Incentives Don’t Work

By James Kwak

Driving home from school today, I listened to a Fresh Air interview from two months ago with Atul Gawande, by now perhaps the most famous doctor in the policy intelligentsia. The interview was based on a New Yorker article discussing how some doctors and even some health care payor organizations are trying to reduce health care costs for the most expensive people while improving outcomes. In Camden, New Jersey, one doctor found that one percent of people generate thirty percent of health care costs.

One refrain you heard incessantly during the health care reform debate was that we have high health care costs because of overconsumption and we have overconsumption because people don’t bear a high enough share of their marginal health care costs, so the solution is to increase copays and deductibles. This is what Economics 101 would tell you: people respond to incentives. But Gawande discussed one large company that tried this year after year, but only saw their costs going up. The problem was that while most members responded to the higher copays and kept their costs more or less steady, the 5 percent of members who generated 60 percent of the costs behaved differently. Or, rather, they also reduced consumption (of doctor’s visits and prescription medications), but as a result they often had catastrophic outcomes. These were people with heart disease on cholesterol-lowering medications, and when they went off their medications they ended up in the hospital with heart attacks and then with congestive heart failure.

If incentives worked on this level, we should have solved the problem already. Employers all want to bring health care costs down, so if any insurer could bring health care costs down they would have a competitive advantage, and so insurers should be trying to bring health care costs down. But it’s not working. One explanation is that insurers don’t have enough market power compared to providers (like large hospital chains); I believe Uwe Reinhardt has explained the situation this way.

Another way of looking at the problem is to note that there is no one who is trying to brings costs down directly. Sure, insurers try to do it, but they do it through the types of monetary incentives that economists love: higher copays, lower payments for various procedures, etc. But that’s not actually what most companies do when they have a cost problem. If you run an auto company and it’s costing too much to build a car, you don’t lower the transfer price that you pay to that factory and let incentives solve the problem. You go and figure out what the problem is and you engineer a solution, whether by redesigning the manufacturing process, reengineering the product to use cheaper parts, negotiating lower wage costs, negotiating lower input costs, or something else. That’s how you solve most problems in the business world — not by tweaking some clever incentive scheme.

This is a high-level analogy for what Gawande is talking about: doctors and health care organizations identifying their most expensive patients or members, figuring out what’s wrong with them, and getting them the right treatments. In the few examples that Gawande discusses, it results in cost reductions on the order of 20 percent with better outcomes. It seems that for the people who consume the most health care dollars, you can save money simply by focusing on giving them better care — because right now their big problems are things like coverage gaps that prevent them from getting basic care, not being on the right medications, and ending up in the emergency room for catastrophic problems. Maybe for most people you would not save money simply by providing better care, but for the few people who consume most of the system’s resources, maybe you would save money. The problem is that with few exceptions, no one is trying to do that. That’s what we need an incentive for.

117 responses to “Incentives Don’t Work

  1. Andrew Foster

    The incentives worked they just did not produce the desired outcome –people stayed away, but the incentives encouraged people to avoid obtaining preventitive healthcare. They stayed out a certain health care “market” (which it manifestly is not since larges swaths of participants cannot freely enter or exit) –the one that those interested in containing cost should actually nurture. I think if you redesign incentives to encourage “wellness” –if you quit smoking your employer gives you a bonus since it will lower company costs –you might see a better cost containment strategy in the making.

  2. Countries who offer universal health care also face this problem of a small percentage of people who consume a big share of the health dollars. Here in Canada, I have long believed that anyone who consistently consumes more than, say, four times the average should be required to consult with a health counsellor. This would help weed out those who are hypochondriacs or simply lonely, and also offer guidance for people with complex chronic conditions.

  3. I was reading last year about a hospital in Utah that focused on standardizing care for certain procedures. They studied the most effective use of a procedure and then trained their staff around the most effective use. This is an area of improvement that is sorely needed. I work with elders who have insurance and tend to have health issues, so access is not an issue for them. I have heard them comment that it is hard to find doctors who understand their needs. I see tremendous room for efficiencies with this population.

  4. “The problem was that while most members responded to the higher copays and kept their costs more or less steady, the 5 percent of members who generated 60 percent of the costs behaved differently. Or, rather, they also reduced consumption (of doctor’s visits and prescription medications), but as a result they often had catastrophic outcomes.”

    Clearly, the “incentives” – raising costs to persuade people to think twice about utilizing the healthcare system – worked. But when you are very ill, this kind of “incentive” can cost more in the long run.

    We keep looking at healthcare as if it is a commodity like a purse or an airline ticket. I can choose to buy a purse at Target or a Gucci bag at Nordstroms – or I can choose not to buy a purse at all and my life will remain fairly tranquil regardless.

    If I need medication or chemotherapy or heart surgery, it’s not an option. It’s a necessity.

    Passing on higher costs to consumers (a la Bush’s consumer driven healthcare) – in an era of stagnant wages and high unemployment – seems destined to backfire in spectacularly expensive ways.

  5. mondo, I do believe that the problem of a small percentage of people consuming a big share of health care dollars stems from the fortunate fact that only a small share of people are chronically or acutely ill at one time.

    This is a very good thing; not a bad thing. At any given moment, one of those people could be you, or it could be me. It could be my daughter, or your mother.

    In a really excellent healthcare system, the “health counsellor” you suggest would be one’s physician.

    I think research has shown that the idea of hypochrondriacs and lonely people eating up a big share of healthcare expenditures is largely a myth.

    But in any case, a good doctor who really knew her patients as any good doctor actually wants to do, would certainly be able to handle those infrequent cases. Unfortunately for the good doctor, all the financial incentives seem to run in the other direction and psychic incentives do not pay her bills.

    Good healthcare will never exist within a strict framework of capitalist incentives, any more than good parenting or good education will. These things are just way too important to be left to the market, as is evident when we consider the results produced by for-profit healthcare and charter schools.

  6. James, this is my field. And you’re right in your analysis, but you’re wrong in the premise that incentives don’t work. They absolutely work, but medical billing systems are VERY antiquated, sometimes still running on mainframes, and states/insurers don’t want to update the software to implement something more complicated because there’s no budget for up-front costs.

    But if there was budget for more complicated payment systems, the right thing to do would be to make EVERY visit at your local doctor free, with no deductible. In fact, it would serve America well if our deductibles for other procedures decreased based on whether we had been seen in the last six months, or twelve months.

    However, in addition to their being no money to change, there’s also no political will from the American Medical Association, the American Heart Association, etc. to reduce the frequency of the most expensive (profitable!) procedures in favor of general practice. If you’re a cardiologist at a hospital (almost NEVER working for the hospital, you’re always in independent practice that you may refuse to accept Medicare Assignment and later “balance bill” the patient, bankrupt them, and buy a Ferrarri), your goal is to generate as much expense as possible.

    The Obama administration has begun to take good steps in the right direction on this with Medicare’s changes in the Affordable Care Act. Medicare as of Right Now excludes any preventive care from being charged coinsurance, which is exactly the type of model that the rest of the insurance industry should be following.

  7. There’s a name for that small minority: sick people!

    Seriously, this was well documented by Canadian researchers a long time ago:

    http://www.ncbi.nlm.nih.gov/pubmed/12160120

    Decisions about health care consumption are usually not made at the margin. The choice is virtually never “what is the utility of consuming one more unit of health care?”. Firstly because treatment itself is almost always an all or nothing proposition, but more importantly because the ‘consumer’/patient will be willing to pay up to the total ‘value’ of their health or their life itself (or that of a loved one). In other words, the choice is not “what am I willing to pay for one more pill given the other things I can do with the money?. It’s really “how much am I willing to pay for hope and the chance to not to die/be crippled/be in pain etc …”.

    The only price incentive that’s going to work is to make the price so high that paying it is literally is worse than the prospect of pain and/or death. Or you can have death panels. Your choice.

  8. As a leader of a non-profit attempting to house the homeless in sustainable and, ideally, permanent housing, I think I have a unique perspective on this issue.

    Many of my clients are uninsured and high-end users of the health care system because of the risks associated with living on the streets and addiction issues. Thus, emergency care, which is inherently more expensive than preventive primary care, is their first point of contact with the health care system even when dealing with relatively minor issues.

    To top it off, when my uninsured clients have a major health issue, because they are uninsured, they do not receive adequate care and often return to the emergency room weeks, days, and, in some cases, hours later with the exact same health issue. Consequently, they are charged at emergency care rates twice, but, again, because they are uninsured and have no assets, taxpayers pay the health care costs that my clients generate. For example, I have had clients released to the streets after double bypass surgery who have returned to the hospital weeks later for quadruple bypass surgery.

