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Sunday, January 15, 2012

Shedding light on misaligned incentives

Sometimes I read a story which appears to be unconnected to health care which sheds light on the health care payment quandary. Today is such a day, In today's WSJ Kate Linebaugh wrote a piece on the challenges facing municipalities which are trying to deploy light emitting diode (LED) streetlights. While LED streetlights are still more expensive than high pressure sodium lights, the cost of such streetlights has reportedly dropped by half in the past three years. Furthermore, the frequency of replacement is substantially less and municipalities are generally willing to absorb the up front costs in order to garner ongoing lower energy costs.

The economics of this share certain similarities to health care in that there are three parties involved.  Here there is the supplier of the service (electric utility), the direct payer (municipal government), and the actual recipient of the service (the public receiving street lighting). Here you have a technology which is disruptive in that it is less expensive in  terms of power needs. However, it often can only be deployed by the very entity which relies on selling power to remain viable (electrical utilities). 
From the perspective of many light-owning utilities, LED streetlights are too expensive and present a host of uncertainties—from light quality to how they would handle violent storms, extreme heat and cold and vandalism. LED lighting today "is nowhere near cost effective," Xcel Energy's Mr. Romero says.
Plus, utilities that have the capacity to power cities during the day have little incentive to try to reduce use at night, when power usage is low. "If you are an investor-owned utility and your profit is based on your revenue, what possible motivation do you have to conserve off-peak energy?" said Dan Howe, assistant city manager in Raleigh. 
Why should they adopt a technology which undercuts their ability to make money even if it benefits the other two parties involved. Utilities might encourage customers to cut power use during peak demand times but why adopt a new technology which save power during off hours? Utilities claim that the risks associated with adoption of this new technology rests heavily on them. They are not inclined to take such a risk when it is coupled to a less robust revenue stream. 

Similarly, medicine has triangles like this one. Provider organizations behave like regulated utilities. Payers are like municipalities.  Individual people are recipients of services. Less expensive interventions may be available but will not be widely adopted if they have lower profit margins. Why push to use a cheap chest x-ray when you have a higher margin CAT scanner available for use? In addition, there is risk associated with newer and less expensive approaches to care. More expensive is almost always associated with increased sophistication and sensitivity, whether additional patient benefit can be demonstrated or not. What if the CXR fails to reveal something the CAT might reveal. Liability in medicine is open ended. This is similar to the arguments put forth by the electrical utilities:
"When a utility makes a decision, for instance about lighting, it ends up becoming a permanent decision because once you put a light up in the air, you have to maintain that light for the rest of its life," said Rick Larsen, Progress's director of market and energy services. "There are a lot of risks." 
There are initiatives which change how these decisions are made. Municipalities who own their own light fixtures are heavily incentivized to adopt the LED technology. They rapidly see return on their investment in terms of lowered power and maintenance costs. They are all too willing to take on the costs and risks of installment when they also see the savings. In some sense we have seen changes in payment which change how health systems use resources. The DRG bundled payment system for hospital payment did succeed in moving to shorter hospital stays and drove for cost controls for hospitals to a point. When hospitals were placed at financial risk and could reap the financial benefits from limiting resource use, they became very effective at this while simultaneously demonstrating better outcomes.
Can we (or should we) coerce industries to adopt technologies which undermine their business model? The problem with this is no matter what you try to accomplish, if it places entities at financial risk, it will not work.
"It all comes down to money," said Gabriel Romero, a spokesman for Xcel in Colorado. "It doesn't save us any money. It saves them money. We pay for the installation when they receive all the cost savings."
If the financial incentives are not aligned, even the most obvious desirable outcomes will not happen. Furthermore, consistently aligning incentives with complex triangular financial architectures is essentially impossible. This is why simple and adaptable (read limited regulation) markets work so well. Parties who have goods or services to sell can offer them on their terms. If their terms are unattractive to those who might be around to purchase them, the sellers will either adapt or disappear. If the buyers are unreasonable in their demands, they will go without goods or services they might benefit from. In each case the impact of bad decisions tends to fall upon those who make the bad decisions. There are limited gaming opportunities. It is much easier to get the incentives aligned because there are simply fewer incentives to align.

Healthcare in the US (and perhaps around the world) will not get incentives in better alignment until the transaction architecture evolves into a simpler one. The ACO movement and its concept of gain sharing is a perfect example of this flawed approach. Hidden behind the copious verbiage in the documents defining its missions and structure is a simple focus... to save money. The gain sharing is a sharing of gains between providers and insurers. Whether it is at the patient's expense is arguable and will boil down to perception rather than fact. It will always appear to be at the patient's expense.

The problem goes away with a simpler architecture. While the triangular architecture of health care paid for by their parties will always be with us for realms of health care expense associated with the catastrophic and unpredictable, there will be a benefit from the conversion of the more mundane portion of the health care economy to move to the simpler market model. This is not the current state where the incentives are almost always to provide the most expensive (and high margin) service possible, whether it adds additional value to patients or not. Patients generally have limited awareness of the differences in cost, but because of the marketing efforts are attracted to the higher end services. Average people can obtain these services because third parties insulate from the cost. Average people can gain above average resources to pay for goods and services in only the health care economy. We do this by borrowing from the future and we can do this for only so long.

Ultimately, those who offer goods and services in the health care economy need to figure out how to provide them at prices attractive to average people with average resources. As opposed to rewarding those who find more and more expensive ways to deliver something, the incentives need to reward providers of services who can  do this at every decreasing costs and deliver more. This is how markets work. I can buy a flat screen TV now at a fraction of the cost three years ago and it will be bigger and sharper. That will never happen in health care if we push for a structure where insurers and providers are in cahoots to split the proceeds from stinting on patient care.

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