First in a series.
Way back as a business strategy undergrad and then as a medical student, I developed a framework for understanding health care systems. I call it the Healthcare Incentives Framework, and I believe it clarifies the big-picture components of health care systems that people need to grasp to be able to understand the sources of problems, which then leads to appropriate solutions. The whole thing cannot be explained in a single post, so look forward to a few of these.
The starting point for understanding a health care system is to understand what you expect it to do for you. Initially, you may think there are only two jobs: prevent disease and treat the disease that cannot be prevented. But, because incentives work differently for different kinds of prevention, let’s split that job in two: cost-saving prevention and cost-effective prevention.
Cost-saving prevention saves more money down the road than it costs upfront. For example, maybe hiring someone to visit the homes of people with really bad heart failure will prevent enough hospitalizations that it more than compensates for the salary of the person doing the home visits. Cost-effective prevention ends up increasing total spending–that is, the money saved (if any) doesn’t outweigh the upfront investment–but the health benefit is large enough to justify that investment. For example, screening for colorectal cancer costs a lot, but it catches a lot of cancers early and saves enough lives that the investment is worth it. The exact definition of what’s cost-effective depends on how much society is willing to spend to prevent disease.
Because health care is characterized by rare, unpredictable, potentially financially catastrophic treatment episodes, I will add a fourth job: a health care system must provide financial protection in the form of risk pooling.
And, finally, most people in most societies believe a health care system has a responsibility of providing these services even for people who cannot afford them, so equitable access (as defined by the society) can be added as the fifth and final job of a health care system.
Here are those five jobs again:
The utility of enumerating these jobs is that we can now identify which parties in a health care system will have financial incentives to perform them.
First, what are the different parties involved in providing services in a health care system? It’s not that complicated. There are providers. And there are insurers, which includes not only insurance companies but also large employers who are acting as the insurance company for their employees. And there’s also government, which is potentially available to step in and act as an insurer or employ providers to assist in fulfilling any of the jobs that wouldn’t otherwise be adequately fulfilled just strictly based on financial incentives.
Taking each job one by one, let’s look at who has an incentive to perform it:
Treatment. Providers get paid for doing this, so it’s an easy one.
Cost-effective prevention. Again, providers have an incentive to do this because they get paid for performing the service. The problem is, patients are often unwilling to spend money on things that won’t benefit them immediately. We’re all a little short-sighted now and then. So this is a case where government intervention may be warranted, such as making a policy that all insurers need to cover certain cost-effective prevention services without a copay.
Cost-saving prevention. Providers are the ones getting paid to actually perform the services, so they are happy to provide these services, but really the insurer (or whoever is going to foot the bill for the total costs of care in the long run) is the party that has the greatest incentive to ensure cost-saving preventive care is delivered because they’re the one that stands to save the money in the long run. This assumes, though, that the insurer has long enough coverage time horizons to reap those long-term savings.
Risk pooling. Again, this one is straightforward. Insurers get compensated for doing this one.
Equitable access. Do insurers or providers have a financial incentive to deliver care to people who cannot afford it? No. They definitely have cultural incentives to do this, but not financial incentives. So, if society believes that the cultural incentives are not enough to promote sufficient care provision to those who cannot afford it otherwise, this would be another potential role for government to intervene by either paying insurers and providers to do it or by directly acting as an insurer or provider.
In summary, here is the basic structure of the Healthcare Incentives Framework:
Next time you are unsatisfied with the value delivered by a health care system in performing one of these jobs, you can see who is responsible for that issue. For example, I commonly hear this complaint: “Why aren’t hospitals doing more to keep people from getting so sick that they get admitted over and over for preventable things and rack up enormous expenses that society has to pay?” It sounds like they’re unsatisfied with the amount of individual-targeted cost-saving prevention, and they seem to be blaming the providers for it. They’re blaming the wrong party.
Once we correctly identify the job, we’re talking about and the party responsible for it, our questions become more productive. “Why aren’t insurers administering more individual-targeted cost-saving prevention?” The answer to that is explained in my next post, where I will go beyond just simply identifying which parties have incentives to perform which jobs and discuss what is needed for those parties to have incentives to perform those jobs as effectively and efficiently as possible.
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