Why Incentives Matter

Why Incentives Matter

US healthcare costs have consistently risen at 1.5 to 2 times the rate of the Consumer Price Index (CPI). Why? Because incentives matter, and the primary incentive for physicians, hospitals and patients in the US is to deploy and consume as many available resources as possible, regardless of the impact on patients. Providers are encouraged to act this way because they are, for the most part, paid for every unit of service they administer. Patients are encouraged to demand as many services as possible because, until recently, they were insulated from the actual cost of the services delivered, thanks to a generous third-party payer system.

So what’s the solution?

First, demand has to be tempered, and that’s progressively happening with now more than 20% of Americans having high-deductible health plans, which introduces a fair amount of cost sharing. Think about it this way: if you have a $10,000 deductible on your home insurance, you’re hoping there will never be cause to call the insurance company.
Second, the supply of services has to be more balanced, and that’s the tricky part because the supply of services should never be restrained when needed, but should be when ineffective. The science about what and when services should be delivered is not always clear, and the complexity of medicine requires nuanced approaches to the management of patients, often on a case-by-case basis. Designing provider incentives that achieve that balance is our goal. It’s the “goldilocks” approach, and it’s more of an effort in minimizing negative incentives than optimizing good ones. Ideally, incentives that are well designed should create a financially neutral environment in which doing right for the patient equates to doing well for the clinician.

How do we approach our work?

The graphic below illustrates our framework. Balancing the legitimate needs of the patients with a more restrained supply of services requires a shift from focusing simply on the volume of services to the value of services. That shift occurs more naturally when there is a financial risk for those providing excessive and unneeded services. And the greater the shift of financial risk to providers, the greater the potential savings to payers while, simultaneously, the greater the need to mitigate potentially negative consequences (e.g. short term decisions that negatively impact patients over time).

To respond to the urgent need to decrease the rate of growth of healthcare costs, several experiments have been, and are continuing to be tested, refined, and understood. One conclusion so far is clear: there is no single answer that will fit every situation. As these experiments continue and we understand better what works under what circumstances, we will disseminate that knowledge through this site and other media.

We’ve organized this section to match the current framework, synthesizing the lessons learned to date and linking several resources for those wanting to implement payment reform and change the current volume-based incentives.

Payment Models

Pay for Performance (P4P)

Medical Home

Shared Savings

Bundled Payment

Capitation