cardiology, orthopedic surgery,
and maternity care—intended to increase the rates of
appropriate use of procedures through feedback, shared
decision-making, and incentives to address appropriate-
use criteria. It is working with CalPERS to develop an
intensive primary-care service model with novel payment
approaches that is meant to help chronically ill patients
avoid complications and unnecessary hospitalizations.

“Where do patients fit into this, and what do

they see as value?”
—Gloria Rodriguez, president and CEO,
Community Clinic Association
of Los Angeles County

© Phil Channing

california task force on affordable care 14

 All of these experiments will focus on improved value and
include rigorous evaluation.
Transparency
Openly sharing and publishing data about quality, cost,
price, and outcomes helps providers understand and
improve care delivery. It further helps patients and
referring physicians identify the sources of care while
providing an account of patient safety and value to pub-
lic and private payers and regulators. Although what
constitutes an appropriate level of transparency is open
to debate, California providers, payers, and purchasers
generally agree that the best medical outcomes will be
achieved through collaboration, attention to measure-
ment and clinical science, and continuous improve-
ments in data quality.
California has made strides toward transparency in the
past decade through CAHPS and HEDIS scores for health
plans56; CalHospitalCompare, IHA and OPA reporting on
medical groups; and the CPPI reports on physician per-
formance. These initiatives have stimulated modest gains
in quality, but many stakeholders still feel that they do not
yet measure what matters or use measurement to drive
redesigns that maximize outcomes. This is driven in part
by reliance on process measures that are not necessar-
ily indicative of overall quality or patient satisfaction and
carry risks of misclassification.57
financial data) and more meaningful, accurate, and reli-
able measures of efficiency. It will also involve, when
possible, improving the quality of the underlying data.
Current efforts rely primarily on analyzing claims data,
which can be inaccurate and imprecise. In addition,
any quality transparency program must be very careful
to avoid creating disincentives to care for the hardest-
to-treat patients. It is critical, therefore, to develop acu-
ity-adjustment protocols that include factors that can
influence outcomes including poverty, English as a sec-
ond language, and multiple conditions.
The next great challenge to improving trans-
parency will be to increase the ability to
document health outcomes and appropri-
ateness and to couple economic and clini-
cal data. Achieving these goals will require
both technical improvements (e.g. connected
electronic health records) and major policy
changes (e.g. sharing of financial data) and
more meaningful, accurate, and reliable
measures of efficiency.

The next great challenge to improving transparency will
be to increase the ability to document health outcomes
and appropriateness and to couple economic and clini-
cal data. Achieving these goals will require both tech-
nical improvements (e.g., connected electronic health
records) and major policy changes (e.g., sharing of
Current California law requires hospitals to provide price
estimates to the uninsured and stipulates that, if the
patients are low-income, the prices cannot exceed what
the hospital is paid by public programs. However, after
a study in which they posed as uninsured persons and
requested information on hospital pricing, researchers

“We should be less worried about pilots

than about getting agreement on overall
goals. We need definitions and measures of
value. Then people will be very smart about
how to achieve it.”
—David Lansky, CEO,
Pacific Business Group on Health
© Phil Channing

15 new america foundation

 “Patients throughout California have vastly
different backgrounds, language competencies,
and economic issues, all of which will affect
what kind of outcomes they will get. A big
challenge is how to balance needs of individuals
versus those of the system.”
—Lisa Folberg, vice president for medical and
regulatory policy, California Medical Association
© Phil Channing

from RAND documented that “the median discounted
price estimate was higher than Medicare reimburse-
ment rates for all procedures” and concluded that “cur-
rent California legislation fails to meet its objective of
enabling uninsured patients to compare prices for hos-
pital-based healthcare services.”58 The California Hospital
Association objected that since the researchers did not
stipulate their supposed income in their requests for
information, it was unclear whether the caps on price
should apply.59 However, this simply underscores that the
complexity of the current process places burdens both on
consumers and on providers.
More comprehensive legislation related to transpar-
ency was proposed in California’s 2007-2008 legis-
lative sessions, but stalled in the Senate. AB 2967
(Assemblymember Sally Lieber, D- San Jose) was mod-
eled on the provisions of California’s comprehensive
healthcare reform bill AB X 1 1 and would have expanded
public reporting of patient safety and healthcare-qual-
ity measures. SB 1300 (Senator Ellen Corbett, D-San
Leandro) would have prohibited confidentiality clauses
in contracts between providers and insurers that keep
information on pricing and healthcare quality from con-
sumers and employer purchasers. Providers and plans
expressed valid concerns about the specifics in these bills.
But until Californians have access to better information
about safety,60 quality, cost, and, when relevant,61 the price
of their care, it will be challenging, if not impossible, for
them to get better value for medical spending.
Federal reform addressed transparency in many ways:
increased quality reporting for physicians and in long-
term care hospitals, inpatient rehabilitation hospitals,
nursing homes, hospice programs, psychiatric hospitals,
and PPS-exempt cancer hospitals; as well as reporting of
healthcare-associated infection rates, to be made available
on the HHS website.62 After the federal regulatory process
fleshes out the specifics of these provisions, California
stakeholders should return to the negotiating table to
establish whether there are additional state-specific mea-
sures that should be taken to augment these reforms.
Physician and Hospital Leadership
A great deal of evidence has emerged recently that medi-
cal value, particularly in the area of the efficient use of
resources, is driven in great part by the culture of local
providers.63 Dr. Atul Gawande’s recent article in The New
Yorker brought this issue to the attention of the public.64
Alan Baumgarten, chief of the medical staff of Mission
Memorial Hospital in Ashville, N.C., also described a
“clinical conservatism” in his community that “edges out”
doctors who deviate from the standard.65
California leads the nation in coordinated integrated sys-
tems and most of these systems owe their successes to
one or more physicians who have long promoted value
agendas in service, quality and outcomes. In addition to
the leaders who served on the Task Force, notable phy-
sician champions in this area include Dr. Robert Pearl
of The Permanente Medical Group, Drs. Bart Asner and
Jay Cohen of Monarch Healthcare, Drs. Don Balfour
and Jerry Penso of Sharp Rees-Stealy Medical Group,
Drs. David Drucker and Tony Marzoni of the Palo Alto
Medical Foundation, and Dr. Hal Yee of San Francisco
General Hospital.

california task force on affordable care 16

 Rehospitalization and Readmissions

3. To immediately reduce medical costs and promote patient safety during the transformation of the payment and
delivery systems, public and private initiatives should focus on reducing preventable hospital readmissions and health-
care-associated infections (HAIs).

• Programs designed to reduce unnecessary rehospitalization have proven effective nationwide and in
California.
• California has taken concerted action to address the prevalence of healthcare-associated infections.
• Both types of efforts should be quickly brought to scale and expanded statewide.

High-Value Top 10: Directly act to reduce hospital readmissions: $16B; directly act to prevent the acquisition of HAIs: $19B.

Two promising strategies for generating more immedi-
ate savings on healthcare focus on avoiding preventable
rehospitalizations and reducing the incidence of health-
care-associated infections. In both cases, demonstration
programs in California and elsewhere in the nation have
shown significant results. Unlike many complex cost-con-
trol strategies, such as bundled payment, these programs
are relatively straightforward. They include guaranteeing
that all patients receive detailed instructions when they
leave the hospital; ensuring that complete and timely infor-
mation is provided to those who will care for patients upon
discharge; and requiring doctors and nurses to wash their
hands consistently and follow checklists to prevent health-
care-acquired infections.
in understanding their diagnoses and prescriptions. A
pharmacist also participates to reinforce the medication
instructions. “Thirty days after their hospital discharge,”
one study found, “the 370 patients who participated in
the RED program had 30 percent fewer subsequent emer-
gency visits and readmissions than the 368 patients who
did not.”68 Nearly all those in the RED program left the
hospital with a follow-up appointment with their primary-
care physician compared with 35 percent of the patients
who did not participate. Nearly all (91 percent) had their
discharge information sent to their primary-care physi-
cian within 24 hours of leaving the hospital. The success
of this program is consistent with evidence of effective-
ness from other transition-management programs.69

Avoiding Preventable Readmissions
A report by the Agency for Healthcare Research and
Quality found that in 2006 4.4 million hospital admis-
sions and readmissions costing $30.8 billion could have
been avoided and that potentially preventable hospitaliza-
tions accounted for about 10 percent of hospital expendi-
tures. Federal legislation, beginning in 2013, will impose
financial penalties on most hospitals for excessive admis-
sions based on 30-day readmission measures for heart
attack, heart failure, and pneumonia that are currently part
of the Medicare pay-for-reporting program.66
One of the first and most influential efforts to reduce
preventable hospitalizations has been the Re-Engineered
Hospital Discharge Program, or RED,67 piloted in
Massachusetts, which uses specially trained nurses to
assist patients in scheduling follow-up appointments and
Another strategy is public reporting. In 2009, the Centers
for Medicare and Medicaid Services (CMS) added hospi-
tal readmission rates to the publicly-reported quality mea-
sures on their Hospital Compare Web site, although the
effectiveness of this strategy in reducing rehospitalization
has not been evaluated. CalHospitalCompare does not list
readmission rates.
Interventions in care transition that have shown signifi-
cant results also involve relatively simple processes. In
California, patients are benefiting from innovations such
as the “Welcome Home” program of Hill Physicians, in
which nurses reach out to patients newly out of the hos-
pital to review the instructions they received before their
discharge. This helps eliminate unnecessary return trips
to the hospital that are dangerous and demoralizing for
patients and extraordinarily costly to the medical system.70

17 new america foundation

Reducing Readmissions in California
A recent study by the California HealthCare Foundation
(CHCF), Homeward Bound: Nine Patient-Centered Programs
Cut Readmissions, examined successful models for reduc-
ing hospital readmissions. These success stories included
several California examples:
• HealthCare Partners Medical Group, a participant
in the Task Force, has a strong financial incentive
as a fully capitated system to reduce unnecessary
readmissions. It has developed tools to group
patients into risk categories as well as disease
registries to facilitate targeted interventions. The
group’s HomeCare Program and Comprehensive
Care Centers allow specialized clinicians, nurses,
and social workers to work with high-risk patients
following their discharge from hospitals to reduce
unnecessary readmissions and emergency depart-
ment visits. The HomeCare program, which targets
the 5 percent of HealthCare Partners patients who
are unable to access outpatient care, has reduced
the readmission of high-risk patients by 18 percent.
• Sharp Rees-Stealy Medical Group, another pri-
marily capitated system, has a comprehensive
program that includes the use of a “telescale,”
which is a disease-management tool that makes
a daily check on the health of patients who are at
home. It has dramatically reduced hospitalization
rates and produced an 8:1 return on investment
for the medical group.
• Blue Shield of California has pioneered a
patient-centered management program that pro-
duced high satisfaction rates among patients (92
percent) and reduced costs by more than $18,000
per patient, primarily through shifting care from
acute, inpatient facilities to homes and hospices.
Implementing the best practices of these initiatives on a
statewide scale in California will require aligning financial
incentives so that hospitals and medical groups will want
to minimize unnecessary readmissions. If hospitals get
paid to provide services regardless of whether a readmis-
sion was preventable, they have little financial incentive to
ensure that a patient’s transition between home and hospi-
tal is properly managed.
Reducing Healthcare-Acquired Infections
According to estimates from the federal Centers for Disease
Control and Prevention, one of every 20 patients will con-
tract a healthcare-associated infection (HAI) this year.
HAIs are the fifth-leading cause of death in the United
States. Each year, nearly 2 million patients contract an
HAI, and an estimated 99,000 die from one. The Centers
for Disease Control and Prevention estimate annual hos-
pital costs of HAI in the United States to be between $25
billion and $31.5 billion per year.71
California Healthcare-Associated Infection-
Prevention Initiative
In 2005, the Blue Shield of California Foundation (BSCF)
sponsored the California Healthcare-Associated Infection-
Prevention Initiative (CHAIPI) pilot program to determine
if new technologies could help infection-control special-
ists track and prevent the spread of infection. According
to Crystal Hayling, former president and CEO of the
Foundation, the goal of the 10-hospital pilot was “to elimi-

State Spotlight: Pennsylvania—Mandatory Reporting of HAIs

In 2007, Pennsylvania passed the Healthcare Associated Infections and Control Act, which requires hospitals to
report all hospital-acquired infections within 48 hours. Although HAI rates are lower than the national average
in Pennsylvania, 58 hospitals reported higher-than-expected numbers of bloodstream infections. Even renowned
healthcare systems such as Geisinger reported higher-than-anticipated levels of infection. Further, some hospitals
that are aggressively attacking the problem are recording high numbers of infections, while other hospitals are
reporting zero or few infections. This skewed finding is likely the product of insufficient monitoring.74 Pennsylvania’s
mandatory reporting act, which was built on existing policies, helped reduce HAIs from 30,237 in 2006 to 27,949
in 2007, an 8 percent decrease in one year.75 An aggressive program to reduce healthcare-acquired infections in
California would presumably include mandatory reporting of this kind.