    Needless to say, as I work with my clients to find sustainable housing, I also work with them to find health care insurance and primary care providers to avoid situations like the ones I have referenced above.

  9. Jeoffry B. Gordon, MD, MPH

    I have been a solo practicing family doc for nearly 40 years and am a passionate fan of Baseline Senario, but speaking from the front lines of our nation’s health care catastrophe I have to tell you that this blog is way, way off base. Three points:

    1) Internationally the United States is now 50th in both life expectancy and in maternal mortality, while spending twice as much per capita on health services than the next country.We have nothing to brag about.Fiddling with a few parameters will not accomplish anything. We need major paradigm shifts.

    2)The major economic inefficiency (waste) in the health care system is the absurd, complex and expensive for-profit medical insurance system. Involving 1300 companies and itemized unit billing this complex system generates administrative costs (from both the insurance companies themselves and the administrative costs to providers) which conservatively consume 30 cents of every insurance premium dollar. A universal enrollment (end to marketing) and single payer financing system (Medicare for All) can easily generate these savings but has been so threatening to the health insurance finance system THAT THESE ISSUES WERE NOT EVEN ON THE TABLE in our recent reform debate. This blog is so clear about the banking system and how it (mal)functions. You should also get up to speed and be clear about their little(?) brothers in the medical arena.

    3)The main paradigm shift must be away from high and higher tech specialized and complex administrative solutions, back to a primary care system. Other countries with sophisticated systems have two primary care docs for every one specialist while our ratio is reversed. In these countries, by and large patients have good access and simple conditions are treated simply with access to sophisticated care as needed. Econometric and financing reforms are not enough. The system needs to be turned on its head which in the end may not at all be feasible – too many powerful stakeholders (as they say) with financial benefits to preserve.

    Finally, I want to end by introducing you to an inspiration of mine, a now elderly, Welsh general practitioner, Dr. Julian Tudor Hart, who wrote an excellent book, THE POLITICAL ECONOMY OF MEDICAL CARE, but who is better known for his exposition of THE INVERSE CARE LAW (published in Lancet, February 27, 1971):
    “The availability of good medical care tends to vary inversely with the need for the population served. This inverse care law operates more completely where medical care is most exposed to market forces, and less so where such exposure is reduced. The market distribution of medical care is a primitive and historically outdated social form, and any return to it would further exaggerate the maldistribution of medical resources.”

  10. I must be living in a different world. Overconsumption? I have been told that my ailments/injuries have been nothing to worry about three times, two of which took three years to diagnose and fix and the last I wouldn’t take “go home and rest” for an answer, all 3 requiring surgical remedy. These were NOT complicated problems (1 torn arch, 1 broken foot, and appendicitis). I was denied the TIME with the doctor to diagnose the problem(s) correctly from the onset in favor of cheaper alternatives.

    I am of the opinion that DOCTORS can prevent future visits (keeping costs low) by spending more time with each person seeking care to actually identify the cause of the ailment rather than treating the symptoms. Some illnesses and injuries take longer than 15 minutes to diagnose and are curable IF properly diagnosed, but result in misery and lots of useless treatment ($$$$$) if misdiagnosed. The current “insurance” status quo does not give Docs the incentive to spend TIME with the people that might benefit from it.
    \rant>

  11. What a great comment, thanks! Especially like the Inverse Care Law.

  12. Herbert Wetherby

    Another big problem the industry faces is education -vs- treatment costs. We know what causes many cancers and things like broken appendixs. Rather than educate your way with preventive maintenance we instead try to find cures for things that are prevenable in the first place. The reasons for this are basicly the same reasons we have economic breakdowns, efficiency of the system and abuses to it. And we have to live in a different world, if we want true change.

  13. Gawande’s original New Yorker article was mostly about one doctor’s successful efforts to reduce the total cost of treating these high cost patients by actively managing their care. Successful efforts. Unpaid, but successful efforts.

    It is possible to manage down the cost of health care. I suggest that you do a quick search on “Quadgraphics + health + care” to see how they’re doing it. Start here:
    http://www.businessweek.com/bwdaily/dnflash/nov2002/nf20021118_0219.htm

    Or read The Innovator’s Prescription: A Disruptive Solution for Health Care by Clayton Christensen — he has a chapter on Quadgraphics.

    James says, “Maybe for most people you would not save money simply by providing better care, but for the few people who consume most of the system’s resources, maybe you would save money.” In fact, the number of “high cost users” can be reduced by taking better care of them and teaching them to take better care of themselves before they get sick. Diagnose and treat hypertension. Prevent and reduce incidence of diabetes through diet and lifestyle changes. Stop(don’t start) smoking. Pre-natal care. Exercise. Educate, educate, educate.

  14. There have been some articles in the press lately about a variety of “concierge” medical practices, where doctors charge a flat fee for all primary care per year. Doctors see fewer patients and patients have access to the doctors 24/7. The doctors doing this claim to earn sufficient $ while providing better care. I’ve seen annual fee amounts from a few hundred dollars to a couple of thousand.

    Some primary care doctors are also “going bare” – charging patients directly for care and reducing per visit costs that way.

    I support a single payer plan, but it appears this is never going to happen in the US and we need to look at other options.

  15. anandopadooda

    I have personally known many families who regard doctors like some kind of priests. When they are anxious about a minor health issue they are not self-reliant, and many of their frequent visits to the doctor are unnecessary. Such people used to be able to touch base with their doctor by telephone, but that is now rare. A counselling session could always be open to imput by the family doctor, but need not be his/her primary responsibility.

    More importantly, perhaps, it is estimated that up to 30% of tests ordered by doctors are unnecessary. Doctors make money by ordering tests, and also protect themselves from potential lawsuits. The tests are not only expensive, they are often invasive, painful and even harmful. Because doctors and hospitals profit from tests (even in Canada no doubt) it would be important to keep counselling independent of doctors. And counsellors certainly should not work for health insurance companies. They should function as ombudsmen for patients’ rights.

  16. Actually, the only thing which works well within a strict framework of capitalist incentives is capital accumulation by those mastering the power of conspiracy. Those who doubt this should waste some time mastering economic history and ignore the bleating of the law and economics crowd who represent the final stage of relgious fundamentalism.

  17. Here is the test, of whether Messrs Johnson
    and Kwak read what we write here. Here is a
    Real Live MD saying what I — and I guess
    several others — have been saying, over and over, as often as we have patience to do it.

    I just found what I wrote several weeks ago:

    “I rarely post any more, since I don’t believe
    that Messrs Johnson and Kwak read what we write.
    I’ve posted about Health Care Costs before, and
    both the above gentlemen completely ignore the
    data. But I have a few minutes so I’ll try
    again.

    “1. The U.S. pays 16% of GDP on health care.
    The rest of the developed world countries –
    Japan, Canada, England, France, Germany,
    Denmark, Sweden, etc — pay less than 10%
    of their GDP on health care. I suspect that
    this disparity may be because these other
    countries have Single Payer, aka Socialized
    Medicine, whereas these terms frighten us
    USAns to death.

    “2. All these other countries rank above the
    U.S. in most measures of health, whether it
    be longevity, infant birth weights, average
    age of primaparas, women’s health during
    pregnancy and childbirth, etc etc.

    “There! I’ve said it again. My duty is done
    for another couple of months.”

    Of course Dr Gordon has said what I said
    as cogently, and with incomparably more
    authority, than I.

    I am going to send a “private” E-mail to
    Mr Kwak, asking him to read Dr Gordon’s
    post. If others here want to join me,
    here is Mr Kwak’s Gmail address:
    James Kwak

    It really is time that Mr Kwak and Mr
    Johnson stop tiptoeing around the basic
    problems of health care in the U.S. and
    read and absorb what Dr Gordon is saying.

    Best wishes to all,

    Alan McConnell, in Silver Spring MD

  18. Mr Kwak’s E-mail didn’t show up, because of
    the less-than and greater-than signs. Here it
    is again: jamesykwak (at) gmail (dot) com.

    Alan

  19. My former employer is actually doing this. If you don’t smoke, you get a lower premium. If you want to stop, you get cessation programs as a paid-for benefit. They also paid for an annual “health screening” which was basically a blood pressure and cholesterol check, but they did it at the workplace so it was convenient.

    The non-smoking discount was essentially on the honor system, though — you had to promise not to smoke. There were limited verification mechanisms.

    But smoking is “easy” — there is 50 years of evidence about how harmful it is. There aren’t enough behaviors with that clear of a health impact (yet). So it is not clear whether that sort of incentive structure will scale much beyond the “low-hanging fruit”.

  20. Actually, the biggest waste in the U.S. healthcare system is the private insurance companies. Eliminating them and their marketing costs, administrative overhead, the costs they incur on “providers” (hospitals and doctors) who must hire personnel to handle all the conflicting insurance company requirements, would, conservatively, cut our healthcare costs by at least 20 percent.

