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.

One Way New Medical Knowledge and Technology Will Make Healthcare Cheaper

Here’s my way of explaining one cool way that healthcare will get cheaper. Picture a stack of papers. It’s maybe a few feet tall, and each paper represents some kind of healthcare-related service that could be delivered. For example, one of those sheets represents a triple bypass. Another represents a consultation about asthma. Another represents an MRI imaging. There are tons of them! Now picture that they are arranged in order of simplest procedure (at the bottom of the stack) to the most complex procedure (at the top of the stack). So we’ve got administering someone with a vaccine and stuff like that at the bottom of the stack, all the way up to, say, some crazy brain surgery at the very top of the stack.

Obviously only the most super-specialized physicians can do brain surgeries and other similarly complex services, while probably a technician or medical assistant could administer vaccines. Thus, we could draw lines on that stack of papers that look like this:

A physician could do anything in his section of papers, and he could probably also do (maybe with a little practice) anything that a nurse or technician could do. But he isn’t trained to do anything above his line–only specialists can do those things.

Now on to how healthcare will become cheaper. As our medical knowledge and technology increase, things that used to require great training become simpler. For example, hip replacements used to be so complex that only the most highly trained specialists could do them. Now, thanks to better man-made sockets and such, they are much simpler to perform, and probably any orthopedic surgeon could perform one and get outcomes that are better than in 1980. In short, the lines move up as technology and knowledge progresses.

This saves money mostly because a technician’s time is less costly than a nurse’s time, a nurse’s time is less costly than a physician’s time, and so forth.

And, I should probably mention two other things. First, there is another, lower cost, caregiver emerging: the patient himself. These days, who do you think primarily takes care of diabetic patients? The diabetic himself! Second, I don’t know if specialists will become extinct any time soon, since there are always papers being added to the stack as we find out we can do more and more things to heal people.

And one last thing: I said all this will make healthcare cheaper–meaning the actual cost of the provision of care will decrease for a lot of diseases–I didn’t say this will reduce our total spending on healthcare. Why not? Because as we learn how to do new, crazy surgeries and stuff, we’ll probably start spending lots of money on those, and that will likely more than outweigh the spending reductions we’ll get as a result of what I described above.

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.)

Stupid Assumptions I Often See Healthcare Experts Make

Brief preface: Our healthcare system is a mixture of government-run stuff (e.g., Medicare, the VA system) and non-government-run stuff (e.g., the private insurance market, private hospitals).

Often I will read something written by a healthcare expert that says, “Turning healthcare completely over to the free market can’t fix our healthcare cost problems because spending in the private aspects of our healthcare system has been growing at an unsustainable rate.” That statement is often accompanied by its corollary, “And there is also no data that a completely government-run system can solve our increasing cost problem because Medicare hasn’t done so already.”

I’d just like to make explicit the major assumptions contained within those two faulty assertions:

  • Major assumption #1: The free-market aspects of our current system have no influence on the success of the government-run aspects of our system.
  • Major assumption #2: The government-run aspects of our current system have no influence on the success of the free-market aspects of our system.

An example: Our free-market system’s pricing is mostly based on the government-administered prices Medicare uses. This definitely hinders the free market’s ability to price things according to their real value to the market, which, in turn, affects what medical device companies and pharmaceutical companies choose to invest in.

Another example: Medicare is limited in how much it can reduce compensation to providers because they will just start rejecting Medicare patients in favor of seeing only private-insurance patients. This definitely hinders Medicare’s ability to price things according to what they view as sustainable.

How to Keep Insurance Companies from Stealing Healthcare Cost Savings

In February 2011, I posted on what healthcare delivery reform proposals are getting wrong. Here’s the brief rundown on what I explained:

  • Most reform proposals will make care less expensive for patients (due to more integrated care plans, a better focus on preventive care, fewer complications, etc.)
  • Providers are the ones charged with making these delivery changes
  • Patients saving money = providers getting paid less
  • Why would providers make the changes only to lose money? They somehow need to financially benefit from their efforts and improvements
Are there solutions to this? Of course! Here are my favorite two:

 

First, integrated delivery. If the organization charged with making changes to how care is delivered is the same that will benefit financially, it works. An example might help. I live in Utah, where Intermountain Health Care (IHC) dominates. IHC is really good about doing research and finding ways to improve quality. So let’s pretend they do a lot of heart valve replacements, and that they’re usually paid $20,000. But, if they have a complication, they have to do all sorts of extra work, and they end up getting paid $30,000. (I’m making the numbers up, but I’m not lying about the fact that providers often get paid more for procedures when there were complications.) So, IHC finds that they can tilt the bed at a 20-degree angle and that magically reduces complications by 25%. But that means they’re getting paid $10,000 less every time they avoid that complication! The patient whose complication was averted with the tilting of the bed maybe ends up paying $2,000 less in co-pays than he would have, and the insurance company saves the other $8,000.