california task force on affordable care 18

 nate the human suffering and the additional healthcare
costs that result from healthcare-associated infections”
through promoting the use of new technologies and imple-
menting process improvements. According to the foun-
dation’s data, during the 18-month pilot, more than 600
infections were prevented, resulting in 4,640 fewer patient
hospital days. BSCF estimated that the CHAIPI pilot pro-
gram lowered costs of care by more than $9 million for an
initial investment of $1 million.
Buoyed by this success, in 2008 BSCF launched CHAIPI
II in partnership with 51 nonprofit healthcare facilities in
California. The foundation expects that this program will
avoid as much as $25 million in costs for hospitals, patients,
and the healthcare system. Participating hospitals take part
in a BSCF-funded collaborative about best practices for HAI
prevention run by the Institute for Healthcare Improvement
(IHI), the Association for Professionals in Infection Control
and Epidemiology (APIC), and the California Institute for
Health Systems Performance (CIHSP). With support from
BSCF, 18 CHAIPI II hospitals opted to purchase automated
surveillance technology at reduced rates. Such technology
has been shown to be critical to early identification and pre-
vention of HAIs in hospitals.
A third component of CHAIPI II is a $1.5 million BSCF
investment in statewide research and evaluation conducted
by the University of California, Berkeley, and Columbia
University. The Berkeley study is examining HAI rates,
costs, and practices in all California acute-care hospitals.
Similarly, the Columbia University study is examining the
changing role of the infection preventionist in the state’s
acute-care hospitals. Both studies feature data collection
that began in fall 2008 just prior to the implementation of
major California HAI legislation, with follow-up data col-
lection scheduled to occur in May and June 2010.
California’s Healthcare-Associated-Infections Program
State legislative action between 2006 and 2008 man-
dated72 that the California Department of Public Health
begin a program of infection surveillance. The program
initially was hamstrung by budget woes, but it recently
received a $2.4 million grant from the federal Department
of Health and Human Services as a part of the American
Reinvestment and Recovery Act (ARRA) of 2009. These
funds will support the continuing development of a state
HAI prevention plan by the advisory group chartered by
state legislation.
19 new america foundation
The initial focus will be “central-line insertion practices
(CLIP), central-line-associated bloodstream infections
(CLABSI), and Clostridium difficile infections.”73 The
state also will assign regional “field infection prevention-
ists” to assist hospitals in developing HAI programs and
submitting data to the state. The hospitals participating
in the program are often smaller, rural, and somewhat
isolated, with less access to resources, so some funds will
support collaboratives that have been developed to focus
on these issues.
California already has the structures in place
to dramatically reduce the acquisition of
healthcare-associated infections through the
California Healthcare Associated Infection
Prevention Initiative and the Healthcare
Associated Infections Program of the
Department of Public Health. If California
is to improve patient safety and curb the
growth of healthcare costs caused by prevent-
able healthcare-acquired infections, it must
quickly build on and expand these efforts.
Preventing Healthcare-Acquired Infections in California
California already has the structures in place to dramatically
reduce the acquisition of healthcare-associated infections
through the California Healthcare Associated Infection
Prevention Initiative and the Healthcare Associated
Infections Program of the Department of Public Health.
However, the state must take more aggressive action if it is
to improve patient safety and curb the growth of healthcare
costs caused by preventable healthcare-acquired infections.
The current strategy involves the deployment of specialists
to help improve hospital practices and the development of
collaboratives that focus on this issue.
The state could take more steps, however, that would have
an immediate and significant effect on healthcare-associ-
ated infections and their massive cost in dollars and lives.
The first step would be to mandate that healthcare facili-
ties adopt the best practices that are associated with low
rates of HAI, such as participation in an HAI collabora-
tive and the use of automated surveillance technology. The
state also could mandate support for specific best practice
“bundles” such as those developed by IHI and APIC (used
in CHAIPI). In addition, it could require the use of check-
lists modeled on those of the Michigan Keystone project
(developed by Peter Pronovost). In that project, checklists
dramatically improved the safety of everything from draw-
ing blood to the complicated care required in intensive
care units.76
For example, here is a checklist for patients who are to be
anesthetized:
• Patient has confirmed: identity, site, procedure,
consent.
• Site marked (or marking confirmed not applicable).
• Anesthesia safety check completed.
• Pulse oximeter on patient and functioning.
• Does patient have a known allergy?
• Does patient have a difficult airway/aspiration
risk?
• Is there a risk of >500ml blood loss (7ml/kg in
children)?
Such checklists have proven feasible to implement and
effective in improving patient outcomes.77
It is also crucial to link best practices to financial incen-
tives. A mechanism for doing this was embedded in the
2008 update to the Medicare Diagnosis-Related Group
(DRG) codes, which now include designation of certain
hospital-acquired conditions that will not receive additional
government payments for treatment. California could pass
legislation indicating that no payer is required to com-
pensate hospitals for charges related to hospital-acquired
conditions. Lower reimbursement for HAIs by public and
private insurers would be a strong incentive for reducing
california task force on affordable care 20
HAIs. The recently-signed federal health reform bill, for
instance, directs Medicare to levy a 1 percent penalty on
hospitals that rank in the top quartile of hospital-acquired
infections, and mandates that hospitals report informa-
tion on these infections that can be readily compared.78 In
recent years, California hospitals have profited from HAIs
when insurers provided higher reimbursements for hospi-
tal-acquired conditions.
It is also crucial to link best practices to finan-
cial incentives. A mechanism for doing this
was embedded in the 2008 update to the
Medicare Diagnosis-Related Group (DRG)
codes, which now include designation of cer-
tain hospital-acquired conditions that will
not receive additional government payments
for treatment.
California hospitals are required to report 27 different
HAIs to the Department of Healthcare Services. However,
they still receive reimbursement from the state for treating
these conditions. In two consecutive legislative sessions,
Assemblymember Mike Feuer (D-Los Angeles) introduced
legislation that would stop Medi-Cal payment for some
“never events,” consistent with policies implemented by
Medicare in 2008. AB 542 passed the Assembly during the
2009-2010 session before stalling in the Senate. Ending
payment for never events through all California public pro-
grams, building on federal action in this area, would be a
powerful incentive for providing higher-quality, more cost-
effective care.
 Defensive Medicine

4. To reduce defensive medicine, providers should be protected from liability when using appropriate medical judg-
ments that improve patient outcomes.

• California’s caps on noneconomic damages have brought some stability to malpractice insurance premi-
ums but have not eliminated defensive medicine.
• Other states’ efforts to install broad guidelines for best practices have not protected providers or driven
down costs.
• The most effective strategy would target defensive practices in high-cost areas including imaging, ortho-
pedics, emergency room care, and obstetrics.

High-Value Top 10: Develop best practice guidelines that protect providers who use appropriate medical judgments in
targeted high-cost areas: $15B.

Medical Liability Reform in California
In 1975, the California State Legislature enacted the Medical
Injury Compensation Reform Act (MICRA) to address the
rising premiums for medical malpractice insurance. This
act allows injured patients to receive unlimited economic
damages for any and all past and future medical costs; eco-
nomic damages for lost wages and lifetime earning poten-
tial; and punitive damages. MICRA also caps at $250,000
compensation for “noneconomic” damages, often referred
to as pain and suffering. About half the states limit dam-
ages in this way. More than a simple cap on damages,
though, MICRA includes a framework for dispute resolu-
tion that encourages arbitration and limits lawyers’ fees.
People disagree about whether caps on malpractice awards
are ethically justified79 and courts in many states have
declared them unconstitutional.80 However, caps are fre-
quently promoted as a way to contain medical costs by
driving down insurance rates and limiting “defensive med-
icine,” such as ordering tests and procedures that may be
unnecessary out of fear that a more conservative course
of treatment might result in legal liability. For those who
promote caps as an appropriate policy solution, MICRA is
seen as the gold standard for the nation.
Medical Liability and Healthcare Costs
In recent years, defensive medicine has been acknowl-
edged to be a modest driver of escalating healthcare costs.81
Although measuring the exact amount that liability concerns
add to healthcare costs is difficult, the Congressional Budget
Office has estimated that reducing the cost of malpractice
insurance as well as the incidence of defensive medicine
could lower nationwide healthcare spending by 0.5 percent.
That reduction would be insufficient to address healthcare
costs that are rising at as much as 10 times the rate of infla-
tion. Nevertheless, the CBO estimates that this reform would
reduce the federal deficit by $54 billion across 10 years.
The effect of a change to the system of legal liability in
healthcare might be smaller in California than elsewhere in
the nation because it already has a cap on the noneconomic
damages that have been shown to most influence physician
behavior.82 The state also has a high penetration of managed
care (64 percent compared with 32 percent nationwide).
In research reported in 2002, Daniel Kessler and Mark
McClellan found that when tort reform was introduced,
healthcare spending in regions with relatively more enroll-
ees in managed care did not fall as much as it did in regions
with relatively fewer enrollees because managed-care plans
eliminate some excessive medical treatment that otherwise
would be reduced by tort reform.83 Nevertheless, limiting the
practice of defensive medicine is worth including in a com-
prehensive strategy to reduce the growth of healthcare costs.
Defensive practices are particularly prevalent in high-cost
areas such as medical imaging and emergency room care.84
But what prompts patients who are injured after medical error
to initiate legal action? In a 2006 article in the New England
Journal of Medicine, Barack Obama and Hillary Clinton cited
studies showing that the primary factor in patients’ decisions

21 new america foundation

to file lawsuits is not negligence but ineffective communica-
tion between patients and providers.85 Further, the present
system tends to advance many meritless malpractice claims
while claims with merit can go unrecognized. Numerous
studies have shown that most patients who suffer from a
medical error are not compensated, while a select few win
outsized awards. On average, patients also must wait nearly
five years to resolve claims and receive payments.86
Partly in response to these issues, the University of
Michigan Health System abandoned the traditional “deny-
and-defend” model and moved to a system in which it
admits liability when appropriate and moves to resolve
claims quickly. In the aftermath of this change, it reports
that claims have dropped dramatically, and costs per case
have dropped by more than half. The program, it says, “has
now begun to affect actuarial projections of future malprac-
tice costs, favorably yielding palpable financial benefits.”87
Other efforts, including “apology shield” laws that allow
doctors to admit culpability without confirming liability,
try to address the extent to which medical malpractice
claims are driven by a lack of communication. Although
these strategies may marginally lower costs for individual
providers, little evidence exists that they are effective in sig-
nificantly lowering healthcare costs.
Best-Practices Guidelines and Other Strategies
One strategy aims to shield providers who make good-faith
efforts to incorporate quality and efficiency standards into
their practices from legal consequences and unmerited court
cases.88 In the 1990s, Maine became the first state to enact
a pilot program that was intended to shield doctors from
malpractice lawsuits if they followed guidelines developed
by a state-appointed committee of physicians, insurers, and
hospital representatives. However, physicians were unable
to use adherence to these guidelines as an effective defense
against malpractice claims, and the guidelines were not
proven to lower healthcare costs. The state allowed the pro-
gram to expire in 1999.89 None of the pilot programs in states
that followed Maine’s lead remains fully operational at this
time. “Certificates of merit” are another unproven approach
to the liability issue. These certificates “would allow a panel
of experts to weed out the cases that shouldn’t clog up the
courts or cast shadows on doctors.”90 Both the feasibility and
the legality of this approach are, as yet, unclear.
Effective Pilot Programs
Clinical guidelines apply to populations, but each individ-
california task force on affordable care 22
ual has unique needs and preferences, which means that
broad-based clinical guidelines may not be the most promis-
ing approach to the costly problem of defensive medicine.
However, it may be possible to develop guidelines that con-
trol costs and improve quality if they focus on common, high-
volume, and high-cost medical procedures such as imaging.
California should move quickly to establish such guidelines
not only because they would represent effective medical prac-
tice but also because they would define inappropriate uses of
medical procedures. Once guidelines were codified in a pilot
program, the state could institute them for other high-cost,
high-use, but sometimes questionable procedures in the
areas of obstetrics and emergency cardiac care.
It may be possible to develop guidelines that
control costs and improve quality if they
focus on common, high-volume and high-
cost medical procedures such as imaging.
California should move quickly to establish
such guidelines not only because they would
represent effective medical practice but also
because they would define inappropriate
uses of medical procedures.
Federal legislation includes medical malpractice liabil-
ity reform demonstration projects—providing $50 mil-
lion in grants for state efforts to evaluate alternatives to
litigation for medical torts.91 Such grants make sense
because the most effective legal and regulatory approach
is unclear. The grants would fund projects that encourage
the prompt, fair, and efficient resolution of malpractice
disputes and improve patient safety and provider access to
liability insurance. The projects are to be developed with
input from all stakeholders, including patient representa-
tives, health care professionals and providers, attorneys
for the plaintiff and defense bar, malpractice insurers, and
patient safety experts. Patients would, however, fully retain
the right to turn to tort litigation to enforce their rights and
could ignore the programs developed under this provision.
Past experience has shown that claimants are often reluc-
tant to pursue alternative dispute resolution in malpractice
cases if tort litigation remains an alternative.
 II. Reduce Administrative Costs Not Directly Tied to Healthcare

Common Standards

5. To reduce administrative overhead, all public and private payers in California should adopt a common set of standards for
claims processing, eligibility and benefit determination, and general contracting terms.

• A substantial amount of healthcare costs in California go toward administrative expenses not directly tied to
improving healthcare.
• Models from other states, as well as multi-stakeholder initiatives in California and nationally, provide a
basis for moving to a more efficient system.

High-Value Top 10: Put in place common standards for billing, eligibility, and contracting: $93B.

The McKinsey Global Institute has estimated that admin-
istrative costs for public and private payers in the United
States amounted to $145 billion in 2006. This was about
$91 billion more than what other developed countries
spend on healthcare administration as a percentage of
their GDPs.92 James Kahn, Richard Kronick, and their
colleagues have estimated that California’s private insur-
ers spend almost 10 percent of their revenue on admin-
istration and another 8 percent on billing and insurance-
related activities. Physician offices spend more than 27
percent of their revenue on administration and 14 percent
on billing, while hospitals weigh in at 24 percent and 11
percent respectively.93
Administering health claims is time-consuming. According
to a recent study, physicians spend an average of 142 hours
a year dealing with healthcare plans, at an average cost of
$70,000 per physician,94 and medical and surgical nurses
spent 35 percent of their time on documentation related
to billing and claims.95 Even though administrative costs
amount to only about 7 percent of healthcare costs, signifi-
cant efficiencies and savings could be realized.
Reducing Claims-Processing and
Other Administrative Costs
Administrative costs—which include program adminis-
tration, billing and claims processing, marketing, quality
reporting, network management, and profits—are not all
wasted. In some circumstances, spending more on admin-
istrative efforts can weed out fraud or help implement
chronic-care-management programs or medical group
integration that could reduce overall costs.
The most immediate ways to achieve savings in adminis-
tration would be to address the frictional costs of informa-
tion-sharing that result from the pervasive fragmentation
of the US healthcare system. As McKinsey’s Paul Mango
writes, “The average US hospital, for example may work
with 40 to 60 different payers, each with several products
sporting unique contracting terms, reimbursement algo-
rithms, and reporting requirements for quality metrics,
productivity incentives, and so forth. As for payers, they
incur unnecessary administrative costs as a result of the
vastly different IT systems the thousands of providers they
interact with use.”96
Under the federal Health Insurance Portability and
Accountability Act of 1996 (HIPAA), public payers such
as Medicare and Medicaid were required to use standard-
ized forms and codes for a set of common transactions
such as billing, payment, and insurance eligibility infor-
mation. HIPAA established a standard electronic format
for transmitting claims and required providers to submit
claims electronically to public insurers. However, HIPAA
does not compel private payers to use common standards.
Nor did it standardize the ways in which each payer uses
and interprets these codes, meaning that providers must
continue to interpret what each code means according to
each of many payers.
To address these gaps and others that HIPAA does not
address, providers and payers in California will need to

