New Technologies and Pay for Performance

One of the key beliefs of President Obama and his advisors is that health technologies can make a significant difference to the quality and cost of care. In a recent speech at the Heritage Foundation, Professor Richard Epstein of the University of Chicago challenged this notion, maintaining that adoption of technology by government seldom goes well. It was not clear if he would also maintain that the government seldom gives effective impetus to adoption of new technologies in the private sector. Lots of counterexamples exist there: the Interstate Highways system leading to big box retailing and Walmart; ARPANET leading to Google.

In any case, Epstein maintains that if a technology’s value exceeds its price, it will be adopted by the private sector without any help from the government. That may hold true in a perfect market, but the healthcare system is far from perfect.

Is there a concise way of understanding the features of the healthcare system that have made private-sector innovation unable to stem the tide of cost? Epstein would likely cite government interference, particularly the unique tax treatment of employer-provided healthcare.
In Super Crunchers, Ian Ayres makes the case the increasingly powerful databases and processing power can significantly change how industries operate, including the medical field. Experience, however, seems to validate Epstein’s position. So far, large deployments of evidence-based medicine and pay-for-performance systems appear far and few between. A few notable examples do exist: Medicare bundles payments to hospitals based on diagnosis, forcing hospitals to internalize some incentives for efficiencies; California has the Pay for Performance Program; The Leapfrog Group of Fortune 500 employers has pursued making data on medical cost and outcomes more widely available. While these groups may have laid the foundation, it appears that the economics of healthcare payments has not changed much. The California Pay for Performance coalition, founded in 2001 set the modest goal in 2006 of 10% of physician compensation being outcome-based by 2010.

Blame it on doctor resistance? In that case, it may be a first mover problem and therefore a perfect example of a place for government to get involved.

Hal Luft has said that carriers just don’t have the incentives. Large employers are self-insured, which minimizes the carrier’s skin in the game. Moreover, helping the doctors keep costs down and deliver good outcomes helps the other insurance companies, since most doctors participate in multiple carrier networks.

Is an Accountable Care Organization a better model? Kaiser says no true ACOs exist today, but organizations like Claremont Partners do perform the kinds of longitudinal analysis and intervention that we would expect to see from an ACO.

This blog entry and the questions raised will be refined and answered in the coming days.