Why Aren’t Prices Transparent in Healthcare?

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I had a friend ask me that (the title of the post) a few days ago. He prefaced the question by saying he’s asked a few different people and knows already that there isn’t a simple answer to it. But those other people he asked misled him. The answer actually is quite simple. And why nobody is explaining this clearly, despite all the talk about price transparency in healthcare these days, is a symptom of a general lack of understanding of how industries actually function.

Prices are transparent in healthcare–the insurer knows exactly how much they’ll pay each healthcare provider for every service they cover. The problem isn’t transparency. The problem is that the party making the decision on where to seek care is not the same party that bears the financial consequence of that decision. Who chooses where to seek care? The patient. Who bears the financial consequence of that decision? The insurer. Therein lies the rub.

Think about two different scenarios. In the first, the patient will have both responsibilities. Patients would start to actually consider whether the extra $5,000 they would have to pay to go to Provider B for their cholecystectomy would be worth it as opposed to just going to Provider A. Is Provider B’s quality actually that much better to make it worth the extra $5,000? If not, patients will probably choose Provider A. And what happens when patients all start being unwilling to pay unjustifiably high prices? Provider B will either have to lower prices (goodbye crazy price variations!) or continue to deal with a large number of unused operating room hours. Patients win because they get better value, and high-value providers win because they get patients. In this situation, the decreased expenditures on healthcare are taken from the low-value providers. Who would argue against that? In this case, even the “I’m better than the average physician” belief that 100% of physicians have (statistically impossible as it may be) will help to decrease healthcare expenditures.

This pairing of both responsibilities in patients is actually happening, by the way. Why do you think insurers are trying out reference pricing, where they just commit to put a set dollar amount toward a given procedure and have the patient cover the difference if they choose a provider who charges more than that? And what about tiered plans, where patients choosing to go to the more expensive hospitals (the ones in the higher tiers of the insurance plans) have to pay a larger copay? And what about high-deductible plans for services below the deductible? These are all doing the exact same thing but in different ways: making the person who chooses where to get care the same person who bears the financial consequences of the decision. And providers with higher value are being rewarded with increased market share (volume).

In the second scenario, the insurer will have both of those responsibilities. It’ll still bear the financial consequences, of course, but now it’ll also be the one that tells patients exactly where to go for care. Patients wouldn’t like this, of course, but what would happen? Insurers would send every patient to the cheapest provider that meets minimum quality standards. Unlikely to ever happen? For run-of-the-mill procedures, probably it won’t ever happen. But for incredibly expensive one-time procedures, it already has. I heard a story about an insurer that did this with liver transplants (which, all told, is estimated to cost over $500,000 dollars). The insurer asked around to all the reputable local hospitals and got the cheapest bid for each patient. Then they sent each patient to the lowest-bidding hospital. The insurer saved a bundle. And the hospitals that could offer lower prices (possibly because they had lower costs somehow) were rewarded with volume. Ah, that whole reward value with volume thing again. It’s beautiful.

One final real-world example. ACOs. So far, one major way they’ve saved money is by sending patients to cheaper specialists. Let’s apply the principles we’ve just talked about to understand what’s going on. The referring provider is generally the party charged with making the decision of where the patient will go for a specialist visit. (The doctor says, “You need a specialist to look at this. Here’s the phone number for a good doctor, so go see her.” The patient says, “Okay, Doc, whatever you say. I’ll go see her.”). And when the referring provider is getting a bonus for keeping overall costs down, he now also bears the financial consequence of sending patients to expensive specialists because it’ll cost him his bonus. Now that you understand the principle of those two responsibilities needing to be invested in the same party, the world starts to make sense; you start to actually be able to predict whether something will work or not.

So now when you hear people complaining about our “horrendously evil system of third-party payment,” you’ll know that it’s not intrinsically a bad thing. It’s only bad when it results in a separation of those two responsibilities, the decision-of-where-to-seek-care responsibility and the financial responsibility.