  21. Hypochondriacs and lonely people may be a small number, but they do exist. As an example, the mother of someone I know (Mom’s Medicare age),”doctor shops”, always looking -hoping really, for some dramatic illness or problem that she can milk for sympathy. Because of the lack of co-ordination between doctors, they duplicate tests and therapies. I hate to think what this lady has cost the Medicare system! She has had surgeries, replacements, PT, etc.
    Also, thirty years ago we couldn’t maintain conditions through drug therapy like we do today; high cholesterol and triglycerides just put you in a pine box. Now you can live for decades (during which you will no doubt consume more health care).

  22. I have been a volunteer advocate and activist for single-payer healthcare ever since my late husband died due to denial of care.

    Dr. Gordon is, of course, 100% correct. Atul Gawande is way too invested in the medical establishment. Whether they’re willing to be vocal about it or not, most physicians know that Dr. Gordon is right.

    After a decade of working very hard to promote change in this area, I threw in the towel with the creation of Obama’s Orwellian “Patient Protection and Affordable Care Act.”

    Now I feel it is more important to work on reform of the monetary system and after that (because it cannot happen until after that) REAL campaign finance reform with full and equitable public funding for all campaigns.

    Decent healthcare is lost to at least another generation of Americans. What a travesty!

  23. Absolutely right. But it seems we’re stuck with them. Another corporate predator sucking our blood.

  24. The problem of cost is much larger than providing better care for those with poorer health. We need a system that penalizes physicians for providing un-needed care.

    This article on the cost of health care in McAllen, Tx. finds that the cost is frequently driven by the profit motive of the health care providers. In order to reduce costs all of the drivers of cost should be considered and dealt with.

    “McAllen has another distinction, too: it is one of the most expensive health-care markets in the country. Only Miami—which has much higher labor and living costs—spends more per person on health care”

    Read more http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande#ixzz1HQUUC6DO

  25. jitterbalm, I’m with you on that — and I am one of the elders.

    A while back when doing master’s work in political science, I conducted a survey among elders, asking them if they would be willing to dedicate one percent of their pensions to creation of an ombudsman’s office for seniors. I had in mind advocacy for passage of laws protecting the elderly, and promoting their welfare. I was surprised to learn that, while they were quite willing to contribute to such a program, what they primarily wanted from an ombudsman was PROTECTION FROM OVER MEDICATION AND OVERTREATMENT BY DOCTORS. Pardon my shout.

  26. Carla, I am sorry for your loss. No wonder you are sometimes angry.

    Here in Canada the corporate types run the hospitals for profit, so our system has its bloodsuckers too. I think you are right to be focussing on the money game.

  27. YES. Thank you, ella, for citing the McAllen research.

  28. “Incentives” can work fine if information about medical conditions is free. Unfortunately, several anecdotes prove how hard it is for individuals (doctors, too!) to make effective judgements about the cost/benefit of any treatment.

    My read of the Gawande article was that, rather than attacking incentives per se, it emphasized the situations where information was potentially most valuable, individuals who are very ill and not able to make effective self-care decisions — whether due to unrelated life circumstances, the severity of their illness making outcomes very uncertain, or simple difficulty of diagnosis.

    In fact, once the problem was properly defined, incentives were important to achieving good health without bankrupting either the patient or the providers.

  29. Your correct incentives do not work but with your example given from the point of the doctors they also need to cover there asses from all the law suits of today! And getting back to incentives how about WALL STREET?

  30. Where are the system incentives to prevent this… “Pharmaceutical Company Hiking Price Of Drug That Prevents Premature Births From $10 to $1,500″ http://thinkprogress.org/2011/03/12/pharmaceutical-company-hiking-price-of-drug-that-prevents-premature-births-from-10-to-1500/

    Just how many more cases are like this? How many billions are added to the cost of care by pharma?

  31. Insurance companies don’t really have an incentive to lower the overall costs of health care — just their own costs by reducing their own expenses. Insurance companies benefit when the overall cost of health care increases because then they are justified to raise their premiums.

    So insurance companies have an incentive to encourage increases in the overall costs of health care while decreasing benefits to subscribers. Which is where we are at now.

  32. James Kwak says, “Incentives don’t work.”

    He then says that after increasing the cost of prescription medicines and doctor visits,” … most members responded to the higher copays and kept their costs more or less steady.” For these people, the incentives clearly worked.

    Then James says about the rest of the members, ” … the 5 percent of members who generated 60 percent of the costs behaved differently. Or, rather, they also reduced consumption (of doctor’s visits and prescription medications), but as a result they often had catastrophic outcomes. For these people the incentives worked as well — they spent less on prescriptions and doctor visits.

    We’ve read here often about the perverse incentives in banking and on Wall Street. People are/were paid a lot of money to do stuff that ultimately brought their employer to ruin and cost US taxpayers unfathomable amounts of money. The incentives worked but they were tied to the wrong outcome — short term gains — without having any adult supervision to prevent lying, cheating and stealing (insert here the text of 13 Bankers).

    Similarly, you can’t simply incent people to use less health care without some adult supervision to make sure they use at least what is required to stay healthy. This ranges from education and management (what was done in the Gawande article) to “if you don’t take your meds, we’re not gonna pay for your angioplasty and you’re gonna die.”

  33. Terrific viewpoint, Dr. G!

    However, it may also be that “the healthcare system” does not contain all the relevant parameters. The epidemiological data overwhelmingly show that as income inequality increases (in a nation, in a state within the US), physical health status worsens, life expectancy decreases and mental illness increases. These trends are for everyone (rich and poor), so this cannot be explained by differences in access to medical care. See Wilkinson & Pickett, “The Spirit Level”.

    In other words, we should think about economics as an element of “preventive medicine”.

  34. We could do more but it just won’t fly with the law. For instance you could give people who lose weight a premium discount, but good luck getting that passed the Feds.

    Depending on the company, there can also be substantial savings if they can offer healthy eating and living options at work.

  35. Excellent post, Dr. Gordon.

  36. Thank you jakepgh. Perhaps the gini income inequality research reveals whether the people of a nation care about each other, or merely compete with each other. That sort of thing affects health in many ways. Being secure in one’s community is healthful, being insecure is not. There is much to be learned about provision of health care, and I think future generations will look back on this era in North America with horror.

    Some poor nations are able to provide decent hospital treatment but require family or friends to bring meals to the patients. That probably beats hospital food any day. Other nations provide regular spa and massage holidays for all elders, and this probably pays for itself in medical savings.

    We cannot bring our money-making, competing mentality into the world of healing — it just doesn’t work.

  37. jeff simpson

    If there is an element of chance, then most folks will gamble and think they can save money and not suffer because they skimped on their ‘ounce of prevention’ — instead later requiring a ‘pound of cure.’

    Just another example of things that the market does badly, along with protecting the environment, or ensuring a level-playing field, or maximizing societal happiness.

    This last assertion is a big one, and so let me elaborate. Globalization allows companies to reduce production costs by outsourcing the peon jobs, thereby putting domestic workers out of business, but at the top, the profits get big (for a while, until the middle class consumer class disappears), and so the upper management reward themselves with huge bonuses. But overall, the gains at the top have come at the expense of the middle class, and many more middle class workers are now job-less (or underemployed, perhaps working as a greeter at WalMart). Mergers do the same thing. They render jobless a whole array of now redundant management positions, and those at the top of the pyramid do better. Big companies also get to the point that they can afford to lobby as individuals, and so legislative and regulatory capture becomes an issue as well. In short, unregulated markets result in income disparity, societal polarization, and non-competitive market behavior. This is the hard truth the ‘small government is beautiful’ folks refuse to admit, instead working dutifully to evoke fond and distant memories of Dutch and his dewy eyes as he communicated to us how much he cared about our future.

    Government of the rich, by the rich, for the rich.

    Banana republic 101.

  38. Thank you, Dr. Gordon! Well said! A friend who has spent 30+ years writing AR code for hospitals (all not-for-profit only), and I were discussing just this recently. I commented that I had noticed that when doctor’s charges began to increase was about the time more people began using insurance. My family never had health insurance, back in the day, but costs were such we could self-insure, barring a catastrophic illness. You are dead on when regarding the layers of cost due to insurance billing, etc.
    And I totally agree that single payer universal coverage is the way to go – NOT FOR PROFIT health care for all!