23 new america foundation

develop common standards, building on federal regula-
tions, to streamline the ways in which transactions are
processed. This will minimize the time and effort needed
to deal with different coding, billing, claims-manage-
ment systems, health IT standards, contracting terms,
and reporting requirements. National standards develop-
ment organizations such as the National Uniform Billing
Committee, the National Uniform Claim Committee,
HL7 International, and CAQH, which bring together con-
sortia of major payers and provider groups, have made
considerable strides toward this goal. Federal legisla-
tion includes many administrative simplification provi-
sions that draw on the work of these groups and improve
the existing HIPAA framework. These include a unique
health plan identifier, standards for electronic funds
transfers, and steps to explore the creation of a standard-
ized application form for insurance enrollment.97 The
explicit goal of these measures is to make financial and
administrative data exchanges in healthcare as straight-
forward as an ATM transaction.
As the underlying incompatibility of standards and forms
becomes more fully resolved, the promise of using Health
Information Exchanges (HIEs) to move information elec-
tronically across organizations within a state, in regions,
and in communities can be more fully realized. In 2007,
Governor Arnold Schwarzenegger issued an execu-
tive order calling for “100 percent electronic health data
exchange” within ten years. While state, regional, and inde-
pendent organizations are pursuing this goal, and several
of California’s integrated health systems already exchange
data electronically using common forms and standards,
the underlying incompatibilities in common standards
need to be addressed.
Several promising initiatives that tackle this problem are
underway in other states. Minnesota amended its Healthcare
Administrative Simplification Act in 2008 to mandate that
all healthcare providers, insurance companies, health plans,
and other payers submit and adjudicate claims electronically
using standard data and the same format. Oregon plans to
follow suit through its new Oregon Health Authority. It
estimates that moving to standardized forms will produce
a $42 million savings in three years. And Utah’s success-
ful Regional Health Information Organization (RHIO), the
Utah Health Information Network (UHIN), has had a clear-
inghouse in place for transporting claims efficiently since
the mid-1990s (see box).
One familiar challenge will be the ability of solo and small-
group practices to adopt these standards and participate
fully in a coordinated system. Through its Washington
Healthcare Forum, a consortium of providers, insurers,
and government agencies, the State of Washington has
proposed a public-private partnership through which small
provider groups would receive state assistance in upgrad-
ing and managing these new systems in return for a state-
subsidized fee. Utah gives access to its information-shar-

State Spotlight: Utah Health Information Network

Since 1994, the Utah Health Information Network (UHIN), a not-for-profit organization of insurers, providers,
and government agencies, has operated a centralized clearinghouse that transports commonly coded claims
between providers and payers by establishing definitions for claims payment codes. This simplified, uniform
system ensures that each code has the same meaning on each claim and, consequently, claims can be read by
computer. As a result of this consortium’s work, the largest provider in Utah, Intermountain Healthcare, pays
just one-tenth of a cent per claims transaction, and the average provider pays five cents. This compares to 20
cents to 50 cents per transaction for most providers in California. The numbers are not readily comparable,
however, because commercial clearinghouses reshape the basic data to serve their clients’ needs, while UHIN
transmits data without change.102

The success of UHIN is in part due to the small number of hospitals, laboratories, medical groups, and insurers
in Utah. UHIN also required the passage of a state law requiring that all insurers accept administrative files in a
standardized format. While California’s medical system is much larger and more diverse than Utah’s, exploring the
feasibility of similar legislation still is warranted.

california task force on affordable care 24

 ing and electronic billing network to any provider with an
Internet connection, while its larger payers and providers
pay for and make the rules for the network. The ARRA
allocated $31 billion for improving IT nationally, of which
$1.9 billion will go to California to be used to enhance IT
capability for Medi-Cal providers and to implement the
Health Information Technology for Economic and Clinical
Health Act.98 Initiatives for generating and implementing
claims-processing standards to support development of
a full-fledged health-information exchange also could be
funded from the ARRA.
As the underlying incompatibility of stan-
dards and forms becomes more fully resolved,
the promise of using Health Information
Exchanges (HIEs) to move information elec-
tronically across organizations within a state,
in regions, and in communities can be more
fully realized.
Simplifying Enrollment in Public Programs
Enrolling applicants, verifying their information and
removing people from the rolls of California’s public pro-
grams such as Medi-Cal has been costly and, for beneficia-
ries, aggravating. Governor Schwarzenegger has proposed
streamlining the process for Medi-Cal, CalWORKs, and
food-stamp applications principally by moving applica-
tions online.99 (It now takes 27,000 workers in 58 coun-
ties to handle enrollment issues.) The Governor’s January
2010 budget proposal—which contains provisions to limit
25 new america foundation
eligibility for CalWORKs and other public programs—esti-
mates that these changes could produce $500 million in
savings by 2012-2013.
This proposal builds on the success of “Health-e-App” and
its successor, “One-e-App,” which are Web-based applica-
tions developed by the California HealthCare Foundation
and the California Endowment in partnership with
California’s Health and Human Services Agency. The
Lewin Group found that the implementation of Health-e-
App in the pilot site of San Diego County produced a 40
percent drop in application errors and a more than 20
percent reduction in the time it took to determine eligi-
bility for the Medi-Cal and Healthy Families programs.
Heath-e-App is being used in all counties, with more than
one in five applications for these programs now submit-
ted electronically. One-E-App allows beneficiaries to apply
for multiple public programs and automatically adjusts for
county-specific rules; 10 counties now use the application,
and a statewide version has been developed.100
The investment in this tool has reduced administrative
overhead and improved the continuity of coverage for chil-
dren who need public assistance, according to researchers
at UCLA and at Lewin. This tool is in use in other states,
too, including Indiana and Arizona. Several California
counties are in the process of adopting another application
and eligibility system, but the underlying value of a stream-
lined electronic system remains. Under the recently-passed
federal health legislation, the Secretary of HHS is charged
with developing a single streamlined form that may be
used to apply for all applicable state subsidy programs and
with developing a secure electronic interface that will allow
the verification of eligibility for all subsidy programs based
on a single application.101
 Rationalizing Regulation
6. To effectively protect consumers, the health insurance wing of the Department of Insurance and the Department of
Managed Healthcare should be merged into a single agency with consistent standards for all health insurance products.
The Department of Managed Healthcare (DMHC) licenses
and regulates healthcare-service plans (also known as
health maintenance organizations or HMOs) under leg-
islation originally enacted as the Knox-Keene Healthcare
Service Plan Act of 1975. The California Department of
Insurance (CDI) traditionally regulates the “business of
insurance,” which consists of 26 lines of insurance, includ-
ing “promise to pay” insurance, better known as “fee-for-
service” plans. These two regulatory agencies are the prod-
uct of changing political circumstances and marketplace
trends during the past half-century. 103
The History of Insurance Regulation in California
In response to scandals about the poor quality of care
and fraudulent practices among Medi-Cal prepaid health
plans in the early 1970s, the Knox-Keene Act was enacted
to transfer regulatory authority from the state attorney
general to the Department of Corporations and to estab-
lish a framework for regulation of healthcare-service
plans. In addition, the act set rules for mandatory basic
services; financial stability; availability and accessibility
of providers; review of providers’ contracts; administra-
tive organization; and consumer disclosure and grievance
requirements.
In the 1990s, the Knox-Keene regulatory framework was
amended to include additional benefit and provider man-
dates; new provider contracting and claims payment require-
ments; and changes to coverage and contract requirements.
In 1997, the Managed Healthcare Improvement Task Force
recommended that a new agency be created to regulate
Knox-Keene plans. In the following year, the legislature
passed AB 78, which created the Department of Managed
Healthcare. The evolution of the health insurance market
since then has led some observers to believe that it is time to
reexamine this dual regulatory structure.104
Problems Relating to Dual-Regulatory Agencies
The principal goal behind creating the Department of
Managed Healthcare was consumer protection. The agency
california task force on affordable care 26
has been aggressive in its enforcement of laws and regu-
lations designed to protect people enrolled in managed-
care plans. However, the agency’s actions ultimately may
undermine the quality of care provided to California con-
sumers as well as the national move toward coordinated
care if consistent standards are not applied to all health
insurance products.
Standardizing regulations, including ben-
efit mandates, across all insurance products
would remove the incentive that is pushing
insurers toward low-cost, low-quality options.
Managed care plans have pioneered many innovations,
but their market share is eroding in California, partly
because managed care entities are subject to much more
stringent requirements than plans regulated through
the CDI. For example, “timely access” standards apply to
entities regulated by both departments, but the standards
are much higher for managed care plans. As these plans
lose their price advantage for this and other reasons, the
market is moving back toward standard indemnity prod-
ucts. This is not a positive development for Californians
as consumers or as patients. Voluminous research has
shown that consumers of indemnity products often over-
estimate the care insured by these products and so can
put themselves at financial risk by not having more com-
prehensive coverage.105
Standardizing regulations, including benefit mandates,
across all insurance products would remove the incen-
tive that is pushing insurers away from products that offer
coordinated care and toward low-cost, low-quality options.
In this way, the state would be protecting all consumers,
not just those in managed care. This also would create a
level playing field for value-based competition.

© Phil Channing
Maryann O’Sullivan, executive director,
Campaign for Effective Patient Care, and
Michael Johnson, director, Public Policy,
Blue Shield of California.
Merging the Agencies
With a more standardized healthcare system that is trans-
parent to the consumer, preserving an opaque regulatory
system makes no sense. A transparent system would have
the potential to dramatically reduce costs through the
application of market forces. But these forces would not
have an effect if the state regulatory structure continues to
offer stronger incentives for insurers to offer lower-value
products with fewer regulations (under the CDI frame-
work) rather than higher-value products with strong con-
sumer regulations (under the DMHC framework).
Therefore, these agencies should be merged, standardiz-
ing their regulations so that all consumers of healthcare
in California can be equally and fairly protected. This
also may be a precondition for implementation of federal
healthcare reform, which will require efficient coordina-
27 new america foundation
tion and policy implementation at the state level.106 The
best plan would be for California to transfer the CDI’s reg-
ulatory authority of health insurance to the Department of
Managed Healthcare. Insurance companies then would be
licensed under DMHC, which might need to provide these
services through a subsidiary organization. Having all
health insurance regulation under the DMHC likely would
lead to equalized benefits and uniformity in administrative
and quality-of-care programs, claims practices, and regula-
tions regarding financial solvency.
Having a single regulator and a single regulatory standard
for insurance products, unfortunately, won’t guarantee
protection for consumers or affordable coverage. Michigan
has a single regulator—the Office of Financial and
Insurance Regulation in its Department of Energy, Labor,
and Economic Growth—yet the WellPoint rate increases
that received so much recent attention were highest for
some consumers in Michigan’s individual market.107
Making government regulation more rational also will not
necessarily solve some significant issues in the insurance
market, but California’s current regulatory environment is
pushing insurers away from providing comprehensive cov-
erage for individuals and toward plans that provide fewer
benefits and consumer protections.
Finally, creating a high-value healthcare system for
California might be more difficult if the self-funded mar-
ket is not part of the solution. Employers are preempted by
ERISA and do not have to conform to the California insur-
ance rules. For this reason, the risk pool will continue to be
segmented. It will be hard to manage the cost of healthcare
without all the state’s population being involved. About 31
percent of California workers are covered by self-funded
plans, considerably fewer than the 57 percent average
nationally because of California’s high penetration of
HMOs. This lower figure nevertheless still represents a
very significant portion of the market.
III. Create Meaningful Choices for Health Consumers

Insurance Exchange

7. To promote value-based competition and enhance affordability, California should design its state-based insurance
exchange for individuals and small businesses to promote maximum participation and to avoid risk selection.

• California has models of markets with value-conscious consumers.

• The state should implement federal legislation to promote value-based competition among all individual
and small business markets.
• Among the tools used to accomplish this goal are standardization of benefit design and market-wide risk
adjustment.

High-Value Top 10: Create a sole-source insurance exchange for individuals and small businesses: $25B.

Exchanges in Federal Reform California discussed below. Nevertheless, understanding

Few subjects led to more lively conversations among Task
Force members than that of the correct structure for the
new health insurance exchanges envisioned in national
reform. As anticipated by this dialogue, federal legisla-
tion created separate state-based exchanges for individu-
als (the American Health Benefit Exchanges) and small
businesses (the Small Business Health Options Program
[SHOP] Exchanges). These exchanges will open in 2014
and will be administered by a governmental agency or a
non-profit organization. In 2017, the state will have the
option to open the exchanges to businesses with more than
100 employees.108
The exchange will feature two federally-qualified multi-
state plans, a new federally-supported “consumer operated
and oriented plan” (COOP) plan as well as offerings from
existing participants in these markets. There will be four
standardized levels of products in the market. All plans
must include an essential benefits package and are subject
to other requirements including an adequate provider net-
work and the use of a uniform enrollment form. This pro-
posed structure of the exchange incorporates most of the
elements discussed by the Task Force and in some cases
moves beyond them.
Since the exchange is the vehicle through which people
will receive subsidies to purchase health insurance, it is
less likely to face the kind of adverse selection death spiral
that has tripped up some prior exchanges, including one in
issues related to selection, risk adjustment, and the role
of health insurance brokers is vital as the state prepares to
administer its exchange.
Existing Choices for California Consumers
State employees in California and those who work for
large institutions, such as Stanford University and the
University of California, have access to an insurance
exchange that is similar to the Federal Employee Health
Benefit Plan (FEHBP), which permits current and for-
mer federal employees to choose between multiple plans
marketed by insurers, employee associations, and labor
unions. In addition to choosing among several private
insurance products—both HMOs and PPOs—state
employees have access to three “public options”—PERS
Select, PERS Choice, and PERS Care, which are all
PPOs funded by the premiums paid by public employ-
ees and administered by private corporations including
Anthem Blue Cross. Also, in some counties, including
Los Angeles County, some Medi-Cal enrollees can choose
between a private insurance plan and a publicly adminis-
tered option.109
Sole-Source Exchange
California also had a small business health insurance
exchange, PacAdvantage, which was used by more than
10,000 small businesses to purchase insurance between
1993 and 2006. The Pacific Business Group on Health, the
last administrator of the exchange, participated in the Task

california task force on affordable care 28

 “The exchange that public employees access through CalPERS has allowed state
employees to save money personally by making individual choices, but the overall
market in the state is too dominated by open-ended fee-for-service for a relatively few
employment groups to be able to drive down premiums in general.”
—Alain Enthoven, professor emeritus, Stanford University

