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.