Mind to Market

Sunday, April 08, 2007

Perverse Incentives

In a recent piece in the Wall Street Journal entitled Perverse Incentives in Health Care, John Goodman describes the environment in today's healthcare system that disincentivizes efficiency and quality in healthcare and rewards the status quo. Goodman places the blame for this on a system in which the payer calls the shots; Medicare or the insurance companies dictate what procedures they will authorize and how much they will pay for them. It's the healthcare providers' job is to provide the best care for their patients while staying within the boundaries set by the payers.

This has the effect of reducing and discouraging any innovations in the field because the provider may not be reimbursed for them. If a healthcare provider, medical device or pharmaceutical company has a better, more efficient or effective way of treating a patient this must be reviewed and approved by the payers before a healthcare provider can get paid. Although it is in the long term interest of the payers to reduce costs and improve quality, they are large bureaucracies and do not respond quickly to changes in the market. As a result such innovations as email and electronic medical record systems are not as easily implemented in healthcare as they are in virtually every other sector of the economy.

Goodman points out that those sectors of healthcare that are not reimbursable but rather paid for directly by the consumer, such as cosmetic or laser eye surgery, are both competitive and entrepreneurial. These sectors offer competitive and dropping prices, rapid gains in technology and constantly improving quality. In these sectors the coupling between payer and provider is looser; the consumer is simply interested in a smaller nose, better eyesight or fewer wrinkles and does not want to sweat the details of how much a syringe, anesthetic or some sub-task costs.

Some healthcare providers, such as the Mayo Clinic and Intermountain Healthcare, have bucked the system and have implemented efficient practices resulting in dramatically reduced healthcare costs. This requires not only vision, but a large investment of resources to implement. Most healthcare providers are too constrained by their current financial situation to take such a risk. Goodman suggests a way for Medicare to reward innovations that will lead lower costs in the long run. It may be a start, but the whole idea of a government agency managing innovation strikes me as equally perverse and ultimately futile.

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