Healthcare Reform is Trickier Than You Think

Paul Lillrank has been Professor of Quality and Service Management at Aalto University since 1994. He has served as the Head of the Department of Industrial Engineering and Management and been Academic Dean of the school’s MBA program. He received a Ph.D. in Social and Political Sciences at Helsinki University in 1988 after spending six years as a post-graduate student in Japan where he researched quality management in Japanese industry. He is a pioneer in introducing industrial management methods to the study of healthcare service production. He has been visiting professor at the University of Tokyo, and teaches regularly at the Indian Institute of Technology, Kharagpur.

Healthcare is a troubled industry. There is no known health service system that would work to the satisfaction of all major stakeholders, patients, providers, and payers. No matter the amounts spent, nothing is ever enough.

The resource problem looks different in the rich and in the developing world. In affluent countries demand is relentlessly driven by new technologies and cures, ageing populations, life-style –related problems and the medicalization of trivial ailments. Islands of undercare dot a sea of overcare. In the developing world the situation is the reverse.

All responsible governments have noticed that the situation is unsustainable. In Finland gross health service expenses have doubled since the year 2000 outpacing economic growth by several percentage points. Health and welfare has become the cuckold that kicks other public tasks, such as infrastructure, education and defense out of the nest.

The obvious counter-measure is to increase productivity. According to a recent study by Aalto University, there is ample room for that. If all districts in the country, after adjusting for local variations in population and morbidity, would perform at the level of the national average, one billion euro could be saved out of a total expenditure of eighteen billion. If all would perform at the level of the best, no innovations required, the savings could be three billions.

Such regional variation is puzzling in a health system that is to ninety percent tax financed and centrally regulated. Neither the government, nor the professions have been able to implement standardized best practices. There is a strong case for Lean healthcare.

Raw improvement of everything, however, may be a dull weapon. There are several interesting patterns that are not visible to the naked eye. A data –driven helicopter perspective is needed. There are areas where improvement would be especially welcome, and not only in the shape of smooth processes but better structures and allocations.

Curiously, there can be simultaneous overspending and undercare. A common observation is that healthcare expenditure follows the Pareto distribution or the 20/80 rule: one fifth of the population spends four fifths of the resources. In a recent study, The Nordic Healthcare Group (NHG), a consultancy, studied the health expenses in a medium-sized city. The distribution was sharper than the traditional Pareto. Ten percent consumed seventy percent. There was a hard core of high spenders, a few hundred individuals that consumed more than half of the total municipal health and welfare budget. They could be divided into three categories: expensive somatic cases such as premature and massive trauma; elderly multi-morbidity patients in around-the-clock care; and the sad combination of substance abuse and mental disorder. With the possible exception of the first group, these people did not get value for the money. Their quality of life was overall bad.

This happens in a welfare society that has for decades mobilized the full force of the state and committed massive resources to universal access and equality of care. Still there some people are simultaneously overserved and undercared.

Growth has been fastest in the extremes of the care spectrum. The most technically advanced specialist care spends like there were no tomorrow. The low end of home and community care is not that expensive per unit, but the number of cases increases dramatically. In Finland between the years 2000 and 2014 expenditure for specialist care doubled, long-term care for the elderly and handicapped grew 160%, while primary care have had to do with a paltry 60% increase. The trouble is in the middle.

Since WHO’s Alma Ata declaration in 1978 every policymaker has paid lip service to the strengthening of primary care. Therapies should be administered at the lowest sufficient level to save the specialized resources to those that truly need them. It is better to treat diseases early than to allow time to turn them into complications. Despite the best of intentions, quite the opposite is happening. A relatively weakened primary care feeds growing numbers of increasingly sick people to hospitals.

It is common knowledge that free markets do not work in healthcare. The relative weights of primary and secondary care, however are powerfully market driven. Consider two hypothetical doctors. A is an accomplished neurosurgeon, who successfully saves lives by removing brain tumors. B is a general practitioner, whose working day is an endless stream of small infections, minor trauma, and unspecified pain. As a patient, taxpayer, or regulator, how much would you be willing to pay for a day’s work to A and to B?

The answer is obvious. Medical students, investors and decision makers have long since decided to follow the money. In the Nordic countries center-left governments have traditionally been suspicious, if not openly hostile to markets in healthcare. Still, and despite all the Alma Ata –rhetoric, they have been incapable of stemming this particular market mechanism.

This points to a broader problem. It appears that even in publicly financed and administered systems, public sector provision is not under public sector control. The government did not call for rampant cost-inflation. No politician has demanded queues and increasing socio-economic health inequality. Still it happens.

