What would an optimal government-run health care system look like?

Next in a series.

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 its 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, a single-payer system, and a fully government-run system (this post).

So, without further ado, what could a government-run (“socialized”) system look like with this framework fully implemented?

The first thing to note is that, from an insurance standpoint, this system is very similar to a single-payer system in that the government runs the single insurance company. The benefits and downsides of this were discussed more at length in my single-payer description last time, so I will not completely rehash those here. The important point is that there will be greater simplicity (read: lower administrative expenses) and they can leverage cradle-to-grave time horizons to prevent as many care episodes as possible, but only having a single insurer will likely decrease the amount of cost-saving innovation happening.

But how would things change if now the government also owns all the hospitals and clinics?

Initially, it may seem problematic that patients only have a single health care provider option, which means there is no room for patients to choose higher-value options, but just because a single entity owns all the hospitals and clinics does not mean they are all the same.

In this system, the government determines where health care facilities will be built and what services they will provide, but it allows great freedom in their operation. At every facility, providers are able to organize care however they like, and they are also free to charge any price at or below the maximum allowable reimbursement for each service. And since providers are paid not just straight salary but also have a production component, they have great motivation to put in the effort required to find ways to lower costs and prices and/or improve quality relative to other providers because they will make more money if they do by drawing in more patients.

One of the greatest benefits to the insurer and providers are all operating under one roof, so to speak, is that the billing in this system is particularly simple. Some specific requirements are in place for the purpose of accumulating data that will help track for problems in the health care system, but there are no complex billing codes or arcane documentation requirements. When providers document a patient encounter, they do so for the purpose of communicating to other providers what they thought and did.

There is at least one major downside of this system compared to a single-payer system. Providers face the upside of potential bonuses for doing well, but there is not necessarily much downside risk in providers who are mediocre or worse and still getting paid their relatively stable salary. In any other market, the risk of being forced out of business due to lost market share drives competitors to innovate to improve their value so they can become profitable, but in this system, the worst-case scenario is that the government closes their clinic and relocates those providers elsewhere. Additionally, many innovations require new types of facilities or caregivers, or they require cooperation between multiple types of providers, which can be difficult when providers have limited control over facility design, placement, and reimbursement contracts.

The effects of these innovation barriers are difficult to quantify, but they need to be balanced with the benefits of a reduced documentation burden, a simpler billing system, and a more reliable dispersion of health care services across the country.

This completes my “optimal” description of three health care systems: a libertarian-type system, a single-payer system, and a government-run system. My goal with these descriptions was to show that policymakers overseeing any type of system can improve the long-term value delivered by their system if they will identify their system’s current barriers to patients choosing higher-value providers and insurers and then eliminate or minimize as many of them as they can. Only then will their system begin to evolve to deliver increasingly higher value for patients over time. This is the only way to permanently bend the cost curve to a sustainable trajectory. This kind of health care system transformation is sorely needed the world over.

There’s another benefit of understanding the principles of this framework that is particularly important in the United States right now: Policymakers attempting to achieve equitable access will know how to craft policies that do that in a way that creates the fewest new barriers to patients being able to choose high-value providers and insurers.