U.S. Healthcare’s Perverse Commercial Incentives

An interesting article recently published by Robert Kuttner in the New England Journal of Medicine explains how our relentlessly increasing healthcare costs are due to more than these usual culprits: Our aging population, expensive new technologies, poor diet and lack of exercise, the tendency for the supply of supply providers, medical devices, and new treatments to generate its own demand, excessive litigation and defensive medicine, and tax-favored insurance coverage.
The other culprit, he explains, is America's "pervasive commercialization," which is dominated by:

... for-profit insurance and pharmaceutical companies, a new wave of investor-owned specialty hospitals, and profit-maximizing behavior even by nonprofit players raise costs and distort resource allocation ... [as] private bureaucracies siphon off $400 billion to $500 billion of the $2.1 trillion spent [due to] perverse incentives produced by commercial dominance of the system.

Mr. Kuttner isn't the only one blaming our economic system for many of healthcare's problems. His explanation of pervasive commercialization driven by perverse incentives is consistent with John Bogle's description of the "pathological mutation of capitalism" that is destroying the American economy. Mr. Bogle is an authority who has been named by FORTUNE magazine as one of the four giants of the 20th century in the investment industry, and by TIME magazine as one of the world's 100 most powerful and influential people. As I wrote at this link, the pathologically mutated form of capitalism he describes has infiltrated and broken our healthcare system by pressuring healthcare providers to treat more patients in same amount of time to maintain their profits, which mean greater likelihood of errors and omissions due to overload. Furthermore, providers who keep their patients healthy longer through prevention, and who treat ill patients in the most cost-effective manner, are at serious risk of financial ruin. Not to mention the lack of good evidence-based guidelines defining what cost-effective care actually is. The end result is that the consumer receives less value, i.e., higher costs and lower quality.

So, our healthcare system is based on a pathologically mutated model of capitalism that encourages a form of commercialization in which perverse incentives maximize profits for some by delivering low value to the consumer … What a mess!

Mr. Kuttner gives examples of the kinds of problems these perverse commercial incentives are causing in the healthcare industry. He begins by explaining how many private insurance companies control costs by:

...practicing risk selection, limiting the services covered, constraining payments to providers, and shifting costs to patients…[thus] resources are increasingly allocated in response to profit opportunities rather than medical need, many attainable efficiencies are not achieved, unnecessary medical care is provided for profit, administrative expenses are high, and enormous sums are squandered in efforts to game the system. The result is a blend of overtreatment and undertreatment — and escalating costs. Researchers calculate that between one fifth and one third of medical outlays do nothing to improve health.

He then claims that:

Great health improvements can be achieved through basic public health measures and a population-based approach to wellness and medical care. But entrepreneurs do not prosper by providing these services, and those who need them most are the least likely to have insurance… Comprehensive, government-organized, universal health insurance systems are far better equipped to realize these efficiencies because everyone is covered and there are no incentives to pursue the most profitable treatments rather than those dictated by medical need… Commercial incentives are not fixing what's broken.

He also explains how primary care physicians are suffering the brunt of our broken healthcare system due to perverse cost-containment strategies, such as income targeting, which cause their caseloads increase and net earnings stagnate or decline:

The idea is that physicians have a mental picture of expected earnings — an income target. If the insurance plan squeezes their income by reducing payments per visit, doctors compensate by increasing their caseload and spending less time with each patient … [which] has multiple self-defeating effects. A doctor's most precious commodity is time — adequate time to review a chart, take a history, truly listen to a patient. You can't do all that in 10 minutes. Harried primary care doctors are more likely to miss cues, make mistakes, and — ironically enough — order more tests to compensate for lack of hands-on assessment. They are also more likely to make more referrals to specialists for procedures they could perform more cost-effectively themselves, given adequate time and compensation. And the gap between generalist and specialist pay is widening.

Another cost-containment tactic is to increase deductibles and copayments in order to:

…dissuade people from going to the doctor. But sometimes seeing the doctor is medically indicated, and waiting until conditions are dire costs the system far more money than it saves. Moreover, at some point during each year, more than 80 million Americans go without coverage, which makes them even less likely to seek preventive care.

Furthermore, a strategy used by hospitals to maximize their revenue involves fierce defense of their profit centers, investing heavily in facilities for lucrative procedures that will attract physicians and patients (such as cardiology). It would be better for our healthcare system as a whole, however:

…to shift resources from subspecialists to primary care [where many things can be done for much lower cost]. But in an uncoordinated, commercialized system, specialists might take their business elsewhere, so they have the leverage to maintain their incomes and privileges — and thereby distort cost-effective resource allocation.

And physician entrepreneurs are increasingly moving toward "boutique medicine:"

...in which well-to-do patients pay a premium, physicians maintain good incomes, and both get leisurely consultation time. It's a convenient solution, but only for the very affluent and their doctors, and it increases overall medical outlays. Other doctors opt out by becoming proprietors of specialty hospitals, usually day surgeries. In principle, it is cost-effective to shift many procedures to outpatient settings that are less expensive but still offer high-quality care. In a government-organized universal system, the cost savings can be usefully redirected elsewhere. But in our system, the savings go into the surgeons' pockets, and their day hospitals often have a parasitic relationship with community hospitals, which retain the hardest cases and give up the remunerative procedures needed to subsidize those which lose money.

I propose a healthcare system that focuses on bringing value to the consumer by fostering high quality care delivered efficiently (i.e., cost-effective care) through better use of clinical research, evidence-based guidelines, and health information technology. It would also have incentives for:

• Delivering high value care to consumers
• Making quality and cost transparent to enable consumers to make better healthcare decisions
• Offering consumers wellness tools, counseling and guidance to enable them to take better care of themselves.