Next in a series.
I have developed a framework, which I call the Healthcare Incentives Framework, that helps me understand health care systems. It outlines the jobs we expect a health care system to do for us and identifies which parties in the health care system have the primary incentive to fulfill each of those jobs. This is helpful because, if we are unsatisfied with how a job is being fulfilled, we know which party is failing us.
But more important than that is the challenge of figuring out how to shape incentives in a way that motivates those parties to fulfill their jobs as effectively and efficiently as possible for patients. The conclusion of my last post was that the only way to do that is to reward parties that are delivering higher-value to patients with more profit. And the means by which their profit needs to increase is via increasing their quantity sold (market share), meaning more patients need to choose higher-value providers and insurers. Why isn’t this happening already? Because there are barriers to patients choosing the higher-value providers and insurers.
To understand what those barriers are, you must first understand what needs to be in place to enable someone to choose the highest-value option:
Requirement 1: multiple options. This one seems straightforward–no market share can flow anywhere if there is only one option available. Clearly, having robust antitrust laws is important, as well as avoiding regulations that reduce providers’ and insurers’ ability to enter new markets. But there is another, less obvious challenge with this. Parties need the freedom to vary their price and quality in ways that create unique value propositions. Otherwise they will all look pretty similar, so the effective options people have would be severely limited, even if the total number of options is not. For example, administrative pricing mechanisms that create a fixed price for all competitors.
Requirement 2: ability to identify the highest-value option. Remember that Value = Quality / Price. People choosing from among multiple providers or insurers need to be able to compare apples to apples, the quality and price of all their options (i.e., determine each option’s value) before they select one. Regarding price information, people would need to know their total out-of-pocket cost for each option, which is currently impossible to predict for most things. And regarding quality information, not only would it have to be specific to the service they are interested in—a hospital’s total mortality may not be so relevant to someone choosing where they will get a knee replacement—but also it would need to be measured the same by each option and reported in a simple enough way to be easily understood. For example, comparing the relative quality of insurance plans is quite a challenge if it requires combing through multiple websites to determine which providers are in each plan’s network.
I should mention here that there are many barriers to identifying the highest-value option that will not likely be overcome. For example, medical emergencies don’t allow time to make a thoughtful decision about which hospital to go to. Low health literacy is also a barrier for many people. And there are many important aspects of care that cannot easily be measured, such as a primary care doctor’s ability to correctly diagnose uncommon diseases.
Requirement 3: incentive to choose the highest-value option. Even if people have multiple options and are able to easily tell beforehand which is the highest-value option, they will not choose that highest-value option without the right incentives. Consider this example: Suppose a patient has the choice to have a procedure at a nearby world-renowned hospital (95% success rate, $80,000) or the local community hospital (94% success rate, $40,000). Further, suppose that this patient will pay $10,000 out of pocket (their annual out-of-pocket max) regardless of which hospital they choose. Which will they choose? An additional 1% chance of success for an extra $40,000 seems steep, but since they’re not paying that extra $40,000, most people would go for the world-renowned hospital regardless of the price difference their insurer will be paying. Extracting the principle from this example, people need to pay more when they choose a higher-priced provider/insurer and pay less when they choose a lower-priced provider/insurer. This doesn’t mean they always need to pay the complete difference between the two, but they at least need to pay some of that difference.
Does the presence of these barriers—some of which are insurmountable, others of which will be very difficult to ameliorate—mean that our health care system will never be able to get market share to flow to the higher-value options? No! Even if many patients’ insurer/provider selections are not particularly logical or value-focused, the more barriers we overcome, the more patients will be enabled to choose higher-value options, the more value for patients will be rewarded with profit, and the faster our health care system will evolve to deliver higher and higher value over time.
This concludes my explanation of the Healthcare Incentives Framework. Wouldn’t it be interesting to see it in action in a few different types of health care systems? My next few posts will describe how this would work in a libertarian-type system, a single-payer system, and a government-run system. After that, I will finish the series off with an imagined description of what the principles of this framework could do to fix the American health care system.
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