  39. The problem isn’t with the form of the incentives, but with the people. Three of the people in the New Yorker article, for example, had serious health problems of their own making. One was an asthmatic with a crack habit. Smoking crack would result in severe asthma attacks requiring emergency care. She had no interest in quitting crack. Another was a obese diabetic who repeatedly refused her doctors’ advice for diet and exercise until after her third heart attack. A third patient had many chronic and severe conditions stemming from his obesity (over 500lbs) coupled with alcohol and cocaine abuse. If the medical consequences aren’t incentive enough for these individuals to change their habits, neither increasing copays nor promising to reduce premiums will make a difference.

    At the risk of sounding callous, I wonder about the morality of forcing everyone else to pay for the choices of those who refuse to take responsibility for themselves and repeatedly end up in the hospital for choices they actively and make.

  40. What do the Feds have to do with it? Wouldn’t it be a private business decision?

  41. The problem is that there is a good chance–especially as we get older–that ALL of us will be in the one percent who consume the 30% or so of medical costs at some point.

  42. a breath of “fresh air”

    “the problem is to note that there is no one who is trying to brings costs down directly”

    “a small percentage of people who consume a big share of the health dollars” –

    wake up everyone!

    some people need more health care than others and therefore generate higher health costs than others
    big surprise

    duh! this is the basic premise of insurance

    pooling resources

    health costs are criticized, health insurance premium rates are criticized

    the solution – it is the fault of the sickest among us

    it is also said that people need to be “more responsibility for their health – their lack irresponsibility regarding their health is also a major health cost problem

    the groups who make their money in health care are not part of the problem

    health care is seen as a cash cow – a business sector where demand is an entrepreneurs dream

    md’s and hospitals are striving to grow, maintain or improve their revenues

    pharma lives off of exclusive patent rights – they are looking for ways to increase their revenues

    insurers are looking for ways to increase their revenue

    the only group with no power are the well and the sick and especially the sickest

    and maybe stock market expectations for continuously increasing growth are also part of the problem

  43. Short term incentives don’t work to fix long term problems, when the amortized cost (worsening health) is not salient.

    If immediacy == cost savings today, then either hyperbolic discounting or short volatility risk models (or game theory?) can explain the results found.

    Incentives have to match costs and benefits in order to succeed…

  44. Ok, I just re-read the original Gawande article in the New Yorker. While James’ post is clearly a “half empty” the article is closer to 7/8 full.

    Gawande:
    “An experiment in Atlantic City conducted by the Casino Workers’ Union and AtlantiCare Medical Center.
    After twelve months in the program … their emergency-room visits and hospital admissions were reduced by more than forty per cent. Surgical procedures were down by a quarter. The patients were also markedly healthier. Among five hundred and three patients with high blood pressure, only two were in poor control. Patients with high cholesterol had, on average, a fifty-point drop in their levels. A stunning sixty-three per cent of smokers with heart and lung disease quit smoking. In surveys, service and quality ratings were high.”

    “But was the program saving money?”

    ” … the Atlantic City workers in Fernandopulle’s program experienced a twenty-five-per-cent drop in costs.”

    More Gawande:

    “A recent Medicare demonstration program, given substantial additional resources under the new health-care-reform law, offers medical institutions an extra monthly payment to finance the coördination of care for their most chronically expensive beneficiaries. If total costs fall more than five per cent compared with those of a matched set of control patients, the program allows institutions to keep part of the savings. If costs fail to decline, the institutions have to return the monthly payments.”

    “Several hospitals took the deal when the program was offered, in 2006. One was the Massachusetts General Hospital, in Boston.”

    “Three years later, hospital stays and trips to the emergency room have dropped more than fifteen per cent. The hospital hit its five-per-cent cost-reduction target.”

    When the incentives are right and applied properly, they work. There’s lots of good news in Gawande’s piece. And its the good news part we need to focus on.

  45. Part of the problem with being the “Health Morality Police” is that the decisions that we get most bent out of shape about are the ones we don’t like. You could just as easily make the case that someone like Christopher Reeve should have to pay all of their own medical bills – after all, he made the choice to get on the horse. (Of course, since Reeve was an actor, he could have been wealthy enough to pay all of his own expenses, but hopefully you see the point I’m making.) But there would be an outcry about that. So teasing apart the difference between making people take responsibility for their risky choices and punishing people for behavior we disapprove of becomes difficult, and if we’re going to institute a system of personal responsibility, our personal opinions shouldn’t be the driving factor.

  46. Herbert Wetherby

    At the same time that cars were getting safer and therefore less costly to insure injury, the cost of replacing a vehicle has allowed the insurance companys to start the premimum high, and basicly keep it there for one of many reasons. Insurance and banking are two of our largest scams, from every angle.

  47. One of the challenges in this field is that, taken as a whole, it’s unclear that preventative care is effective relative to treating disease when it arises.

    However, in some cases it is more clear, and the example given, basically that we should prefer (costwise) that high heart-risk individuals take their medicine, is easily integrated into any competitive insurance program. The insurer would require such individuals to pay a higher premium for foregoing their medicine, or offer them a break in their premium for taking it (same thing).

    Incentives do work, more than we expect usually. They just have to be aligned with the correct goals and chosen carefully so that when they work, we’re better off.

    There are some doctors writing in the comments who are drawing some incredibly superficial conclusions from gross data. The fact that other countries have both lower costs and a single-payer system does not mean that a switch in who pays generates the lower costs. You should know that. It’s entirely possible that the different approach by the citizenry to its government in the US would produce higher-still costs in a single payer system. It’s also probable that some of the ways in which foreign governments control costs would be unacceptable here, as they were when HMO’s tried them.

    Competition and choice works, and we should adopt it as a feature of our medical landscape – something all too rare in our present system.

  48. This is excellent. Thank you Dr. Gordon!

  49. never did understand why you would make people pay insurance and then leap over another gate(co-pay) just to make an appointment. Some organizations help out people with a consulting nurse service that assesses whether an appointment would be needed.

  50. I read the New Yorker article and didn’t get the impression that the points made by Gawande and Dr. Gordon were mutually exclusive. It seems to me that both approaches could be part of an overall solution. However, I agree Carla, the opportunity to do anything like the right thing has passed due to our total dysfunction, just like financial reform.

  51. death panels!!!

  52. paul quigley

    Dr Gordon sure said a mouthful and he’s not the only medic who reads the Baseline.
    Way to go buddy.

  53. Bravo to Dr. Gordon. We in Canada are confronting the neo cons who wish to open up more private provisioning of sick care. On the face of it there are opportunities to meet economic/financial requisites of universal system in Canada. However, there will be a need to ensure that the medical establishment not use it as a wedge to exploit higher costs.

  54. You weren’t generating enough income for the effort to diagnose your situation. When you got worse you’d be easier and more lucrative to treat.

  55. Remember that your waste = wages. If doctors couldn’t charge for useless treatment they would drive Hondas.

  56. Unsympathetic

    The morality of “forcing everyone else to pay” will stay – until we as a nation confront the so-called morality of allowing people to live unhealthy lifestyles. It’s easier to just pay the bill than it is to lecture/punish/confront the people who feel entitled to be stupid.

    Want to get fat? Fine, but that needs to be paid for. Childhood obesity is not simply an amusing anecdote – those fat kids, unless by some miracle they choose a life of deadlifts and pull-ups, will cost far, far more than the kid who played soccer all his life.

    This is truly a societal issue! You canNOT do whatever you want and merely “expect” doctors to have a solution for it. Rather, everything is a choice with risks and rewards.. and the life you lead should determine what you pay. This is truly not an American idea, and it will be interesting to see what happens in the future.

    Preventative care is not just something for the already-healthy, it should be mandated for everyone.

  57. Unsympathetic

    Mondo: Anecdotes do not substitute for fact.

    How many case reviews did you have a doctor perform to correlate with those people who told you what they “want” from their doctor? Just because they told you what they “want” DOES NOT MEAN THEY ARE CORRECT.

  58. doubt seriously that it has any thing to do with what platform the applications are running on. more to do with having no incentive to do so. they have to spend money to do it, and will not profit from doing so. and providers wouldn’t be real happy either, as they can hit the procedure lottery .
    insurance companies lost any interest in controlling costs once providers also became monopolies. their only option they will invest in ‘cost’ control is denying claims or recession (canceling a policy)

  59. ezra s abrams

    sorry, totally wrong
    Health care costs are driven by technology, and the unlimited demand for health, particularly as people age.
    The other stuff is important, but secondary
    You make everyone loose weight, stop smoking, go on a low cal high fiber diet etc etc, it will temporarily stop the rise in HCCs (health care costs) but as those people age, they will demand $$ care.
    Even the perverse incentives to providers – your Doctor makes money treating you – are secondary to technology costs.

