Month: June 2018

Building a Healthcare System from Scratch, Part 2: Parties

In Part 1, I began explaining the Healthcare Incentives Framework by enumerating the five jobs of a healthcare system:

  1. Treatment
  2. Cost-effective prevention
  3. Cost-saving prevention
  4. Risk pooling
  5. Equitable access

This time, I will look at which parties in a healthcare system have financial incentives to perform those jobs.

First, what are the different parties involved in providing services in a healthcare system? It’s not that complicated. There are providers. And there are insurers, which includes not only insurance companies but also large employers who are acting as the insurance company for their employees. And there’s also government, which is potentially available to step in and assist in fulfilling any of the jobs that wouldn’t otherwise be adequately fulfilled just strictly based on financial incentives.

Taking each problem one by one, let’s look at who has an incentive to fulfill them:

Treatment. Providers get paid for doing this, so it’s an easy one.

Cost-effective prevention. Again, providers have an incentive to do this because they get paid for performing the service. The problem is, patients are often unwilling to spend money on things that won’t benefit them immediately. We’re all a little short-sighted now and then. So this is a case where government intervention may be warranted, such as making a policy that all insurers need to cover certain cost-effective prevention services without a copay.

Cost-saving prevention. Providers are the ones getting paid to actually perform the services, but really it’s the insurer that stands to gain when a patient gets a service that ends up saving a lot more money down the road by preventing future care episodes. This assumes insurers have long enough time horizons to reap the benefits (long-term savings) of investing in cost-saving prevention.

Risk pooling. Again, this one is straightforward. Insurers get compensated for doing this one.

Equitable access. Do insurers or providers have a financial incentive to deliver care to people who cannot afford it? No. They definitely have cultural incentives to do this, but not financial incentives. So, if society believes that the cultural incentives are not enough to promote sufficient care provision to those who cannot afford it otherwise, this would be another potential role for government to somehow intervene.

jobs and parties

In Part 3, I will write about how these parties can have incentives not just to fulfill those jobs but to maximize the value they deliver when fulfilling them. Bear with me–the utility of the framework isn’t quite obvious yet, but it will come together quickly.

 

Building a Healthcare System from Scratch, Part 1: Jobs

Honey-Oat-Bread-Ingredients
Image credit: bakingdom.com

This series explains my framework for understanding healthcare systems. For ease of reference, I call it my Healthcare Incentives Framework. I use it to make sense of everything I see happening in a healthcare system. And one could use it to build a healthcare system from scratch. Each subsequent post builds on all the prior posts, so I strongly recommend reading them in order. For convenience, here are links to parts 2, 3, 4, 5, 6, 7, and 8.

I developed the majority of the Healthcare Incentives Framework over 5 years (2010 – 2014), during which time I was thinking/reading/studying about healthcare policy almost every spare thinking moment. I just had this insatiable drive to make sense of the evidence I was reading as well as what I was seeing in the world. It was the ultimate puzzle. Luckily, my wife was patient and convincingly interested in my thoughts, which I shared almost daily. Every time I came up against a phenomenon that I couldn’t understand or explain within the context of the greater Framework I was developing, I would struggle with it in my mind, sometimes for weeks, until I figured out what it meant and how it fit. Most of the posts on this blog came as a result of those struggles, and everything I now write about health policy is based on the foundational understanding encapsulated in this Framework.

The Healthcare Incentives Framework starts by enumerating the jobs you want a healthcare system to do for you. Initially, it seems like only two jobs: prevent disease and treat the disease that cannot be prevented. But, because incentives work differently for different kinds of prevention, I will split that job into cost-saving prevention and cost-effective prevention.

Cost-saving prevention saves more money down the road than it costs up front. For example, maybe hiring someone to visit the homes of people with really bad heart failure will prevent enough hospitalizations that it more than compensates for the salary of the person doing the home visits.

Cost-effective prevention ends up increasing total spending–that is, the money saved (if any) doesn’t outweigh the upfront investment–but the benefit is large enough to justify that investment. For example, screening for colorectal cancer costs a lot, but it catches a lot of cancers early and saves enough lives that the investment is worth it. The exact definition of what’s cost-effective and what isn’t depends on the society, but the metric used is the cost for each quality-adjusted life year you gain ($/QALY).

In addition to those three jobs related to maximizing health, and because healthcare is characterized by rare, unpredictable, potentially financially catastrophic treatment episodes, a healthcare system must also provide financial protection in the form of risk pooling.

And, finally, most people in most societies believe a healthcare system has a responsibility of providing these services even for people who cannot afford them, so equitable access (as defined by the society) can be added as the fifth and final job of a healthcare system.

The utility of enumerating these jobs will be seen in Part 2, when we will look at which parties in a healthcare system have financial incentives to perform which jobs.

Jobs