Perverse Health Care Incentives
From the New York Times Magazine piece on innovation in health care:
ONE DAY, WHILE I was standing in Intermountain’s cardiology intensive-care unit, which, unlike those in many other hospitals, is next to the cardiac-surgery wing, it occurred to me that Intermountain really was not so unusual. It is unusual for a health care organization. But its story is fairly typical in the rest of the economy.
The executives at a company realize that their industry has built up all kinds of bad practices over the years. Those practices damage the quality of their product and waste money. The executives do a rigorous analysis of their operations, relying on solid information rather than conventional wisdom. And then they persuade their colleagues to make changes. . .
But there is a fundamental difference between Toyota and Intermountain. As Toyota built better cars than its competition for less money, it won new customers. Some rivals matched its successes (as Honda did); some lost market share (as Detroit did). No such dynamic exists in health care. . .
Why? In part, it is the faith that patients have in their doctors. When people are buying a car, they often consult Consumer Reports or Road & Track. When they are choosing a place to have surgery, they ask their doctor to recommend a surgeon and go to the hospital where that surgeon works. Hospitals that provide less than top-quality care are rarely punished in the way that General Motors and Ford have been.
Even more important than how we choose our health care, though, is how we pay for it. One of Deming’s principles is that improving quality also tends to reduce costs. That is not always the case in health care; expensive treatments — implantable cardiac defibrillators, for instance — can bring enormous benefits. But Deming’s principle holds more often than you might think. When in doubt about the best procedure, doctors tend to do more — more tests, more procedures, more surgery. So if a hospital does a rigorous analysis of what actually works, it is likely to discover a fair amount of waste.
But in our current health care system, there is no virtuous cycle of innovation, success and expansion. When Intermountain standardized lung care for premature babies, it not only cut the number who went on a ventilator by more than 75 percent; it also reduced costs by hundreds of thousands of dollars a year. Perversely, Intermountain’s revenues were reduced by even more. Altogether, Intermountain lost $329,000. Thanks to the fee-for-service system, the hospital had been making money off substandard care. And by improving care — by reducing the number of babies on ventilators — it lost money. As James tartly said, “We got screwed pretty badly on that.” The story is not all that unusual at Intermountain, either. That is why a hospital cannot do as Toyota did and squeeze its rivals by offering better, less-expensive care.