Methods of cost control: Capitation
As I have mentioned previously, the extension of health insurance to all Americans by 2013, as proposed by President Obama, will, by itself, do nothing to control the escalating costs of health care. Rather, by increasing demand without correspondingly increasing supply, there is every reason to believe that it will put additional upward pressure on the cost curve.
A point of general agreement among health care economists is that the prevalent fee for service model for the delivery of physician, hospital and other professional services is a significant source of the cost problem. This model gives strong incentives to providers to direct patients toward more, and more intensive, services, and for both patients and providers to select services and procedures that have any possibility of a marginal positive result, even if the cost is vastly out of proportion to the possible benefit. Further, economically speaking, the patient and the payer (whether the government or private insurance company) bear all of the risk -- the providers get paid for providing the services whether or not the patient's health is improved.
Expanding on the point a little bit, under the fee for service model, health care providers get paid the most for providing treatment to people who are sicker, as they need more, and more expensive, services. This systematically discourages providers from structuring their care in a way that will most efficiently keep people from getting sick in the first place and keep them well over time. To be clear, I am not suggesting that individual doctors don't do this anyway. Most doctors do what they do because they want to help people, and would rather see their patients stay healthy, rather then get sick and get treated. It is, however, largely against the doctors' individual and collective economic interests to provide efficient, preventative, health sustaining care. Systematically, individuals and organizations will tend to act in their own economic interests. If we want to change the direction of the system, both to lower costs and to deliver more effective care, we need to line up the economic incentives of providers and payers with the health interests of patients.
One way to do this is to change the way providers are paid. Rather than fee for service, we can pay providers a fixed amount to provide all the care a given individual needs for a period of time. (Since providers are paid "per head," this model is usually called "Capitation".) This creates a very strong incentive for the provider to keep the patient healthy in the most efficient way possible. It also has some limitations:
A point of general agreement among health care economists is that the prevalent fee for service model for the delivery of physician, hospital and other professional services is a significant source of the cost problem. This model gives strong incentives to providers to direct patients toward more, and more intensive, services, and for both patients and providers to select services and procedures that have any possibility of a marginal positive result, even if the cost is vastly out of proportion to the possible benefit. Further, economically speaking, the patient and the payer (whether the government or private insurance company) bear all of the risk -- the providers get paid for providing the services whether or not the patient's health is improved.
Expanding on the point a little bit, under the fee for service model, health care providers get paid the most for providing treatment to people who are sicker, as they need more, and more expensive, services. This systematically discourages providers from structuring their care in a way that will most efficiently keep people from getting sick in the first place and keep them well over time. To be clear, I am not suggesting that individual doctors don't do this anyway. Most doctors do what they do because they want to help people, and would rather see their patients stay healthy, rather then get sick and get treated. It is, however, largely against the doctors' individual and collective economic interests to provide efficient, preventative, health sustaining care. Systematically, individuals and organizations will tend to act in their own economic interests. If we want to change the direction of the system, both to lower costs and to deliver more effective care, we need to line up the economic incentives of providers and payers with the health interests of patients.
One way to do this is to change the way providers are paid. Rather than fee for service, we can pay providers a fixed amount to provide all the care a given individual needs for a period of time. (Since providers are paid "per head," this model is usually called "Capitation".) This creates a very strong incentive for the provider to keep the patient healthy in the most efficient way possible. It also has some limitations:
- It requires large, organized networks of providers. Individual doctors or small specialized practices can't work this way, since they are essentially required to become risk pools themselves. This type of system requires large networks with the ability to offer comprehensive care and the size and financial wherewithal to spread and normalize the risk.
- It needs strong regulation. Since the providers get paid a flat amount no matter how much care a person receives, there is a strong incentive to provide less care. If the provider is looking at the short term, or believes that it can somehow escape the liability for providing care to it's patients who do not receive needed care and later get sick as a result, the results could be quite bad.
- Patients who are used to fee for service may not like it. Related to 2, part of the efficiency of these types of systems relies upon the provider networks providing less but more efficient and effective services to patients. Patients who are used to getting whatever services they seek, whenever they ask are likely to be unhappy when their provider tells them no, because that service is not likely to help you enough.
The first two issues above point very strongly in the direction of government administration for this type of plan. The government is able to provide the largest possible pool, and is not subject to the risk of fly by night operations to take people's money, let them get sick then skate when the bill comes due. Conversely, we desperately need dynamic innovation, and, to put it mildly, the government is not know as the best source for that.
Ultimately, I believe we need to go down this path. With it's pitfalls, it nevertheless does the best job of aligning incentives to push the system in the direction we want it to go.
For an interesting, related report on California's experience with capitation payments to physician groups, see: Reforming Physician Payments: Lessons form California.
I see the benefits you're suggesting. Though I also would be concerned that physicians, or health care groups, would then be incentivized in a new way to avoid individuals with chronic health conditions. They'd obviously have to see them more, etc., while not getting paid any more for this extra service. This would seem another way that the switch you're suggesting could lead to undercovering individuals, in this case those that especially need it.
ReplyDeleteI've not read of California's experience with capitation. I do know of smaller models where capitation has been applied with some success to controlled groups of workers. I find it hard to apply the model to a more diverse universe of individuals without overwhelming the providors and short-shifting some at either end of the "bell curve."
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