How to Reward Value Instead of Volume

Who has heard the favorite healthcare reform saying these days? “We need to reward providers for value, not volume!” It has almost become cliche. And conventional wisdom would teach that something touted frequently would be well thought through by the people touting it; but we all know conventional wisdom is often wrong. (Did I just say that the knowledge that conventional wisdom is often wrong is conventional wisdom?) I admit that I have not read everything by everyone doing the touting, but I’ve never heard anyone break down exactly how we can reward value instead of volume. So I’ll tell you.

There are only two ways to do it: a dumb way and a smart way. But first, let’s review how a healthcare provider makes money:

Revenue = Price x Quantity

Do you see that there are only two components (that we can control, at least) that determine how much money a company makes? We can change the prices we pay them or the quantity they sell.

Now, let’s suppose we are able to identify an objectively highest value healthcare provider out there. Let’s further suppose that we want to reward this high-value health system for its amazingly high value so that it can be financially rewarded for being so awesome and so (we hope) others will copy them to have high value and be rewarded, too. How can we do it? Let’s look at our two options:

Increase price: You’ll recognize this as what Medicare is trying to do. Will it have the intended effect? Probably. High-value providers will be rewarded with higher prices. But hold the phone–isn’t our true intended effect to get society the highest-value healthcare we possibly can? So how are we maximizing value if we’re raising prices? Raising prices lowers value. So we’re identifying the highest-value providers and then lowering their value. Hm. Ah, but maybe there will be an overall aggregate effect of higher value because we won’t raise prices much, but we’ll get lots of low-value providers to improve their quality. I guess. But all this seems to be doing is increasing the total money we pay on healthcare, which is not a good idea right now. So I call this the dumb approach. But people haven’t thought hard enough to know there’s also a smart approach . . .

Increase quantity: What this means is getting more people to the highest-value providers, so now we’re rewarding value with volume. Their hospital beds are full, their specialists are performing lots of high-margin surgeries, etc., and they are rewarded handsomely for being high value. Not only does this reward the high-value provider, but look what happens to patients–they get to have higher-value care because they’re going to the high-value providers! In other words, society collectively will be receiving higher-value healthcare. And the low-value competition, meanwhile, will not be so busy anymore, they’ll start to lose money, and they might actually go out of business UNLESS they improve their value as well. That’s quite an incentive to change (probably the most powerful one, actually).

So why aren’t we doing this rewarding value with volume thing? I could list a bunch of reasons why we’re not, but that wouldn’t be very clear thinking now, would it? Instead, I’ll ask this: Who is deciding which providers patients will go to? Whoever is making that provider selection (sometimes it’s the insurer or employer, sometimes it’s other providers, usually it’s the patients themselves) needs to (1) have the price and quality information necessary and be able to determine which provider they think is the highest value and (2) bear the financial consequences of their choice (otherwise they’ll just choose the highest quality every time without regard for price!). If the provider-selecting party can meet both of those conditions, they will be making what I call value-sensitive provider selections.

In summary, policy ideas to reward value with higher prices will not do much for aggregate healthcare value our society is purchasing. But policy ideas that can get those 2 conditions fulfilled for the parties making the provider selections will successfully reward value with volume and concomitantly provide low-value providers with an ultimatum to either improve value or go out of business.

So the questions we should be asking ourselves if we want to “reward providers for value, not volume” is How can we remove the barriers to value-sensitive provider selection?” When will I write another post that enumerates all of the most salient barriers and how to remove them? Ask me tomorrow, but not today.

Customers Determine the Financial Incentives

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This is one of the great non-understood truths about how industries work: (see title). [Brief pause to let the words sink in.] Let me illustrate:

I was at the 2012 Healthcare Conference at Harvard Business School and heard H. Lawrence (Larry?) Culp, the President and CEO of Danaher Corporation, speak. Danaher Corporation, just so you know, is one of the big suppliers to the healthcare industry. It’s the parent company for a ton of brands that make really sciency devices and diagnostic stuff. And now that I’ve slaughtered the description of the company. . . . So, Mr. Culp spoke about how profitable they are and how successful they are and whatnot, and then he opened it up for questions at the end.

