This document proposes a "fourth way" for health care delivery that focuses on coverage and responsibility. It suggests: (1) insuring only chronic illnesses and inpatient care through universal coverage pools, (2) paying provider teams bundled payments for episodes of inpatient care, (3) having patients choose primary care providers who are paid fee-for-service but incentivized to reduce costs, (4) making providers and developers responsible for costs and rewarding innovation. The goal is to align incentives for improved and more efficient care while maintaining universal coverage.

1. 6/29/2010
Overview
Aligning Incentives to Achieve the • What makes health care delivery different?
Performance One Cannot • Standard solutions:
(Micro) Manage • Private delivery via insurance
• Public delivery via budgets
• Choice among health plans (HMOs)
Harold S. Luft, Ph.D.
• Problems with the standard solutions
Palo Alto Medical Foundation Research Institute
and
• A 4th way: Focused Coverage and Responsibility
University of California San Francisco
• Inpatient vs. outpatient care
XXX Jornadas de Economia de la Salud • Patient responsibilities
Valencia, Spain • Provider incentives
23 June 2010 • Drug developers and “insurers”
Health Care Delivery: Health Care Delivery:
What Makes it Different?—1 What Makes it Different?—2
• Medical care is a mixture of (relatively) • The services needed, however are not readily
affordable and commonly used services assessed—expertise is relied upon for:
Some of these are similar to other things we routinely — diagnosis (figuring out what is needed)
purchase: massages, cosmetics, piercings, OTC drugs
— delivering treatments experienced just once
• And infrequently used, but very expensive ones
but these are not like homes, cars, or vacations • The former leads to a reliance on physicians
• Only someone with special training understands what
• Expensive “usual” items are optional is needed in a specific situation
• But in medicine, need can be unpredictable • The latter leads to reliance on professionalism
and existential (utility preference changing) • Only someone with special training understands
• Resulting in a demand for insurance (Arrow, 1963) whether the treatment was performed correctly
The Role of Uncertainty Dealing with Uncertainty
• When one’s car or house is damaged, an • Before insurance, patients would bear the
insurance “adjuster” estimates repair costs risk of occurrence and physicians were paid
• The insurer, bears only the risk of occurrence on a fee-for-service basis
• The maximum payout is usually fixed by contract • But this was largely for physician time
• So the costs were not that substantial
• It is often difficult, however, for even a highly
• Physicians carried the risk of not being paid
skilled physician to determine in advance
exactly what needs a patient needs • As the costs of care increased, people
• So, one needs to consider both the (patients and physicians) wanted insurance
— risk of occurrence ~ f(patient risk factors) • Insurers then carried both the occurrence and
— production risks ~ f(patient and provider factors) production risk

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The Usual “Solutions” Private Delivery with Health
(Sickness) Insurance
• Private delivery with health insurance • Designed to cover the costs of medical care
• Public delivery with budgets • Typically, payment for services rendered, vs. just
having the “insured” bear the cost
• Competition among health plans (HMOs)
• Sometimes this is actually “reimbursement”
• But often it is simply “payment” of specific fees
• …and then the problems with each • How those fees are determined is often controversial
• As with much insurance, it relies on deductibles,
coinsurance, and sometimes copayments
Competition Among Health Plans or
Public Delivery with Budgets Health Maintenance Organizations (HMOs)
• An alternative to a personal insurance model • A middle ground between classic FFS insurance
and government budget models
• Establish budgets for specific types of
providers, e.g., hospitals, physicians, drugs • People enroll in one of several health plans
• Government pays the providers directly • Premiums are paid by government, employers,
• budgets for facilities
enrollees, or a combination of the above
• salaries for professionals • Plans cover all (or most) medical services
• negotiated prices for drugs
• Enrollees may pay small copayments for care
• Patients seek care at little or no direct cost
• although copayments are sometimes levied • Plans pay providers in varying ways, from
budgets and salaries to modified FFS
Assessing the Alternatives (Logical) Problems with Insurance
• Often simply reflects ideologies: • Deductibles create strong incentives to avoid
• Right: likes voluntary insurance and private delivery using services at the beginning of the year
• Left: likes tax-based coverage and public delivery
• Coinsurance doesn’t make much sense for
• Middle: universal coverage, delivery system choice
inpatient services that the patient can’t assess
• But, empirical assessment of each is impossible
• Fees for individual services offer providers no
• Results of “demonstrations” are artificial
payment for coordination and similar activities
• Overall payment systems function as “ecologies”
• Separate aspects cannot be assessed • And no rewards to those who appropriately
• Politics governs the “rules of the system” reduce the use of services of others
• And systems reflect national cultures and values
• No natural focus for assessing quality of care

