If ever an entire sector of the U.S. economy was guilty ofcommitting one of Peter Drucker's greatest sins ofmismanagement—confusing activity with results—it's health care.

As the Commonwealth Fund noted in a report last year, spendingper hospital visit in the U.S. exceeds that of all other countriesbelonging to the Organization for Economic Co-operation &Development, and American patients count among the most likely toreceive procedures requiring advanced technology. Yet at the sametime, the U.S. now ranks in the bottom quartile in life expectancyamong OECD countries and has seen the smallest gains in this metricover the past two decades.

This week, WellPointannounced that it's taking steps to counterthese trends. In what experts have described as the most extensiveeffort of its kind, the giant insurer said it was revamping the wayit reimburses about 1,500 hospitals across the nation, so thatannual payment increases are pegged to WellPoint's definition ofquality care rather than to the quantity of services delivered.

WellPoint's new formula—based 55 percent on health outcomes, 35percent on patient-safety measures, and 10 percent on patientsatisfaction—is one piece of a broader push to tie health-carecompensation to effectiveness, not simply to volume. For its part,the Obama Administration is reworking how the government payshospitals through Medicare so that the system becomes moreresults-oriented, a subject I've discusssed in this space.

On one level, these moves are designed to curb costs. AndWellPoint, which policymakers and the media have slammed in recentyears for denying coverage to people with illnesses and preexistingconditions, is certainly a company with its eye on the bottomline.

But if WellPoint's new reimbursement policy works, it shouldalso prod doctors, nurses, and other medical personnel to makesignificant strides toward giving their “customers” (the sick) whatthey value most (a chance to return to health and stay well). Inthis broader sense, the company's actions can instruct all sorts oforganizations hoping to measure and improve their performance.

Drucker pointed out that public-service institutions, includingmany hospitals, tend to have a particularly tough time in thisarea. Because of their inherent complexity, such enterprises “areprone to the deadly disease of bureaucracy; that is, towardmistaking rules, regulations, and the smooth functioning of themachinery for accomplishment,” Drucker wrote in Toward the NextEconomics.

To combat this, Drucker advised, the organization must setexplicit goals. “To say our objective is … 'health-care' isoperationally a meaningless statement,” Drucker asserted. Instead,this grand sense of purpose must be “converted into specific … workassignments” that, in turn, can be analyzed and appraised.

Indeed, this process is what good management is all about:deliberately translating a lofty mission into a concrete series oftasks and feedback mechanisms that lead to smarter decisions.Drucker recalled, for example, that Sears, Roebuck definedits mission in the 1920s as being “the buyer for the AmericanFamily”—a “totally intangible” statement. But the ways in which“Sears then set to accomplish this mission (e.g., to develop arange of appliances that most nearly satisfy the largest number ofhomeowners at the most economical price),” Drucker added, “was anoperational objective from which clear and measurable goals withrespect to product line, service, assortment, price, and marketpenetration could be derived.”

Similarly, ” 'saving souls' as a mission of a church is totallyintangible,” Drucker wrote. “ At least, the bookkeeping is not ofthis world.” But a church could easily define and assess theobjective of doubling the number of people under the age of 35 whoattend Sunday services.

Setting these sorts of measurable objectives is exactly whatWellPoint seems to be driving at. The company has actually beenpiloting a “pay for performance” model for some time (a “startsmall” approach that Drucker also would have liked), and says thatthe initiative has already prompted behavior change.

For instance, by measuring how fast someone's blood vessel isopened during a cardiac event—and then compensating hospitals inVirginia accordingly—the company has witnessed “a reduction invariation” across different facilities, as well as “a more rapidresponse time, meaning that patients are receiving the proper caremore quickly.” Other hospitals have been graded on whether theyprohibit smoking on their campuses or whether they've generateddischarge plans detailing how patients should take theirmedication.

Not everyone is pleased with the new arrangement. Criticsmaintain that hospitals in poor neighborhoods could face penaltiesbecause their discharged patients often get sick again for a hostof reasons that have nothing to do with the quality of care.

But goals and measurements are not immutable; they should bemonitored and adjusted continually. Meantime, with at least someguideposts in place, the administrator can “move from diagnosis toprognosis,” Drucker wrote. “He can now lay down what he expectswill happen and take proper action to see whether it actually doeshappen.” Armed with this evidence, he can then act as a managershould, systematically reviewing “objectives, roles, priorities,and allocation of resources,” as Drucker put it.

At many hospitals, that would amount to a procedure that no onecould object to: a much-needed transplant surgery, with resultsreplacing activity and quality replacing quantity.

Bloomberg News.