Pay for Perfomance

I’ve had a businessweek article marked to read in my browser for days now, and finally tonight I got around to reading it. It discusses how President Obama spoke to the AMA (American Medical Association) and discussed some of the changes he believes should be made in the current health care system. Many of the changes would result in lower incomes for doctors—so the president was not exactly “preaching to the choir”. Doctors likely see the effects of high medical costs every day, but surely don’t want the cost reductions coming out of their paychecks.

A lot of health insurance policies in the United States are structured in a fee-for-service fashion. This means that as a doctor performs more services he/she receives more money. It’s not hard to see the effect this would have on the number of services provided by doctors. Obama noted that this fee-for-service changed the way medicine has been practiced—and it needs to change.

"It is a model that has taken the pursuit of medicine from a profession—a calling—to a business," said Obama. (taken from businessweek article)

This incentive structure provides another reason health care costs are higher in the United States than in other countries. How much higher--now that is a good question. According to the BusinessWeek article"it is doctor payments that consume one-third of the nation's $2.4 trillion in health-care spending." I think we would need to verify this with more data, but if it's even remotely true, this topic ought to be at the top of the list of necessary health care reforms.

There is no question regarding the power of incentives. Perhaps the solution here is to align incentives with both our financial and health goals, rather than having them compete. For example, what if doctors were paid bonuses when a patient quit smoking—I’m not aware of any policy like this currently in the U.S. Currently doctors get paid to advise people to stop smoking, and they treat the illnesses that occur because of smoking—cancer, emphysema—both very costly (physically, emotionally, and financially) illnesses. If we could persuade doctors to get patients to quit smoking with additional income, rather than just the happiness a doctor gets from getting a patient to quit, I think we would see a decrease in smokers, and eventually a decrease in diseases caused by smoking

Pay for performance. It’s not a new concept—but it is an effective one.