How financial incentives transform health care [PODCAST]

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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 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 J. Christensen: Well, as an undergrad I decided, probably typical of most physicians, that I like science and 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 the basic sciences, then you’ll have a more diverse application for med school.” So I said, “Well, I’m working for a startup company. That’s really interesting. I’m going to try out business for my major.”

The thing that really shifted the path of my life toward this health care policy, fixing-the-health-care-system focus that I’ve developed, was 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, and I totally wanted to figure out what’s wrong with the health care system.

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. And so I ended up moving forward with going into medicine, but I shifted my focus and my major to business strategy. That was so that I could get a big-picture, broad understanding of the health care system, because that’s what you focus on in business strategy: You’re looking at industries and how they work. So those were the main events, I guess, that shaped the direction that my career took.

Then, when I went to med school, I specifically chose 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 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 I didn’t decide to finish it, because I didn’t want to pay my own way for all those years. So I just went straight through and finished med school.

I’ve just been reading and blogging about and studying the health care system, trying to figure out how it works, what really is the core cause of what’s wrong with it, and then from there, what makes sense to do to try and make it better. So that’s sort of what led to me writing this series of articles, actually, on your platform, that really describe the framework. As the pieces sort of fell together and I figured them out one bit by one bit, they all formed into this kind of framework in my mind, and so that’s what I was attempting to explain. Today, the post that we’re talking about is one little piece of that, which is just financial incentives: what role they play, are they good or bad, and all of that topic.

Kevin Pho: Sure. So I completely agree, of course, on the complexity of our health care system, and you wrote this series of pieces 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.” So tell us about this article for those who didn’t get a chance to read it.

Taylor J. Christensen: Yeah. So I guess, first of all, the thing that was really impactful to me when I was in residency, that sort of motivated me to think more about this topic, was that I had an attending, and I don’t remember specifically the 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 done my business strategy degree. I had 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. And 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: It’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 understand 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 in the health care system. 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 bread a factory would produce. There were still financial incentives. So that’s the first big thing that I want to get across: There will always be financial incentives in health care.

I guess the problem is that people, I think, maybe just fuse the fact that financial incentives in health care right now are not aligned with what we want. And so they misunderstand and think, “Well, 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 perspective. I think back to what your attending said, so perhaps you should have prefaced that: In an ideal world, financial incentives should not matter when it comes to medical decision-making. But as you articulated, we don’t live in that world. So for those who may not be familiar, from a physician perspective, talk to us about some of the financial incentives that physicians have to navigate through on a day-to-day basis.

Taylor J. Christensen: Yeah, well, and I’ll just expand that a little bit by saying that it’s not just physicians who are navigating, not that you were implying that it’s not, but across the whole system. Every decision the health care system makes, whether it’s a hospital system or the insurance company, is all shaped by financial incentives.

As physicians ourselves, a lot of times, and there are laws, right, that try to prevent these things from happening, and so hopefully it comes into play less. But think of the patient who comes in. I work as a hospitalist right now, and so I don’t end up seeing as many of these. They go to the emergency department. It’s somebody with chest pain. It’s an NSTEMI, right? They’re having a heart attack, but it’s not severe enough to be, probably, life-threatening. And they call the cardiologist, and the cardiologist has an incentive: They make more money to do a procedure, and so they’re more likely to do a catheterization, even though maybe there’s evidence that that’s not strictly, totally necessary in a lot of these situations.

So we’re facing it when we’re choosing which treatment plan. We face it when we’re saying, I just discharged a patient yesterday. They’re new on anticoagulation. Apixaban is much more expensive than warfarin, but that was the one that was going to be most convenient. And so I was having to have that conversation: “Hey, if you can’t afford this, and insurance doesn’t cover it well enough, then sure, we’ll switch to something else.”

But in the selection of treatments, in the decisions about whether to admit somebody or not, this is something that I’m facing as a hospitalist. There are a lot of times where I’m thinking, “Yeah, we could do some good if they’re in the hospital, but we’ll do a lot more harm financially, and the risk of sending them home is low enough that I think that’s a reasonable thing to consider,” especially because they don’t have insurance. With all of these things, it comes into play with every single decision we make. We just often aren’t realizing it.

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

Taylor J. Christensen: In broad strokes, I think it’s always been that way. It’s just that maybe we never talked about it in the past. You think of the early health care system, when it was a doctor going from house to house, and they would maybe sometimes be influenced by who can pay for the care that they’re going to give. And I know that there’s a lot of goodwill, and doctors are just trying to help people, and they sacrifice a lot of time, a lot of effort, and resources to help people who can’t afford it. I think that’s always been part of this.

But the reality is, if you want to continue to earn enough money to make a living. And it’s the same for modern health care systems too. The hospital system that is choosing whether to provide more charity care or not, there are just the financial realities that restrict them. So I think it’s always been this way. It’s just grown to be more complex along the way, is probably what’s changed.

Kevin Pho: You talked earlier about how that attending didn’t want to necessarily admit that financial incentives were present in everyday medicine, and that was years ago. What’s it like today? Because we’ve certainly talked a lot about health care policy and the influence of policy on KevinMD and on this podcast, and I’ve certainly been running KevinMD for more than twenty years now. So is it any better today, from what you observe? Do you feel like there’s a more explicit discussion of some of the economics and financial incentives in medicine today?

Taylor J. Christensen: In some ways, yes. I think that there has been more acknowledgment. I mean, the discussion that comes to mind immediately right now is just this idea that medications are too expensive, especially as GLP-1s become so popular and are bankrupting so many, maybe, state insurance agencies or state insurance plans. So it’s becoming more acknowledged, but I don’t think we’ve gotten any better understanding of what to do about financial incentives.

And that’s what I write about in this article. Really, I mean, this is just straight basic Business 101: first of all, understanding what a financial incentive is, and then from there, you can understand the levers you have to change those. So if it’s all right, I want to jump into that.

First of all, recognize the profit of a company, or if you’re talking about a nonprofit company, it’s called surplus, but it’s still the same thing. Whether you’re for-profit or nonprofit, you want that profit or surplus, because this is what allows you to stay in business and to reinvest. And that profit is calculated by revenues minus costs.

And so I guess the connection that I want to make clear is that the financial incentive is whatever leads to greater profit in a company. If a company not just makes more money but gets to keep more money, because their revenues rise more than their costs, then that’s where they go. That’s what they want. So what we need to do is find a way to get health care companies, whether it’s hospitals, insurers, whatever, to earn more money when they do what we want them to do for patients, which generally is to provide high-value care. And by high value, I mean good bang per buck: good quality for a reasonable price, or amazing quality for a not crazy high price. It doesn’t matter what price point you’re talking about, but it has to be great quality for that price. That’s what we want them to provide for patients.

And so when we’re trying to figure out how to achieve that and get them to make more money for doing that high-quality care, or I guess high-quality insurance coverage if you’re talking about insurance agencies here, the only way to get them to make more money when they do a good job is either to lower their costs or raise their revenues when they’re doing that. And there’s not really an easy way to lower costs. They’re already trying to purchase things as cheaply as they can; that cost minimizing is always in effect with businesses. So we’re looking at how we raise their revenues when they’re doing a good job.

And with revenues, there are actually two different pieces of that: There’s the thing that you’re selling, and how many of those you’re selling. So price times the quantity equals how much revenue you make. And what we’ve tried to do, which is really frustrating for me, is we’ve tried to say, “Well, if you do good, high-quality care, high-value care, let’s raise your price by giving you a bonus for having good quality.” And what does that do? It raises their price, which, if you go back to what we want them to provide, high value, quality divided by price, when you raise the price, it means you’ve just lowered their value.

So it’s good: You’ve rewarded somebody who is delivering high-quality care. But what happens when other people start copying that and they all get higher value? Well, the quality goes up, and the price. We’re not really, we want better quality, but we also want to find a way to get better quality for a lower price. So it’s kind of counterproductive.

And the same with, for example, ACOs. It’s essentially shared savings. If a group of physicians caring for this population of patients lowers the total cost of care, the insurance company will share some of those savings that they reaped with the group of physicians, which is the same thing: You’re raising their price as a result of them doing high-quality care. So all of these popular efforts that the country has made have not really achieved what we wanted to achieve, and that’s been frustrating for me. So really, it comes down to the solution: You need to increase not the price but the quantity of services provided by the higher-value providers.

So I want to unpack that and make sure it’s clear. If a hospital is doing a great job, whatever it’s doing, taking care of heart failure patients, or maybe it’s in the orthopedic surgeries, with their hip and knee replacements, they have great outcomes, very low complications, and their price is very reasonable. If patients can find out about that when they realize, “It’s time for me to get my hip replaced,” and they preferentially choose, I guess, the physician that works at that hospital that’s doing surgeries there, what happens is now you have more patients filtering toward the higher-value provider.

And so not only are more patients getting better value, high quality for a lower price, but now the other hospitals, the other physicians doing surgeries at those other hospitals, are getting fewer patients. They’re making less money, right? Their profits have gone down because they’re lower value. Meanwhile, the hospital that has higher value has actually gained more profits. So in a static world, that’s great, but in a dynamic world, it’s super impactful, because that means the competitors for hip replacements are now forced to say, “Well, why are more patients choosing that other hospital?” And they start having to make changes to improve their quality or just straight up lower their prices. Either way, this kind of beneficial evolution starts to take place.

So really, it all boils down to getting patients to somehow filter toward the higher-value options, whatever service they’re looking for. And this applies to insurance companies just the same: getting more patients to choose the higher-value insurance plans. That will reward those higher-value competitors with more profit, and the other ones get less profit, and they have to change or they go out of business. This is how every other industry works. We just somehow can’t translate that into our understanding of health care. So that really is the core of aligning financial incentives with what we want: getting more patients to choose higher-value options.

Kevin Pho: So we don’t have that transparency yet in terms of directing patients to those high-value options, as you said. I thought Medicare had one of those transparency boards, like star ratings, that can sometimes be a little bit of what you said. Is that obviously not good enough?

Taylor J. Christensen: Yeah, I really like that there are these efforts to push the quality metrics, recording those in an apples-to-apples fashion and then sharing them with patients. The problem is, one, patients a lot of times don’t know about them. But they probably don’t know about them because of the other issue with them, which is that they’re usually not relevant to patients. It’s like, what percentage of people who get admitted to this hospital with, whatever, heart failure die? And it’s like, OK, you can choose this hospital that has 0.1 percent or this hospital that has 0.15 percent mortality rate. That’s not relevant to patients choosing which is the highest-value option. And then there are also the issues of, well, if one’s in network for their insurance and one’s not, then of course they’re going to choose the in-network one.

So I guess as far as the transparency with quality goes, they have to know two things up front before they choose where they’re going to get their care. And this of course doesn’t apply to an emergency situation, a true emergency, which is not as common as most people think. But if it’s an emergency, you go to the nearest place, and that’s that. If it’s not an emergency, pretty much every time patients are choosing care, they do have the option, or the opportunity, to choose between multiple options. And so they need the quality information, and they need the price information, up front.

On the quality side, there are just not a lot of great quality metrics that are relevant to patients. So that’s one of the big barriers to patients starting to choose higher-value providers: They just don’t know who’s better. They just have to rely on word of mouth or anecdotes or Google reviews or something else that may not be as reliable.

Kevin Pho: So in terms of immediate next steps forward, let’s say you were our health care czar, right, running our health care system. What would you do in the immediate future?

Taylor J. Christensen: That’s a great question. So I think I would approach it with a two-pronged attack. The first would be getting better quality metrics that are actually relevant to helping patients recognize which providers are higher value, and figuring out what metric is most relevant for each care episode, which would require talking to patients and finding out what they care about. And then also, of course, taking into account the quality metrics that we as caregivers understand; lowering complications in surgeries is an obvious example. So I would approach it by starting to identify and then measure, in an apples-to-apples way across every hospital in the country, those sorts of metrics.

And probably the other part of that would have to be putting this all somewhere that patients can easily find and easily navigate. If there could be a single website that shows all of these metrics, that everyone knows is the go-to website, that would make it so much easier. I think people would start to actually say, “Hey, maybe I should check what the actual quality metrics are” before they go to a certain outpatient provider or a certain hospital. So in the two-pronged approach, that would be what I would do for quality.

And then we also need to have a better up-front understanding of prices, and there are many layers to this. The big thing is patients don’t care what the total price is; they only care how much they pay. And so there’s an insurer that’s kind of an intermediary in between the hospital’s total price and what the patient’s actually paying. So I would first make sure that insurance plans are designed a little bit differently, in a way that the patient will pay more if they choose a more expensive provider and less if they choose a less expensive provider. That could just be through multi-tier plans: “This is tier 1. Your copays will be the lowest if you choose a provider in tier 1. Here’s tier 2; your copays are higher,” whatever. You could do it like that.

There are other really cool ideas, like reference pricing, where the insurance company says, “We’ll pay this much for this surgery. We don’t care where you go; we’ll pay that much. If the total price is higher than that, you’ll pay the difference. If you choose somebody who’s at that price or lower, you don’t pay anything.” So suddenly patients are now starting to care about the price of these things. And yes, I know that that is a scary thing for people to hear when we’re talking about health care. There are cases where patients can’t afford to pay anything, and maybe in that case, that’s a separate situation that I guess I don’t have to get into. But for the majority of patients who are insured, even if it’s just a small difference, they need to pay more when they go to a more expensive provider.

And then the other part of that is something that I love that’s been going on more and more. A lot of times, the insurance company doesn’t even know beforehand what the total price of that care episode will be. But it’s called bundled payments. You basically say, “Hey, this is our average cost, including the anesthesiologist, including the cost of the OR, the surgeon, the follow-up care. We’re just going to bundle all of that into one price and say, ‘Here’s our price for all the patients.'” And suddenly the insurance company, the patient, everybody can know beforehand what the total price is going to be. So bundled payments are also a very important innovation that is happening that I’m excited to see, and I would push that forward more if I were the health care czar.

So, pushing changes that allow people to know what the price is beforehand, and getting patients to at least pay a little bit more if they choose a more expensive provider. If we have both of those, if patients are now saying, “Oh, I’m going to have to pay $1,000 or just $50, depending on which of the two hospitals I choose,” then they might start thinking, “Is it worth it to go to the $1,000 option?” And then they’d go to that website that I already designed as the health care czar, and they would see, “OK, the quality metrics are, oh, actually the cheaper one has better quality,” which so often is the case in health care.

And then suddenly, what you see is tons of people start choosing that lower-priced option. And that’s when the hospital that’s more expensive says, “Oh, we need to change. We need to lower our prices, or we need to improve our quality somehow.” And that normal evolution toward higher value starts to take place in health care, just like it does in pretty much every other industry that we have.

Kevin Pho: We’re talking to Taylor Christensen, internal medicine physician and health policy researcher. Today’s KevinMD article is “How to structure financial incentives in our health care system.” Taylor, we’ll end with some of your brief take-home messages to the KevinMD audience.

Taylor J. Christensen: Sure. So I guess the first thing is I want physicians to understand, and all care workers really, that financial incentives are a part of health care, and they always will be, no matter if we have a U.K.-style government, a U.K.-style system that’s fully government-run, or whether we have some imaginary, very libertarian system. Across the board, financial incentives will exist, and the problem that we have with them isn’t that they exist; it’s that they are not aligned with what we want. So the first thing is we’ve got to accept that they exist in our health care system and always will.

And then the second thing is, once we’ve accepted that, then we can move forward to understanding, from a systems perspective, what they are and how to align them with what we want. And that’s going to be the big focus: If we can do that moving forward, we’ll start to fix our health care system. I’ve always thought of it as a two-step process to fixing our system. Step one, align financial incentives with what we want. And then step two, let the players within that system take those financial incentives and respond rationally, like humans always do. Well, not always, but at least we are pretty predictable in responding to financial incentives and doing what’s going to earn our business more profit. So step two is allowing those businesses to respond to those financial incentives and start to make changes that increase their value.

And then I guess the last thing I want to say and leave with your audience is that we as physicians especially are the worst offenders, but I think a lot of caregivers who work in health care do the same thing. Because we’re so highly trained and educated in this field, we think that that makes us an expert also on what’s wrong with the system. We see from our narrow vantage point what’s wrong, and we then expand that to the entire system and say, “This is what we need to do, these things, to fix the health care system.” And so often it leads to these misguided attempts, and it helps in one area and hurts in five other areas.

And so I guess I just want to encourage your audience, one, for sure, get involved and talk about this, but also get some more education. Don’t assume that just because you have an MD and have high expertise in the area that you work in, that means you also understand what’s wrong with the system as a whole, which gets into health care economics more than anything. So get some education, start reading about this, and of course, get involved and make a difference, in a way that is not just the kind of ignorant “I understand this piece, and now I know what’s going on,” but “I’ve studied this, and I understand in the trenches, but I also understand from the systems perspective what needs to happen, and now I can advocate for what’s going to be most important for our health care system.”

So I encourage everyone to start doing that more. I think we need more of that in our country. The politicians rely so much on caregivers and our input, so let’s have an informed input that we can give them.

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

Taylor J. Christensen: Thanks so much, Kevin.

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