Perverse Incentives Abound, But Maybe We Can Control Them

I remember when, back in the early 1990s, the physician community went ballistic over the threat, and in some cases the actuality, of payment by capitation. It was bad — bad for the docs, perhaps, but very, very bad for patients. And docs were just looking out for their patients.

Capitation, as we all know, creates a perverse incentive on the part of the doctor to shortchange the patient. If it’s professional capitation, he hustles the patient out as quickly as he can, so as to maximize throughput (see as many patients as possible in the shortest amount of time). If it’s global capitation, where the physician’s practice is at risk for all or most services, there’s a tendency to undertreat.

They conveniently forgot that the fee-for-service system (still going strong in 2007) had its own perverse incentives, to which capitation was a reaction.

With all the intellectual capital working on the problem of provider compensation, you’d think we’d have eliminated all this perversity, but no, we haven’t, and in fact it is near center stage and is really intertwined with the star of the show: The Incredible Rising Cost of Health Care.

Tom Reinke’s cover story looks at what payment systems are competing for the attention of Medicare and private health plans, and finds a lot of interest in an evolution of the diagnosis-related group in which providers (not necessarily just the hospital) would be paid a more or less flat fee for treating a patient at a particular stage of disease (forgive me for oversimplifying). How the providers would divide that fee would be their challenge.

Of course there’s more to it than that, but it’s an attractive idea, and there seems to be a fair amount of interest in it. What perverse incentives does it incorporate?

We may have to wait and see.

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