Now, before I tell you what I asked him, you should know that I’ve always believed, based on what I learned in my business strategy education, that if we could fix the financial incentives in the healthcare system itself, the suppliers to the healthcare system will have their incentives fixed for them as well. So, if doctors all of a sudden start making tons of money by providing really high-value care for patients, but the big thing limiting them from improving their value by decreasing their prices even more is the cost of MRI machines and diagnostic tests, I’ve thought that the makers of those MRIs and diagnostic tests would see that, if they want to kill their competition, all they’d have to do is find a way to make much cheaper stuff to sell to the doctors, and the doctors would jump all over it. But, before the suppliers will invest money into developing those cheaper MRIs and diagnostic tests, they have to know that the doctors really want and will preferentially purchase cheaper stuff that still gets the job done.

So, with that background, I asked my question to Mr. Culp: “I see your company as a supplier of devices and diagnostics to the healthcare industry; in other words, you are providing a lot of the innovation to the industry. This is awesome, because it will help me do so much more for my future patients. But the discussion about how innovation is the main thing driving unsustainable health spending has become more and more important lately, so I’m just wondering, does that conversation affects how you choose to focus your R&D money by pushing you to start developing more cost-lowering innovations, or are R&D investments just determined by what customers are requesting?”

He gave a very professional and politically correct answer, and this is what it boiled down to: We’re a company, and just like every other successful company in this country, we’re trying to make money by making what customers will buy. As soon as customers start demanding cheaper devices and diagnostics, we’ll “pivot” our R&D investments toward those. (Yes, he actually used the word “pivot,” and it was very articulate of him.)

What’s the message in all of this? Customers determine the financial incentives.

Pop quiz: If everyone thinks MRIs are remaining unnecessarily expensive, how should we fix it?

  • A: Tell the MRI makers that they’re not providing high value machines, and then regulate them into developing cheaper technology
  • B: Realize that they’re not investing in developing cheaper MRIs because customers aren’t demanding cheaper MRIs, so figure out why customers aren’t demanding cheaper MRIs and solve that problem

I hope you chose the second option. Now apply this to what we’re seeing with all these regulations to try to fix the value provided by doctors and hospitals. Shouldn’t we be looking at the doctors’ and hospitals’ customers and fixing whatever is keeping them from choosing high-value doctors? The regulations will likely help, but they’re not going to be a sustainable solution to our providers’ value problem. We need to understand and fix whatever’s going on with their customers (ahem, patients and insurers). Oh, insurers aren’t providing the highest value insurance they could provide? Why could that be?

Parting thoughts:

In the medical devices/diagnostics-provider relationship, the provider is the customer. But in the insurer-provider relationship, the provider is the supplier. Remember, there is a whole chain of customer-supplier relationships in every industry, so this means if we want to fix the financial incentives in the healthcare system, we have to go all the way back to the very beginning customer in the chain and fix what they’re doing, which will then fix what the next party in the chain is doing, which will then fix what the next party in the chain is doing, . . .

Why Insurers Are Finally Investing in Primary Care

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First off, I apologize for the long delay between blog posts. I’m still here, and I still am obsessed with health policy. I’ve been working on a publication that outlines some of what I’ve figured out lately, and I’d rather people first see it in a publication by me rather than by someone else who came across it on my random blog and ran with it.

Anyway, let’s talk about why insurers are starting to do things differently lately. They’ve started doing pilot projects to see if investing in primary care will save them money by preventing unnecessary tests and services (they predict it will in a big way). They’ve also started investing more in IT to keep track of patients’ health information, again hoping they can use it to find ways to prevent patients from needing preventable tests and services.