Force. Understanding why this exchange ultimately failed
to fulfill its promise is the key to understanding how to
implement a successful one.
Because it is more likely that an exchange will be suc-
cessful if it has a larger membership that brings more of
the California health system into a competitive market,
separating individuals and small businesses is not ideal.
However, more important than the size of the exchange
is whether the marketplace is the sole source for specific
types of consumers to purchase insurance in a given state.
If it is not, the exchange may attract most of the bad risk in
the market while plans outside of the exchange will attract
the good risk. This, in a general sense, is what transpired
with PacAdvantage.110 According to Peter Lee and John
Grgurina, both of whom had a significant role in adminis-
tering the exchange:
“People with higher medical costs enrolled in
PacAdvantage, while lower-risk people obtained
coverage outside the exchange where they could
find less-expensive insurance. This drove up pre-
miums inside the exchange, causing healthier
people to drop out. This is known in the insurance
business as a classic ‘death spiral.’ ”111
However, even if the exchange avoids an outright death
spiral it may be unable to offer better prices over time if
there is competition for the same customers both within
and outside of the exchange.112 The reason is that this com-
petition tends not to involve full information on the part
of consumers. Plans outside of the exchange will struc-
ture their products so as to attract less risk (for example
through offering poor or no benefits for certain high-cost
chronic conditions).
A second relevant dynamic in play is that plans outside
of the exchange have the advantage of being preferred by
insurance brokers. Within a marketplace, such as a web-
site where the costs and benefits of each plan are clearly
delineated, it is probably not necessary to have a class of
people who steer buyers toward specific insurance plans.
The commissions that these brokers extract may be jus-
tified within a complex marketplace in which it is dif-
ficult for consumers to find the product that is right for
them. However, such commissions could be substantially
reduced within a marketplace where consumers have
access to full, comprehensible information about the cov-
erage options available to them.
Brokers have a large amount of political influence and
therefore a strategy to reduce the number of entities that
contribute to the overall cost of insurance will have to be
carefully developed. But the role of brokers in this process
must be examined and addressed. The conclusion that the
new health insurance marketplace may not have a sub-
stantial role for brokers was not shared by all members of
the Task Force. Some participants believe that even with
reforms that make it easier for consumers to compare dif-
ferent products, the inherent complexities of health insur-
ance will remain. Many people will continue to find it chal-
lenging to determine which products best meet their needs
and therefore a role for brokers may need to be preserved
in any exchange established by the state. Federal legisla-
tion allows the state to set rate schedules for brokers as a
part of the establishment of the exchange.
Standardized Benefits
To create a marketplace in which the need for interme-
diaries is reduced along with costs, benefit designs will
need to be standardized. In implementing its state-based
healthcare reform, Massachusetts included standards for
minimum creditable coverage (although the legal require-
ment to have such coverage lies with the individual, not
the insurance company). Federal reform also specifies that
there will be four benefit tiers leading to the assumption

29 new america foundation

 “We need a purchasing exchange that creates maximum competition, choice, and
transparency — and one that remedies the undue administrative burden and lack of
economies of scale that currently results in small business healthcare costs that are 18
percent higher than average.”
—John Arensmeyer, founder and CEO, Small Business Majority

that this will give consumers substantially more informa-
tion about how much of their medical bills their insurance
will cover. However, an extensive study by Karen Pollitz
suggests that the Massachusetts system of dividing insur-
ance products into different tiers does not give consum-
ers adequate information about what is covered and what
medical expenses they can expect.113 This is partly because
insurance companies are not required to share their ben-
efit design with consumers until after the consumers
already have purchased their products. And, when they
do provide this information, it often is incomprehensible
even to specialists, changes frequently, and does not use
even seemingly straightforward terms such as “deductible”
in standard ways.114 Federal legislation has several provi-
sions that attempt to address this issue such as the require-
ment that the exchange provide comprehensible and com-
parable information on the offerings of each competitor in
this new market. The federal regulatory process will help
specify the extent to which this creates a marketplace that
is truly transparent to the consumer.
Risk Adjustment
Before its dissolution in 2003, California’s insurance
exchange for small businesses had, with increasing suc-
cess, experimented with risk adjustment. Those experi-
ences could serve as models for a new exchange. Risk
adjustment among plans was difficult, because plans
were able to offer products both inside and outside of the
exchange, and some PPOs had very small percentages
of their businesses within the exchange.115 Task Force
members disagreed about whether the model for risk
adjustment within PacAdvantage had improved substan-
tially. The Task Force members who had been involved in
administering the plan believed that it had, but the insur-
ance company executives whose companies had partici-
pated in the exchange were skeptical. Insurers were not
necessarily opposed to risk adjustment, but they wanted
to ensure that it would be a standardized and relatively
predictable process that would allow them to plan from
year to year.
The example of PacAdvantage suggests that risk adjustment
may be more likely to succeed on a marketwide level, as
envisioned in federal reform, so that such adjustment can
be a tool to ensure that the entire exchange isn’t subject to
adverse selection. International examples of successful risk
adjustment on a nationwide level include the Netherlands
and Germany.116 In order for risk adjustment to work, plans
also must be required to provide detailed information to
the exchange that allows for an accurate determination of
the health of their enrollees. The development of detailed
and accurate electronic health records and fully functional
health information exchanges, though representing a sub-
stantial investment of time and energy, would be necessary
for this larger effort to control costs and through fostering
value-based competition among insurers.

california task force on affordable care 30

 Shared Decision Making

8. To assure that patients’ values and circumstances are taken into account in decisions that doctors and their
patients make together, unbiased, scientifically-based patient decision aids should be made available when appropri-
ate. Shared decision making often results in more conservative courses of treatment.

• Shared decision making initiatives in California have shown great promise in encouraging the adoption
of effective courses of treatment that are also more efficient in their use of resources.
• Accredited decision aids in multiple languages are needed as well as support for patient coaching.
• Shared decision making should be integrated into the benefits available through both public and private
health coverage.

High-Value Top 10: Increase support for shared decision-making to ensure that patients’ values and preferences are taken
into account in decisions that they make in conjunction with their doctors about healthcare interventions: $2.3B.

Shared Decision Making in California and Other States
Shared decision making is a “collaborative process whereby
patients and doctors make healthcare treatment decisions
together.”117 It honors the patients’ right to be informed
about the risks and benefits of their medical options as well
as of the scientific evidence that supports various courses of
treatment.118 More than 50 randomized controlled trials of
shared decision-making have been held across the country.
Patients who participated in these trials were, on average,
20 percent more likely to choose less invasive treatment
options.119 The goal of shared decision making, according
to Dominick Frosch, a specialist in health communications
from UCLA, is to provide the patient with “prescription-
strength information.”120
In California, the insurer Health Net implemented shared
decision making, including processes for managing chronic
conditions and elective procedures. To measure the effect of
this, in 2006-2007 Health Net conducted a randomized con-
trolled trial of 70,000 commercial members in California,
identifying an 11 percent decline in hospital admission rates.
Surgery rates for back pain, hip replacements, and cardiac
revascularizations declined by as much as 20 percent. In
addition, 84 percent of plan members reported that the asso-
ciated use of health coaches improved their quality of care.121
These results suggest that shared decision making has
significant potential for moderating the rate of growth
of health expenditures. The Lewin Group has published
research quantifying the monetary effect of reductions
that are in use for individual conditions. It concluded that
when decision aids are used, higher-cost treatments were
significantly reduced with no decrease in the quality of care
or of the patient-reported quality of life. Lewin estimated
that the national savings for the Medicare population for
just 11 conditions would be more than $4 billion annually.122
Shared decision making has been found to be effective in
improving outcomes and patient satisfaction in the course
of the treatment of mental health issues as well.123
While California has not passed legislation on shared deci-
sion making, Washington State authorized support for
SDM.124 An ongoing demonstration project will gauge the
effects of informed consent for treating patients who have
multiple alternatives for care. The project includes such
conditions as osteoarthritis of the knee or hip, low back
pain, abnormal uterine bleeding, fibroids, benign prostatic
hyperplasia, chronic stable angina, early-stage breast can-
cer, and breast reconstruction after mastectomy.125
At the federal level, the Patient Protection and Affordable
Care Act, signed by President Obama in March 2010, cre-
ates a new shared decision-making program and calls for
awarding funding to produce and update decision-making
aids, creating centers to support this work, and providing
grants to health care providers for the development, use,
and assessment of such tools.126
Although California has not yet provided funding for such
programs, demonstration projects are underway in the

31 new america foundation

state. The School of Medicine at UCLA has a program that
uses “decision aids in small, community-based practices
that serve low-income populations to determine the barri-
ers and solutions to integration of decision aids across the
healthcare field. In addition to qualitative data collected,
physician focus groups and patient interviews are planned
to help resolve problems with implementing shared deci-
sion-making.”127 The University of California, San Diego,
also is participating in an initiative at three clinics that
focuses on the logistics of shared decision making. The
project will determine factors that will predict a patient’s
response to shared decision making as well as ways to use
technologies such as electronic medical records and the
Internet to increase shared decision making.
The Breast Cancer Initiative of the Foundation for Informed
Medical Decision Making covers all the major decisions
faced by an individual with breast cancer in a comprehen-
sive and easy-to-understand manner. Its programs address
early-stage treatment options; living with metastatic breast
cancer; chemotherapy and hormone therapy; and whether
breast reconstruction is desirable. California cancer cen-
ters participating in this initiative include the Cancer
Resource Center of Mendicino County; Kaiser Permanente
of Oakland; Mendocino Cancer Resource Center; the
University of California, San Francisco; and the Wilshire
Oncology Medical Group. The University of California,
San Francisco, Breast Center Decision Services program
trains premed students to coach patients and has a Web
site, decisionservices.ucsf.edu, with links to resources and
information for patients.128
Public Data Regarding Patient-Decision Aids
The California Office of the Patient Advocate recently began
measuring the percentage of HMO members in California
who report that their doctor talked with them about the
pros and cons of their treatment choices and who asked
which choice best fit their needs. According to the data,129
the top HMO providers have doctor-patient consultations
between 40 percent and 60 percent of the time. The data
do not measure the quality of these consultations or their
ultimate outcomes.
Integrating Information With Decision Consulting
Physicians who lack the time or skills to facilitate personally
informed decision making can start a discussion and then
refer patients to nurses or other trained personnel who have
time to distribute educational materials and answer patients’
questions. There is a current lack of well-placed financial
incentives to encourage shared decision making. There is
little to no financial support for clinicians or their staff to
undergo formal informed-choice training, emphasizing the
communication skills necessary to promote this goal. A sec-
ond option is for patients to be supported by counselors/
coaches outside their physician’s practice for help in the
informed decision making process. Decision counselors,
a new type of healthcare professional in many communi-
ties, can help patients to understand options, to consider the
probability of benefits and harms and the supporting evi-
dence, to explore values, preferences and life circumstances,
to determine the desired level of control in making deci-
sions, to prepare questions to bring to their doctors, and to
find motivation to engage with their primary clinician.

“Patients can and should be partners in cost

containment and quality improvement, if there is clear
and trustworthy information that these choices will not
compromise the quality of their medical care. Patients
don’t want their coverage or care arbitrarily limited for
profit, but they don’t want to spend more days in the
hospital than necessary or take extra medications that
provide little or no benefit.”
—Anthony Wright, executive director,
Health Access California
© Phil Channing

california task force on affordable care 32

 Encouraging Shared Decision Making in California
Much of the information that patients require is available
amid the vast resources of the Internet and other media.
However, the quality of web sites and other information is
uneven, and patients do not always recognize embedded
advocacy by medical suppliers. The sheer volume of avail-
able information in itself is a problem, making it difficult
for patients to locate specific information. The current gen-
eration of decision aids and software tools is inconsistent,
sometimes out of step with scientific evidence, and cannot
fully satisfy patients’ questions and information needs.
Federal legislation took significant action in this area. It
establishes a new shared decision making program that
will establish a certification process for decision aids;
award funding to develop and update aids; create “Shared
Decision Making Resource Centers;” and provide support
to providers for development, use and assessment of shared
decision making using certified decision aids. It offers sup-
33 new america foundation
port for new measures to assess shared decision making
tools and provides support to test innovations that assist
individuals in making informed health care choices under
the new Center for Medicare and Medicaid Innovation.130
As well as monitoring the implementation of federal leg-
islation, California’s leaders should carefully watch for
the results of the demonstration project in Washington
as well as follow efforts in Minnesota, Connecticut and
Vermont, states that are also considering implementing
shared decision making demonstration programs. Some
of these proposals include funds for healthcare provid-
ers to participate in shared decision making sessions.
Currently, many providers have a strong financial disin-
centive to do so, both because they do not receive much
or any compensation for consultation with their patients
and because these sessions may reduce the number of
procedures performed and hence the income generated
by them.
IV. Address the Social Determinants of Poor Health Outcomes

Improving the Food Environment

9. To combat the high morbidity and cost of diabetes and other conditions caused by obesity, California should
improve the affordability and accessibility of highly nutritional foods through local tax-incentive programs, revenue-
generating disincentives to the consumption of calorically sweetened beverages, and the removal of high-calorie, low-
nutrient foods from vending machines and cafeterias in schools, and in healthcare and public facilities.

• Costly chronic diseases are linked to the quality of environments in which people live and the behavioral
choices they make.
• California’s actions such as passing the nation’s first statewide menu-labeling law attempt to address the
connection between food choices and obesity.
• To control health costs and improve health outcomes, the state must take more concerted and coordi-
nated action modeled on anti-smoking campaigns.

High-Value Top 10: Reduce diabetes and other chronic conditions by improving the affordability and accessibility of
highly nutritional foods and imposing fees on sugar-sweetened beverages: $27B.