3. 6/29/2010
Problems with Budgets Problems with Relying on HMOs
• When HMOs are paid a fixed premium,
• Lack of patient financial responsibility (“all is competition leads to avoiding sicker enrollees
free”) leads to the perception of rationing
• This can be partially addressed with risk
• Budgets are often set by category, e.g., adjustment, but probably never perfectly
hospitals, physicians, or drugs, with no easy way • (Reimbursing HMOs is like FFS, once removed)
to substitute services across categories
• Internal HMO payments to providers bring the
problems of either FFS or budgets (or both)
• Within categories, no way to incentivize micro-
level decision-makers (MDs) to be more efficient • Quality may focus on the HMO, but providers may
belong to several HMOs
• Quality focus is typically global or departmental
• Lack of patient involvement in costs leads to the
perception of rationing or profiteering
• Centralization creates an easy political “target”
Beyond Insuring Financial Risk A fourth way–
Focused Coverage…
• Patients can’t directly “discipline” providers
• Focus the coverage of the enrollee on:
• Insurance just covers financial costs • (1) chronic illnesses
• (2) inpatient (or equivalent) care
• Budgets just limit outlays That is, the sources of financial risk warranting insurance
• What is being purchased is unclear • Have everyone in the same risk pool, called
• And there is little assessment of its quality here the Universal Coverage Pool (UCP),
thereby:
• Medical care is often highly personal, yet this • Avoiding the selection problems due to voluntarism
is rarely taken into account • And that arising from people choosing among HMOs
…and Responsibility Paying Providers—Inpatient
•
Care
Physicians and hospitals form care delivery teams
• Patient responsibility for things patients control
(CDTs), these are typically non-overlapping
They pay for minor, repetitive interventions
o But not for inpatient care • UCP pays a bundled amount for an episode of
• Although one can have deductibles (perhaps time- care (including pre- and post-discharge)
scaled) for discretionary procedures
o No deductibles for chronic illness care
• Payment is based on average costs incurred by
those CDTs achieving above average outcomes
But consumers bear the costs of differences (at the
margin) in “practice style” and fees among providers • CDT members are free to split the payments
among themselves however they choose
• Provider responsibility (indirect) for incremental
costs associated with inefficient production • CDTs are not allowed to encourage admissions

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Paying for Outpatient Care Patient Responsibilities
• Each patient chooses a primary care provider • The PI transfers charges (after the UCP’s chronic
(PCP); either an individual or a clinic illness offsets) each month to the patient’s bank
account—primarily the costs of minor acute care
• Each PCP chooses a payment intermediary (PI) to
• The PI offers various “insurance” options and
handle billing, much like a credit card company
copayment levels to smooth out payments
• The PI gets monthly chronic illness management
• In either case, government reduces the patient’s
payments from the UCP based on identified (not burden with an income-based subsidy, which is
predicted) chronic illnesses of the PCP’s patients totally “behind the scenes” (providers don’t know)
• Providers are essentially paid FFS, but they can • The patient’s net cost reflects the subsidies, the
determine these, e.g., they can bill for phone fees and practice styles of the PCP chosen and
calls, care coordination and set their own fees the providers usually used by that PCP’s patients
Provider Incentives—Inpatient Provider Incentives—Outpatient
• CDTs have strong incentives to reduce the costs of • PCPs attract more patients by offering them
care for each episode, i.e., technical efficiency— better service at lower “net premiums”
because excess charges are passed on to the PIs • Reflects their own fees and excess costs of CDTs
• “Gold stars” given CDTs with superior outcomes
• MD time is less expensive than what MDs order
(positive deviants) encourage a quality focus
• PCPs will want patients to feel cared-for, but will
• CDTs can use whatever inputs they want
also help them care for themselves
• CDTs will demand information on which tests, drugs,
etc., add the most value • The “fee schedule” is irrelevant because PCPs
can set their own structures and charges
• CDTs, especially referral sites, have incentives to
provide better data for improved risk adjustment • PCPs will demand information on best practices
from the PIs or others able to analyze data
Outpatient Specialists Drug and Device Developers
• Demand will favor those innovations that:
• Want to be attractive to PCPs to gain their referrals
• Lower cost while maintaining patient outcomes
• Their net costs are reflected in PCP-based premiums • Or markedly enhance quality at some extra cost
• Like PCPs, they can be paid more for their time if • Direct marketing to patients will not pay off very
they reduce the overall costs of what they “order” well because of physician push-back
• Build experience-based relationships with PCPs to • Physicians will scrutinize developer claims and
reduce marginally needed specialist visits demand independent head-to-head assessments
• They will question the value provided by expensive • All claims data will be in the public domain (de-
new tests, procedures, and drugs identified) to be analyzed by many parties

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Payment Intermediaries Focused Coverage and Responsibility
• Recognizes the different types of medical care
PIs compete for the business of PCPs, offering: • Public assurance of universality and subsidy
• low-priced claims administration • Links responsibility & reward with risk & control
• PCP-focused performance assessments • Inpatient teams get responsibility with flexibility
contrasted with “positive deviants” nationally
• Risk adjustment occurs via direct payment for
• to represent PCPs achieving lower inpatient inpatient care and offsets based on chronic illness
use—arguing with the UCP to shift resources • PCP practice styles (including referrals) and fees
are summarized in PCP-based premiums
• to provide the interfaces, infrastructure and
support for electronic health records • Direct patient incentives are primarily in minor
acute care and choosing efficient PCPs
Incentives for Improvement De-politicization of Health Care
• Providers can take home more money by • Universal coverage for the insurance risk
lowering the costs of treating their patients • Government doesn’t try to control fees
• Public recognition of “positive deviants” who • But excess fees flow to patients who can
self-identify and can be scrutinized change providers
• Public use data files allow multiple assessments • Income-based subsidies for patient share
of performance
• Specialty societies do not control guidelines
• Knowledge transfer is demanded by providers
• Patients can pay for more “intense”
• “Bending the (technology) curve” in medicine treatments, the UCP sees if they work
For more information, see:
Harold S. Luft, Total Cure: The Antidote to the
Health Care Crisis, Harvard University Press,
2008
http://www.SecureChoice.info