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We sit down with Taylor J. Christensen, an internal medicine physician and health policy researcher, to discuss his health care incentives framework. Taylor explains how restructuring financial incentives can encourage providers and insurers to deliver higher value for patients. Tune in as we explore the barriers preventing patients from choosing high-value care, how to align competing interests in health care, and the future of innovation driven by better incentives.

Taylor J. Christensen is an internal medicine physician and health policy researcher.

He discusses the KevinMD article, “How to structure financial incentives in our health care system.”

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast. Today, we welcome Taylor J. Christensen. He’s an internal medicine physician and health policy researcher. Today’s KevinMD article is “How to Structure Financial Incentives in Our Health Care System.” Taylor, welcome to the show.

Taylor J. Christensen: Thanks, Kevin. It’s nice to be here.

Kevin Pho: So let’s start by briefly sharing your story and journey.

Taylor Christensen: Well, I, in undergrad, decided, probably typical of most physicians, like science, want to help people. And so I decided I’d be pre-med, but I got some really good pre-med advice. The counselor said, “You should choose a focus, a major that you enjoy because you’ll get better grades. And if it’s not a basic science, then you’ll have a more diverse application for med school.” So I said, well, I’m working for this startup company that’s really interesting. I’m going to try out business for my major.

And the thing that really shifted the path of my life toward kind of this health care policy, fixing-the-health-care-system focus that I’ve developed is when I read the book Complications by Atul Gawande, one of my heroes. I realized when I read that book that the health care system is the most incredibly complex puzzle that probably humanity has ever devised. And so, based on that, it just sucked me in. I totally wanted to figure out what’s wrong with the health care system.

And for a while, I actually toyed with going into health care consulting, but I decided I still wanted to help people individually, directly as a physician. So I ended up moving forward with going into medicine, but I shifted my focus and my major to business strategy. And that was so I could get a big-picture, broad understanding of the health care system. In business strategy, you’re looking at industries and how they work, so that shaped the direction of my career.

When I went to med school, the med school I chose specifically—Case Western—they had an MD-PhD program in health policy. So I started there, and then, sadly, right when I was about to start my PhD years, I’d already done PhD classes in the first years of med school, the era of fiscal austerity happened, and they dropped half of those kinds of programs across the country, including ours. So I did part of a PhD in health policy but then decided not to finish it because I didn’t want to pay my own way for all those years. So I went straight through and finished med school.

Since then, I’ve been reading, blogging about, and studying the health care system, trying to figure out how it works and the core causes of what’s wrong with it. From there, I just started looking at what makes sense to do to try and make it better. That’s what led me to write this series of articles on your platform, which describe the framework that, as the pieces fell together, I figured out bit by bit. They all formed into this kind of framework in my mind, and that’s what I was attempting to explain. And today, the post we’re talking about is one piece of that, which is just financial incentives, what role they play, and whether they’re good or bad.

Kevin Pho: Sure. I completely agree with the complexity of our health care system. You wrote this series a few years ago, so let’s talk about one of them, as you said, “How to Structure Financial Incentives in Our Health Care System.” For those who didn’t get a chance to read it, tell us about the article.

Taylor Christensen: Yeah, so the thing that really impacted me when I was in residency, which motivated me to think more about this topic, was that I had an attending, and I don’t remember the exact context of the discussion. It was probably some patient who couldn’t afford some care or something like that. And my attending said, “There is no place for financial incentives in health care.” Up to that point, I’d studied, done my business strategy degree, and studied the health care system for so long, and I heard that, and it shocked me that somebody could actually believe that. But I found that it was a pretty typical way for physicians to feel.

