Value-Based Healthcare – A Winning Formula

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Many of my blogs have talked about how perverse incentives have driven parts of the healthcare process away from serving the patient and toward serving and rewarding other participants in the process. Using the adjective “perverse” might be too strong and to some reflect negatively on incentives. Incentives are a good thing when they give us better products at a lower price. It’s what makes the free market work so well. You are driven to make a better mousetrap to capture more of the mousetrap market. You are driven to be more efficient to lower your overhead costs to make your price more competitive.

Healthcare can’t operate in a pure free market because of its unique environment. We need to have insurance to protect us from financial ruin due to an illness, and we need regulations to protect us from below-standard care and hurtful medicines. It has been shown, however, that competition, within the guardrails of regulations, can bring some of the free market efficiencies into the healthcare business process. The public/private partnership of Medicare Part D is a prime example of the efficiencies of competition working within the guard rails of government regulations. The point is, in healthcare, when the regulations create incentives that encourage providers to focus on the patient’s short- and long-term health, while also controlling costs, we are on the road to a positive outcome. However, these types of good incentives in a government-regulated environment are difficult to obtain.

Medicare and, to a lesser degree, commercial insurance, has operated in a fee-for-service environment for the most part. My blog today will focus on Medicare. Fee-for-service means that Medicare pays for a specific medicine or service at an agreed upon price. While this may sound like a good approach, it offers the bad incentive of giving the opportunity to the provider to make more money by providing more medicine or more services. The focus is more on the quantity of healthcare rather than the quality. While this might tend to put doctors into a bad light, remember that they are leery of being sued for not making the right diagnosis, and they are also trying to satisfy a patient who might request/demand to have more tests or procedures performed. The patient and often the doctor are separated from cost consideration which adds to the inefficiency of fee-for-service. Since healthcare costs in Medicare are divided into separate accounting silos, i.e., hospital, doctors, and prescription drugs, if one silo lowers costs in another silo, the savings are not credited to the silo that generated the savings. For example, the savings that resulted from the introduction of a new Medicare Part D drug which reduced hospitalizations in Medicare Part A, were not attributed to Part D. Fee-for-service payment has reduced the incentive for efficiency in the different Medicare silos and continued the focus on the short term, rather than the long-term health of the patient. So, what’s the solution?

Value-based healthcare is an approach that seeks to align incentives that produce better long-term health for the patient while producing long term cost savings. Medicare has been working on testing different approaches to value-based healthcare. According to the Centers for Medicare and Medicaid Services (CMS), the goal of value-based care is to provide better care for individuals and better health for populations at a lower cost − all great goals. The trick has been for CMS to develop the right regulations that maintain the financial incentives that encourage the participation of the best providers while controlling costs.

The promise of value-based care is that it could be a win for the doctors, hospitals, insurance companies, Medicare, and the patient. One example of where many aspects of value-based care is being employed is Medicare Advantage. This program, often referred to as Medicare Part C, allows private insurance companies to assume the responsibility of providing healthcare for Medicare beneficiaries for a set fee. This arrangement, by itself, changes the focus from short term to long term. This approach makes it advantageous to coordinate care and encourage timely responses to a patient’s needs. It is to the insurance companies’ advantage to provide preventative care, free access to exercise facilities and programs to encourage healthy living, all of which result in healthier clients and reduced costs. These are the type of good incentives that result in better service and health for the patient and long-term savings.

Advances in communication, computerized record keeping and analysis, home monitoring, telemedicine and wearable devices can all add to maintaining health and provide early responses to any problems that are detected. The rise in artificial intelligence could have a huge impact on providing personalized treatments for individual patients. All of these things will add to the efficiency of value-based healthcare.

Our government needs to work quickly in updating regulations to encourage the acceptance of value-based care. Refining the incentives for coordinated care and enabling competition wherever appropriate will all add to the effectiveness of value-based care. Renewing a call for tort reform for healthcare professionals would go along way toward reducing unneeded tests. The yearly increase in Medicare Advantage participants is a testament to older American’s acceptance of this form of value-based care. We need to encourage our lawmakers to continue to push toward this winning formula for healthcare.

Best, Thair

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