01/29/2009 05:12 am ET | Updated May 25, 2011

Negawatts and Negabeds

The last months have brought home to the American public the critical importance of markets and how they are structured. So as President-elect Obama looks beyond finance to two of the other major challenges we face -- health care and energy -- he would do well to consider the following riddle:

Q: How is a kilowatt-hour of electricity like a day in the hospital?

A: Nobody wants either.

That's easy to see for the kilowatt-hour: it has absolutely no intrinsic value. We care about electricity only because it gives us things we want, like hot showers and cold beer. With high fuel prices and a warming planet, the less energy we use to get what we want, the better.

A day in the hospital is the same: it has absolutely no intrinsic value. We care about it only because -- only if -- it does something else for us, such as relieve our pain, restore our health, lengthen our life, or improve our death. The fewer days we spend in the hospital to get what we really want, the better. After all, unnecessary health care has some nasty side effects, like wasting our time, exposing us to infections, warping families' lives and ruining the public treasury.

In both cases, it is the end that matters, not the means.

If we want to achieve our ends with fewer resources, then why do we create market structures that link profits directly to volume? Rewarding energy providers for delivering more kilowatt-hours or hospitals for putting more patients in beds, as we do now, drives both to try to increase use, rather than to find more efficient ways to achieve the end-use goals of cold beer and good health.

This insight has begun to transform energy markets from California to Massachusetts; it could do the same for health care.

In energy, fast spreading market and regulatory innovations are rewarding "negawatts" (saved electricity) as highly as megawatts. With support from utility companies, environmental groups, and firms like WalMart, these market reforms have three key ingredients. First, utility company profits must be "decoupled" from the volume of energy they produce, allowing companies to survive even as total energy production falls. Second, utilities are given a share of savings they achieve by raising end-use efficiency, rewarding them for helping consumers improve efficiency. Third, regulators monitor performance to make sure that they don't profit by skimping on needed services.

Decoupling works. California has held per-capita electricity use flat for 30 years while per-capita real income rose 79%. The approach: help consumers and businesses change their energy behavior, create greater efficiency in the distribution and delivery processes, build alternative sources of energy, and partner with community leaders.

So what does this have to do with health care?

We know that it is possible to achieve equal or better health outcomes with much less money than we spend on health care today. For example, health care spending would fall by 30% or more if we simply adopted nationally the patterns of practice already being used in the highest performing one-fifth of our regions. Our best practices reduce unnecessary hospital stays (create "negabeds") and eliminate unnecessary physician visits and diagnostic tests.

How can we encourage interest in such "end use efficiency" among health care providers?

Some models of health care payment reform head exactly in that direction. Traditional health maintenance organizations, for example, paid on a per-capita basis, effectively decouple payment from utilization. Rochester, NY used regional planning in the early 1980s to slow hospital spending growth; and both Vermont and the Medicare program are experimenting with comprehensive shared-savings payment models.

Consumers will worry about incentives that could reward providers for withholding needed care. Rewarding end-use efficiency in health care requires that we measure how well our health care systems achieve what we want: health and resilience, better function, and improved quality of life, without skimping. Measurements like that are already in use routinely in some health care systems, like the Geisinger Health System (in Pennsylvania) and Dartmouth-Hitchcock Medical Center (in New Hampshire). It is now feasible to safeguard consumers' interests while we decouple health care profits from volume.

Most hospital leaders today would find ludicrous the suggestion that they should seek to empty their beds. The current payment system has them trapped; to thrive, they need to grow and fill their beds with profitable patients. Construction cranes abound on medical campuses. In this environment, the last thing a "smart" hospital can do today is to make its own services unnecessary. That could get the CEO fired.

These perverse incentives need to change. Policy and payment should reward providers for keeping people healthy and restoring them to function rather than for filling hospitals and expanding services. We suspect that America's health care leaders -- doctors and hospital administrators -- would prefer to play a more sensible game. Change the rules, decouple profits from volume, reward better health achieved through an elegant frugality of means, and these same leaders can thrive under those new rules. Why make ruinous overuse their only route to success?

Imagine if U.S. per-capita health care spending were flat for the next 30 years.