If the state is to focus resources where they are needed, it
must do more to stop the onset of preventable diseases.
This will require individuals to make better choices about
food to avoid obesity and the costly chronic diseases that go
along with it. The state also must guarantee that all residents
have access to healthy foods rather than being inundated
with opportunities to buy and consume high-calorie, low-
nutrient choices; otherwise, communities will continue to
be “designed for disease.”131
live. Multiple factors, including the lack of access to quality
healthcare, contribute to these gaps.
The challenge of improving the health of people in lower-
income communities is a holistic one. It includes behavior
models, the quality of education, and the environments in
which people work and live. Chart 7 from the Bay Area
Regional Health Inequities Initiative (BARHII) depicts the
influence of these multiple factors on health.132

Governor Schwarzenegger made disease prevention a Neighborhoods Matter

major policy goal through his push for state-based health-
care reform. He also co-hosted a summit on this issue with
former president Bill Clinton in early 2010. The state’s
philanthropic community has invested heavily in the devel-
opment of disease-prevention strategies, including the
California Endowment’s 10-year commitment to improving
health outcomes in 14 communities. The state also is home
to many prominent nonprofits and university centers doing
research in this area.
In California, the difference in life expectancies among peo-
ple living just a few miles apart is striking. As the Bay Area
Regional Health Inequities Initiative reports, “People who
live in West Oakland...can expect to live on average 10 years
less than those who live in the Berkeley Hills. Similarly,
people who live in Bayview/Hunters Point can expect to
live on average 14 years less than their counterparts on
Russian Hill, while residents of Bay Point can expect to live
on average 11 years less than people in Orinda.”133

The Social Determinants of Poor Health
The connection between community characteristics and
the poor health of its residents is particularly vexing in
the state’s lower-income communities. There has been an
increasing understanding that people’s health status and
outcomes are very strongly associated with the social and
economic characteristics of the communities in which they
Because cities are often segregated by race or ethnicity,
and poorer neighborhoods are often communities of color,
striking and persistent disparities in health outcomes exist
along racial and ethnic lines. For the most part, although
these disparities are a factor in the communities in which
people live; most studies report little evidence that ethnic
groups “differ in their ability to transform socioeconomic

california task force on affordable care 34

 Chart 7. The Social Determinants of Health Outcomes
resources into good health.”134 As long as economic dispari-
ties exist, so will differences in health status and outcomes.
Recent evidence suggests, though, that these inequities
can be partially addressed through changes to the environ-
ments in which people live.
Food Environment
A report from the California Center for Public Health
Advocacy and the UCLA Center for Health Policy
Research135 has shown a strong link between the Retail
Food Environment Index (RFEI) for a community and the
prevalence of diabetes and obesity. This index, a measure
of the accessibility of healthy food, divides the number
of fast-food restaurants and convenience stores in a com-
munity by the number of supermarkets, produce stores,
and farmers’ markets. These differences persist when
controlling for income and other factors, showing that
the environments in which people live can have a positive
effect on their health despite persistent economic inequi-
ties. The implication is that market-based incentives for
increasing the number of stores selling healthy food and
reducing the number of stores selling high-calorie/nutri-
35 new america foundation
ent-poor foods could significantly improve the health of
a community.
Los Angeles Fast Food Ordinance and Menu Labeling
In July 2008, the Los Angeles City Council unanimously
passed an ordinance banning the construction of new
fast-food restaurants in South Los Angeles. This economi-
cally depressed area of the city has some of the highest
rates of obesity in California. A study by Roland Sturm
and Deborah Cohen of the Santa Monica-based RAND
Corporation, however, questions whether this policy inter-
vention has been effective, citing, among other facts, that
many residents of the area purchase high-calorie, low-
nutrient foods at convenience stores that are not targeted
by the ordinance.136
Community Health Councils, a nonprofit health advocacy
organization in South Los Angeles, conducted a study
documenting the oversaturation of convenience stores and
fast-food outlets that led to the enactment of the morato-
rium.137 The moratorium, however, is only one part of what
must be a much larger public policy response to the high
Chart 8. Retail Food Environment Index
rates of obesity and disparities in health in communities
such as South Los Angeles. The L.A. ordinance is designed
to preserve space in otherwise substantially built-out neigh-
borhoods for healthier food options and to usher in more
rational planning, zoning, and development that achieves
both the economic and health goals of the community.
According to Lark Galloway-Gilliam, executive director
of the Community Health Councils: “It is premature to
attempt to evaluate the impact of the ordinance. There is
sufficient evidence from similar efforts to reduce exposure
to tobacco and other health-related triggers to warrant fur-
ther study over time.”
The RAND study suggested that menu labeling might be
a more effective way to reduce rates of obesity—and con-
sequently the rates of chronic diseases and the growth
of healthcare costs. In 2008, California passed a menu-
labeling bill (SB 1420) that requires fast-food restaurants
with 20 or more outlets in California to provide nutritional
information on their standard items. Recent studies con-
firm that menu labeling can decrease calorie intake by
as much as 14 percent in terms of the choices that diners
make for themselves and their children. Federal legisla-
tion mandates menu labeling and requires restaurants to
offer more nutritional information to customers.140
Soda Tax
A more immediate way to influence behaviors that lead
to poor health outcomes is to make unhealthy consumer
choices more expensive. Higher rates of taxation of tobacco
california task force on affordable care 36
products, paired with aggressive public education cam-
paigns, have significantly reduced the rate of smoking
in the United States during the past two decades, which
in turn has led to lower rates of tobacco-related disease.
Revenue raised from the taxes on the sale of tobacco also
has increased public funds available for social priorities
such as children’s education and healthcare.
Following the example of the successful anti-smoking
effort, California should act to shift the full social costs of
the consumption of soda and other calorically-sweetened
beverages to individual consumers. The UCLA Center
for Health Policy Research, in collaboration with the
California Center for Health Policy Advocacy, has shown
that “adults who drink one or more sodas per day are 27
percent more likely to be overweight or obese than adults
who do not drink soda, even when adjusting for poverty
status and race/ethnicity.”141 Coordinated action could
both increase the cost of sugar-sweetened beverages
through fees and end their sale and advertising in pub-
licly-funded settings such as schools, day-care facilities,
and after-school programs. As with the anti-smoking ini-
tiative, public education would need to be an enormous
component of this work.
The idea of taxing sugar-sweetened snacks is not new. “Since
the 1920s and 1930s, many states have used taxes on snacks,
candy, and soda as a source of revenue, particularly during
times of budget deficits.”142 What is relatively new is the
intense industry lobbying in opposition to these taxes that
has led to the repeal of excise taxes formerly levied on soda
in eight states (Louisiana, Maine, Mississippi, New York,
North Carolina, Ohio, South Carolina, and Washington)
and the District of Columbia. Only six states still have excise
taxes that target soda exclusively (Arizona, Missouri, Rhode
Island, Tennessee, Virginia, and West Virginia), although 11
other states include sodas in their general sales taxes. The
connection between soda consumption and obesity is well
documented,143 and the evidence suggests that these taxes
help reduce obesity and thus decrease the costly medical
conditions associated with it.144
 Building Healthy Communities

10. To promote physical activity that prevents the onset and mitigates the consequences of many chronic diseases,
state and local governments should alter transportation and land-use policies to make walking, biking, and the use of
public transit viable, affordable, safe, and attractive.

• California and federal transportation policy is geared towards creating a society increasingly dependent
on car and highway travel.
• State policy should be used to develop livable and walkable communities because most Americans do not
have the time to add exercise to their already overburdened days.
• Promoting physical activity can improve health and reduces chronic disease.

High-Value Top 10: Engineer moderate physical activity into the daily lives of all Californians by altering transportation
and land-use policies to make walking, biking, and the use of public transit viable, affordable, safe and attractive: $27B.

The sedentary lifestyle encouraged by transportation and
land-use policies contributes to skyrocketing rates of obe-
sity, which can cause diseases such as congestive heart
failure and diabetes as well as conditions such as depres-
sion. To engineer moderate physical activity into the lives
of Californians and thereby reduce the growing healthcare
costs associated with these diseases will require a multi-
pronged strategy. Some elements of such a strategy are
already in place through environmental laws.
A comprehensive strategy would involve implementing SB
375 and other climate-change legislation to require physical
changes in communities that make walking, biking, and
public transit realistic options for all residents. It also would
require changes in transportation spending to ensure that
active transportation modes receive a significantly greater
share of funding. In addition, policies should encourage
more compact and diversified development. When imple-
menting changes to transportation systems and built envi-
ronments, it will be important to apply the “8-to-80 rule” so
that changes are safe for all people aged 8 to 80.145
Safe Routes to Schools
Land-use planning must make daily physical activity safe for
all Californians. One important example is the “Safe Routes
to Schools” Program. In 1999, California was the first state
to adopt its own Safe Routes to School program with dedi-
cated funding from its highway account. During the past 10
years, the program has devoted hundreds of millions of dol-
lars to this project. In 2009, Caltrans issued $48.5 million in
grants to construct sidewalks, bike lanes, and curb ramps to
improve safe access to schools from San Diego to Truckee.
Local civic and educational organizations also have sprung
up to promote walkable and safe communities.
In 2000, Marin County was the site for one of the first dem-
onstration projects funded by the National Highway Traffic
Safety Administration. Nine schools participated in a pro-
gram that ranged from organizing “bike-to-school” days to
studying engineering solutions for safety issues on routes
to schools. The pilot program increased the number of stu-
dents who walked or biked to school from 21 percent to 38
percent after only two years.146 In a recent action, Governor
Schwarzenegger directed the Technical Assistance Resource
Center (TARC), which is funded by the Safe Routes to
School program, to analyze whether schools that have the
highest proportion of children in need are participating in
the program.
Access to Parks
In order to lead active lives, children must have access to
parks and places to play. Funds from the California Clean
Water, Clean Air, Safe Neighborhood Parks, and Coastal
Protection Act of 2002 funded the Urban Park Act, which
created parks in low-income communities using $130 mil-
lion in public funds. But children in Los Angeles, in par-
ticular, continue to have poor access to parks. As compared
with New York City, where 91 percent of children live within
a mile of a park, in Los Angeles only 33 percent of children
do.147 The link between conditions such as diabetes and the
lack of physical activity has been documented. At the same
time, the establishment or expansion of parks has been

37 new america foundation

 Legislative Spotlight: Social Determinants
Increasing Access to Free Drinking Water During School Mealtimes: SB 1413 would require school districts to make
fresh, free drinking water available in food service areas by Jan. 1, 2012. The bill was introduced by Sen. Mark Leno
(D-San Francisco) and sponsored by Governor Schwarzenegger.

Eliminating Electrolyte-Replacement Beverages From California Public Schools: SB 1255 would mandate that
electrolyte-replacement beverages, commonly known as sports drinks, would not be sold during the day in public
middle and high schools after July 1, 2011. The bill was introduced by Sen. Alex Padilla (D-Pacoima) and sponsored
by Governor Schwarzenegger.

Increasing Moderate to Vigorous Physical Activity in After-School Programs: AB 2705 would require moderate
to vigorous physical activity during 50 percent of physical education classes and during at least 30 minutes of
after-school programs. The bill was introduced by Assemblymember Isadore Hall (D-Compton) and sponsored
by Governor Schwarzenegger.

shown by the Centers for Disease Control and Prevention
to increase physical activity for people who live in the vicin-
ity by 25.6 percent.148 A study by the RAND Corp. further
showed that “Los Angeles residents who live close to parks
exercise more and visit parks more frequently compared
with residents who live further away from parks.”149
Building Livable Communities
The single most-often cited barrier to more physical exer-
cise is the lack of time. In the past, most people got their
daily physical activity simply by moving around during the
day—walking or biking to and from neighborhood schools,
stores, and public transit. During the past 50 years, how-
ever, California and federal transportation and land-use poli-
cies have favored dispersed, suburban-style development in
which housing is far from employment centers, retail, and
schools. As a result, we not only frayed the social fabric of
our communities, we decreased our daily physical activ-
ity, increased our hours spent in cars, and contributed to
climate change. Federal and state policy, therefore, must
acknowledge the connections among land-use and trans-
portation policies and good health and increase funding for
public transit, and pedestrian and bicycle options. Land-use
policies must be altered to favor healthy, compact, walkable
communities planned around public transit hubs.
This is not just an environmental imperative, nor is “green-
ing” our communities a luxury that we cannot afford dur-
ing a recession. Recent research has shown that factors such
as neighborhood compactness, access to public transit, and
rates of vehicle ownership are the key to predicting mort-
gage performance. With transportation costs accounting
for roughly 17 percent of the average American household’s
income—and the foreclosure crisis still garnering atten-
tion—the need for better land-use planning and better lend-
ing practices has never been clearer.150
In addition, the healthcare system cannot afford to have sub-
stantial numbers of people who are obese and who develop
multiple chronic conditions in their 30s and 40s rather than
in their 60s and 70s. Without livable communities, we will
continue this trend and accelerate the unsustainable growth
of healthcare spending that threatens to bankrupt our fami-
lies, our businesses, and our governments.

