Billing and financial incentives in healthcare

In order to bill the insurance company, your physician must boil down each interaction and procedure performed into one of around 7,400 medical codes.  In essence, when you seek medical care you are actually ordering from a precisely defined menu of around 7,400 dishes – even more than Cheesecake Factory.  Important points to keep in mind: (1) no restaurant (clinic) serves every dish, (2) the prices are hidden, (3) the waiter (physician) has a very strong influence – almost complete in many cases – on what you order and (4) the tip is automatically included on the tab.  If the analogy were complete, then you might expect to order a very nice bottle of wine every time you go out to eat. 

To prevent people getting sick from all that wine, physicians have developed a society built around a very particular set of social norms, dating back at least to Hippocrates, that encourage priorities that are more in line with the patients’ needs.  As in any society, the strength of influence of social norms varies from individual to individual, but the combination of norms, legal penalties and rewards tends to work for most.

If we generally trust physicians to keep the interest of their patients paramount, the next question becomes, how are those hidden prices set?

Medicare payments for Part B

Medicare uses a criteria for setting prices for each of the 7,400 therapies that can be described as “reimbursement for costs” (see this fact sheet for a description).  The overall strategy is to compute three types of Relative Value Units (RVUs) – modified for cost of living – for each procedure that is reimbursed.  These are associated with (1) the cost of performing the procedure, (2) the cost of maintaining a medical practice and (3) the cost of malpractice insurance.  Any provider who has “accepted assignment” is required by this agreement to accept the agreed upon dollar amount for their services. There is an important caveat to this; physicians may accept assignment from Medicare but then refuse to see any patients who have Medicare as their primary insurance.

Medicare is supposed to pay for 80 percent of the allowed amount, but as can be seen from Figure 1 showing payments for Pemetrexed (a cancer medication), this percentage can vary.  The usual reasons for this variation are supplemental insurance and deductibles.

There are two obvious difficulties with this approach to defining payments for medical services. First, there is the challenge of deciding who will estimate RVUs for each procedure. This is the task of the Relative Value Scale Update Committee. Ideally this sort of problem would be settled in a free market, but that is challenging because patients have poor information about the costs and quality of services in different healthcare settings.

Second, the actual efficacy of the procedure is nowhere to be found in the computation of payment. For the most part, therapies are deemed to be either appropriate or not as determined by whether they are medically necessary for the patient. For medications, this definition usually equates to FDA approval although there are some counter-examples.  Under this system, assuming CMS has done a good job of estimating costs, there is a perverse financial incentive for healthcare providers to choose whichever medically necessary therapy costs the most since providers will make a percentage of that back in profit.

While this is the standard in the United States, there are systems in the UK and elsewhere designed to set reimbursement based on Quality Adjusted Life Years (QALY).  This is an attempt to quantify the efficacy of a medical treatment and incorporate that into the reimbursement computation.  It addresses the second issue associated with health insurance reimbursement decisions, but is still susceptible to bias in the estimation of efficacy.

Is it possible to take advantage of free market ideas to drive efficiency and improve health?

A free market economy becomes a force for good when the goals of earning money and benefiting society can be aligned.    However, the incentive structures in healthcare are all wrong.

• Hospitals are paid to do more, not make people healthier.
• Physicians can earn more by choosing more expensive therapies.
• Drug developers earn more from palliative drugs that must be taken continuously rather than cures.

As things stand now, market forces are often in strong opposition to the benefit of society.  Momentous changes such as risk sharing arrangements between hospitals and payers, public health exchanges, "big" data and the availability of data to patients and the imposition of payment penalties based on quality metrics are all leading to changes in important financial aspects of healthcare decisions.  If their combination leads to better alignment between financial incentives and patient health, then we are at the beginning of a healthcare renassaince in the United States.