  60. My pained point is that the so-called overconsumption, in my case, would have identified the problems and led to better outcomes and less exposure to malpractice (I didn’t sue, BTW, but I could have).
    If you’ve ever broken a foot or torn an arch, imagine walking around on them each for 3 or 4 years. I do not see overconsumption, I see an unrealistic cookie-cutter compensation approach to paying docs to diagnose complicated problems. The docs that got it right took the time and probably didn’t get paid for doing so.

  61. ezra s abrams

    what on earth is wrong with mainframes ?
    are you an expert in computer technology ?
    Do you have any idea what fraction of the worlds banking transactions run on COBOL ?
    Also, regarding hte 1st doc visit is free – I once asked my primary care doc about copays, and he said, you have no idea of how many people come in on monday, saying I think I’m going to get a cold, then come in on Teu, I’m getting sick, then come in on wensday…..It doesn’t take a lot of those people to run up a bill.

    The problem is that med care by MDs is INSANE
    think about it: where else in our society is something as mundane as a routine checkup provided by face to face 1 on 1 with a person paid as much as an MD ?
    It’s just crazy: you can’t have people making 200,000 dollars a year or more providing 1 on 1 care….

  62. ezra s abrams

    Are you really sure of your statistics on international comparisions ? Iknow the right wing has had a lot of papers in peer rev journals suggesting those stats are off; as someone (PhD scientist) who has had to look into the stats on a related field, hosp aquired infections and morbidity due to multi drug resistant bacteria, I would be highly surprised if the stats are as good as people say they are

  63. we already technically have death panels. its called not having health insurance. no insurance and you only choice is the ER. and only if its potentially fatal. otherwise you wait till it is.
    today we have lost of folks who will delay going to the doctor at all unless they just can’t avoid it. at which point its really expensive.

  64. Romeo or Juliet

    Well, you could orbit Mars for a while, then pick up some blindfolded recruits to gather food, rondeyvoo with you know who, and its a hopeful done deal. Just as long as you know who your pardner is and hope the dice roll in ones favor. : > ) X2.

  65. We might have to get together, I need a seenin eye dog that don’t mind wherein a bag over its head from time to time, you sound like just the type. Spring fed stock, likes horses, travel, riches, and company.

    Don’t call me I will call you.

  66. oooo-kay . . so all those slender people in the non-fat countries like Japan and France are self-disciplined, but fat Americans are “doing whatever they want”? I don’t think so. I think slender populations also do pretty much what they want — but they are eating better food. Take a look at corporate food before you blame the people for being fat.

  67. anandopadooda

    My local hospital is full of amazing medical technology and highly trained experts — but patients there struggle to heal under unhealthful fluorescent lighting, breathing stale, polluted air in rooms with windows which cannot be opened, eating dead corporate chemicalized food, and drinking chlorinated water. And the doctors go from patient to patient and forget to wash their hands. What created this environment? These people have lost their way in the adulation of technology and money. They are not true healers. I really, really don’t want to be trapped there — rather die. Now THAT’s incentive.

  68. Yes, #uck you very much for the offer

  69. CBS from the West

    It’s hard for me to write about the ills of the health care system because they are so numerous and so pervasive that it’s hard to know where to begin and how to proceed. So, this time I’ll try to respond directly to the post and confine my attention to its points.

    Trying to modify the health care system through incentivizing patients is like trying to put out the fires of a burning city using a water pistol. Patients generally lack the knowledge to make decisions about their health care in their own best interests. Even physicians, when ill, generally have only insufficient, superficial knowledge outside their own specialty areas. And when facing serious illness, it is difficult to think in the clear, focused manner necessary. Patients have little choice but to rely on the guidance of the people caring for them. So, when all is said and done, the only decision that is truly in the patient’s hands is whether to seek health care or not. Once you enter the system, you lose control and are swept into the maelstrom. With luck, you emerge from it later with less damage than you would have sustained had you stayed out. So raising the economic barriers to entering the system will have precisely the result you describe. People will neglect some conditions that could truly benefit from getting care: how could they know? And others who are impelled either by the actual seriousness of their conditions or by the perception thereof will blunder forward into the mill of tests and procedures and boundless expenditures.

    There’s another side to this. Even if patients were capable of making rational health care decisions, there is simply no transparency to health care pricing. The only thing predictable, if you have insurance, is your copay. The coinsurance is a predictable percent of the “allowed fee” but the allowed fee is never known. Try asking a doctor what his or her allowed fee is. Those who say don’t know; those who know don’t say. Actually, most will simply tell you that they themselves don’t know (which is often even true!)

    We have pretended since the 1980′s that markets can provide health care in some sensible manner. The rest of the world has known better all along. And we Americans still refuse to accept the blatant reality of our own experience. But whenever you hear somebody talking about fixing the health care system by incentivizing patients or other attempts to modify patient behavior, you know you’re dealing with a charlatan.

    If you wanted to “bend the curve” with incentives, the incentives to modify are those of the doctors and hospitals: they’re the ones who actually make the decisions. And all of their incentives are currently aligned to produce precisely the exponential cost explosion we have witnessed for the past 40 years.

  70. “But whenever you hear somebody talking about fixing the health care system by incentivizing patients or other attempts to modify patient behavior, you know you’re dealing with a charlatan.”

    I’d call them predators because the snake oil salesmen KNEW they were charlatans and had a boundry, the snake oil was a placebo, the modern version – the predator – considers himself an “elite” expert pushing the drug on you…

    But putting all the hardball moral assessments aside – especially because you can’t legislate morality but you can legislate who gets “forgiven” for what crimes through man made “laws” writ by predators (health insurance company as a PERSON is forgiven causing suffering and death in order to to make an extra buck for the “shareholder”)

    PROFESSIONAL health care providers – clinicians – do not have the DATA that they need anymore, either!

    Pharmaceutical customer and research data and health insurance data

    *do not match up*

    So never mind that teaching anatomy in middle school has been dropped as a curriculum and there goes the best idea for nurturing the naturally gifted potential “healers” found in all economic strata

    seminars are being given by those who rigged health insurer business models to provide “profit through misery” to researchers and health providers to teach the not-good-with-money doctors and nurses the same methods of “data” collection.

    That’s a place to start – question the DATA coming in NOW – it’s all bogus – and manufactured faster than reality can possible generate such data from REAL people!

    Look at the rate of maternal health and infant mortality in China (a less mixed race, granted) and the rate of cancer BEFORE they went hog wild with “modernization”

    and look at those rates today in China.

    Clear cut, rock solid temporal relationship “truth” data between chronic disease and “industry”…

    it’s all in the water – depending on where you live in USA, and Camden could be a good bet, the fat crack addict could be getting his meds in the glass of municipal water.

    The business “risk” assessment that the treatment can’t have a worse outcome than – oh, let’s take that data collected through the untreated syphilis secret study as an example – the untreated disease

    is no longer in play.

    Don’t collect the data….that’s how you eliminate “risk”….more and more people are worse off – right? And even if the scales are tipped over, how would you know it happened? Insurers and hospital admin won’t cough up the data…

    Main street media ain’t the only ones professionally ignoring MILLIONS of people for the kleptocrats…

    it’s all predatory – all of it…

  71. Mollyrose, it still comes down to individual choice. I can choose to spend my money buying a bag of potato chips or a bag of apples. Corporations may offer their product for sale, but no one is forcing me to buy it. As I mentioned in my original post, one of the patients mentioned in the New Yorker article was an obese diabetic who ignored her doctors’ advice to exercise and change her diet until after her third heart attack. But she did ultimately make the choice to follow their advice.

    But we are not just talking about obesity. Another patient mentioned was an asthmatic who was repeated hospitalized because her crack smoking triggered dangerous asthma attacks. She refused offers to help her break the crack habit. She will continue to enjoy her crack habit while the doctors continue to deal with the consequences and we continue to pay for it.

    As for the “slender people,” I’ve spent time in Europe; “corporate food” is available there as well, but the people indulge in it less and walk much more than people in the US.

  72. Herbert Wetherby

    Nobody walks in LA.

  73. The idea that we have a “system” of health care is the greatest misnomer. What we have is a collection of independent, profit oriented actors (specialists) working on aspects of person’s health care without any responsibility for the overall outcome. It should not be surprising that a small percentage of people account for a large percentage of health care costs. Nobody is responsible for integrating the total care structure for patients. There are exceptions, but the general economic and organizational structure of the current “system” results in a fragmented approach to health delivery.

  74. The single payer model does work to reduce costs. As a monopoly provider, it can force a supplier to reduce the costs of medicine. That is the benefit to “death panels”. If your product isn’t approved, you don’t make the sale. Increasingly aggressive tactics are being employed by pharmaceutical companies to get on the list, but mostly it is just brinkmaship by the authorities to lower costs. By having competition between providers, the pharma company holds all the cards and can charge what they like, knowing that not providing a drug will hurt a servicers reputation.