Of course this makes sense. If they, as a business, can invest $500,000 in primary care and then save $600,000 by preventing a whole bunch of things down the road that they otherwise would have had to pay for, it’s a great investment! But why haven’t they started trying out these investments in cost-saving prevention until now? Remember that a business is always trying to use the money they’re making and invest it in projects that improve their financial performance. But there are a lot more options of projects to invest in than they have the money to invest. So they are trying to find the projects that seem to offer the greatest reward for the lowest risk. This would lead us to assume that these kinds of projects haven’t had a great reward-risk ratio until now.

I haven’t figured out a great way to organize my thoughts about this, so here they are in a random order. (FYI, one of the items in the list below is going to change, and it explains why insurers are changing their ways, so you better figure out which.)

  • If an insurer wants to invest in prevention, but then the patient switches insurance before the insurer gets to reap the savings, that was basically wasted money. Yeah the patient is healthier as a result, so that’s a small consolation prize, but the analyst who forgot to compare the expected payback period with the average length a patients stay on their insurance will probably still be fired.
  • Trying to pay a primary care physician to do better at keeping patients healthy isn’t an across-the-board money saver. Actually, it probably only saves money for a small portion of patients. But the thing that makes it worth it is that those patients are probably the highest-cost patients, so a ton of money still stands to be saved.
  • Paying a physician more to establish a medical home or hire a care manager or something like that probably involves the insurer paying the whole cost for the physician to do that, otherwise they won’t. And since the physician has the care manager, chances are he/she will use that care manager for all his/her patients who need the service, including patients that are covered by other insurers. So the insurer is now stuck paying for a competitor’s patients to get healthier, saving the competitor money even though the competitor didn’t invest a thing.
  • An insurer won’t be very popular if they add services to only a select group of patients on the exact same coverage plan. Other people will say that’s unfair and demand to receive the same service. This would be annoying, and they’d have to find a way around it so they don’t end up spending all this prevention money on people who won’t end up saving them much in return.
  • People, when buying insurance plans, aren’t really able to compare the coverage offered by different plans. There are so many complexities, all they can really do is look at the price and look at some of the basic coverage provisions, but that’s it. There may be all sorts of limitations that they don’t even know about. Because of this, insurers can get away with offering a high-priced plan with not great coverage and still (through great marketing) convince a lot of people to buy it, so where is the reward in finding ways to lower price by doing cost-saving prevention when you can just add a few exclusions to save money instead and nobody will ever notice when they’re choosing their insurance plan?

I hope you figured out that the last one is changing. With new tools coming out that help people more easily compare the quality of coverage offered by different health plans, including insurance exchanges’ standardized levels of coverage, people will be able to spot the insurance plan with equivalent coverage but a way lower price. And when that happens, people will flock to that insurance plan. This is a significantly larger incentive to try out risky investments in cost-saving prevention, which also means it’s quite a risk not to try anything out for fear that you’ll lose all your customers. Finally, cost-saving prevention projects that actually decrease overall health spending and keep patients healthier will top every analyst’s list!

And in case you’re wondering what role increasing health costs have played in this whole thing, the answer is . . . probably nothing. Health costs have always risen, and insurers have always raised premiums to maintain pretty constant profit margins. Sometimes spending increases slower and they make a bundle, sometimes costs rise faster than predicted and they increase premiums even more the next year. But none of this changes the risk-reward evaluation done by analysts to decide if they should finally start to invest in cost-saving measures, although it might in an indirect way because people are clamoring louder (as costs rise) to get cheaper health insurance, but unless those people were finally able to compare the value of different plans, all their clamoring wouldn’t have much of an effect on insurers’ investment strategies.

What the Government Should Do to Help Flailing Industries

I recently reread two really good pieces on different roles the government should take in helping flailing industries. One was the last chapter of Clay Christensen et al.’s The Innovator’s Prescription, and the other was Atul Gawande’s Testing, Testing. Plus, I have my own addition. (Bear in mind, this all relates to established industries, so I won’t mention the additional subsidizing roles the government could take in helping the foundation of industries.)