“Just telling people to exercise more doesn’t work in our time-stressed society. We must
change the physical layout of our communities so that walking, biking, and public transit
are the easiest, safest, most attractive options for moving ourselves through our days.”
—Jean Fraser, health system chief, San Mateo County

california task force on affordable care 38

 Appendix
This appendix references the studies that form the basis of
the estimates for how much these cost-containing strategies
could save and explains how we modified them to apply spe-
cifically to California.
Aggregate Impact
We produce an aggregate impact for these different strategies
– $305 billion over 10 years – to emphasize that these strate-
gies will be most effective when coordinated with one another.
However, while these strategies are mutually reinforcing, they
also will overlap in terms of their effects. For example, some
of the same unnecessary procedures that would be eliminated
through realigned incentives might also be avoided through
improved involvement of patients in their own care. We expect
this overlap will be roughly one-third, consistent with the
views of an expert panel recently convened by the Institute of
Medicine.151 Therefore, the aggregate savings of each individ-
ual strategy was reduced by a factor of one-third to reflect the
overlapping impacts of these strategies and to prevent double
counting of the savings.
The slower rate of growth of California healthcare spending
implied by summing the impact of these strategies and reduc-
ing this number by the expected overlap is also well in line with
expectations of other aggregate-level studies. $305 billion is
roughly equal to the amount of money that state would save were
we to reduce over ten years the growth of healthcare spending
from its expected trajectory to a rate that is one percentage point
above the historical growth of GDP, a reduction that many ana-
lysts believe is highly plausible.152 To calculate baseline growth,
we assume that California’s healthcare spending will grow by
4% from 2009 to 2010 (matching the growth of healthcare
spending from 2008-09) and then at an average annual rate
of 8% from 2010-2019. This matches the compound annual
growth rate of health spending in California from 1980 to 2004
and is within the range of other recent projections.153
Scope of Estimates
It is important to note that for almost all of these recommen-
dations, we are not starting from scratch but rather building
on established efforts and pilot programs, ranging from the
national Medicare physician group practice demonstration
to local California ordinances that limit the development of
new fast food facilities. The expectation that we will achieve
savings within a ten-year time frame is predicated on quickly
expanding these projects, building on their successes and
learning from their missteps.
39 new america foundation
Though $305 billion is a substantial amount of money, it is in
some ways a very conservative estimate. Some health econo-
mists estimate that as much as one-third of healthcare spend-
ing does not contribute to improving health and other OECD
countries spend, on average, approximately half the amount
of the United States does (expressed as a percent of GDP)
while achieving comparable outcomes.154 Were Californians to
reduce their total healthcare spending by one-third, it would
save approximately $1.2 trillion dollars over ten years. $305 bil-
lion represents only 8.5% of the $3.6 trillion Californians are
expected to spend on healthcare over the next ten years.
Calculating the Savings of the High Value Top Ten
1. Payment Reform (Savings estimate: $211 billion)
It is the promise of payment reforms generally that forms
the basis for our confidence that the state could generate
savings of the magnitude we project over the next ten years.
However, our estimate relies on studies that have docu-
mented the cost-controlling potential of a particular reform,
bundled payment. This falls in the middle of the continuum
of such payment reforms which run from fully pre-paid
medical services to the bundling of all care for an entire epi-
sode (including pre- and post-operative care) to bundling for
a single hospital admission (such as the “Diagnosis Related
Group” or DRG payments within the Medicare program).
The RAND Corporation has done extensive analyses using
the PROMETHEUS model155 to examine the potential savings
from implementing “a single payment for all services related
to a given treatment or condition, causing providers to assume
risk for preventable costs.”156 RAND estimates that bundling
payment for an entire episode would slow the rate of growth
of medical spending by as much as 5.4% nationwide. By caus-
ing providers to coordinate care, they are expected to become
25-50% more efficient in their resource usage. In fact, their
model may understate the potential savings since it focuses only
on “avoidable complications” rather than on overall efficiency
and device usage. Nevertheless, bundled payment is the most
effective cost-containing strategy that they evaluate. It is the big-
gest source of savings that we estimate, based in large part on
the two RAND studies as well as other national studies.157
To determine the actual effect that is reasonable to estimate
within the very large range presented by RAND (-5.4 percent-
age points to -0.1 percentage points), we start with the mid-
point, a -2.65 percentage point reduction in the growth of
spending. However, we must then estimate how the high
penetration of relatively efficient managed care in California
affects the estimation of potential cost savings. This is chal-
lenging for a number of different reasons. First, managed care
has been eroding somewhat in California which contributes to
our assumption that California will revert closer to the mean
health spending growth for the nation over the course of the
next ten years rather than preserving its relatively slower rate
of growth over the past twenty years. Moving to bundled pay-
ment will not necessarily have a substantial impact in fully inte-
grated systems like Kaiser, but it could work to change incen-
tives in partially capitated systems. So a reasonable estimate is
that the impact of this reform would be 28% lower, which is
the market share of Kaiser.158 Hence the ultimate effect would
be to slow growth by 1.9 percentage points (2.65% * .72).
How quickly can the state achieve these efficiencies? In this
analysis, we assume that these savings would not start until
2011 and that they would be scaled in .38% increments over 5
years with the 1.9 percentage point reduction not fully in effect
until 2015. Slowing growth by 1.9 percentage points (phased
in from 2011-2015) relative to baseline growth would save
Californians $210.9 billion over ten years. This estimate relies
on a series of assumptions that are significantly more conser-
vative than those in studies that assume that the full amount
of savings could be implemented within local markets or that
their potential cost-controlling effects would phase in fully in
the immediate- to near-term.
2. Reduce utilization of high-cost services ($21.5 billion)
One of the many studies that examined the cost-controlling
potential of strategies designed to reduce overutilization of such
high-cost, preference-sensitive services as radiological imaging
is Federal Healthcare Cost Containment – How in Practice Can It
Be Done? Options with a Real World Track Record of Success pub-
lished by the UnitedHealthcare Center for Health Reform and
Modernization in May 2009. This report documented a series of
strategies to control utilization including radiology benefit man-
agement, radiology therapy management, member incentives
to use highest quality providers, integrated medical manage-
ment and prospective claims review, all of which address directly
or indirectly the issue of utilization. Together, they estimate
that these measures will control spending by $214 billion from
2010-2019. The estimate that these strategies will save the state
$21.4 billion dollars over ten years represents 10% of this figure
as Californians are responsible for roughly 10% of total national
healthcare spending ($167 billion of $1,551 billion in 2004).159
3. Hospital readmissions ($16 billion)
Potentially preventable rehospitalizations cost the Medicare
california task force on affordable care 40
program $17.4 billion in 2004 alone.160 There is wide varia-
tion among hospitals with the top quartile of hospitals rated by
Medicare Hospital Compare having 65% lower spending on
this measure than the national average.161 California’s rate of
readmissions within 30 days in the Medicare Fee-For-Service
program is 19.5%, only .1% lower than the national aver-
age.162 Interventions designed to reduce unnecessary rehos-
pitalizations such as those detailed in the report above have
reduced rates by 20% to 75%.163 Assuming that the total cost
to Californians is twice the cost of the state’s share of Medicare
readmissions (grown in line with overall market expectations
described above), and that coordinated action among public
and private stakeholders can reduce preventable admissions
by a maximum of 30% phased in over five years, the savings
to the state would be $16 billion. This is one of many cost-con-
trolling efforts that builds on existing successful programs and
models both in California and nationwide.
4. Healthcare-associated infections ($19 billion)
The Healthcare Associated Infections Program of the California
Department of Public Health estimates that the cost of health-
care-acquired infections at California’s acute care hospitals
alone is $3.1 billion dollars per year. Recent changes to Medicare
as well as provisions within federal healthcare reform stipu-
late non-payment for many healthcare-acquired infections.
However, it is difficult to definitively categorize many condi-
tions as HAIs and ongoing state and federal action to address
their costs is likely to fall significantly short of recouping these
total costs. Our estimate assumes that the cost of these infec-
tions will grow at 8% per year and that nonpayment and other
proven projects already in the process of being expanded will
be able to reduce spending related to healthcare-acquired infec-
tions by 40%, phased in over four years for a total of $19 billion
in savings between 2010 and 2019.
5. Reducing Defensive Medicine ($15 billion)
The CBO has estimated that a package of medical liability
reforms could reduce healthcare spending by .5% over ten
years through a combination of slowing the growth of mal-
practice premiums and reducing the incidence of defensive
medicine.164 California already has in place restrictions on eco-
nomic damages yet concerns about malpractice insurance and
defensive medical practices persist. Credible estimates of the
total amount of spending attributable to defensive medicine
run as high as 25%.165 Using the funds earmarked in federal
legislation for state-based pilots to aggressively pursue over-
utilization of high-cost medical services that have been identi-
fied as common areas for defensive medical practices166 could
 reduce spending in the state by .5% in line with the scope of
CBO estimates. If such a reduction started in 2012, the sav-
ings to the state over the next ten years would be $14.9 billion.
6. Reducing Administrative Inefficiencies ($93 billion)
The Congressional Budget Office projects (“Letter to Harry
Reid, November 11, 2009”) that “Requirements that the
Secretary of HHS adopt and regularly update standards for
electronic administrative transactions that enable electronic
funds transfers, claims management processes, and verifica-
tion of eligibility, among other administrative tasks,” would
decrease premiums on the exchange by as much as $40 per
person per year. If these savings scale in starting in 2012 due to
California-based efforts already underway and grow at the rate
of medical inflation after 2014 and accrue equally to all par-
ticipants in the private insurance market, the ten-year-savings
to Californians from reducing administrative inefficiencies
would be $79.6 billion. Adding to this the California-specific
savings of $13.3 billion from “Administrative modernization of
Medicaid programs,” as described in the UnitedHealth report
“Coverage for Consumers, Savings for States: Options for
Modernizing Medicaid” creates a total savings of $92.9 billion
over ten years.
7. Insurance Exchange ($25 billion)
The Congressional Budget Office estimates that the creation
of an insurance exchange would reduce spending by the par-
ticipants in this market by 5% per year through a combination
of lower administrative overhead, greater competition, admin-
istrative simplification, and improvement to the overall risk
pool.167 There were 5.9 million people who purchased insur-
ance either on the individual market or through a small group
in California in 2008.168 It is difficult to get a precise figure of
the average cost of their premiums since this number aggre-
gates across consumers of different products in different mar-
kets purchasing insurance both for themselves and their fami-
lies. However, a reasonable estimate for this average annual
cost is $5,133, which was the average cost of single coverage in
the employer-based market in 2008.169
To calculate total savings, we grow the size of the overall market
over the course of the next ten years at 2% (to account for popu-
lation growth) and the average cost of premiums at 10% (in line
with its CAGR over the past ten years). We then assume that
the savings projected by the CBO would accrue to this market
beginning in 2014, which is the year that the exchanges out-
lined in federal reform become operational. 5% savings within
this market over the five-year span of 2014 to 2019 would save
41 new america foundation
Californians $24.7 billion. The actual savings could be signifi-
cantly greater since the premium number we employ is for sin-
gle rather than family coverage which is approximately three
times more expensive. Furthermore, premiums for some con-
sumers in the individual market in California have grown sig-
nificantly faster than 10% in recent years.170
8. Shared Decision Making ($2.3 billion)
In a 2009 report prepared for the Commonwealth Fund, “A
Path to a High Performance U.S. Health System: Technical
Documentation,” the Lewin Group estimates that savings
associated with implementing shared decision making in
the under-65 population for 23 conditions171 would be more
than $23.4 billion over 10 years. Since California is respon-
sible for approximately one tenth of national health expen-
ditures, our share of these savings is $2.3 billion. Lewin’s
estimate calculated only the effect of Patient Decision Aids
rather than a more comprehensive strategy such as the one
discussed in this report.
9 & 10. Social Determinants of Health ($54 billion)
Addressing the social determinants of poor health is not only
a moral obligation; it is also an economic imperative. The
California Center for Public Health Advocacy estimates that
the higher health care costs generated and economic produc-
tivity lost due to obesity and physical inactivity in California
were approximately $41 billion in 2006. Nearly one in four
Californians (23.3%) is obese. Obesity is associated with the
five chronic conditions that alone account for as much as 75%
of our healthcare spending in the United States: diabetes,