  75. BTW, I want to make it clear that my late husband had insurance. He was always insured. The insurance company via his “gatekeeper” primary care physician dictated that although he had a long-standing heart condition and was experiencing symptoms, he did not need to see a cardiologist. He died.

    The “uninsured” are a problem…the denial of insurance to those with pre-existing conditions is unconscionable, but the point I want to make is: for-profit “health insurance” is the real problem, and not a solution for anything.

  76. High health care costs are not, primarily, the result of overconsumption. We pay more for health care than any other nation, in many cases by a factor of 2 or more, and have worse outcomes (ranked 37 or somethng like that). If we want to contain costs and improve outcomes we will need to fundamentally rethink the health care system. That means challenging Big Pharma (twice as much spent on marketing than R&D), Big Hospital chains, health insurance companies that increase revenues and net every time health care costs rise since they pass the cost through in the form of premiums, oversupply and overuse of technology and, in many cases, overpaid doctors who profit from self-referral, Big Pharma incentives, etc. Until we begin to address these issues – even study them – we aren’t going to contain health care costs. And we won’t decrease the costs by passing more of them along to consumers. The problem is overcharge, not over use.

  77. Patient incentives don’t work. Yes, this is basic.
    Nonetheless, you are doing a good service to explain it, for those that aren’t aware yet.

    I wish you would attract more of the readers that matter — those designing plans — by titling your post correctly: Patient Incentives Don’t Work.

    Here’s the next step though:

    Incentives can help a lot when they act as an information input for those that actually do the choosing/deciding in health care — doctors.

    After months of writing and thinking on this, I wrote a blog post about incentives that would work:

    http://findingourdream.blogspot.com/2009/06/new-way-to-hold-down-health-care-costs.html

  78. it used to a CYA for doctors to order all kinds of tests. now its a money maker as they now own the labs running the tests

  79. Rich, I concur, but also would like to point out that one reason a small percentage of people account for a large percentage of health care costs is that many (most?) of us are healthy until we get sick or injured. For example, I have been blessed with good health (thank you, my parents) but four years ago tripped on a crack in a sidewalk and took a bad fall, in which my left wrist was shattered.

    The bill for the surgical repair, which included the installation of a metal plate and ten screws, and follow-up care, including physical therapy, came to $30,000. It was the only time I have exceeded or even come close to meeting my deductible at least since the birth of my daughter, let’s just say decades ago.

    My point is: accidents happen. Sometimes the accidents are imposed from without, and sometimes from within, as in the case of cancer for example.

    Just because I’m healthy today, doesn’t necessarily mean I will be tomorrow. And I do believe this applies to everyone else.

    We all want appropriate medical care to be there for us when we (or our loved ones) need it. It may be that the only way to accomplish this is to make sure it is available to everyone. That would be my preference.

  80. Roy is a Knappin

    It should not be surprising that a small percentage of people account for a large percentage of health care costs.

    Are you serious? I alone can out number you with one hand tied behind my back, standin on one foot.* Or look ma, I’m ridein a unicycle with no hands, or look ma, I’m ridin a unicycle with no hands and no seat. Now if you can beat that, I’ll buy you a truck.

  81. Two points to consider:
    1. Often, the wrong entity in the process is given the ecomomic incentives. Instead of providers/organizations/hospitals being given extra money when they reach benchmarks, how about we directly incentivise patients? How about a payment or discount when a patient quits smoking or is compliant with his or her medication?
    2. If health plans or organizations spend extra money up front to give high level of care and service to patients right from the start of their illness, the argument is that the organization saves money in the long run. The business problem with this idea is that patients often change insurance plans and medical groups on an annual basis. The change is precipitated by employers choosing the least expensive offering. By the time economic savings on care is seen, the patient has changed plans two or three or more times…

  82. CBS from the West

    # 2 is a good point, often overlooked in discussing the economics of prevention in our fragmented health care “system.”

    But #1, well, there are a couple of problems with paying patients who quit smoking:

    First, this has been tried and doesn’t seem to have much effect on quit rates. Smoking prevalence is way down now compared to 20 years ago. Many of the remaining smokers really enjoy its mental effects and won’t be bought off with modest payments or, more often, are severely addicted to nicotine and simply unable to quit.

    Second, and more profoundly, even if we got everybody who smokes to quit, it is by no means clear that this would reduce overall health care costs. I haven’t reviewed the literature on this in a long time now (and it may have changed in the intervening decades), but I recall more than one study from the 1980′s showing that eradication of smoking would actually _increase_ population health costs. The reasons for this was that smoking-related illnesses tend to be relatively rapid in their lethality. Yes, it costs some money to treat somebody for lung cancer, a heart attack, or obstructive lung disease. But smokers die young, and the duration of smoking-related illnesses from onset to death tends to be fairly short. If they quit smoking and didn’t die off early, they would hang around and generate health care costs related to longer-term illnesses like diabetes, Alzheimer disease, arthritis, etc., that could cost even more.

    As I say, I’m not sure that these older calculations would hold up with modern data. But the more general point is still valid: that looking to prevention as a way of saving lives is a great idea, but looking to it as a way of saving money generally is not.

  83. Nicely put. There is a built-in upward cost bias as the population ages and we learn more about how to prolong life. Even the most halting attempt to think about this issue is what started the “death panels” thing.

    As for point #1, doesn’t it get largely solved in a single-payer system?

  84. Andrew Foster

    There are some “choices” that could easily lend themselves to a cost-benefit analysis. Most of the arguments I have read are apropos of the pros and cons of a motorcycle helmet law: I am effectively being forced to subsidize such a “freedom” in the form of higher health care premiums and Medicare tax to offset the very demonstrable connection between traumatic head injuries and helmetless motorcycle riders. Even this is a not a “no-brainer” as it were. Most states require helmets for minors but not for adults.The politics are obvious. The public policy rationale inscrutable. The reality is that no one really wants to pay the true cost of their “liberty” and enough politicians are content to permit the idea that “freedom” is free to persist. It isn’t –the question is not really so much should we have a fat tax, but rather how do we equitably distribute the costs that we should be trying to minimize. Anyone here for their property taxes going up 15% so schools can restore phys-ed programs so that kids have a better chance of being physically fit? Or should we just have them sitting around all day loaded up on ADD meds eating an extra bag of Cheeto’s made freely available in the school cafeteria and “save” the money now so our grandchildren can spend it later on the extra social and medical costs associated with their obesity?

  85. Yes, they exist but how many $10,000 per year medications are they prescribed? How many heart transplants do they receive?

    I believe that some mathematician demonstrated that any system will have room for “cheaters” because diminishing returns make the cost of rooting the last ones out too high. When we focus on these quirky cases, we lose focus on the demonstrably big spenders.

  86. Incentives work but they don’t work as desired. What incentives do is change the relationship between the person and the thing that is incentivized. As was noted in your article, the higher copay changed the relationship between people and medical services. Perhaps we should start calling the issue by what it actually is, medical services insurance. We might then begin to understand what is needed for quality (value-added) healthcare. Insurers should be removed from the practice of healthcare. Do automobile insurance companies engage in the manufacture of automobiles?

  87. CBS from the West

    “As for point #1, doesn’t it get largely solved in a single-payer system?”

    Yes.

  88. CBS from the West

    “Do automobile insurance companies engage in the manufacture of automobiles?”

    Well, they do, though less directly than health insurers. Much of the regulation that requires safety features in cars, from seat belts and air bags to collapsible steering columns, resulted from initiatives by the automobile insurance companies.

  89. If you want to look at incentives, look at the incentives of the health indurance industry. Profits without providing service. CEO pay, denials, etc. There is no justification for private, for profit insurance. The country should self-insure with a single payer system. New, improved, and expanded Medicare for All: HR 676. It has been reintroduced again. Vote for no one who fails to support it.

  90. Robert Kraljii

    People already have the best incentives available. Avoiding, pain, illness and death by staying healthy.

  91. She’s had surgeries, replacements, PT – how dare she, when you know she is nothing but a hypochondriac! And poor you, having to pay for it!

  92. US Death Rate Falls for 10th Straight Year
    The age-adjusted death rate for the U.S. population fell to an all-time low of 741 deaths per 100,000 people in 2009 — 2.3 percent lower than the 2008 rate, according to preliminary 2009 death statistics released today by CDC’s National Center for Health Statistics. This marks the 10th year in a row that U.S. deaths rates have declined.

    http://www.cdc.gov/media/releases/2011/p0316_deathrate.html
    http://www.cdc.gov/nchs/data/nvsr/nvsr59/nvsr59_04.pdf
    http://online.wsj.com/article/SB10001424052748703858404576214820012621098.html?mod=googlenews_wsj

  93. How about a few simple things that don’t cost anything- like allowing Medicare & Medicaid to bargain for RX? Not allowing hospitals to charge and patient with insurance $1,000 and then charging someone without insurance $10,000(absolutely immoral on it’s face). A single payer system would probably save 30% (less paperwork and no SALES & UNDERWRITING expense).