So I guess the first thing I want to convey is that that is absolutely false. I kept my mouth shut at that time, but I’ll say it here—that’s not true. Anytime you have an industry where people are getting paid for the work they do, there will be financial incentives, no matter if it’s health care or anything else. It’s just a fact of life; this is how the world works. So understanding that, first of all, there have always been and will always be financial incentives in health care. No matter how much government involvement is at play, there will always be financial incentives. Even Soviet Russia, right? In communism, they had financial incentives, even though the government was controlling everything, even down to the prices and how much a factory would produce of bread, there were still financial incentives. So that’s like the first big thing I want to get across—that there will always be financial incentives in health care.

I think the problem that people misunderstand is they think that means financial incentives should be gone, but that’s impossible. What we really need is just to align them with what we want.

Kevin Pho: So talk to us from a physician’s perspective. Thinking back to what your attending said, maybe they should have prefaced that, in an ideal world, financial incentives should not matter in medical decision-making. But as you articulated, we don’t live in an ideal world. For those who may not be familiar, from a physician’s perspective, talk to us about some of the financial incentives that physicians have to navigate daily.

Taylor Christensen: Yeah. Well, I’ll just expand that by saying it’s not just physicians who are navigating these incentives. Every decision in the health care system—whether it’s a hospital system or an insurance company—is shaped by financial incentives. As physicians, a lot of times—and there are laws that try to prevent these things from happening, so hopefully, it comes into play less—but, for example, I work as a hospitalist right now. I don’t see as many of these patients because they go to the emergency department, but take someone with chest pain, an NSTEMI, which is a heart attack that’s not severe enough to be probably life-threatening. They call the cardiologist. The cardiologist has a financial incentive; they make more money doing a procedure, so they’re more likely to do a catheterization, even though maybe there’s evidence that it’s not strictly necessary in these situations.

So we face this when choosing a treatment plan. We face it when deciding whether to admit someone or not. This is something I encounter as a hospitalist. For instance, I just discharged a patient yesterday who’s new on anticoagulation. Apixaban is much more expensive than warfarin, but it’s the most convenient for them. So I had to have the conversation, “Hey, if you can’t afford this or if insurance doesn’t cover it well enough, we’ll switch to something else.”

It also comes into play when deciding whether to admit a patient. I often think, “Yes, we could do some good if they’re in the hospital, but we’ll do a lot more harm financially.” So the risk might be low enough to consider sending them home, especially if they don’t have insurance. Financial incentives come into play with every single decision we make. We may not always realize it, but they’re there.

Kevin Pho: And before we move on, how did we get to this point where financial incentives influence so much of our medical decision-making, explicitly or implicitly? How did we get here, in broad strokes?

Taylor Christensen: I think it’s always been that way. Maybe we just never talked about it in the past. Think of the early health care system when a doctor went from house to house and might have been influenced by who could pay for care. I know that goodwill exists, and doctors sacrifice a lot to help people who can’t afford care. That’s always been a part of this. But the reality is, to make a living, you need to earn enough, and the same is true for modern health care systems. A hospital deciding whether to provide more charity care is restricted by financial realities. It’s always been this way; it’s just become more complex over time.

Kevin Pho: You mentioned how your attending didn’t acknowledge financial incentives in medical decisions. That was years ago. What’s it like today? Is there a more explicit discussion on the economics and financial incentives in medicine?

Taylor Christensen: In some ways, yes. I think there’s been more acknowledgment. One discussion that comes to mind is medication costs, especially with GLP-1s becoming popular and burdening state insurance plans. It’s more acknowledged, but I don’t think we have a better understanding of what to do about financial incentives. And that’s what I write about in this article.

First, it’s basic business 101. Understanding what a financial incentive is allows us to see what levers we have to change things. If it’s OK, I’ll jump into that.

Kevin Pho: Absolutely.

Taylor Christensen: So first, recognize that the profit of a company—or surplus, in a nonprofit company—is what allows it to stay in business and reinvest. That profit is calculated by revenues minus costs. A financial incentive is whatever leads to greater profit for a company. So if a company makes—not just makes more money but keeps more money because revenues rise more than costs—that’s what they want.

