Next in a series.

In prior posts, I described my Healthcare Incentives Framework. If you haven’t read those, I recommend you check them out first to have the full context for this post. But here’s a refresher of the main points of the framework without re-explaining all the rationale:

The Healthcare Incentives Framework helps show how to fix incentives in health care systems. It starts by enumerating the five jobs we expect a health care system to do for us and then identifies which parties in the health care system (providers or insurers) have a natural incentive to fulfill each of those jobs. Those incentives arise naturally, but the big challenge is shaping them in a way that encourages providers/insurers to fulfill their jobs in a way that maximizes value for patients. This can only be accomplished by rewarding the providers/insurers that are delivering higher value to patients with more profit. Of all the factors that determine a company’s profit, the only one that will work in this regard is by increasing their market share, meaning more patients need to be enabled to identify and then choose higher-value providers and insurers. As barriers to patients doing this are reduced, more patients will naturally begin to choose higher-value options, which will cause those options to earn greater profit and flourish and cause lower-value options to earn less profit and wither, thus initiating a continuous evolution in the health care system toward delivering higher and higher value.

And here’s the visualization of that:

An important point about this framework is that it is largely welfare-spectrum neutral, meaning the principles apply to health care systems that sit at any point on the welfare spectrum, which is why I am describing its application in a libertarian-type system (this post), a single-payer system (forthcoming post), and a fully government-run system (forthcoming post).

So, without further ado, what could a libertarian-type system look like with this framework fully implemented?

In this system, there are many private insurers all offering creative and innovative health insurance plans. Their efforts are focused on trying to maximize cost-saving prevention so they can lower their costs, which allows them to earn greater profits either by keeping the difference or drawing more patients by outpricing their competitors. This has led to many ways of keeping people out of hospitals and emergency departments.

Health insurance is an inherently complex product, so some standardized levels of coverage have been agreed upon to help people compare those plans apples to apples. This standardization has been implemented in a way that maximally improves comparability with minimal limitation on plan design flexibility. Multiple health insurance comparison shopping websites have arisen, all highlighting those standardized coverage levels, differences between plans, and clear pricing.

An important aspect of these insurance plans is that most of them require the enrollee to pay some part of the price differential between providers; this did not need to be mandated because insurers found that they are able to price premiums more aggressively when they have implemented those cost-sharing characteristics. The plans that do not have this feature are much more expensive, but some people prefer them because they don’t ever need to worry about prices when choosing providers.

There is no requirement for people to buy health insurance, but because there is also no guarantee of care if someone without insurance has a catastrophic medical expense, many people are motivated to buy catastrophic coverage. The rest of their care they buy a la carte out of pocket. Providers readily publish their prices in an effort to win those patients.

Many of the poor, as well as people with chronic expensive medical conditions, are priced out of the insurance market, but private charities have cropped up that assist with this for most of them.

Looking at the provider side, nonprofit organizations have played a leading role in establishing standards in provider quality metric tracking and reporting. These nonprofits also certify the quality information being reported by providers, so patients are easily able to compare quality information from one provider to another. The quality metrics being reported and certified are determined by what patients find most relevant in helping them decide between providers for each service they are shopping for. Similar to the health insurance shopping websites, there are provider shopping websites presenting those standardized metrics alongside providers’ advertised prices.

Because providers are assured increased market share when their value goes up relative to competitors, there is a great variety of innovation toward crafting high-value care experiences for patients. Most of the value improvements are in the form of cost-lowering innovations because of the downward pressure on price exerted by the uninsured population and the price-sensitive insured population. Providers have particularly found that shifting the location of care to less expensive settings (including even the patient’s own home) and shifting to relying more on narrowly trained provider types (particularly for treatments that are relatively algorithmic) is very effective at lowering costs. Suppliers of health care devices have also found that they are more successful as they focus on developing lower-cost devices, even if that means sacrificing some amount of quality or features. And since government regulations have been kept to a minimum, all these innovations have been allowed to progress and flourish quickly. This occasionally results in unsafe practices and devices cropping up, and individuals have been hurt in the process, but people have felt that the rapidity of innovation that has improved so many lives has been worth that cost. And any practice that proves to be unsafe is exposed quickly in this marketplace.

Providers have also found that, when patients are shopping for a provider, they are looking for a specific well-defined service or bundle of services, such as a year’s worth of chronic disease management (including hospitalizations related to those chronic diseases), a CT scan, a hip replacement (including all the pre-op workup and the post-op rehab), or a diagnostic evaluation. This has led to standardized bundles of services (also certified by those non-profits), which has made shopping for health care services easier and also enhanced the ability to compare the prices from one provider to another.

This system is far from perfect. Some people choose not to buy insurance and then have to declare bankruptcy when they have an expensive care episode (or end up not getting care due to inability to pay), and some people want to buy insurance but are frustrated that they cannot afford it, although this number is decreasing each year as value continues to improve. Providers face challenges dealing with multiple insurance plans with different reimbursement schemes and coverage rules. And unsafe practices or innovations crop up every so often that harm patients. But, overall, the value delivered by insurers and providers increases rapidly as insurers find new ways to prevent care episodes, and, for the care episodes that cannot be prevented, providers find ways to make care safer, more convenient, and more affordable.

Taylor J. Christensen is an internal medicine physician and health policy researcher. He blogs at Clear Thinking on Healthcare.

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