In Part 5, we talked about the three requirements for getting market share to flow to the highest-value options, which is necessary if we want higher-value parties (insurers and providers) to be rewarded with profit. The context for why this is the crucial feature of our optimal from-scratch healthcare system is discussed in parts 1, 2, 3, and 4.
As a reminder, those three requirements were for patients to have (1) multiple options, (2) the ability to identify the highest-value option, and (3) incentives to choose the highest-value option. Let’s look at examples of the common barriers to each of them so we will know what to avoid when we build our optimal healthcare system.
If we want people to have lots of options to choose from, we need to avoid any policies that directly or indirectly limit the number of competitors in a market.
For providers, this means we will allow them to build hospitals and clinics whenever and wherever they want. They will not do this with reckless abandon because they will know that, if they choose to build in a new region and end up delivering lower value than the incumbents, they will not get many patients and their new endeavor will not be profitable.
For insurers, we will need to avoid regulations that make it difficult for them to enter new markets. For starters, nationally standardized regulations will simplify the process of selling insurance in multiple markets. This does nothing to ease the challenge of negotiating prices with providers in a new market, but the more providers competing with each other in the region, the more likely they can work something out.
Good antitrust laws to prevent too much consolidation will also be a necessity.
In addition to making policies that encourage lots of competitors, we also need to allow those competitors to vary their price and quality so they can offer unique value propositions. Otherwise, we end up with multiple options that are all pretty much the same, which defeats the purpose. Thus, avoiding administrative pricing mechanisms that set standardized prices will be a necessity. More will be said on setting prices in a later post.
Identifying the Highest-value Option
To identify the highest-value option, people need to first recognize that they have multiple options that are of very different value. In almost every other industry, people are great value shoppers, but, in healthcare, they have been conditioned historically not to even think about it. There are many reasons for this, most of which are related to the historical difficulty of knowing prices and quality beforehand.
The biggest barrier to knowing price beforehand is uncertainty about what services will be needed—most people do not present to the emergency department with a diagnosis already, nor can they predict what additional complications might arise during the hospitalization. But for specific, well-defined episodes of care, such as a nonemergent surgery, bundled pricing (i.e., a single set price that covers all the care for the entire episode) can make prices knowable beforehand.
As for quality data, in our current system it is primarily gathered for the purpose of giving bonuses or penalties to providers rather than for the purpose of enabling people to compare the quality of their different options, which means the metrics most relevant to helping a person make a good decision are usually not available. For example, a hospital’s overall mortality rate or readmission rate has little bearing on the quality of care a patient will receive for something like a straightforward gallbladder removal. Standardized, easy-to-understand, appropriately risk-adjusted, decision-oriented quality data are needed.
A single website to house all this price and quality data in one place and display it in an easy-to-compare format would significantly lower the effort required for this comparison work to be done.
And there are times when no price or quality information will make a difference. In addition to the already-mentioned uncertainty of what services might be needed, there are medical emergencies, irrational patient preferences based on prior anecdotal experiences, and there are important aspects of care that cannot easily be measured, such as a primary care doctor’s ability to diagnose uncommon diseases. This is okay—100% of decisions do not need to be perfectly logical and value-focused to sufficiently stimulate the evolutionary value improvements that come when value is rewarded with profit.
Incentives to Choose the Highest-value Option
Before a person can choose the highest-value option, we need to make sure they are the one making the decision. If a physician refers a patient to a specific specialist, or if they send their order for a CT scan to a specific imaging center, they have taken away the opportunity for the patient to find the highest-value option for them. But only the patient knows how much money they are willing to spend on a medical service and what quality metrics are most important to them, so they need to be the one making the decision.
The other great barrier to patients having an incentive to consider both quality and price when choosing is insurance plan designs that do not require them to pay more when they choose a more expensive option. For example, if they have a set copay for a particular service regardless of where they receive care, or if they have no out-of-pocket requirements because of already hitting their annual out-of-pocket maximum. Insurance plan designs need to be structured in a way that minimizes the number of decisions that do not have some degree of differential spending for the patient. This could be accomplished even for patients who have already exceeded their deductible through reference pricing, multi-tier networks (preferred tiers have lower copays), or even rebates for patients who choose lower-priced providers.
If the above discussed barriers are minimized, the healthcare system will naturally and continuously evolve toward higher value.
This concludes the big-picture explanation of this framework. In Part 7, we will solidify the implications of this framework by looking at the various system designs that could meet all the requirements of this framework.