What we need to do is find a way to get health care companies, whether hospitals, insurers, or others, to earn more money when they do what we want them to do for patients, which is to provide high-value care. By high-value care, I mean good quality at a reasonable price or great quality for a not-crazy-high price. That’s what we want them to provide for patients.

So when we’re trying to achieve that and get them to make more money by doing a good job, the only way to do that is to either lower their costs or raise their revenues. There’s not an easy way to lower costs because they’re already trying to buy things as cheaply as possible. So the question is, how do we raise their revenues when they’re doing a good job?

Revenue is determined by the price of what you’re selling and the quantity sold. We’ve tried to raise prices by giving bonuses for good quality care, but this actually lowers value because it raises prices without necessarily improving quality proportionally. And it’s similar with ACOs, where shared savings reward physicians financially for lowering the total cost of care. These approaches haven’t achieved what we want.

The solution is to increase the quantity of services provided by high-value providers.

Kevin Pho: Let’s unpack that. If a hospital is doing a great job with, say, heart failure patients or orthopedic surgeries, achieving great outcomes and low complications at a reasonable price, patients should know this when deciding where to get care. If more patients choose that hospital, they’re rewarded with increased profits, while lower-value providers lose patients and revenue. Competitors would then need to improve quality or lower prices.

Taylor Christensen: Exactly. If patients can filter toward higher-value options, high-quality care would drive more patients to those providers. It would prompt lower-value competitors to improve. This beneficial evolution would start, rewarding high-value providers and encouraging competition for quality and cost.

Kevin Pho: But we don’t have that transparency yet to direct patients to high-value options. Medicare has star ratings, but is that enough?

Taylor Christensen: I like that these efforts exist, but quality metrics aren’t always relevant to patients. For example, mortality rates may not resonate when choosing providers. Patients may not be aware of these metrics because they aren’t always useful. And network restrictions also play a role. Patients need both quality and price information upfront to make informed choices.

Kevin Pho: If you were the health care czar, what immediate steps would you take?

Taylor Christensen: I’d approach it with two main objectives. First, I’d work on better quality metrics relevant to patients, identifying and measuring these across all hospitals. Then I’d create a single, user-friendly website to display these metrics for easy access.

Second, I’d address price transparency. Patients only care about what they’ll pay out-of-pocket, so insurance plans should incentivize choosing lower-cost providers by tiering co-pays or using reference pricing, where patients pay the difference for more expensive providers. Bundled payments, which show total costs upfront, are also essential. Together, these changes would empower patients to choose lower-cost, high-quality options, and this competition would drive improvements across the system.

Kevin Pho: We’re talking to Taylor Christensen, an internal medicine physician and health policy researcher. Today’s KevinMD article is “How to Structure Financial Incentives in Our Health Care System.” Taylor, let’s end with some of your take-home messages to the KevinMD audience.

Taylor Christensen: Sure. First, I want physicians and all care workers to understand that financial incentives are a part of health care and always will be. No matter if we have a UK-style system or a very libertarian one, financial incentives will exist. The problem is they aren’t aligned with what we want. We need to accept their presence and then work to align them with the goals of high-quality, affordable care.

Once we accept this, we can move forward by understanding these incentives and adjusting them systemically to encourage desired outcomes. Fixing our health care system is a two-step process. Step one is aligning financial incentives with what we want. Step two is allowing providers to respond rationally to those incentives, improving quality and lowering costs.

Finally, I encourage caregivers, especially physicians, to educate themselves. Physicians often think our expertise in medicine gives us insight into system issues, but that’s not always the case. Health care economics and policy are complex fields. If we get informed, we can offer valuable, informed input to policymakers. So, I encourage everyone to learn more and advocate for meaningful, informed change in our health care system.

Kevin Pho: Taylor, thank you so much for sharing your perspective and insight. Thanks again for coming on the show.

Taylor Christensen: Thanks so much, Kevin.