How to incentivize higher quality and lower cost in U.S. medical care

U.S. health care costs are high – over $3 trillion annually and about 18 percent of our GDP.  Estimates suggest that our costs are rising.  Concomitantly, we are entering an era of extreme biomedical promise, where research breakthroughs are translating into unprecedented clinical benefit.

Luxturna from Spark therapeutics, for example, remarkably restores vision loss in patients with a specific eye disease.  With amazing innovations, however, come high price tags.  At $850,000 per treatment, Luxturna carries the highest price for any medication in U.S. history.

The introduction of expensive miracle treatments raises questions about how to pay for such therapies.  Our health care system is already financially burdened, yet it seems unfathomable to restrict a sick person’s access to breakthrough cures for fiscal reasons.  How do we create a health care system that keeps pace with technological innovations?

We need a more efficient health care system in general – one where each dollar spent offers higher quality outcomes. To capture this vision, we must reengineer incentivizes that will encourage higher quality, lower cost care.  Here are three potential strategies.

Bundled payments

Around 90 percent of U.S. medical providers are paid in a fee-for-service manner, meaning they are paid for each patient service, including tests, procedures, and consultations, they provide.

Fee-for-service might seem logical.  However, this system potentially incentivizes medical providers to perform more interventions than necessary or ones that pay better when a cheaper option would suffice.

For example, one suggested reason explaining increasing US C-section rates argues that physicians are incentivized by the C-section’s higher payment compared to vaginal delivery.  Not only does this trend raise medical costs, but such practice of performing potentially unnecessary surgeries could harm patients.

Bundled payments offer an alternative to fee-for-service and carry potential to encourage higher quality, lower cost care.  With bundled payments, medical providers are paid a set cost for the management of a particular condition.  Consider a patient needing a hip replacement.  That patient’s medical team would receive one payment covering diagnostic testing, the operation, and other necessities to provide a high-quality outcome.

Through bundled payments, the incentive to perform superfluous or higher-cost interventions is eliminated.  Instead, rewards flow to providers that offer highly coordinated, efficient care.

Studies offer support that bundled payments can decrease health care costs while maintaining or improving outcomes.  In 2006 the Geisinger Health Plan in Pennsylvania used bundled payments for elective coronary artery bypass grafting surgery.  They noticed a 5 percent cost decrease with some indications of improved patient outcomes.

We should strive to further incorporate bundled payments into our health care system to incentivize better, less costly medicine.


Capitation provides another alternative to fee-for-service.  With capitation, the care provider receives a set payment amount per time period per patient.  Given fixed payment, the physician has a high incentive to provide less expensive care.

The hope is that providers will lower costs while simultaneously maintaining or improving care quality.  For example, when possible providers might decrease their use of expensive and potentially only marginally beneficial medical tests or interventions, instead relying on lower-cost, equally effective treatment measures.

In a capitated system, providers might also further emphasize preventative health care in an attempt to keep patients healthy and out of the doctor’s office.  Indeed, in the U.K. where most general practitioners are paid via capitation, strong preventive health care efforts exist.

About 5% of medical payments in the U.S. occur through capitation, mainly to primary care providers in managed care organizations.  By prudently implementing more capitation-based payment into our medical system, we may realize decreased costs and improved care.

Rethinking U.S. health insurance architecture

I’ve previously written about how the complexity of the U.S. health insurance system increases health care spending by contributing to high administrative costs.  I also believe our insurance architecture negatively influences spending and outcomes in a second way.

In the U.S., many receive insurance through their employers, ACA exchange plans, private insurers, or Medicaid.  At 65, most switch to Medicare coverage.  Thus almost all Americans change insurers at 65.

I wonder if this lack of continuity with one insurer negatively impacts health care.  Reading T.R. Reid’s book, The Healing of America, helped solidify my thoughts on this topic.  In contemplating this issue, I think of how health insurance functions in other developed nations.  In the U.K. for example, the National Health Service (NHS) covers almost all citizens for life.

Since the NHS covers patients for life, it has deep incentives to invest in preventative medicine.  Such action will likely yield a return on investment because its covered patients will subsequently be less likely to suffer devastating and costly diseases long term.

In the U.S. however, non-Medicare insurers have less incentive to encourage preventative medicine.  Their return on this investment will likely never be realized, as those in whom they invest will ultimately switch to Medicare.  By instituting a less fragmented health insurance system, we may notice insurers increasingly motivating those they cover to live healthier lives.  Such actions could increase health while decreasing expenditures.


The three strategies I have discussed can better align incentives with delivery of higher quality, lower cost care.  However, I recognize challenges exist for each strategy.

For example, a bundled payment offering one reimbursement rate for treatment of one ailment might fail to account for the individuality of care that each patient requires.  Or with capitation, some worry that providers might stint on care, since payment will be equal regardless.

These and other issues are valid and should be considered thoroughly.  Nevertheless, I believe that with careful thought we can preserve the intended motivations of these three strategies.

In this era of massive biomedical innovation, exciting new treatments will increasingly become available.  Now is the time to restructure our health care system such that it can accommodate the costs of novel miracles and provide outstanding care to all in need.

Samuel Falkson is a cancer researcher and a 2017-2018 United States Fulbright Scholar to Israel in biochemistry.

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