Christensen et al. tell multiple stories that are all pretty similar to each other, but here’s a typical one: the government sees that mainframe computers are really expensive and that IBM has a near monopoly on them, so, using the “increase competition, lower prices” dogma, it spends tons of money trying to break up IBM. Meanwhile, new innovative companies come along and meet the same computing needs of consumers with way cheaper micro-processor-based computers, lowering prices for computing way more than competition amongst a bunch of broken up IBM competitors could ever have. Moral of the story #1: instead of worrying so much about monopolies and other limitations on sustaining competition, the government should be more focused on identifying and eliminating regulatory barriers to disruptive innovators. This is when you should think about barriers such as against the building of specialty hospitals, certain prescription-writing privileges for physician extenders, and the licensing of dental health aide therapists for serving rural areas.

Gawande talks about the agricultural industry and how it was revolutionized into a much more efficient industry through a government program (that started out as just another pilot program) that eventually placed government-employed farming consultants in nearly every county. The role of the consultants was to continually provide to the local farmers information about the state-of-the-art methods for growing the best and most abundant crops. For some reason, the invisible hand of competition wasn’t enough to convince farmers to use new farming techniques. Moral of the story #2: if competitors don’t have access to information that can help them improve value, or if the implementation of such information is above their ability/willingness to try, the government can help information flow and help competitors implement that information, possibly by providing subsidies that take away the downside risk of implementation or by teaching how others are doing it.

And here’s my addition: before we can start worrying about removing regulatory barriers or helping information flow and implementation, we need to remember that the goal of all this is to improve the value of the industry, and then we need to make sure financial incentives are aligned with what we value. What I mean is, without the financial incentives to develop a cheaper version of a mainframe computer, it would have taken a lot longer to come about; without the financial incentives for farmers to use new techniques to grow and sell more crops, they would have been even more hesitant to try the new ideas out. Moral of the story #3: until financial incentives are aligned with value, anything else the government does to try to help low-value industries improve (including the first two morals of the stories) will be severely limited in efficacy. I can’t think of another privatized industry in history where financial incentives haven’t been aligned with value, so I think this point isn’t as obvious to people.

Is this list exhaustive? Honestly, I don’t know. I guess the question I need to be able to answer is, Are there other causes of competition failing? I can’t think of any others, but I’m not enough of a markets historian.

Also, this post obviously doesn’t explain exactly why I think financial incentives aren’t aligned with value in healthcare, but that’s what I’ve spent the last month writing a perspective article about (thus, the long time since my last post), and the ideas will make it to my blog hopefully soon.

Why Leadership Is More Important in Healthcare than in Other Industries (And Why It Shouldn’t Be)

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In a lecture I heard by Rulon Stacey, American College of Healthcare Executives chairman, he said that health systems are the most complex organizations devised by man. Yes, it may be true. (Think: doctor relations, dealing with mounds of existing regulation and changing regulation, uncertain revenue streams, constantly changing technologies, complex patients, complex care processes, dealing with a science that is still more of an art, thousands of patient pathways, trying to manage the care process, lives on the line, board/corporate relations, media relations. . . .)

And all that would make leadership really important in healthcare, but that’s not why I’m convinced leadership is so much more important to earning a world-class reputation in healthcare. No, I think it’s because, to become world class, you have to have the courage, vision, and charisma to go against financial incentives and do what’s right (i.e., always choose what’s best for patients, even when you know you will lose revenue for doing so). Oh, and while fighting the good fight, you have to convince the rest of your employees to put the future of their jobs on the line by joining with you. In a world where people more and more take care of themselves first, this is an incredible task.

I saw this quest in nearly every session I attended at the recent IHI National Forum–good people trying to make care better for patients, even when it leads to reduced profits.

But it shouldn’t be like this. Why shouldn’t doing what’s best for the patient be the same thing as doing what’s best for your profits?

This misalignment is what leads many people to be cynical about profit motives in healthcare, asserting that there should instead be no profit motives in healthcare. I disagree. Align financial incentives and unleash all the creativity and ingenuity the good people of this industry have to offer in innovating in ways that improve the value of care for patients. How else are we going to make care affordable enough to offer it to every citizen without making our country go bankrupt?