    There will always be some very sick people and I suppose you could always tie this to some choice they made- especially if you don’t want to pay. By the way, only a few people are the cause of any insurance payout. Only someone with no imagination thinks they are never going to be sick and need help.

    The first step, as I see it, is to at least acknowledge that health care is a social service, not a business.

    We do a lot of really stupid things in this country. I want to see the word “pragmatism” more often and “I believe” less than “I think”.

  94. James, you write these nice little reviews of a subject, with the basic introduction which says “I am an economist at heart, but here is a nice little example of how simple economics doesn’t work”. They are very thought provoking.

    But “incentives don’t work?” They work wonderfully. Every marketer worth their salt uses them extensively and subtly. But somehow it is not thought legitimate to use them on health matters.

    The most dramatic examples of this is in drug addiction, where just a few dollars a day enable addicts to stay clean. (It’s widely reported, though I haven’t found any good references. A good review is here: http://www.bbc.co.uk/iplayer/episode/p00cqfkn/Health_Check_03_01_2011/ )

    But such positive incentives are thought to be unacceptable. In the case of health care, there two counters. The first is that it is contrary to our value of individual responsibility to compensate people for doing what they should be doing for themselves anyway. And the second is of dilution: that people are being rewarded for what they would have done anyway. Though it is ironic that when it comes to bankers earning $60M a year, the dilution argument that they would have worked just as much for $20M is considered invalid.

    As an economist, I would think the right reaction is to shrug your shoulders and say “if positive incentives work, i.e. they produce an optimal economic outcome, then let’s do it”. But the larger political world doesn’t work that way.

    So, what happens in practice is for the focus to turn away from incentives to disincentives – negative incentives. But we want people to consume the right kind of health care, so disincenting that is bound to produce the wrong results, as James reports

    Another fundamental problem is that health care decisions cannot be rationally made at the point of consumption. It is the myth of economics that they can be rationally made in any market, because there is generally a trade between a concrete cost now against future costs that are not determinable. It might an approximation which is good enough in most markets, but an individual health care decision has a complexity which makes this calculation completely inaccessible. How can anyone assess the likely future costs of a decision not to visit the doctor until next week, as opposed to tomorrow?

    Even the simple assumption that health care costs are available is false. Have you ever tried to get an estimate for a procedure from a hospital? Beside that fact you will experience strenuous non-cooperation in answering the question, even if you receive an answer it will be fiction: Blue Cross Blue Shield will only pay a third of that anyway.

    A re-engineering of the system is essential, but it won’t happen without a major change in attitudes.

  95. This moral point is often argued, but it is too simple.

    Being a drug addict or obese is not a “choice”, in the usual sense, even if it is easy to frame it that way. A positive choice has to be driven by a positive outcome – I feel good about the fact that I like that sofa I just bought. In the case of addiction or over eating, the positive outcome of the “high” overwhelms the rational decision not to do it. You can rail all you like about the issue, but the unfortunate truth is that if you were in that situation you would behave the same way.

    However, it is interesting that even very small positive incentives can change the decision. This effect has been widely reported though I haven’t found any good references. A good review is here: http://www.bbc.co.uk/iplayer/episode/p00cqfkn/Health_Check_03_01_2011/ )

    But most people find this approach difficult to swallow, even if it is rational.

  96. The argument for “capitation fees” or “concierge” is seductive, but generally doesn’t work in practice.

    The point is that a doctor is indeed incented to improve the management of an individual’s healthcare, but the same effort applied to actively selecting healthy patients bring a much higher reward. Not the desired outcome!

  97. Thanks for the comment. Like Rich S. above, I’m also not clear what the major disagreement is. I agree (and I’m sure Gawande would as well) that fiddling with parameters will not work — hence the title of my post. Gawande is talking about a different model of care that sounds a lot like the primary care system you mention in point #3. The organizations he talks about use more primary care physicians, social workers, and health care advocates, and fewer specialists.

    But, the question is, how do we get there? Single payer is obviously one way, but politically that is decades away at best. You say that financing reforms won’t work, which is sort of the point of the title of my post. But in one example that Gawande points to, the union for Atlantic City casino workers, specifically in order to control costs, created a new health plan for its most expensive members. Because that plan pays on a per-member basis, not a per-procedure basis, it gets better outcomes at lower cost.

  98. I don’t see how we control costs without finding some way to require people to take responsibility for maintaining their own health. Educating patients doesn’t seem to work – many people believe that a pill will save them from themselves and unfortunately the drug companies and their relentless tv advertising campaigns aggravate this view.

    On the other hand, we will end up with dead people if we use financial incentives, including refusal to treat the results of self-destructive behavior. Might be necessary, however, since we all pay for such treatment and paying for it necessarily takes money from other, perhaps more worthy, causes.

    There’s a very good discussion of this issue (with no solution) in Leon Kass’ book Toward a More Natural Science – an old book, but still timely.

    On the high cost of health care for the homeless and mentally ill (sometimes the same people), why not re-institutionalize them? We can probably all agree now that de-institutionalization has not worked to anyone’s benefit.

  99. Any lead paint still around for rebuilding Japan in the radius of the nuclear power plant?

    Maybe I should check wiki to see if lead still blocks radiation….

  100. I like the idea of making insurance companies non-profits. I believe they would attract the type of people who are more interested in the what’s best for the people insured than the bottom line. Another idea I have seen is insurance companies structured like co-ops. If you don’t use the insurance, you get part of your premiums back at the end of the year. Another part goes into building a fund for when you do need it. There will still be admin/overhead costs, but I bet they would be much lower than the corporate structure. The main problem with this idea is the way the market is currently set up. These companies would have to get a large enough share of the profits to have any negotiating power. It would definitely be an uphill battle to start.

    As a side note regarding the making people pay for their higher costs comment above. There will ALWAYS be people who will play but not pay. I.e. if we choose to put the moral issue of forcing hospitals to treat patients regardless of their ability to pay first, they will always lose money on the majority of those patients – meaning the rest of us pay higher prices to make up for it. If they can’t & won’t pay, there is nothing anyone can do that will force them to pay. Report them to the credit bureau? Their credit is probably already screwed. Sue them and try to get money from their paychecks? They may not even have a job. Put them in jail – they are still not working. Then, add to that, the homeless. Many of them are in and out of hospitals because there is no structured care to maintain their treatment, or maybe they don’t want it. I could go on and on. There is NO easy – or perfect answer. That doesn’t mean we can’t do better. We just need to try to do the best we can with what we have.

  101. I understand the scariness factor there, but if we want to be realistic – let’s ask this question. SHOULD we be shelling out hundreds of thousands of dollars to extend someone’s life 6 months, when that entire time, they will be in pain or have no quality of life? Or let’s say, there is not insurance co there – would you want to leave your family with that kind of debt for you to have a few more months?. It’s much easier to spend the money when it’s not coming directly out of our own pockets. To me what’s scary though, it our society has become SO scared of letting people die that sometimes we fail to think about the quality of life factor. And of course, there is the moral issue of can we be okay with denying someone that extra 6 months if they REALLY want it? However, I can’t think of this kind of conversation without Terri Schiavo coming to mind. She is a good example of the lengths we are willing to go to keep people alive. I think medicine is a great thing and is beneficial in so many ways. However, I don’t necessarily always think it’s always morally wrong to let nature take it’s course.

    It scares me (and most of my family for that matter, as we have talked at lengths about this) that someone else could force me to live as a vegetable or in constant pain just because they fear the repurcussions from either a moral standpoint, or societal pressures, or for pure selfishness (THEY don’t want to “lose me”), of letting me go. Don’t know if there is a good answer to any of this, but I think it is another addition to why our healthcare costs are so high. Don’t just blame the people who can’t pay. We ALL contribute to the high costs with our “moral” ideals. And maybe that’s okay in a lot of cases. But to some extent, we have to accept that if we want to take the moral high road (tell hospitals they can’t deny treatment, allow people freedom of choice in their lifestyles, etc) – it’s going to costs us in our pockets and that sometimes we’re going to be frustrated with other people’s choices.

