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Health Care Transparency: The Fox Is Guarding the Chicken Coop in Washington Again

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Now that more people can shop directly for their own health insurance under the Affordable Care Act, they have been transformed from potential patients to consumers, and like any other consumers of goods or services, they want to know if what they're buying is any good. They want to compare the prices and value of what's on offer. In our notoriously inefficient and uneven health care system, this is a desperately needed shift. Theoretically, the best providers should win the greater market share.

But transparency can only happen if consumers have access to credible, accurate, and well-sourced information. The market for this kind of data is potentially enormous, so it's no surprise that information companies are rushing to fill the gap. There's big money to be made.

Consider the company Cast Light, which provides health care quality and price data. Cast Light -- with last year's revenue of $13 million and $62 million in losses -- went public in February with an IPO that valued the firm at around $2 billion. This optimism was based on an estimated huge market opportunity of more than $5 billion in selling information. The finance media are fawning over the IPO and Cast Lights' market opportunity.

But what kind of standards, benchmarks, and performance data will Cast Light and other companies use to generate ratings and data that people will pay for? Who will devise the measures to keep score?

To date, the main contender is the National Quality Forum (NQF). Founded in 1999, the NQF reviews and recommends performance measures that define health and safety practices all over the country. NQF gets large contracts from government agencies, including a whopping $100 million allotted in the Affordable Care for health care quality measurement.

Sadly, it looks like an NQF fox is guarding the quality transparency chicken coop. NQF appears to be riddled with serious conflicts of interest at its top levels involving money, and lots of it, from those whose quality it is supposed to measure.

Its CEO, Dr. Christine Cassel, an internist, received sizeable annual sums from Kaiser, the giant health care provider, more than $1.5 million since 2003, and $135,000 in compensation and another $100,000 in stock from Premier, a health care supplier and consultant. All this came on top of the $561,000 salary and performance bonuses Dr. Cassel received for her 2014 NQF work.

In January, the Justice Department shockingly alleged that Dr. Charles Denham, who co-chaired the NQF's Safe Practices Committee, received $11.6 million in payments from medical product company CareFusion to influence the kinds of products the NQF recommends hospitals buy. The Justice Department claimed the payment was inflated so Denham would influence a standard that affected sales of CareFusion's ChloraPrep antiseptic skin wipes. Now U.S. Senator Charles Grassley (R-Iowa) is asking questions about how Denham made $725,000 in donations to the NQF as part of a five-year contract.

It doesn't have to be this way.

President Franklin Delano Roosevelt and Congress created the Securities Exchange Commission in 1934, which FDR presciently called "the truth agency," and empowered it to create thorough and unbiased accounting standards -- what we now call transparency.

Under the leadership of chairmen Joseph Kennedy and later William O. Douglas, the SEC decided to delegate these powers to an independent nonprofit agency, today's Financial Accounting Standards Board (FASB). The FASB in its history has fared quite well in avoiding Washington-style scandals. Its experiences with controversy have typically related to fights over rules and standards, not whether the Board was subject to conflicts of interest or corrupt. For example, the FASB has repeatedly clashed with Congress when elected officials thought its accounting methods should be softened to benefit the business community.

Although some academics doubt that FASB's accounting standards have really done much to improve the functioning of capital markets, countries which lack the FASB's and SEC's model for measuring corporate performance typically have higher costs of capital than ours. It is not that the FASB is perfect -- among other structural issues, it is a monopolist --but rather that it is the best in class.

How has the FASB avoided the conflicts of interests that plague the NQF?

First, follow the money. FASB's funding does not come from those whose performance it measures. That includes government. The NQF, on the other hand, accepts funding and contracts from government, while also evaluating the performance of government health care programs -- a huge conflict. By contrast, the FASB and its parent organization are entirely privately funded by a combination of accounting support fees, subscription and publication revenue, and investment income.

Second, the FASB is overseen by people who are experts in measurements, not those representing the interests of industry. Six of its seven board members are Certified Public Accountants, experts in forensic accounting or risk measurement, or professors of accounting. Their expertise is typically verified through difficult examinations and certifications.

In contrast, most of the NQF's 25 board members represent huge chunks of the health care industry and business sectors. They include CEOs of the American Hospital Association, American Medical Association, the lobbying group for the health insurers, and representatives of corporations with major health care interests, such as Johnson and Johnson, Inc. and Xerox. Although all are vitally interested in standards and measurements, only a handful could be considered as expert in the complex subject of health care quality measurement.

Like the NQF, the FASB establishes consensus-based measurement standards but it does so by enabling thorough and open discussion of the accounting standards created by its expert board, rather than by allowing industry stakeholders to create the standards.

Which kind of team would you want guarding your investments or your health?

Long ago the Pulitzer Prize-winning economic historian Alfred Chandler concluded that structure must follow strategy. If our quality measurement strategy is intended to serve the interests the status quo U.S. health care sector, the NQF's structure is perfectly structured for this purpose. But serious conflicts of interest are inevitable in a climate which puts so much power in their hands. If we want best-in-class measures of health care quality, the FASB's structure, with independent funding and domination by professionals in performance measurement, is a much more promising approach.

Like it or not, the Affordable Care Act is here to stay. If we want to ensure safer, better health care for consumers, the ACA must be built on trustworthy transparency about health care quality.

Regina E. Herzlinger is the Nancy R. McPherson Professor of Business Administration at the Harvard Business School and the author of Who Killed Health Care?, among many other books.