How to Think About a Healthcare Reform’s Impact on Total Spending

I know I left off my last post with a cliff-hanger about how to lower the cost of delivering care, but I realized I’m explaining this in an out-of-order way, so I’m going to back up a bit and lay the foundation.

I’ve posted before that there are actually three ways to lower health spending. Again, here’s the equation:

Total Spending = Volume x Price

To lower total spending, we could lower volume or lower price. And, again, we can only lower price so much without actually lowering costs of delivering care.

But what about the third way? A more complete equation would look like this:

Total Spending = Volumea x Pricea + Volumeb x Priceb + Volumec x Pricec + . . .

Get it? Our total spending is the total amount we’ve spent on hip replacements and on metformin and on office visits. . . .

So, the third way for us to lower total spending would be to adjust our mix of services so we’re choosing low-cost treatments instead of high-cost ones. Instead of buying brand-name drugs, we’d buy generics. Instead of full knee replacements, we’d opt for physical therapy.

Okay, good. Now, whenever you hear anything about a reform that’s aimed at lowering total health spending, you should be able to easily place it into one of those three categories.

So what about the Affordable Care Act? There are a zillion different provisions, all with different effects on total spending. Increasing insurance coverage = increased volume. Requiring preventive care coverage = changing services mix (more preventive services, fewer preventable complications we have to fix). Insurance exchanges = lower price through increased price competition among insurers. . . . To mention just a few.

How to Fix Bad Incentives in Healthcare

When talking health policy, I hear the word “incentive” a lot. “Incentives are perverse.” “We need to realign incentives.” “Let’s provide an incentive for quality through payment reform.” Bla bla bla.

Let’s drop the ambiguities and actually talk specifics for a second. I promise you’ll learn more about healthcare incentives in the next 1 minute than you’ve ever learned in your life.

I can only think of two different kinds of incentives in healthcare: cultural and financial.

Our culture has expectations of healthcare organizations to put the patient first, to find ways to reduce errors, etc. I think we’ve done a pretty good job of getting the cultural incentives right in healthcare, but they can only take us so far without . . .

Financial incentives! A financial incentive works like this: If you do ____, you’ll make more money (i.e., profit). How are we doing on financial incentives? Well, we pay providers more for doing more (especially if it’s invasive); we pay providers more for making mistakes and then fixing them; we pay providers more if they band together to increase bargaining power; we pay providers the same amount even if their quality is poor. So . . . we haven’t done so well with the financial incentives.

But here’s how to think about what financial incentives are needed in any situation:

  1. Decide what job you want the organization/industry/whatever to perform
  2. Make it profit from doing that job

I, personally, think a healthcare system’s job is to get/keep us healthy (weird, I know). So that means healthcare organizations need to profit from getting/keeping us healthy; in other words, “profit from wellness” (that’s how they say it in The Innovator’s Prescription).

If we can find ways to get healthcare organizations to profit from wellness, it would solve all kinds of problems! They would be going nuts trying to provide preventive care. They would be spending lots more time with us training us how to manage chronic diseases so we don’t have ED visits and complications. They would be counseling us on weight loss and smoking cessation. And they would be working like crazy to reduce costly errors! (Quality problem: solved.)

So the government can either (1) try to fix bad underlying financial incentives through regulating the healthcare system to death or (2) focus on finding ways to help healthcare organizations’ underlying profit motive be patients’ wellness. One is the bariatric surgery approach, the other is a real solution.

UPDATE: I’ve been thinking more about this, and I should probably mention a few caveats. First, profit from wellness doesn’t work for end-of-life care, for obvious reasons, so a different incentive is needed then. Second, profit from wellness doesn’t work if the payer has a short time horizon because it won’t reap the savings from providing preventive care now to avoid more costly care later. Third, quality problems might not be completely solved just from profiting from wellness because I don’t know if better quality is always cheaper in the long run. Honestly, why do you people let me get away with this stuff by not posting scathing comments?

