“Redefining Competition in Health Care” by Michael E. Porter and Elizabeth Olmsted Teisberg, in Harvard Business Review (June 2004), 60 Harvard Way, Boston, Mass. 02163.

Is there any way out of the health-care mess? The costs to businesses alone of providing health insurance have outpaced inflation in 13 of the past 17 years, reaching more than $6,200 per employee last year, yet the system keeps failing to provide care to all Americans. When it comes to health care, the vaunted magic of the market appears not to work, but making health care a government monopoly hardly seems a better alternative. So what’s the solution?

“The most fundamental and unrecognized problem in U.S. health care today is that competition operates at the wrong level,” write Porter, a Harvard Business School professor, and Teisberg, a business professor at the University of Virginia. “It takes place at the level of health plans, networks, and hospital groups. It should occur in the prevention, diagnosis, and treatment of individual health conditions or co-occurring conditions.” That’s the level at which “true value is created—or destroyed.”

Exacerbating the wrong-level competition is the pursuit of “the wrong objective: reducing cost,” as if health care were a standardized commodity. Health plans compete to sign up subscribers. Health-care providers compete to be included in health plan networks by giving deep discounts to insurers and employers with large patient populations. They also compete to form the largest provider groups, offering the widest array of services. Instead of cost reduction, what occurs is cost shifting. And instead of providing better quality care, the object becomes securing greater bargaining power and restricting access to services.

In the “healthy” competition the authors envision, providers would try to develop distinctive offerings, and most hospitals “would not try to be all things to everyone.” All restrictions on patient choice of health-care providers would disappear. Providers would charge all patients the same price for treating the same medical condition, regardless of the patient’s insurer or employer; billing would be simplified. And instead of trying to limit patients’ choices and control physicians’ behavior, insurers and other payers would compete in giving subscribers helpful information about treatment alternatives and providers who have track records of excellent outcomes with given diseases and procedures.

How to achieve all that? Porter and Teisberg look to employers, “the major purchasers of health care services,” to lead the way—by making quality, not price, the key criterion in their purchases, and by insisting “that choice and information be made truly available at the level of specific diseases and treatments.”