 

Poor IHC, right? They spent thousands of dollars on the research that produced the bed-tilting idea, and now the patients’ and insurance companies’ wallets are benefitting. Except, IHC has a secret. The insurance that patient was on is Select Health, which is IHC-owned! So, really, IHC just saved its patient $2,000 and saved itself $8,000. Not bad! This scenario, when the provider and insurer are the same entity, is called “integrated delivery,” and it creates excellent incentives to improve quality. The only time this breaks down is when IHC averts all sorts of complications for patients on different insurance companies. [Update: There are downsides to integrated delivery organizations, including ACOs, that relate to their limiting of the options available to patients and, thus, interfere with value-sensitive decisions. I won’t explain it here, but I’ve learned more since writing this post.]

 

This brings me to the second solution, which can sometimes work when it’s not an integrated delivery situation. So when IHC goes to renegotiate their contract with, say, Altius, they will have their reduced-complication-rates data in hand, and they will say, “Hey, we have 25% fewer complications than before, so your average cost will go down from $22,500 to $21,000. But we want some of those savings since you didn’t do anything to warrant saving all that money, so we’ll raise your rates a little bit to make your average cost $22,000, which is still lower than it was before, and we’ll be getting some compensation for all this hard quality-improvement work we’ve been doing.” I guess this solution could be called “splitting the savings.” [Update: Since writing this, an amazing idea called “shared savings” became popular. It’s exactly what I describe above. But it has a pithier name.]

 

The providers will still be losing some of the savings to the patients and external insurance companies, but at least they’re improving quality and their reputation!

How Doctors Make Prices

I’m venturing out a little bit on this post because I don’t know if the pricing process I’m about to explain is used by all providers or not. That’s my disclaimer.

Now I’m going to pretend I’m a doctor with a brand new self-run clinic. I’ve just hired all my nurses and bought all my computers, etc. My next step is to decide on a fee schedule. How do I do it?

I start by checking prices of other doctors in the area. Or not, because I can’t find any of those. So then I ask some of my physician friends, who say they generally charge 100 to 120 percent of Medicare fees. “That’s quite a range,” I say. But then they say it doesn’t matter too much what I set my fees at because my future patients’ insurance companies will basically choose how much they are going to pay me anyway.

Insurance companies decide the price? I guess that makes sense because they have all the bargaining power over me, a lowly solo doctor running my own clinic. So I somehow find a way to take a look at compensation schedules for different insurance companies, including Medicare and Medicaid. Their prices are all over the board for every procedure! For a single billing code (maybe it’s the one for setting and casting a broken arm), Insurance Company X will pay $1,100, Insurance Company Y will pay $1,000, Medicare will pay $900, and Insurance Company Z will pay $1,200.

Now I start thinking strategically about this. If patients are never going to ask me how much I charge, since their insurance companies will handle all of that, I decide to set my price for setting and casting a broken arm at $1,200. Why? Because if I set it at $1,000, I’m only going to get $1,000 from Company X, who was willing to pay me $1,100, and $1,000 from Company Z, who was willing to pay me $1,200. Why would I set my price low and leave all that money on the table? So as long as I set my price at $1,200 or higher, I’ll get the full $1,200 from Company Z, the full $1,100 from Company X, the full $1,000 from Company Y, etc.

So how do the insurance companies decide on these fees? I hear stuff about this specialist-dominated group of physicians who, working as a committee (known as the RVS Update Committee, or RUC), get to update the Medicare fee schedule every year. And people keep telling me that’s why I, as a primary-care doc, don’t get paid as much as I should because those darn specialists in that committee overvalue work done by specialists and undervalue work done by primary-care physicians.

At this point, I give up worrying about prices and just trust that the money that comes in every month will be more than the money that goes out every month. And, after a few years, that seems to consistently be the case, so I just stop worrying about it.

. . . That is, until patients on high-deductible insurance plans start calling my receptionist and asking what our prices are for various procedures. We’re not sure we want her to admit that our price for setting and casting a broken arm is a whole $1,200, so we prepare a canned response to such inquiries: “We’re not allowed to quote prices over the phone. You’ll just have to come in so the doctor can take a look at you first.”