asthma, depression, congestive heart failure, and coronary
arterial disease.172 The savings to be realized from addressing
these trends is substantial. The Center estimates that “If the
state of California is able to achieve a modest reduction in the
prevalence of overweight, obesity, and physical inactivity of
just 5% per year for each risk factor, the savings realized would
average nearly $2.4 billion per year.”173 We calculate the poten-
tial savings by assuming that all of the strategies designed
to shift Californians to low-calorie high-nutrient diets will
together reduce obesity by a maximum of 5% phased in over
five years starting in 2011. Likewise, we assume that all of the
policy changes designed to engineer physical activity into the
lives of Californians will increase such activity by a maximum
of 5% phased in over five years starting in 2011. Each of these
strategies, therefore, will reduce healthcare spending by $26.8
billion over ten years. Specific interventions, some of which
are described above, have achieved far greater results for tar-
geted populations.
Notes
1 This aggregate estimate assumes a one-third overlap
among strategies (e.g., adopting prospective payment will
lead to some of the same efficiencies as the use of patient
decision aids). For more detail see the Appendix.
2 RAND Corp., Controlling U.S. Healthcare Spending—
Separating Promising From Unpromising Approaches,
December 2009.
3 UnitedHealth Center for Health Reform and
Modernization, Federal Healthcare Cost Containment–How
in Practice Can It Be Done? Options With a Real World Track
Record of Success, May 2009.
4 The Agency for Healthcare Research and Quality, U.S.
Department of Health and Human Services, Educating Patients
Before They Leave the Hospital Reduces Readmissions, Emergency
Department Visits and Saves Money, February 2009.
5 California Department of Public Health, Center for
Healthcare Quality, Healthcare Associated Infections Plan,
December 2009.
6 Congressional Budget Office, Analysis of the Effects of
Proposals to Limit Costs Related to Medical Malpractice (“Tort
Reform”), October 9, 2009.
7 Congressional Budget Office, Letter to the Hon. Harry Reid,
November 18, 2009; UnitedHealth Center for Health Reform
and Modernization, “Coverage for Consumers, Savings for
States: Options for Modernizing Medicaid,” April 2010.
8 Congressional Budget Office, November 2009.
9 The Lewin Group, A Path to a High Performance U.S. Health
System: Technical Documentation, The Commonwealth
Fund, February 2009.
10 UCLA Center for Health Policy Research, California
Center for Public Health Advocacy, The Economic Costs of
Overweight, Obesity, and Physical Inactivity Among California
Adults, 2006, July 2009.
11 UCLA, CCPHA, 2009.
12 The average rate of growth of healthcare spending
during the past 40 years has been 2.7 percent above the
growth of GDP.
13 California HealthCare Foundation/NORC, Employer
Health Benefit Survey, 2009.
14 Shana Alex Lavarreda et al., Number of Uninsured Jumped
to More Than Eight Million From 2007 to 2009, UCLA Center
for Health Policy Research, March 2010.
15 Peter Harbage and Len Nichols, A Premium Price:
The Hidden Costs All Californians Pay in Our Fragmented
Healthcare Delivery System, The New America Foundation,
December 2006.
california task force on affordable care 42
16 PricewaterhouseCoopers Health Research Institute, “The
Price of Excess: Identifying Waste in Healthcare Spending,”
2008; Gerard F. Anderson et al., “It’s The Prices, Stupid: Why
The United States Is So Different From Other Countries.”
Health Affairs 22(3): 89-105; Jonathan Oberlander and Joseph
White, “Public Attitudes Toward Health Care Spending Aren’t
The Problem; Prices Are,” Health Affairs 28(5): 1285-1293.
17 Yaa Akosa Antwi, Martin Gaynor, and William Vogt, A
Bargain at Twice the Price? California Hospital Prices in the
New Millennium (working paper no. 15134), National Bureau
of Economic Research; Cambridge, MA, July, 2009.
18 McKinsey Global Institute, Accounting for the Cost of
U.S. Healthcare: A New Look at Why Americans Spend More,
December 2008.
19 Uwe Reinhardt, “Why Does U.S. Healthcare Cost So
Much? (Part II: Indefensible Administrative Costs),” New
York Times, Economix Blog, November 21, 2008.
20 Paul Ginsburg, et al., Shifting Ground: Erosion of the
Delegated Model in California, Center for the Study of
Health System Change, California HealthCare Foundation,
December 2009.
21 PricewaterhouseCoopers, Comparison of Payment for
High Volume CPT Codes: Medi-Cal and other California
Payers, March 5, 2001.
22 Managed Care in California: Cost Concerns Influence Product
Design, California HealthCare Foundation, December 2009.
23 Lawrence Casalino and James Robinson, “The Evolution
of Medical Groups and Capitation in California,” Kaiser
Family Foundation, September 1997.
24 Ginsburg, et.al., Shifting Ground: Erosion of the Delegated
Model in California.
25 See, for instance, David G. Smith, Paying for Medicare:
The Politics of Reform, New York: Aldine de Gruyter, 1992.
26 RAND Corp, Controlling U.S. Healthcare Spending
— Separating Promising From Unpromising Approaches,
December 2009.
27 Jerry L. Cromwell, Debra A. Dayhoff, and Armen H.
Thoumaian, “Cost Savings and Physician Responses to
Global Bundled Payments for Medicare Heart Bypass
Surgery,’” Healthcare Financing Review 19, no. 1, (Fall 1997):
41–57; see also M.E. Wynn, “Modernizing the Medicare
Program Using Global Payment Policies,” Managed Care
Quarterly 9, no. 3 (Summer 2001): 42–51.
28 Patient Protection and Affordable Care Act, Pub. L. 111-148,
23 March 2010, Sec. 2704.
29 Marsha Gold, “Accountable Care Organizations: Will
They Deliver?” Mathematica Policy Research Inc., Policy
Brief, January 2010.
 30 Hoangmai H. Pham, Paul B. Ginsburg, Timothy K.
Lake, and Myles M. Maxfield, “Episode-Based Payments:
Charting a Course for Health Care Payment Reform,”
National Institute for Health Care Reform, Policy Analysis
No.1, January 2010.
31 Recommendations of the Special Commission on the Healthcare
Payment System (Massachusetts), July 16, 2009, p.10.
32 Stephen Shortell, “Accountable Care Systems for
Comprehensive Health Reform,” http://www.fresh-think-
ing.org/publications/AccountableCareSystems.html.
33 Michael Trisolini et al., The Medicare Physician Group
Practice Demonstration: Lessons Learned on Improving
Quality and Efficiency in Health Care, The Commonwealth
Fund, February 2008.
34 Henry J. Kaiser Family Foundation, Kaiser Commission
on Medicaid and the Uninsured, “Community Care of
North Carolina: Putting Health Reform Ideas into Practice
in Medicaid,” Policy Brief, May 2009; Randall Brown,
Mathematica Policy Research, “Strategies for Reining in
Medicare Spending Through Delivery System Reforms:
Assessing the Evidence and Opportunities,” Henry J.
Kaiser Family Foundation, September 2009.
35 Berenson, Robert A., Paul B. Ginsburg, and Nicole
Kemper, “Unchecked Provider Clout In California
Foreshadows Challenges To Health Reform,” Health Affairs
(February 25, 2010).
36 Cost efficiency at hospital facilities in California: a report
based on publicly available data. Seattle, WA: Milliman Inc.,
October 17, 2007.
37 Antwi, et al., 2009.
38 Berenson et al., 5.
39 Len Nichols,et al., “Are Market Forces Strong Enough
to Deliver Efficient Healthcare Systems? Confidence is
Waning,” Health Affairs 23, no. 2 (2004): 8–21.
40 Paul B. Ginsburg, “All-Payer Rate Setting: A Response
to a ‘Modest Proposal’ From Uwe Reinhardt,” Health Affairs
(July 24, 2009).
41 Len Nichols, Micah Weinberg, and Julie Barnes, “Grand
Junction Colorado: A Health Community that Works,”
New America Foundation, August 2009.
42 Laurence Baker, Same Disease, Different Care: How
Patient Health Coverage Drives Treatment Patterns in
California, California HealthCare Foundation (April 2008).
43 Harbage and Nichols, 2006.
44 California HealthCare Foundation, California Quick
Reference Guide, 2009.
45 State of California. Concept for a Comprehensive Section
1115 Waiver to Replace the Current Medi-Cal Hospital/
43 new america foundation
Uninsured Care Demonstration Project, December 19, 2009.
46 Some studies question whether Medicaid Managed
Care programs save money or improve quality. See for
example, Mark Duggan, Does Contracting Out Increase the
Efficiency of Government Programs? Evidence from Medicaid
HMOs, National Bureau of Economic Research Working
Paper Series No. 9091, 2002.
47 Medi-Cal Facts and Figures, 2009, California HealthCare
Foundation.
48 Lynne C. Huffman et al., “Impact of Managed Care on
Publicly Insured Children with Special Healthcare Needs,”
Academic Pediatrics 10, no. 1 (January 2010): 48-55.
49 Integrated Healthcare Association, Pay for Performance
(P4P) 2008 Results, Executive Summary, August 2009.
50 http://www.bridgestoexcellence.org/
51 http://www.calhospitalcompare.org/
52 http://www.pbgh.org/programs/quality_measurement.asp
53 http://opa.ca.gov/report_card/medicalgroupcounty.aspx
54 “Expert Touts Need for Quality Reporting To Produce
Data for Patients, Not Just Practitioners,” California
Healthline, March 11, 2010.
55 Johanna Van Hise Heart, “Managing Medical Miracles,”
Berkeley Health, Summer 2009.
56 California stakeholders were involved in creating and refin-
ing two widely-used national measures of quality: CAHPS
(Consumer Assessment of Healthcare Providers and Systems),
“a public-private initiative to develop standardized surveys
of patients’ experiences with ambulatory and facility-level
care” administered by the Agency for Healthcare Research
and Quality (https://www.cahps.ahrq.gov/default.asp); and
HEDIS (Healthcare Effectiveness Data and Information Set),
“a tool used by more than 90 percent of America’s health plans
to measure performance on important dimensions of care and
service,” administered by the National Committee for Quality
Assurance (http://www.ncqa.org/tabid/59/Default.aspx).
57 John L. Adams, et al., “Physician Cost Profiling-
Reliability and Risk of Misclassification.” New England
Journal of Medicine 362, no. 11 (March 18, 2010): 1014-1021.
58 Kate Farrell et al., “Does Price Transparency Legislation
Allow the Uninsured to Shop for Care?,” Journal of General
Internal Medicine 362, no. 2 (February 2010): 110-114.
59 Bobby Caina Calvan, “Report: Most state hospitals fail
to comply with price-quote law,” Sacramento Bee, December
2, 2009.
60 Consumers Union, Preventable Harm: California Fails to
Follow Through With Patient Safety Laws, March 2010.
61 In prepaid and capitated models, there may not be a
price for an individual procedure.
62 Patient Protection and Affordable Care Act, Pub. L. 111-148.
63 Elliott Fisher, Donald M. Berwick, and Karen Davis,
“Achieving Healthcare Reform–How Physicians Can Help,”
New England Journal of Medicine 360, no. 24 (June 11, 2009):
2,495-2,497; Rebecca Shackelton, et al., “Does the Culture
of a Medical Practice Affect the Clinical Management of
Diabetes by Primary Care Providers?,” The Journal of Health
Services Research and Policy 14, no. 2 (April 1, 2009): 96-103;
Brenda Sirovich et al., “Discretionary Decision-Making By
Primary Care Physicians and the Cost of U.S. Healthcare,”
Health Affairs 27, no. 3 (May 1, 2008): 813-823.
64 Atul Gawande, “The Cost Conundrum: What a Texas
Town Can Teach Us about Healthcare,” The New Yorker,
June 1, 2009.
65 Galewitz, Phil, “Local Hospitals and Doctors Join Forces
to Improve Healthcare, Restrain Costs,” Kaiser Health
News, July 22, 2009.
66 Patient Protection and Affordable Care Act, Pub. L. 111-148,
Sec.3025.
67 Brian W. Jack, et al., “A Reengineered Hospital
Discharge Program to Decrease Rehospitalization,” Annals
of Internal Medicine 150, no. 3 (February 3, 2009): 178-187.
68 Agency for Healthcare Research and Quality, Educating
Patients Before They Leave the Hospital Reduces Readmissions,
Emergency Department Visits and Saves Money, February 2,
2009.
69 Eric Coleman et al.,“The Care Transitions Intervention:
Results of a Randomized Controlled Trial,” Archives of
Internal Medicine 166, no. 17 (2006): 1,822-8; MD Naylor,
et al., “Comprehensive Discharge Planning and Home
Follow-up of Hospitalized Elders: a Randomized Clinical
Trial,” JAMA 281 (1999):613-20; C Anderson, et al., “Benefits
of Comprehensive Inpatient Education and Discharge
Planning Combined With Outpatient Support in Elderly
Patients With Congestive Heart Failure,” Congestive Heart
Failure 11, no. 6 (November-December 2005) :315-21.
70 Tom Emswiler and Len Nichols, Hill Physicians Medical
Group: Independent Physicians Working to Improve Quality and
Reduce Costs, The Commonwealth Fund: New York, 2009.
71 R. Douglas Scott II, The Direct Medical Costs of Healthcare-
Associated Infections in U.S. Hospitals and the Benefits of
Prevention, Centers for Disease Control and Prevention,
March 2009; R. Monina Klevens, et al., “Estimating
Healthcare-Associated Infections and Deaths in U.S.
Hospitals,” Public Health Reports 122 (2007):160-166.
72 The California Department of Public Health (CDPH)
mandates for an Infection Surveillance, Prevention and
Control Program are in: Senate Bill 739 (Speier), Chapter
california task force on affordable care 44
526, Statutes of 2006; Senate Bill 1058, (Alquist), Chapter
296, Statutes of 2008; and Senate Bill 158, (Flores),
Chapter 294, Statutes of 2008. (California Department of
Public Health, Center for Healthcare Quality, Healthcare
Associated Infections Program).
73 Healthcare Associated Infections Program materials,
http://www.cdph.ca.gov/services/boards/Documents/
CDPHHAIPlan.pdf.
74 Marie McCullough and Josh Goldstein, “High Numbers
of Bloodstream Infections Logged,” Philadelphia Inquirer,
January 13, 2010.
75 Pennsylvania Healthcare Cost Containment Council,
Hospital-Acquired Infections in Pennsylvania 2006-2007,
January 2009. The 2007 bill changed the definitions of the
set of conditions that qualify as hospital-acquired, meaning
that the data going forward will not be comparable.
76 Atul Gawande, “The Checklist,” The New Yorker,
December 10, 2007; Maggie Mahar, “Pilots Use Checklists,
Doctors Don’t. Why Not?” Health Beat, December 14, 2007.
77 Alex B. Haynes, et al., “A Surgical Safety Checklist to
Reduce Morbidity and Mortality in a Global Population,”
New England Journal of Medicine 360, no. 5 (Jan. 29, 2009):
491-499.
78 Patient Protection and Affordable Care Act, Pub. L. 111-148,
Sec. 3008.
79 Victoria Colliver, “California Medical Malpractice Law
in Spotlight,” The San Francisco Chronicle, September 21,
2009.
80 For example, the Illinois Supreme Court recently struck
down caps in its state: Lebron v. Gottlieb Memorial Hospital
(Nos. 105741, 105745 cons.), opinion filed, February 4, 2010.
However, the most recent challenge to the constitutionality
of the California caps was denied appeal to the California
Supreme Court in 2009.
81 Michele Mello and Troyen Bennan, “The Role of Medical
Liability Reform in Federal Healthcare Reform,” New
England Journal of Medicine 361, no. 1 (July 2, 2009): 1-3.
82 Ronen Avraham, et al., The Impact of Tort Reform on
Employer-Sponsored Health Insurance Premiums, National
Bureau of Economic Research, September 2009; Darius
Lakdawalla and Seth Seabury, The Welfare Effects of Medical
Malpractice Liability, National Bureau of Economic
Research, September 2009.
83 Daniel Kessler and Mark McClellan, “Malpractice Law
and Health Care Reform: Optimal Liability Policy in an
Era of Managed Care,” Journal of Public Economics 84, no.2
(May 2002): 175–197.
