The Power of Incentives:
Health care and physician behavior
21 Jun 2007 in Regulatory Economics
In a Wall Street Journal commentary, Peter Bach explains succinctly why heath care in the United States is lower in quality than it should be given the resources devoted to it. It comes down to incentives. Physicians are compensated based on outputs, not outcomes. Therefore, they are motivated to increase outputs and not motivated to improve outcomes.
Bach's commentary (available for a limited time to nonsubscribers) summarizes the results of a recent study that tested whether a proposed outcome-oriented reimbursement system for Medicare ("pay for performance") could be successfully implemented. Success requires rationalization of care -- most notably, that a single primary care physician be in of coordination so that someone was responsible for ensuring quality.
Bach and his colleagues discovered that the median Medicare beneficiary saw two primary care physicians and five specialists employed by four different medical practices. Coordination of care to ensure quality is difficult -- and perhaps impossible -- under the curent fee-for-service reimbursement system. The greater the dispersion in the number of service providers, the harder it is to coordinate and assure quality.
In his commentary, Bach explains the problem in less scholarly language:
This system is a product of the incentives physicians face under fee-for-service reimbursement:
Health care is like this because of the way doctors are paid. Few doctors receive an hourly rate or a set annual salary; most are paid according to a system called "fee for service," in which visits, tests and procedures are reimbursed separately. Doctors face incentives to provide more services and more expensive services, and so they do just that.
Most telling is the anecdote Bach reports to set up his commentary:
I soon understood the genesis of the "no roundtrip" rule. At the crack of dawn on Monday mornings, before their regular office hours, the doctors would go from room to room, providing consultations and filling out billing cards. Over time I learned that most of the patients had never seen the physicians who woke them before breakfast and were under someone else's care.
Fee-for-service reimbursement motivates physicians to provide services, often of negligible value, in order to be paid. Bach argues for a different model, in which doctors are paid to deliver quality:
Aligning physician incentives with the interests of patients is a challenging problem. However, markets are slowly developing new models that Medicare might consider. For example, Neutral Source managing editor Richard Belzer belongs to a medical practice under the auspices of MDVIP. Instead of relying solely on conventional third-party insurance coverage, MDVIP charges an annual fee that incentivizes the physician to coordinate care and improve quality. Members can receive care from other participating physicians while traveling, and out of town family can receive care if they fall ill while visiting. In return, MDVIP physicians agree to limit the size of their practices.
This model is especially well suited to health savings accounts (HSAs), in which individuals are empowered to take control of their own health care and freed to take advantage of market innovations in health care delivery.
Pham HH, Schrag D, O’Malley AS, Wu B, Bach PB, Care Patterns in Medicare and Their Implications for Pay for Performance, 356 NEJM 11 (1130-1139).
