Using incentives and disincentives in health care

Information is key to empowering consumers, spurring competition

THE SUPREME COURT decision in King v. Burwell resolved another legal challenge to the federal Patient Protection and Affordable Care Act and cited the success of the 2006 Massachusetts health insurance reforms that served as a model for the federal law. In all the political and legal wrangling over PPACA, it is easy to forget that the federal reform, like the Massachusetts model, is built on a private health insurance market chassis with government incentives and restrictions designed to reduce free-riding and encourage shared responsibility of public and private actors.  Gaining near-universal access to health insurance coverage gets us moving, but where we go depends on how we balance government control and competitive market function to steer towards the right care, at the right time, in the right location, all for an appropriate price.

Ongoing efforts in Massachusetts shed light on how this balance might be struck to allow individual consumers and the private market to drive improved health care decisions.  To optimize value over time, government oversight of health care delivery and insurance must innovate and evolve with the health care market to shift government’s role away from the historic regulator model, which imposes specific conduct restrictions and requirements, towards a facilitator model in which the government could develop incentives and disincentives to support consumer and market activity that promotes high quality and efficient health care. In Massachusetts, this paradigm shift has begun through ongoing efforts to promote improved market transparency that empowers consumers to make value-based purchasing decisions, and steps to increase public information designed to support market performance and competition.

Universal access to health coverage got us moving, and ongoing transparency efforts can give us better mapping tools and directional information to help us steer towards health care market improvements.  But it will take more than good maps and sophisticated GPS to drive sustainable reform, particularly because there is no one destination or single road suitable for all consumers and for all market participants. Without unnecessary regulatory restrictions, we support consumers and private market competition through incentives and disincentives that promote value-based directions without prescribing specific approaches. 

Massachusetts has begun to establish rules that make reliable and actionable information publicly available for two distinct purposes:

  • To empower consumers to make value-based purchasing decisions, and
  • To collect and release data designed to support market performance and competition.

These relatively new market transparency rules begin to shift government’s role from health care regulator to market facilitator.

The first purpose is premised on the notion that consumers should have choices between competing health care options and they should be given information and incentives to make rational and efficient decisions. This concept is easy to understand because consumers make innumerable complex purchasing decisions on a range of issues based on the information, incentives, and choices available to them, as well as their own preferences, needs, resources, and capabilities. Some consumer decisions are very complex, like purchasing a house, going to college, or planning for retirement. Consumers can take incredible amounts of information into account when deciding what product to buy, where to eat, and how to get good professional services, among other routine decisions.

Until recently, consumers did not have access to actionable health care price and quality information.  Most health plans did not give consumers meaningful incentives to select care efficiently and they actually insulated consumers from poor economic decisions by spreading unnecessary costs across all health plan members.  But now every health carrier offers products with lower premiums based on network limitations or differentiated out-of-pocket incentives such as tiered copayment or high deductible plans, and consumers are entitled to information on what they will be required to pay out-of-pocket before services are rendered. As recent surveys have shown, however, Massachusetts still has a good distance to go before all consumers have access to adequate health care price and quality information.

Massachusetts’s government has played and will continue to play a key role by requiring transparency of price information to support consumers making health care decisions. This may be novel in health care but it is customary in other sectors where getting the price before a sale is routine.

The second form of market transparency, to collect and release data designed to support market performance and competition, is intended to give the government and market competitors reliable data for comparison to improve overall market performance. In this context, Massachusetts has taken action to provide market participants with information to facilitate competition based on shared and reliable information.

Massachusetts established standardized public reporting by health plans regarding the total medical expenses (TME) of managed patient populations; the relative prices paid to physician groups, hospitals, and other provider types; and the quality of services provided. By allowing private organizations to measure, track, and evaluate healthcare provider performance individually and collectively, these new market transparency rules empower market participants to make more informed competitive decisions.

Historically, information about a provider’s performance and what it gets paid for services by a particular carrier was confidential and considered proprietary. Government agencies would obtain such information when a proposed merger triggered an antitrust examination, a major capital proposal necessitated a determination-of-need application, a proposed closure initiated an essential service review, or through a host of other government processes to monitor particular aspects of care delivery.  These government processes individually and collectively gathered large amounts of information about health care prices, quality, utilization, and relevant market capacity in response to an application or proposal.

But the information gathered had limited value after the government decision had been made because the information generally focused only on a snapshot in time prior to the government decision or report. By facilitating the development of standardized public reporting, Massachusetts can reduce administrative burdens and shift away from transactional or episodic government reporting requirements towards market reporting that supports improved public and private decisions.

Massachusetts already has systems for public reporting of TME, prices, and quality, collects certain utilization data (e.g., hospital discharge data) and has made great strides to collect claims information through the All Payer Claims Database. Public and private sector leaders should support these efforts and examine additional ways to maximize the utility of publicly reported health care information that will support consumer decisions and competitive market function.

