Value Purchasing
Health policy is one of the few areas of human experience where someone can come up with a catch phrase and have others repeat it again and again as though they were saying something profound. (A children’s playground is another place where this happens.)
Today’s catch phrase: We need to start purchasing quality, not quantity.
Unless you spend a lot of time at conferences where health policy wonks mainly talk to each other, I bet you didn’t even realize this was a problem. When you get a flu shot, do you search out providers who will give you the most injections for the same copayment? Don’t we all?… Oops, I guess not. More likely, you search out a doctor or nurse who will give you the right serum with the least amount of pain. If so, hooray for you! You’re already choosing quality over quantity.
If you needed a knee replacement, a colonoscopy or an MRI scan, would you search around for providers who offer two procedures for the price of one? Or would you try to find a provider who would do the procedure only once, the right way, with no mistakes? If the latter, then rest assured. You’re not the cause of our problems.
But, then, who is?
The Problem. The real problem in our health care system is not that people are choosing quantity over quality. Or quality over quantity. Or any combination of the two.
As I explained in my last Health Alert, our problem is that we have smart people and dumb payment systems. The smart people are the patients and the doctors — each pursuing his own self-interest. The dumb payment systems are the reimbursement formulas of the large, bureaucratic, impersonal third-party payers.
Although in popular lore, the big insurance company is the abuser of the hapless patient or the conscientious doctor, the truth is much more often the other way around. Doctors and patients are more likely to outsmart and abuse the insurance companies.
The abuse occurs because everyone faces perverse incentives. Patients with first dollar coverage have an incentive to consume health care until its value approaches zero. Or, until it approaches the value of the time it takes to get the care. Patients aren’t ignoring value. Quite the contrary. They are seeking out care until the value equals the marginal cost of care to them.
On the provider side, the perverse incentive is to maximize against reimbursement formulas. For example, if the formula pays for office visits, but doesn’t pay for phone calls or e-mail, doctors will schedule lots of office visits and avoid phone calls and e-mail. This isn’t an issue of quantity versus quality; it’s an issue of doing what you get paid to do. (Don’t most people in the world get paid to do what they do?)
The Wrong Solution. The solution embedded in the Affordable Care Act (ACA) will make the incentives even more perverse than they now are. Patients will have even more first dollar coverage for all manner of preventive care. They will respond by trying to obtain more pap smears, more mammograms, more colonoscopies, etc., that they probably don’t need and wouldn’t obtain if they had to pay with their own money. Never mind that we have nowhere near the supply of medical personnel that meet this surge in demand. In the very act of trying, they will waste resources, drive up costs and crowd out patients with more legitimate medical needs. And because there is no copayment or deductible, patients will have no incentive to seek out cost-effective care — say, at walk-in clinics.
On the provider side, reimbursement formulas will intrude even more into the decisions doctors make. Even so, I’ll put my money on the doctors. They will figure out how to game the system, no matter how much planning the bean counters devote to it. If all else fails, the doctors will buy computer programs that tell them how to maximize income under the next set of rules. On the surface, these initiatives appear to many to represent radical change. In fact, this approach is largely a continuation of what has been going on in Medicare for the past two decades.
The Right Solution. As we have said many times at this blog, in every health care market where third-party payers are nowhere to be found, we don’t have a problem of value purchasing. Cosmetic surgery, Lasik surgery, walk-in clinics, surgi-centers, specialty phone and email doctor services, concierge doctors, international medical tourism — you name it. Wherever providers must compete on price, they almost always compete on quality as well.
Of course, we can’t get rid of health insurance entirely, and that shouldn’t be our goal anyway. But as we have explained before, insurance need not prevent patients from making marginal decisions and it need not prevent providers from competing for patients on price and quality.
More on this in future Alerts.
Just about the only market in health care where third-party payment is mostly absent is the market for cosmetic surgery. I recently created an index of cosmetic surgery prices to see if they increased more slowly than ordinary physician fees. I found that physician fees rose about three times as fast as the fees cosmetic surgeons charge for procedures typically paid out-of-pocket. http://www.ncpathinktank.org/pub/ba731
How is “value purchasing” supposed to work when someone else is paying the bill?
While I don’t disagree with a word of this, I think it is important to also recognize that payment systems do not always drive behavior. Humans are complex organisms with a wide variety of motives.
This is something the Dartmouth Atlas folks have completely missed. They highlight that some areas consume more services than others and blame it on the payment system. But how can that be when the payment system is exactly the same in each area?
Dartmouth dismisses the role of consumer demand — that varies widely from place to place. Dartmouth assumes that people are automatons, doing whatever the provider instructs them to do. Simply not true. In fact, providers do what we as patients demand of them.
Small but clear example – Earlier this year I saw the ad for my local Walgreen’s that they had flu vaccine available earlier than my normal primary care clinic, where I had received them the previous two years. The Walgreen’s price was $29.99, it was two blocks away, it would be in and out for a trip to the store I would make anyway. I knew I could wait a month, make an appointment (required) at my clinic, make a special trip to the clinic, wait at least a few minutes after filling out the usual deluge of forms, be called back, take up a nurse or tech time, then make the trip back home, much further away, but have to pay nothing as I was over my out of pocket limit for the year. I went to Walgreen’s where it took all of a couple of minutes, it was called in to my health plan who said they would pay nothing of the $29.99, but I paid, and it was even entered into my clinic health record, just like my Rx scripts are. The convenience was well worth it to me for my time, etc., without even considering the fact I didn’t use the clinic resources. Out of curiosity, I went to my records to see how much the plan paid the previous two years. Between the “professional” charge to administer, and the vaccine cost itself, the amount net paid to the provider by my plan in 2008 was $32.69, and for 2009 it was $33.69. I am sure that they would have allowed $34.69 for this year. Why the heck wouldn’t they have covered the cost at $29.99 while saving the administrative cost of paying the clinic, and the clinic resource time, etc.? Never mind – I know why. I am still satisfied with my purchase price and quality, maybe even more now that I know the behind the scenes costs, and the trip/appointment time it save me. Obviously, this might not apply to something that cost $2,500 and/or was “emergency” in nature, but the principle is the thing. By the way, my plan is an HDHP with HSA, but I was already over and used up my contributions.
