An Example of How Evidence Can Be Misleading (Bundled Payments Version)

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Bundled payments are a proven strategy in non-healthcare industries, only we call them by different names. We say we’re paying for a “hotel room” when really we’re paying for the use of the room, the cleaning of the room, the “free” wifi, the “free” continental breakfast, access to the concierge, etc. We say we’re paying for a “cruise” when really we’re paying for the cabin, the unlimited food, the port fees, the access to the shows, use of the onboard pools, etc. These terms (“hotel room” and “cruise” are just two examples) are shorthand terms that refer to the bundle of goods and services you get when you pay that single price. That’s how it works in every industry.

Except healthcare. When we get a bill for a knee replacement, it only contains the surgeon’s cost (okay okay, including the hardware). But there’s also a bill for the anesthesiologist. And for the operating room. And for the hospitalization if you need to stay.

Why would all those things be listed individually if you know you will need a surgeon, an anesthesiologist, and an operating room every single time you get a knee replacement?

Enter bundled payments. They finally turn healthcare a little bit more into a normal industry by allowing patients to pay a single price for the bundle of services that should always be included in that one upfront price.

Sidenote: yes, healthcare is and should always be different from other industries in many important ways. For more details on that, read Arrow’s seminal article on the topic. None of this is incompatible with those insights.

But apparently bundled payments are not very helpful according to this Health Affairs review of the evidence. What gives?

When I see a paper like that, I appreciate the effort to summarize the evidence, but I cringe thinking about all the headlines and misinterpretations and misconceptions that it will perpetuate. People are going to start saying that our large-scale efforts to implement bundled payments are a waste of money . . . and they have evidence to back them up!

But that’s totally the wrong conclusion. This is how I interpret this study: I first think about the overall purpose of bundled payments. When you put their role into the context of the Healthcare Incentives Framework, their purpose is to allow patients to know up front the full price for accomplishing the job they have (get their knee functional again). This enables the patient to compare the price of different options. If they also have quality information of those options, now patients have the ability to shop for the best value (Value = Quality / Price). And when patients start choosing which provider to do their knee replacement based on value, market share starts to shift to the higher-value providers, thus forcing the lower-value providers to change in ways that either raise their quality, lower their price, or (hopefully) both! This is the potential benefit of bundled payments–it is an essential component in stimulating a newfound evolution toward higher quality and lower prices in the market for that specific service.

Compare that to how these studies evaluated the utility of bundled payments: They implemented them for a single procedure and usually with just one of many insurers a provider contracts with. Thus, in most cases the providers were still reimbursed the old fashioned way by all their other insurers. And I would guess that very few competitors in any given region were participating in the same bundled payment program. Therefore, there was no way providers were going to completely shift how they deliver the service because of the narrow scope, a lack of uniform incentives, and a lack of any strong financial imperative to do so (their biggest risk was only of losing a percentage of revenue on small portion of their patients–enough to motivate them to try to do some things a little differently but not to completely redesign how they deliver care–and the risk of losing market share to their competitors due to low value was almost nil). In short, these studies did not get even close to creating the environment for an evolution toward higher value.

With this as context, it’s a surprise to me that any of these bundled payment studies found any benefit at all!

Now, if I could perform my dream study (the design details here and here), that would make a splash. It would get us much closer to the true estimation of how impactful bundled payments could be in healthcare. And until a study like that is done, remember the importance of context, and take any evidence on the impacts of bundled payments with a large grain of salt.

Next week I’ll start looking at Joe Biden’s healthcare plans, so look forward to that!

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.

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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.

Can We Please Use the Proper Definition of Value?

I went to the AcademyHealth Annual Research Meeting over the weekend (it’s probably the biggest health policy conference of the year), and then this morning I went to the annual report for one of the regions participating in RWJF’s Aligning Forces for Quality, and I can’t stand the abuse of the word “value” any longer. The picture on the right is part of the cover of the program I came home with from the meeting this morning. Does the text strike anyone else as . . . ineffective? Shortening the path is great, but shortening it to “high-quality, high-value health care”?

Let’s do a refresher on what the word “value” means. This has a precise definition in the professional and academic world, and I guess anyone can choose to define a word however they want, but this is the widely accepted (and most useful) definition:

Value = Quality / Price

Quality can be defined differently as well, but it generally includes outcomes, patient experience, and everything a patient wants. It doesn’t just include quantitative metrics, but it also includes all the softer metrics that are important to patients. For example, the softer metrics related to a physician would include bedside manner, friendly office staff, convenience, length of relationship, and so forth.

Price is the amount of money paid to get the quality. PRICE IS NOT THE SAME AS COST, NOR IS IT THE SAME AS TOTAL SPENDING. I’ve never done all caps for a sentence before, but this is the first time I felt like a sentence needed it. Cost would be the actual costs that were incurred to provide the service, but patients don’t care about cost. They care about the price, the thing they actually have to pay. And, in healthcare, beware of the word “charge” as well, which generally refers to the price a provider is asking for even if the insurer pays him something completely different. Confused? I explain provider pricing in an earlier post.

Now that the more appropriate meaning of the word “value” is understood, look back at the text on the cover picture. “Shortening the Path to High-quality, Low-cost Health Care” would work. “Shortening the Path to High-value Health Care” would also work, but I guess it would not be as explicit as it would be to anyone who hasn’t read this blog post. But not Hooper Humperdink. Not him.

So, next time you hear someone say, “We need to improve the value of healthcare delivered in the U.S.,” you should think, “Ah. This person wants to improve the quality and/or decrease the prices of healthcare in the U.S.” And FYI, the only way we can substantially decrease prices is to decrease COSTS first. Yes, I would say that our new absolutely most important goal in the health policy world (now that the ACA stands; for the time being at least) is to help providers decrease costs and then make sure prices follow.