I want you to buy something from me. The rules are simple. First, somebody else has to pay for it. Second, it may or may not work. Third, even if it doesn’t work, there are no refunds. What do you say? I’m going to predict that you say “yes”. I know this because I’m guessing that you are one of the approximately three hundred million people in the United States that have health insurance.
What makes healthcare different from every other industry is that the person consuming the services is completely disintermediated from the entity paying for the services. In our free-market economy, consumers get to vote services up or down with their wallets. But what happens when the one holding the wallet has virtually no visibility into how the service was rendered by the provider or received by the consumer?
To illustrate the point, imagine two patients named Alice and Betty. Both go to the doctor with the same symptoms. Alice has a wonderful interaction with her doctor, gets an accurate diagnosis and the right prescription. Betty has a terrible experience with her doctor, receives an inaccurate diagnosis and the wrong prescription. However, from the viewpoint of the health insurance company both Alice and Betty look identical — just a medical claim for a visit and a prescription. And when Betty ends up in the hospital a week later, the health insurance company just assumes she is part of their statistical expectation — their whole business is built on insuring enough healthy people to pay for the anomalies who end up in the hospital.
From the doctor’s perspective, it’s not much better. Alice’s doctor, who is working at the top of her profession, is being compensated at the same rate as Betty’s doctor, who is one malpractice suit away from losing her license. In behavioral economics terms, we call this a misalignment of incentives. The patients consuming healthcare services lack the power to incentivize the medical professionals providing those services. The insurance companies have the power but lack the knowledge to use that power. And the medical professionals, who are paid per claim, are financially incentivized to see as many patients as possible rather than to deliver the best possible care for each individual patient.
So how do we fix it? Going back to Alice and Betty, the thing that we care about is not the fact of them seeing a doctor, but rather what happens as a result of that visit. In other words, what we care about are Alice’s and Betty’s health outcomes. The problem is that the traditional healthcare economic model is what’s known as “fee-for-service”, meaning that we pay the doctors for seeing Alice and Betty rather than for whether Alice and Betty get better as a result of each doctor’s prescribed treatment.
Can you imagine a fee-for-service approach in any other industry? Would you pay an auto body shop for trying to fix your car if you can’t drive it off the lot? Would you pay a phone store for trying to replace your shattered smartphone if they end up just giving it back to you? Would you pay Amazon for trying to deliver that new Kindle or Netflix for trying to stream that new show if they never actually get to you?
Of course, healthcare is more complicated. The insurance company can’t go with Alice and Betty to the doctor’s office, sit with them in the waiting room, or accompany them to the pharmacy. When Betty ends up at the hospital, the insurance company can’t be sure whether it was the doctor’s misdiagnosis, Betty failing to take her medications, natural factors, or some combination of the above that caused the hospitalization. So, while it’s easy to tell if the auto body shop fixed the car, the phone store replaced your smartphone, Amazon delivered your Kindle, or Netflix streamed your show, it can be much more challenging to measure health outcomes as a direct result of a specific treatment or intervention.
Solving this challenge of measuring and tying incentives to outcomes has brought together thought-leaders across all facets of healthcare, including legislators, administrators, practitioners, researchers, and technologists. The regulatory and business models that emerged became known as value-based care (“VBC”) and the driving idea behind VBC was that healthcare providers should be compensated for the value provided to the patient rather than simply the act of performing a service.
What is interesting about VBC is that much of the impetus came from the public sector. The federal Centers for Medicare and Medicaid Services (“CMS”) and the Medicaid agencies in each of the 50 states have historically been challenged with a limited line of sight and control over how healthcare tax dollars were being spent. With tens of thousands of facilities, millions of healthcare workers, and more than a hundred million Medicare and Medicaid enrollees in the United States it is simply impossible to track the validity and efficacy of every medical claim for service. With VBC-based approaches, government agencies can, at last, impose value-driven requirements and task privately managed care organizations with managing payments and ensuring compliance.
A simple way that VBC works in the Medicare and Medicaid space goes something like this: private insurance companies bid on government insurance contracts. Winning a contract means that the insurer is now obligated to manage care for a Medicare or Medicaid population in a particular state or region. In turn, the government pays the insurer based on certain objective quality metrics, such as what percentage of their awarded population had an annual well visit or prescribed screening. On the other side, the insurer enters into contracts with providers that ties payments to quality metrics rather than services. If the providers want to be able to see Medicare or Medicaid patients serviced by this insurer, they are required to participate in a VBC contract. Providers can always refuse to participate in such a contract, but that can result in them losing a significant proportion of existing or prospective patients.
While it has made tremendous progress in the government arena, VBC has yet to transition effectively into the commercial insurance space. There are multiple reasons for this. One challenge is that providers who take commercial insurance prefer fee-for-service models. This is not surprising. If you were a doctor, chances are that you too would opt to be paid for your time rather than have your payment depend on your patients’ health outcomes. Another challenge is that many commercial enrollees are working adults who tend to think of healthcare as transactional. They go to the doctor if they feel unwell and otherwise prefer not to be distracted from work or leisure by a VBC organization that “manages” their health, pushing them to do check-ups, change their lifestyle, or engage in preventative activities.
Despite the challenges of making VBC work in the world of commercial health insurance, positive change is starting to happen. Self-insured employers, meaning companies that take on the financial risk of their employees’ health insurance, have started to recognize the importance of VBC. The rise of corporate wellness programs and benefits such as subsidized fitness, nutrition, and health coaching are an extension of VBC-related ideas. Many self-insured employers have gone even further down the VBC path, putting in place care management programs where licensed nurses work directly with high health risk employees to proactively manage their care and drive better outcomes.
While there are a lot of different viewpoints about the right way to implement VBC, most would agree that VBC as a concept makes good sense. The patients win because the focus is on making them healthier rather than simply providing a service. The payers win because healthier patients mean lower healthcare costs. And the providers win because their incentives are aligned with their training and their moral compass.
Healthcare may be different from every other industry, but that does not make it immune from the influence of incentives on behavior. In a scenario where the payer and the consumer of services are disintermediated it becomes particularly vital that all participants are rowing in the same direction. Regardless of where you in favor of universal healthcare, individual choice, or somewhere in between, VBC offers a compelling argument for the way in which care is actually delivered.
Jack Plotkin is the CEO of Cardinal Solutions, a boutique advisory and investment firm based in New York City. He has more than two decades of experience at the crossroads of business and technology and has advised more than a hundred Fortune 500 firms across virtually all major industries. He has also made key strategic contributions to a number of disruptive startups, including VirtualHealth.