84 David M. Studdert et al., “Defensive Medicine Among
 High-Risk Specialist Physicians in a Volatile Malpractice
Environment,” JAMA 293, no. 21 (June 1, 2005): 2660-2.
85 Barack Obama, and Hillary Clinton, “Making Patient Safety
the Centerpiece of Medical Liability Reform,” New England
Journal of Medicine 354, no. 21 (May 25, 2006): 2205-2208.
86 Ezekiel Emanuel and Victor Fuchs, Healthcare, Guaranteed
(Public Affairs, 2008); Michelle M. Mello, “Medical
Malpractice: Impact of the Crisis and Effect of State Tort
Reforms,” Research Synthesis Report No. 10, Robert Wood
Johnson Foundation, May 2006; Tom Baker, The Medical
Malpractice Myth (University of Chicago Press, 2005).
87 J. Sybil Biermann and Richard Boothman, “There
Is Another Approach to Medical Malpractice Disputes,”
Journal of Oncology Practice 2, no. 4 (July 2006): 148.
88 Health CEOs for Health Reform, Realigning U.S. Health
Care Incentives to Better Serve Patients and Taxpayers, New
America Foundation, June 2009.
89 Linda L. LeCraw, “Use of Clinical Practice Guidelines
in Medical Malpractice Litigation,” Journal of Oncology
Practice 3, no. 5 (September 2007): p. 254.
90 Joanne Kenen, “Is It Time for Malpractice Reform? Tort
Reform Isn’t the Only Way to Fix the Malpractice Problem,”
American Prospect Online (November 2009).
91 Patient Protection and Affordable Care Act, Pub. L. 111-148,
Sec. 10607.
92 McKinsey Global Institute, Accounting for the Cost of
U.S. Healthcare: A New Look at Why Americans Spend More,
December 2008.
93 James G. Kahn et al., “The Cost of Health Insurance
Administration in California: Estimates for Insurers,
Physicians, and Hospitals,” Health Affairs 24, no. 6
(November/ December 2005): 1629-1639.
94 Lawrence P. Casalino et.al., “What Does It Cost
Physician Practices to Interact With Health Insurance
Plans,” Health Affairs 28, (2009): w533-w543.
95 Chow Hendrich and Lu Skiercynski, “A 36-Hospital
Time and Motion Study: How Do Medical-Surgical Nurses
Spend Their Time?” Permanente Journal 12 (2008): 25-34.
96 Paul D. Mango, and Vivian E. Riefberg, “Three
Imperatives for Improving U.S. Healthcare,” The McKinsey
Quarterly, December 2008.
97 Patient Protection and Affordable Care Act, Pub. L. 111-148,
Sec.1104.
98 Recovery.Ca.Gov, http://recovery.ca.gov/html/funding/
science%20and%20technology/science%20and%20tech-
nology.shtml
99 http://gov.ca.gov/index.php?/fact-sheet/12835/.
100 The Lewin Group, Using Web Technology for Public
45 new america foundation
Program Enrollment: Assessing One-e-App in Three California
Counties, California HealthCare Foundation, June 2009.
101 Patient Protection and Affordable Care Act, Pub. L. 111-
148, Sec. 1413.
102 Sarah Payne and Michael Russo, Cutting Red Tape in
Healthcare: How Streamlining Billing Can Reduce California’s
Healthcare Costs, CALPIRG Education Fund, July 2009.
103 Debra L. Roth and Deborah Reid Kelch, Making Sense of
Managed Care Regulation in California, California HealthCare
Foundation, November 2001; Clark Kelso, Regulatory
Jurisdiction Over Health Insurance Products: The Department
of Managed Healthcare & The Department of Insurance, Capitol
Center for Government Law & Policy, November 2001.
104 Jon Christianson, Ha Tu, and Genna Cohen, Managed
Care in California: Cost Concerns Influence Product Design,
California HealthCare Foundation, 2009.
105 James E. Dalen, “Only in America: Bankruptcy Due to
Healthcare Costs,” The American Journal of Medicine 122, no.
8 (August 2009): 699; David U. Himmelstein, Deborah
Thorne, Elizabeth Warren, and Steffie Woolhandler, “Medical
Bankruptcy in the United States, 2007: Results of a National
Study,” American Journal of Medicine 122, no. 8 (August 2009):
741-746; Cathy Schoen, “Insured But Not Protected: How
Many Adults Are Underinsured?,” Health Affairs web exclu-
sive, June 14, 2005.
106 Timothy S. Jost, “Healthcare Reform Requires Law
Reform,” Health Affairs 28, no. 5 (September 1, 2009):
w761-w769.
107 Alex Nussbaum and Nicole Gaouette, “WellPoint
Raised Rates for Profit, Executive Pay, Waxman Says,”
Business Week, February 24, 2010.
108 Patient Protection and Affordable Care Act, Pub. L. 111-
148, Secs. 1311-1324.
109 The two-plan model is just one of many ways in which
the Medi-Cal program is structured at the state level, for
more detail see: http://www.chcf.org/topics/medi-cal/
index.cfm?subsection=countydata&itemID=20451.
110 Alain Enthoven, “Building A Health Marketplace That
Works,” Health Affairs Blog (July 31, 2009).
111 Peter Lee and John Grgurina, “What People Don’t
Know About Health Insurance Exchanges,” Health Affairs
Blog, August 12, 2009.
112 Elliott K. Wicks, Building a National Insurance Exchange:
Lessons from California, California HealthCare Foundation,
July 2009.
113 Karen Pollitz, et al., Coverage When It Counts: What Does
Health Insurance In Massachusetts Cover And How Can Consumers
Know? Robert Wood Johnson Foundation, May 2009.
114 Ibid.
115 Jill Mathews Yegian, et al., “The Health Insurance Plan
of California: The First Five Years,” Health Affairs 19, no. 5
(2000): 158-165.
116 Wynand van de Ven, et al., “Risk Adjustment and
Risk Selection on the Sickness Fund Insurance Market
in Five European Countries,” Health Policy (Amsterdam,
Netherlands) 65, no. 1 (July 2003): 75-98.
117 Campaign for Effective Patient Care, Q&A on Shared
Decision Making in Healthcare, 2009.
118 Steven H. Woolf, “Promoting Informed Choice:
Transforming Healthcare to Dispense Knowledge for
Decision Making,” Annals of Internal Medicine 143, no. 4
(August 16, 2005): 293-300.
119 Bridget M. Kuehn, “States Explore Shared Decision
Making,” JAMA 301, no. 24 (June 24, 2009): 2,539-2,541.
120 Stephen Smith, “Fear Itself,” The Boston Globe, March
10, 2008.
121 Lance Lang, “The Value of Shared Decision-Making: A
Health Plan Perspective,” presented at the Research and
Policy Forum of the Foundation for Informed Medical
Decision Making, February 4, 2009.
122 The Lewin Group, A Path to a High Performance U.S.
Health System: Technical Documentation Final Report,
Commonwealth Fund, May 2009.
123 Karen A. Swanson, “Effect of Mental Healthcare and
Shared Decision Making on Patient Satisfaction in a
Community Sample of Patients with Depression,” Medical
Care Research and Review 64, no.4 (2007): 416-430; A.M.
O’Connor, et al., “Modifying Unwarranted Variations
in Healthcare: Shared Decision Making Using Patient
Decision Aids,” Health Affairs web exclusive (Oct. 7, 2004).
124 “Washington Becomes First State to Endorse Shared
Medical Decision Making,” Business Wire, May, 2, 2007.
125 Kuehn, 2009.
126 Patient Protection and Affordable Care Act, Pub. L. 111-
148, Sec.936.
127 Foundation for Informed Medical Decision Making,
“Research: Work in Progress.” www.fimdm.org/research_
work-in-progress.php.
128 Laura Landro, “Weighty Choices, in Patients’ Hands,”
Wall Street Journal, August 4, 2009.
129 California Office of the Patient Advocate, Shared
Decision Making, 2009.
130 Patient Protection and Affordable Care Act, Pub. L. 111-
148, Sec. 3012.
131 California Center for Public Health Advocacy, PolicyLink,
and the UCLA Center for Health Policy Research, Designed
california task force on affordable care 46
for Disease: The Link Between Local Food Environments and
Obesity and Diabetes, April 2008.
132 Bay Area Regional Health Inequities Initiative, Health
Inequities in the Bay Area. 2008.
133 Ibid.
134 Mark D. Hayward, et al., “The Significance of
Socioeconomic Status in Explaining the Racial Gap in
Chronic Health Conditions,” American Sociological Review
65, no. 6 (December 2000): 910-930.
135 CCPHA/UCLA, 2008.
136 Roland Sturm and Deborah A. Cohen, “Zoning For
Health? The Year-Old Ban On New Fast-Food Restaurants
In South LA,” Health Affairs 28, no. 6 (November 1, 2009):
w1088-1097.
137 David Sloane and LaVonna Lewis, “Improving the
Nutritional Resource Environment of Healthy Living
Through Community-Based Participatory Research,”
Journal of General Internal Medicine 18 (2003):568-575.
138 Christina A. Roberto, et al., “Evaluating the Impact of
Menu Labeling on Food Choices and Intake,” American
Journal of Public Health 100, no. 2 (February 1, 2010): 312-318.
139 Pooja S. Tandon, et al., “Nutrition Menu Labeling
May Lead to Lower-Calorie Restaurant Meal Choices for
Children,” Pediatrics 125, no. 2 (February 1, 2010): 244-248.
140 Patient Protection and Affordable Care Act, Pub. L. 111-
148, Sec. 4205.
141 Susan Babey et al., Bubbling Over: Soda Consumption
and Its Link to Obesity in California, UCLA Center for
Health Policy Research, September 2009.
142 The California Center for Public Health Advocacy,
Status of Soda Taxes in the U.S., Feb. 11, 2009. New York
state, as of March 2010, is considering a penny-per-ounce
tax on soda and other sweetened drinks that would be lev-
ied on producers, with the estimated $1 billion in revenues
slated to be applied to the state’s health care budget rather
than the general fund.
143 V.S. Malik, et al., “Intake of Sugar-Sweetened Beverages
and Weight Gain: A Systematic Review,” American Journal
of Clinical Nutrition, 84 (August 2006): 274–88.
144 Jason M. Fletcher, David Frisvold, and Nathan Tefft,
“Can Soft Drink Taxes Reduce Population Weight?”
Contemporary Economic Policy 28, no. 1: 23-35.
145 http://8-80cities.org/index.html
146 National Safe Routes to School Task Force, Safe Routes
to School: A Transportation Legacy A National Strategy to
Increase Safety and Physical Activity among American Youth,
July 2008.
147 The Trust for Public Land, No Place to Play: A
 Comparative Analysis of Park Access in Seven Major Cities,
November 2004.
148 Centers for Disease Control and Prevention, Increasing
Physical Activity: A Report on Recommendations of the Task
Force on Community Preventive Services, October 26, 2001.
149 “Park Use and Physical Activity in a Sample of Public
Parks in the City of Los Angeles,” Product Page, 2006,
http://www.rand.org/pubs/technical_reports/TR357/.
150 Natural Resources Defense Council, “Reducing
Foreclosures and Environmental Impacts through
Location-Efficient Neighborhood Design,” January 2010.
151 Institute of Medicine, The Healthcare Imperative:
Lowering Costs and Improving Outcomes, Washington, DC:
National Academy Press, 2010.
152 Council of Economic Advisors, The Economic Case for
Health Reform, June 2009; Michael E. Chernew, Richard
A. Hirth, and David M. Cutler, “Increased Spending On
Health Care: How Much Can The United States Afford?”
Health Affairs 22, no. 4 (July/August 2003): 15-25.
153 Christopher J. Truffer et al. 2010. “Health Spending
Projections Through 2019: The Recession’s Impact
Continues.” Health Affairs (published online), February
4, 2010; John Holahan, Health Reform: The Cost of Failure,
Urban Institute June 2009. All figures in this report are
nominal rather than adjusted for inflation.
154 Elliott S. Fisher et al., “Slowing the growth of health care
costs–lessons from regional variation,” New England Journal
of Medicine 360, no. 9 (February 26, 2009): 849-852; see
also Henry Aaron and Paul Ginsburg, “Is Health Spending
Excessive? If So, What Can We Do About It?” Health Affairs
28, no. 5 (2009): 1260-1275; Henry Aaron, “Waste, We Know
You Are Out There,” New England Journal of Medicine 359, no.
18 (October 30, 2008): 1865-1867; Uwe Reinhardt, et al., “U.S.
Health Care Spending In An International Context,” Health
Affairs 23, no. 3 (2004): 10-25.
155 The Prometheus model is not proprietary to RAND but
was developed by an independent non-profit corporation.
Bridges to Excellence (BTE) is the operational partner of
PROMETHEUS Payment® Inc., and Accuro Healthcare
Solutions is their technology partner. Technically,
PROMETHEUS Payment model promotes “bundled bud-
gets” rather than bundled payments.
156 RAND Corporation, Controlling U.S. Health Care
Spending — Separating Promising from Unpromising
Approaches, December 2009.
157 Congressional Budget Office, Budget Options Volume I:
Health Care, December 2008; The Commonwealth Fund,
47 new america foundation
Bending the Curve: Options for Achieving Health Savings and
Improving Value in U.S. Health Spending, December 2007.
158 If you remove Kaiser, California has roughly the same
penetration of managed care as other states.
159 California HealthCare Foundation, 2009.
160 Jencks, et al., 2009.
161 Glenn Hackbarth, Chairman, Medicare Payment
Advisory Commission, “Reforming America’s Health Care
Delivery System,” Statement before the Senate Finance
Committee Roundtable on Reforming America’s Health
Care Delivery System, April 21, 2009.
162 Kaiser Family Foundation, “California: Medicare Fee-
for-Service Patients who were Rehospitalized within 30
Days after Hospital Discharge, 2004,” statehealthfacts.org.
163 CHCF, “Homeward Bound,” 2009; AHRQ, 2009;
Coleman 2006; Kris B. Mamula, “Pittsburgh-area hos-
pitals find savings by reducing readmissions,” Pittsburgh
Business Times, October 26, 2009.
164 CBO, Medical Malpractice, 2009.
165 PricewaterhouseCoopers, 2008; Jackson Healthcare,
“New Gallup poll quantifies U.S. physician opinions on the
scope of defensive medicine practices,” February 19, 2010.
166 Studdert et al., 2005.
167 Congressional Budget Office, Letter to the Hon. Harry
Reid, November 18, 2009; the CBO estimates that costs to
small businesses will go down as much as 10% but part of
this decrease is due to subsidies and tax credits rather than
an absolute decrease in the cost of premiums themselves.
168 Current Population Survey, 2009.
169 California Healthcare Foundation, California Employer
Health Benefits Survey, 2009.
170 Lisa Zamosky, “Health insurance rate hikes are par for
the course,” Los Angeles Times, March 8, 2010.
171 Atrial fibrillation, hypertension, tube feeding in
dementia, chronic obstructed pulmonary disease, colon/
rectal cancer, prostate cancer screening, hysterectomy,
benign prostate hyperplasia, lower back surgery, angina,
breast cancer, asthma in children, gene testing for breast
cancer, depression, epilepsy in children, HIV transmis-
sion to newborns, ovarian cancer, schizophrenia, dental,
maternity, pre-natal testing, circumcision, and depression
during pregnancy.
172 George Halvorson, Health Care Reform Now! (John
Wiley and Sons, 2007).
173 Chenoweth and Associates, Inc, The Economic Costs
of Overweight, Obesity, and Physical Inactivity among
California Adults, California Center for Public Health
Advocacy, July 2009.
© 2010 New America Foundation

This report carries a Creative Commons license, which permits non-

commercial re-use of New America content when proper attribution is
provided. This means you are free to copy, display and distribute New
America’s work, or include our content in derivative works, under the
following conditions:

• Attribution. You must clearly attribute the work to the New America
Foundation, and provide a link back to www.Newamerica.net.
• Noncommercial. You may not use this work for commercial purposes
without explicit prior permission from New America.
• Share Alike. If you alter, transform, or build upon this work, you may
distribute the resulting work only under a license identical to this one.

For the full legal code of this Creative Commons license, please visit
www.creativecommons.org. If you have any questions about citing or re-
using New America content, please contact us.
main office california office
1899 L Street, NW 921 11th Street
Suite 400 Suite 901
Washington, DC 20036 Sacramento, CA 95814
Phone 202 986 2700 Phone 916 448 5189
Fax 202 986 3696 Fax 916 448 3724 www.newamerica.net