It’s the whole volume-margin tradeoff. The more we slash doctor margins, the more overall spending goes up as they try to make money with higher volumes.
I personally think this whole “quality” thing is a little bit overdone. Yes, “quality” care is important, but measuring it is wicked difficult. So, while it sounds really great, I don’t see how it works for creating a whole new payment system.
@ H D Carroll
I like personal stories. Thanks for sharing.
The biggest problem with value purchasing is that it distract us from the true problems — as yousay.
If competition for service is reduced and individual have limited incentive to self regulate their consumption from an economic aspect, would the “perverse incentives” exacerbate the theoretical issues of moral hazard or adverse selection? If an individual has limited incentive to self regulate due to increased quantity, will they be worse off knowing they have access?
I think peole want to talk about value purchasing precisely because they want to change the subject.
To Brian Williams re: How is “value purchasing” supposed to work when someone else is paying the bill?
There’s nothing to it. Simply cede your values to the payers values. What could possibly go wrong with that?
John all very good points., It is a system and the clever ones will find out how to work or game the system to their advantage,.
You must credit insurance companies and government. Although they are expense centers, they also make profits or revenues and power. The bureaucracies are enormous and have to be sustained, so government and financial intermediaries to patients and doctors will make money. So they will be winners in this system.
But earlier in my life, as a conscientious young doctor, I saw first hand how these systems work.
There can be other forms of compensation such as favors and off balance sheet compensation. But I really believe that quality medicine occurs between a patient and a physician who mutually respect each other, and can negotiate their own fees.
Earlier, before insurance I would have the opportunity to discount or forgive medical bills depending on my relationship to the patient. In the future that may not be possible.
I appreciate your staying on top of the issues for us.
BIG LOSERS TAX PAYERS AND PATIENTS WITHOUT CONNECTIONS.
The magic equation is “value” = “quality”/cost. Payment for qualtiy is the facade to cover up clinic pay contingent on “spending” of self-styled “payer” premium and tax dollars. What counts in the counting houses is what is contable–money. “Payer” defined “quality” is double-speak to cover up profiteering from rationing care, something of no value for patients. Bob
It is impossible for a physician to do his best when he is treating a code number instead of a patient.
Are economic incentives the only barrier keeping docs from embracing patient treatment by phone an email? Or, is fear of liabilty part of the issue? How do concierge doctors, who do promote phone and email, get around that?
Uwe,
In the Dec 6 blog, you challenged John asking whether he knew how hospitals and doctors’ offices work.
And John does “wonder if health economists actually understand how other markets work.” I agree with John.
Out of all do respect, have you ever actually run a primary care physician’s office? There is a big difference b/n running a PCP vs other specialties’ practices. We are all different & we’re in different marketplaces.
You also said,
“Write me a blog, then, on how hospitals would advertise their prices to consumers and patients under consumer-directed health care. You know that I have actually wrestled with that issue and written about it. But how would you do it? Ditto for physicians offices.”
There are many different examples of the way physicians are changing health care themselves. Just see the January issue of Town and Country highlighting
Concierge practices…My prices are there…and you will be surprised at how much patients pay for platinum plans.
Patients (consumers) determine whether our services, quality, access, and relationships are of value to us.
HD …I charge $15 to patients for flu shots. I gave one for free today to a vicodin addict who is uninsured but can afford ~$4/day for my plan. it’s my prerogative…And the little old ladies bring me cookies…
BTW, I do give my last name and my cell….
817-313-3466
I would be honored to be a fly on the wall at dinner with you and John….
It is funny that Prof. Reinhardt challenges Dr. Goodman to figure out “how” hospitals would advertise prices to patients. In the first instance, Dr. Goodman wouldn’t figure it out because he doesn’t run a hospital!
However, I see hospitals advertising all the time in San Francisco. They advertise on bus shelters, buses, billboards, and full-color ads in magazines and newspapers. The things they advertise are: Maternity care, “ER care in under 30 minutes,” and their research achievements. What’s missing is prices.
Tangentially, a great article published in the economic literature decades ago demonstrated empirically that markets where advertising is allowed enjoy lower prices than markets where advertising is banned. The authors compared prices of eyeglasses in states where opticians were allowed to advertise versus states where they were not. I wrote about it a while back (http://tinyurl.com/25ousjv).
John,
Great point about hospital advertising. It reminds me of the airline advertising before deregulation. Airlines couldn’t compete on price in the US back then so they advertised frequent flights, great meals, and feminine pulchritude.
Now that our benevolent government deigns to allow airline to compete on price, they advertise price, price, price, and, sometimes, scheduling.
Hospitals face regulated prices via Medicare. Private insurers extend the regulatory reach when they decide to reimburse by some factor times the Medicare reimbursement rate. Perhaps changes in the advertising will be a signal that real reform is under way.