Leaders of health care organizations, like managers in other sectors, need to routinely track their capacity, such as staffed beds or examination rooms, to manage resources and staff.  Business leaders also benefit from information on competitor capacity and utilization.  For an example from another sector, a hotel manager may monitor the occupancy of competitor hotels when that information is available without colluding with competitors to determine how it should price and market available capacity.  We all know that when capacity (supply) is scarce it is more difficult to get a discount, and that when there is excess capacity discounts can be plentiful.

Massachusetts should examine the aggregation of such information for health care to support public and private decision-making and whether the potential benefits of such information aggregation outweigh the costs. Potential benefits would include the ability to better track publicly whether capacity – of behavioral health residential beds for example – is scarce or abundant based on utilization trends and anticipated future needs. Government and market participants should be able to use the aggregation of utilization trends and shifts in capacity for dynamic health resource mapping and strategic planning.

Health care providers should be able to make better-informed decisions on whether utilization trends support service expansion, contraction, or other shifts to meet the needs of the population they serve.  System-wide information should support healthcare provider efforts to advance delivery system reforms that center on population health and increased care coordination. Without adequate information on market capacity and utilization, a health care system may make “penny-wise” decisions that result in “pound-foolish” over-capitalization of services where market capacity exceeds anticipated utilization for the population in their service area.  Better market information should support improved allocation of resources and put health care systems in a better position to negotiate for external services rather than exacerbating pressure to create unnecessary internal capacity.

But, even with improved information, consumers and providers may, and likely will, continue to make decisions that unnecessarily increase health care costs if there are not adequate incentives for more efficient use of health care and rational allocation of resources.  Current efforts in Massachusetts to shift towards value-based health care have yielded positive returns through efforts by some purchasers, notably the Massachusetts Group Insurance Commission, to incent members to enroll in more efficient health plan designs, and even by some providers that have renegotiated rates to lower copayments for health plan members in tiered copayment products.

Increased market information should be used to realign consumer incentives to select value-based care rather than more expensive name-brand care, and for providers to allocate resources to support complete population health rather than over-investment in higher margin services such as orthopedics at the expense of lower margin service such behavioral health.

Government efforts to facilitate market function through publicly reported health care information should also prompt careful examination of how government can realign its regulatory and purchasing functions to be more responsive to market dynamics. Few would question that government has an essential role in the regulation of health care delivery. It must make certain that drugs are safe and professionals are competent; many consider health care a social good which government must ensure is available to all.  Government rules should restrict certain forms of improper market activity and unsafe conduct, but it should not maintain restrictions that unnecessarily impede competition or inhibit access to less expensive forms of effective service.

Health care market oversight has been muddled, however, by the role of government as major purchaser with price-setting authority. This has resulted in varied approaches to market oversight which sometimes resembled utility oversight, including efforts to set hospital rates that have been abandoned in all states except Maryland, and oversight approaches that focused on government purchaser programs with little regard for potential implications for the larger market. The resulting patchwork of state and federal supervision is extensive, complex, and sometimes contradictory.

With improved market information, we could identify services that should be encouraged by government, such as those where capacity is scarce, and places where funding support might help maintain low-cost options.  If a health service is in short supply, government could offer incentives to encourage capacity development, as it does in other economic development areas through streamlined approvals and potential tax breaks.

If there is adequate capacity but a dominant provider obtains materially higher prices to deliver similar service quality, why shouldn’t government seek to foster more effective competition through incentives for competitors and disincentives for the dominant provider?  If there is excess capacity and above average utilization, why shouldn’t government and other payers seek explanations for materially higher utilization?

Such incentives and disincentives could be developed objectively and monitored dynamically through publicly reported information regarding health care prices, quality, utilization, and capacityIn simple form, the calculation to identify market function issues for a service (say solid organ transplants) in a relevant area (AS) against target benchmarks can be expressed as follows:

AS Capacity    x          Benchmark      x          Benchmark      x          AS average quality     

Benchmark                  AS weighted Cost        AS utilization               Benchmark

If these fractions are individually or collectively around one, there should be reduced government oversight because the results are close to market normative results. By focusing on objective market standards, government can target incentives and disincentives toward situations where results are significantly better or worse than the normative benchmark to foster continued improvement in market performance.

Massachusetts’ transparency reforms can be the starting point for developing an objective and dynamic process that continually rebalances and realigns the government’s functions as regulator, purchaser and facilitator to improve private market function by eliminating unnecessary government restrictions and increasing public market performance information.  Massachusetts should build upon its existing efforts to make reliable and actionable information available to support better decisions by consumers and market participants.  In the long run, driving towards sustainable reform will turn on who decides what the “right” care is and what information is available to inform that decision.

Meet the Author

Tom O'Brien

Former chief, Massachusetts attorney general health care division
Tom O’Brien is a Boston attorney.  He was previously general counsel of the Department of Public Health and chief of the attorney general’s Health Care Division.