UPDATE 2: I think the definition of the healthcare industry’s job to “get/keep us healthy” isn’t quite specific enough. The job should really be defined as to get/keep us healthy over the long term, since I’d like to be healthy now and in the future. Thus, profit from long-term wellness. This time horizon issue is a key piece to the foundation on which we will build our future health system.

Bariatric Surgery on the Health System

Today I learned about a doctor group in Ohio that is advocating for a law to eliminate insurance companies’ wanton (and almost unrestricted) refusal to deny reimbursement for various health services. I applaud these efforts; but, I think their focus would lead me to categorize them as bariatric surgeons of the health system.

Bariatric surgery, A.K.A. weight-loss surgery, is criticized as (to reference Thoreau) hacking at the branches of evil rather than striking at the root. The root cause of obesity (in most cases) is a suboptimal diet and insufficient exercise. But, instead of going through painful lifestyle changes to solve the root of their obesity problem, people can now get bariatric surgery instead. (I should say here and now that I don’t think bariatric surgery is all bad–it has its uses, many of which are wonderful and important, as do advocacy groups such as the one spoken of above.)

How does this relate to the work being done by that noble doctor group in Ohio? They’re trying to contain the ill effects of an underlying incentive in the health system rather than change that underlying incentive that is causing insurance companies to seek every way possible to limit medical loss. (“Medical loss” is the term health insurance companies use to refer to their money they spent on paying healthcare providers for services rendered.)

What is this underlying incentive that insurance companies are rationally (yet probably unethically) responding to? They get paid more for spending as little as possible on health care. Instead, they need to get paid more for keeping patients healthy. If that incentive were to be changed, the whole issue of reimbursement denials would be solved.

Even “pay for performance” is another, more sophisticated form of health-system bariatric surgery–providers would naturally invest much more time and effort (e.g., investing in EMRs, crafting policies to help physicians more closely adhere to clinical guidelines, perform research in ways to reduce complication rates and hospital re-admissions, etc.) to find every possible way to keep patients healthy if it meant they would be more profitable as a result of it.

So, how can a payer get paid more to keep patients healthy? Integrated systems. Capitation. There are ways, but this post isn’t about the solutions so much as it is about understanding the causes of the problems. Sorry.

UPDATE: Another way to look at this would be using the carrots and sticks metaphor. Right now, our main way to negate the ill effects of bad underlying incentives in healthcare is by using sticks to punish the natural responses to the incentives the system provides. Using sticks is prone to getting “gamed” (i.e., people find ways to avoid the punishment without actually doing the desired action). Carrots, on the other hand, provide good underlying incentives (assuming the carrot is well-aligned with what we really want health-care providers to be doing for us), and they stimulate creativity to find more effective ways to get them.

The Only Two Ways to Reduce Healthcare Spending

If you’ve graduated from elementary school, you have probably learned this formula:

Money Spent = Number of Units * Price per Unit

If we’re talking healthcare (and we are), the “Money Spent” part would be the approximately 18 percent of our GDP that goes to healthcare. The number of units would be the number of doctor visits, ER visits, x-rays, cardiac catheterizations, pills, MRIs, etc. that we buy each year. And the price per unit would be the actual cost of the provision of care plus some amount of profit.

So, if we are to solve our healthcare spending crisis, we need to either reduce the number of units we buy or the price per unit. Those are the only two ways.

It’s been interesting lately as I read/hear about healthcare reform ideas with this in mind. I’m not sure any of them have actually proposed something that will directly reduce the actual cost of the provision of care, which, in my mind, is what we need to be worrying about. Think about it: We can reduce the number of units by doing more preventive care and rationing; we can reduce healthcare organizations’ profits by having the government set prices lower; but healthcare will still cost a lot of money! The real money-saving potential lies in reducing the actual cost of the provision of care.

Is that possible? YES.

How? Evolution of the healthcare industry through better information, business model innovation, and technology. (See The Innovator’s Prescription by Christensen, Grossman, and Hwang, which doesn’t have all the answers, and the ones provided are disputed, but I think they’re on the right track.)

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