Patient-Based Cost Saving Incentives

There is a lot of talk about new payment schemes for health care providers as possible ways to control health care cost and improve quality. The general principle behind the plans is to create incentives for providers to save cost while maintaining or even increasing quality. Payment systems have to put some risk onto the provider, as through a fixed payment for the care of a population, with residual risk borne by the provider. The theme of "accountable care organizations" includes some form of risk-sharing or savings-sharing, as do payment schemes such as "global payments" or "bundled payments." Of course, Medicare does this to some extent already, by paying providers a fixed fee for a DRG -- diagnostic related group.

What I don't see in any of these discussions is extension of the risk- or savings-sharing to the patient/consumer.

Without bringing the patient to bear on the equation, I fear that we will be trying to make the proverbial horse drink from the stream. We will encounter the problems that HMOs (health management organizations) encountered some years back, when consumers paying good money for health insurance ran up against providers who had incentives to reduce care. Yes, I understand that quality is in the forefront today, but I still think there is a basic conflict with consumers who face a marginal price of zero and a provider who wants to do less. That is a recipe for trouble. We have to somehow reduce the moral hazard problem of consumers demanding care to the point where marginal value is zero (which is typically the marginal price they pay).

One idea one of my colleagues has is for insurance companies to give consumers a lump sum when they are sick -- like your car insurer does when you have a crash. Broken leg? OK, that usually costs $10,00, so here is a check for that amount, do what you want.

The big problem with this is it puts all the risk onto the patient, who is even less able to bear financial risk from cost uncertainty than the provider. There is also the problem that some folks won't get the leg fixed -- we will be a nation of limpers.

But there is another way to do it. How about the insurer says: OK, broken leg, that usually costs $10,000 in our pool. If you can get your leg fixed for less than that, you get to keep 33% of the difference.

Voila!! No risk to the consumer, just upside potential. The insurer will have to price policies a bit higher on average, since they bear all the downside risk and share the upside. But that could be priced easily. As consumers started shopping around and asking providers to cut costs, the whole distribution of cost would shift down. This would unleash tremendous forces to cut cost while keeping quality high. And consumers would not be complaining, for they would be getting paid to save!

I like this idea a lot. It creates tremendously powerful incentives on the patient side, without the problems that other incentive mechanisms have. For example, high deductible policies have the (possible) risk of inducing patients to not take enough preventive care, and both deductibles and copays have to run out at some point if the consumer is not going to bear a tremendous amount of risk. In fact, this is such a good idea that it must be out there somewhere already.