Building a Healthcare System from Scratch, Part 3: Getting the Incentives Right

carrotIn Part 1, I enumerated the jobs we want a healthcare system to do for us. In Part 2, I explained which parties in the healthcare system (providers or insurers) have incentives to perform each job. The next part of the Healthcare Incentives Framework is the biggest challenge: how do we shape those incentives so that they don’t just reward parties for merely performing those jobs, but so they also encourage them to perform their jobs in the best way possible? (“Best way possible” will be more precisely defined below.)

To understand this discussion, two key definitions must be absolutely clear.

First, the definition of value.

Value = Quality / Price

High value can be found at any price point. For example, it could be reasonable quality for a super low price, or it could be the absolute best quality for a not-crazy-high price. It just depends on how much money is available to be spent.

And just as a brief sidenote, I’ll mention that “quality” has many facets, and it’s the patient who–as the person consuming the service–ultimately gets to decide what constitutes quality. And “price” denotes the actual total amount of money paid for the service.

Second, the definition of a financial incentive. A financial incentive is something that rewards behavior with increased profit. Profit is the key here. Companies (or, the people who run them) don’t take huge risks and expend great effort that won’t result in more money for them. (This also applies to non-profit organizations, only they call it “surplus.”) So a project that is projected to increase revenues but also increase costs just as much is a waste of effort from a company’s standpoint.

With those two definitions in mind, here is the principle: Our goal is to create financial incentives that reward value for patients. In other words, a provider or insurer needs to make more profit when they provide higher value for patients. This would motivate them to out-compete and out-innovate their competitors. And the form of that competition wouldn’t be destructive corner-cutting and responsibility-avoiding–it would be to actually provide higher value for patients.

Instead of hospitals spending fortunes on beautiful lobbies, they would be competing on how to make care cheaper, faster, and more convenient. Because that’s how they would make more profit.

Instead of insurers climbing over each other to find ways to cream skim the healthiest patients and creatively design networks to get sick patients to avoid them, they would be competing on how to most efficiently provide cost-saving prevention and how to have the best customer experience. Because that’s how they would make more profit.

Some say financial incentives have no place in healthcare. What they don’t understand is that there will always be financial incentives in any industry where people get paid for their work. We can’t ignore the inescapable presence of financial incentives in healthcare. But we can shape them in a way that motivates providers and insurers to maximize the value delivered to patients.


In Part 4, I’ll enumerate the four levers that affect profit, which will then lead to an explanation of the barriers healthcare systems commonly have to those levers being used to reward value with profit.

6 thoughts on “Building a Healthcare System from Scratch, Part 3: Getting the Incentives Right”

  1. I’ve been enjoying your series here on building a healthcare system from scratch. Part 3 was interesting to me as costs considerations drive every stakeholders decision making process. I have to remember in this series, that this would be an ideal system, not necessarily based on the behaviors of actors in the current system. One point, I would challenge is, “Instead of hospitals spending fortunes on beautiful lobbies, they would be competing on how to make care cheaper, faster, and more convenient.” If one were to define Value as Quality/Price and quality is the patient’s perception, then wouldn’t having appealing facilities be important to healthcare entities to consider? Otherwise, the patient’s experience in a dilapidated hospital would not lead most patient’s to have high confidence in the Quality they are receiving. It would follow the same logic today of hospital’s needing to have the most advanced technology and expertise to attract patient’s because patient’s believe those things offer higher quality. Would that expectation need to be changed and realigned with the new Value proposition?

    1. Great question. I’ll address this in Part 5 of the series, but the main point is this: Right now, patients don’t have any useful quality information about the quality of the care they will receive in a hospital, so they use whatever they can to guess if a hospital will be good, which, unfortunately, ends up being non-clinically-relevant things like the appearance of the facility, ease of parking, supposed food quality, etc. But, if there were easily available and relevant information about the quality of care they’ll receive, I believe most people would start choosing the older-looking hospital that gets them better the fastest with the lowest risk of complications along the way rather than the same-priced-but-lower-quality hospital that has a more beautiful lobby.

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