The Norwegian political scientist Stein Ringen has eloquently described this phenomenon in his book A Nation of Devils. Politicians may think they are in charge. As a matter of fact they don’t do things, they just issue statements, make decisions and allocate money. Before anything real happens on the ground, the issue has to travel through a lengthy chain of civil servants and administrators, who have every opportunity to turn gold into lead.

It is well known that a core issue in health policy is the information asymmetry between patients and doctors. A similar, perhaps even more devastating asymmetry is between politicians and professionals. For this reason planned economies have never worked as planned.

If markets don’t work and command-and-control is hopeless, something else needs to be done. The answer is to be sought from the design of quasi-markets. While greed is and has always been pervasive, nothing controls the greed of a seller as efficiently as the greed of a buyer.

The current center-right Finnish Government has realized the problem and initiated a sweeping reform. While the initiative sill has to run the gauntlet of entrenched interest groups and parliamentary opposition the basic principles are clear.

For a nation to contain health expenditures at a sustainable level without endangering public health, some or all of the following mechanisms must be put at work:

– Care should be initiated at the right time; not too early, not too late.

– Care should be administered at the lowest sufficient level; primary and secondary care must take joint responsibility of care pathways.

– The care of very expensive multi-morbidity cases must be integrated to include somatic, psychiatric and social care.

– The overall productivity and quality of care processes and administration must be improved following the principles of Lean healthcare.

– Care should, when possible, be evidence –based not to do useless interventions.

– Increasing health literacy and the awareness of life-style related diseases should reduce demand.

The core issue is how to design a system that can put to work all or some of these mechanisms. There are no simple solutions. Policy makers have two levers at their disposal, information and money.

The information should be about value. As Michael Porter and other proponents of the Value –based Healthcare movement have suggested, value is the relation between health outcomes and the money spent, measured at the patient level over a full cycle of care. To develop accurate and comparable measures of health outcomes is a formidable task that is currently undertaken by several research and development initiatives around the world.

If such information were available, policy makers could design health finance systems that could align the interests of patients, payers and providers.

In Finland some of the central policy proposals are, first, a single-payer system. The state collects all money and distributes them to regional authorities.

Second, all caregivers should be organized as limited liability companies with standardized accounting and reporting. While most of the money will still flow from the taxpayers, every caregiver would get its income following the same rules and be subject to the same outcome measures. The current public providers who would loose their privileges and be forced to compete, obviously, will furiously resist.

Third, to allow patient choice and strengthen primary care, a finance system based on capitation is proposed. Each citizen should register with a health- and welfare center, which would then receive a fixed annual per capita remuneration from the government.

The amount of the capitation money, and the corresponding variety of services that it should cover, are hotly debated. At the low end, the amount could be calculated based on the average annual spend of the healthy adult population, which currently is in the range of 250 €. At the high end it could include just everything and be about 3 500 €, which is the total per capita expenditure. In the latter case the primary care centers would get full control of all financial flows. On the behalf of patients they would purchase clinical interventions from specialist hospitals as needed, essentially taking the role of an insurer. There would be several problems with such drastic measures, so there will probably be a compromise allowing some part of the specialist care to be financed on a fee-for-service –basis by the regions.

While capitation –based finance provides strong incentives to primary care; there are some known pitfalls. Since the income comes by registered citizen and the costs come from the resources needed to provide service, there is a temptation to engage in skimming, i.e. lure healthy individuals to register while denying service from those with pre-existing conditions. This can be tackled by legislation that prohibits denying anybody from registering as well as kicking anybody off the list. There would still be the risk of undercare and cost-shifting, i.e. costly patients are referred to specialist care, and to be paid directly by the government.

The design of a quasi-market with regulated competition and patient choice requires accurate and publicly available information on value: the relation between outcomes and euros spent at each care organization. Therefore the key task for researchers and policy makers is to develop and experiment with information systems that could do this.

For health policy makers in India and other rapidly developing countries this may sound like a rich-man’s problem. Indeed it is. The message, however, should be that money will not solve a nations health problems. The pit has no bottom. Health systems emerge slowly and are difficult to change. Latecomers can always have the privilege to learn from other’s mistakes and make a mighty leap to the front.

Want to write for InnoHEALTH? send us your article at

Connect with InnovatioCuris on: 


Stay update about IC by visiting:

Connect with InnoHEALTH 2017 on:


Stay update about the conference by visiting: