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Monday, September 14, 2009

Value, incentives, and prices

A series of common theme permeate the health care debate. Two of the themes, value and incentives are linked through a common thread; price. When we hear value we think of benefit gained per unit of cost. When we hear incentives, we think of financial carrots. What do cost and carrots have in common? They are both understood under the umbrella of price. Incentives are the prices paid to induce someone, often a total stranger to do someone else's bidding. Perhaps most of us cannot be bought but most everyone can be leased. Nothing is ever truly free and the value of what we "value" can only be assessed by what we are willing to give up (cost or price) in order to acquire it.

Various things can be used as currency to make these measurements of value. However, the common currency is just that - currency...money. It is powerful and valuable since it is broadly accepted. While the corruption of medicine by financial concerns may be broadly lamented, money still serves as the most powerful and consistently effective tool to entice the health care workforce to get out of bed each morning and serve their fellow man.

There is a broad consensus that one of the most problematic areas in health care is alignment of incentives. Our present system provides incentives to over utilize certain very expensive tools and to under utilize perhaps equally effective and less expensive approaches, delivering less than optimal value to consumers. A very brief moment of reflection may provide insight into why this may the case. What links value and incentives? Nothing more than prices.

The problem with administratively set prices is the best they can aim for is to reflect some sort of average price at a particular moment in time. Average prices are like average time. What is average time? It is what can be measured by a broken clock, accurately reflecting the time at least twice daily. However, using a broken clock to tell you time will not be a useful endeavor.

In the same sense, set prices are not good informational tools. They convey essentially no useful information regarding value and send the wrong information regarding incentives. For prices to convey useful information in these realms prices must be dynamic and changing, reflective of changing preferences and values which change with specific contexts.

A plan for overhauling a health care delivery system which ultimately depends upon prices set administratively is like building a sophisticated rocket with a faulty guidance system. No matter how well constructed, it will be guided by flawed information and the likelihood of it ending up where you desire is not likely.

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