    I recently moved to Canada and most of the people who I have spoken with, while admitting the healthcare system here is flawed, they are thankful that everyone at least has access to SOMETHING. Many I have talked to rarely use the healthcare they are paying for, but they don’t seem to mind paying into it knowing that it allows their neighbors and the less fortunate to have the access and also, that when they do need it, it will be there. That is one thing I do really like about the Canadian Culture. People here (or at least the ones I have spoken with), really seem to CARE about the societal benefits as a whole and think about other people – even when it might mean they are going to pay a little more out of their pockets. When I hear people in the US saying health care is a privelage, it just makes me sad. One person I know from the states told me he didn’t want to pay for anyone else to have healthcare. It was a privelage and if they wanted it, they needed to “work harder” or “get a better education.” It’s such an amazing contrast to me…. Wow, it’s just all so complicated!

  102. Jeoffry B. Gordon, MD, MPH

    Concierge medicine is nothing less than an income maximizing strategy by entreprenurial doctors trying to maximize income by doing an end run around the often horribly low rates of payment by insurance companies and the absurd limitations on practice demanded by insurance company contracts.I guess its a fine thing if you practice in a wealthy area and you can pull it off. What about the vast majority of Americans who cannot pay the extra costs – and what about the moral and ethical implications of limiting your care to this who can bribe (?) you with some extra bucks. A great example of THE INVERSE CARE LAW and free market commercial medicine.

  103. Jeoffry B. Gordon, MD, MPH

    Thank you Alan. Right on! I too really depend on Kwak’s and Johnson’s tremendously helpful insights on the financial system. I cannot see how they can miss that the health insurance industry is following the same paradigm. Facts to prove it: In 2009 during the great health care debate the top 5 insurance companies has a net income of $12.4 billion (up 56% from 2008) while putting up higher barriers to care through copayments and deductibles and trimming some 2 million (expensive) enrollees from their lists of about 100 million. This is a blood sucking for profit, not for health care business model – and it is in a death spiral – a bad business plan. Obama’s health reform saved their ass!

  104. Jeoffry B. Gordon, MD, MPH

    Educate yourself! See:
    1) Nolte, E., and C.M. McKee,London School of Hygiene and Tropical Medicine HEALTH AFFAIRS, published in 2008 comparing “excess mortality amenable to health care in 19 wealthy countries in both 1997 and 2002. If US medical care performance was equal to the average of the other countries we would save 75,000 lives a year.
    2) Also check out international comparisons in the Commonwealth Fund Commission on a High Performance Health System: National Scorecard and Organization for Economic Cooperation and Development: OECD Health Data, 2009, (Paris, OECD, Nov. 2009)

  105. Jeoffry B. Gordon, MD, MPH

    Aside from taking the time to read Dr. Hart’s small book, Mr. Kwak I think you ought to understand that the main INCENTIVE problem is not how to structure incentives in a so called market, but how to liberate health services from the commercial market system. Go back to Kenneth Arrow’s seminal work on the economics of public goods. Dr. Hart when you get right down to it idealistically says the best way to distribute health services is in “a gifting relationship.” Not so peculiar when we think of how we get transplant organs and blood products.
    You, of all people, should be sensitive to how all this discussion of “prevention, “incentives, “death panels,” “abortion,” “information technology,” “diet,” and “exercise” may be somewhat relevant but serves mainly to take everyone’s eyes off the ball which is all about how poorly the US health system performs and how incredible and unnecessarily expensive it is.

  106. Jeoffry B. Gordon, MD, MPH

    Thanks – overall this thread is terrific! Way to go Baseline.

  107. Jeoffry B. Gordon, MD, MPH

    Jim I just though of another huge point you can relate to….Since WWII the USA has had an ongoing and well thought out and well funded national industrialist policy in health care technology. It has been gloriously successful. Obama’s health care reform has good bucks in it to continue this trend. Over $160 million from this pot was sent to my county alone this year for biomedical research.Not a bad contribution to anti-recession economic stimulous. In macroeconomic terms this country is in dire need of similar industrial policy in other sectors. Then we could really get out of the recession and successfully meet the future.

  108. Jeoffry B. Gordon, MD, MPH

    Everyone knows there is no perfection in human endeavor but you guys are doing just fine. Fight back against the neocons. Here is some great work about how well the Canadian system works by Dr.Kevin Gorey from Windsor. His full volumeof work is absolutely terrific.
    Gorey, Kevin, “An International Comparison of Breast Cancer Survival: Winnipeg, Manitoba and Des Moines, Iowa, Metropolitan Areas” (Ann Epidemiol 2003; 13:32-41)
    Gorey, Kevin, M., “Breast Cancer Survival in Canada and the USA: meta-analytic evidence of a Canadian advantage in low income areas,” Internat J. Epidemiol .2009; 38:1543-1553.

  109. Costs can also be reduced without resorting to single payer. They can be reduced by competition or, if that fails for illegitimate reasons, by legislation.

    It does not make sense that the pharma company holds all the cards unless the pharma company does not face competition itself. And there’s no reason for that to be true even if the pharma company is the only provider of a drug. Can you imagine a (potentially much) less expensive health insurance plan that utilizes few if any in-patent (as opposed to generic) drugs? I can, and think it would be a valid choice for some people.

  110. Herbert Wetherby

    Educating patients doesn’t seem to work

    I wasn’t refering to educating patients, I was refering to the education system as a whole, to then be used preventively to cure what ever ills one. And it does not work because people take the letter of the their law to seriously. And overstep their bounds leaving the true law to have to take measures into its own hands to do what is right.

  111. Walking has a lot to do with urban planning. The reason nobody walks in most of the US is that it is sprawl hell. You have to cross ten acres of parking lot and a 6-lane road with no crosswalk to get to the building next door. To reach a place that it would actually be safe (let alone pleasant) to walk could be over an hour’s drive through traffic. Each way.

    Between that and the amount of free time required to exercise, it’s no wonder most of the hamburger flippers and checkout clerks are pretty round. (In the former case, of course, they don’t get a long enough lunch break to eat anywhere other than their employer. Because why not create a captive market when you have the option?)

  112. It wouldn’t matter if they are nonprofit — their desire to make a profit is only part of the problem. The incentive to make someone else pay (whether it’s the patient, another insurer, someone who can be sued for having caused the problem…) is the real issue. That’s the real benefit of single payer — there is no arguing about who pays, there’s no contracts about what is covered and what isn’t, there’s no kicking the can down the road and hoping the patient changes insurers, there’s no medical bills as an element (usually the biggest) of damages in PI/med mal/etc. lawsuits, even. The focus is on fixing the medical problem and not on assigning financial responsibility.

  113. Incentives are often used by managers to encourage productivity. Providing rewards for preferred behavior may produce a more desirable outcome. However, it is important that the right tool or incentive should match the right problem.

  114. Dr. Gordon, Mr. Kwak

    I have been afforded a very up close and personal look at all the principals in the business of healthcare and my conclusion is that there is plenty of blame to go around- but the three primary culprits are: Doctors, Payors and Drug Companies. I still struggle to determine which of the three deserves the highest honor.

    - A President Physician of one of the ( THE) biggest academic medical centers in the US delivered a talk on incentives a while ago. His main theses: healthcare is expensive because…healthcare has gotten so good everybody wants it!! Too much demand essentially and not in any way because…there ARENT ENOUGH DOCTORS and NURSES and Those present make way too mkuch from the shortage!- I was in the audience and privy to a Price Waterhouse Coopers report that shows 30-35% of the net costs in healthcare are directly attributable to healthcare “labor”- doctors and nurses. Modern medicine is a science- one would think it can be taught and learned in as many universities as we are able to construct for the purpose. However the AMA and a large segment of the doctor profession do everything in their power to prevent supply from meeting demand- lest their $$$ and prestige diminish.

    - Next the drug companies- See the Washington Post March 29. A drug company is billing $1500 for a compound that cost just $20 for a different indication from the current one- preventing early delivery of babies. There is no rhyme or reason but unquenchable greed behind pricing of drugs.

    - The insurance companies- well enough has been said here and elsewhere about these fine corporate citizens.

    And the biggest joke of them all- NON PROFITS. These medical centers call themselves NON PRofits while paying their doctors princely sums and stashing away BILLIONS in ever growing endowments- suggest reading the Boston Globe expose if you need data.

    And no- nothing is going to happen in our lifetimes except the slow, relentless decline of quality and availability of care.

  115. BTW- The question really should be- Who are we incentivising and to what end?

    The three culprits- doctors, payors, and drug companies have done made a finely refined art of swindling the general populace. They surely need no incentives.

    So you want the polity to be incentivized to use less care or less “costly” care? So who exactly might benefit- these three groups again?

    Why I ask- Why not incentivize the polity to gather up their pitchforks and go after these three parasites instead. It has happened circa 1917 and such injustice as they perpetrate on the polity might well precipitate such events again.

    Even before your bogeymen Bankers get the privelege of inciting the first riot i might add :)

  116. and where are you going to get the data from to know the truth of the matter?

  117. Incentives did worked but the outcome was not what was expected out of that.