Arnold Kling  

Health Care Administrative Costs

Power of Productivity... Measuring Health Care Effectiv...

In this essay, I argue that improving cost-effectiveness of health care may require higher administrative expenses.

How can suppliers be incented to balance costs and benefits in choosing treatment plans? One solution is to study the results of different treatment approaches, in order to indentify the best practices, based on criteria of costs and benefits. This information can be used to construct guidelines, and doctors can be compensated according to how well they adhere to guidelines. That is what I call process-based compensation.

The challenge with implementing process-based compensation is that it requires overhead. Someone needs to invest in gathering data on how treatment practices affect outcomes. Someone needs to audit doctors to determine how well they adhere to best practices.

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policydoc writes:

This is already happening. National and local guidelines are in place, and for most major disease conditions health care systems, facilities, and sometimes physicians are being profiled on adherence to these practices. There are now a number of "pay for performance" initiatives for physicians.

Unfortunately, there are some obvious flaws in this system. The first is that physicians only partly control the process: in the end, the patient has to agree to (and use) a treatment. The bigger concern, however, is statistical: physicians usually have a small panel of patients with a specific condition, it only takes one or two bad cases to make one look bad. The solution is to get that patient out of your panel - selecting a better population is a much better way to look good than trying as hard as possible to do a better job.

The incentives have to be carefully structured to deal with these issues, and there is still a great deal of empirical research into the best way to define, measure, and reward good care.

Chris writes:

A process-based compensation scheme would be helpful in solving what I call the diet doctor conundrum. A couple of years ago I was seeing a diet doctor, an endocrinologist. My health care plan doesn't compensate for the cost of the medical treatment of obeisity, but it does offer out-of-network coverage. So my doctor would give me a bill to submit to the insurance company with the diagnosis codes for hypertension and hypothyroidism, neither of which I have. I am not well-versed enough in the insurance business to say whether or not this is fraud. But let's say for the sake of argument that it's not fraud but kind of pushing the edge of the envelope. This doctor may feel that I need weekly visits to monitor my weight loss progress, which is not really necessary, but would maximize returns to her. Under a process-based system the doctor would have to adhere to the guidline of what is acceptable treatment for obesity or hypertension or hypothyroidism and would make it difficult to game the system in this way.

On the other hand, every case and every patient's needs are unique and it is wrong to think that there's a one-size-fits-all guidline. For instance the choice to treat prostate cancer surgically or radiologically is a complex one that depends at least in part on the patient's willingness to endure the costs and consequences of these procedures. The risk-benefit analysis will vary according to individual preferences and there is no way to write a guidline that will account for this.

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