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. Now comes the interesting challenge of figuring out how we can get those parties to perform those jobs well.

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.”)

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.

valuewithprofit

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.