When faced with an opportunity to obtain a lower cost healthcare service, many people rationally question, “…but is it lower quality?” As I have written in previous blog posts, there is often a major disconnect between cost and quality in healthcare.
- One study in JAMA found that hospital costs went up as they had more surgical complications. Click HERE to read that blog post.
- THE most successful ACO in the country—Thedacare Health Partners—decreased unnecessary readmissions and in doing so lowered costs so much that they LOST MONEY overall in spite of receiving a bonus payment from Medicare (because they lost even more money from their commercially insured patients that they kept out of the hospital and were therefore not paid for). Click HERE to read that blog
So if a healthcare provider can offer healthcare services like surgery for less cost, it may be because they actually have HIGHER quality.
In my opinion, the root of this Quality – Cost disconnect is the combination of 1) fee-for-service and 2) third-party payment.
In the current fee-for-service model, healthcare providers are paid for ‘Service,’ not quality. If payment was for quality, then it would be called ‘Fee-for-Quality.’ More service does not equal higher quality. As in the above cases of surgical complications and readmissions—more service means Lower quality.
With third-party payment, the person receiving the service is not the one paying for it. It is typically the ‘employee’ who is the patient receiving the service and the ‘employer’ or ‘government’ that is paying for the service. When someone else is footing the bill, the ‘receiver’ of the service is less prone to seek out ‘Value’ (i.e. price and quality). Third-party payment creates a ‘Principal-Agent’ problem or ‘Agency dilemma.’ As Wikipedia defines it, the ‘Principal-Agent problem occurs when one person is able to make decisions that impact, or on behalf of, another person or entity. The dilemma exists because sometimes the agent is motivated to act in his own best interests rather than those of the principal.’
In this case the Agent is the Employee and the Principal is the Employer.
The rest of the Wikipedia entry on ‘Principal-Agent Problem’ is great and can be found here.
However, there is a solution. Incentives must be properly designed to align the interests of the principal and the agent. I would assess that consumerism, consumer-directed health plans, health reimbursement arrangements, and health savings accounts are all efforts to create the proper incentives and correct the ‘Principal-Agent Problem.’
When the incentives are correctly aligned, I think we will see price and quality correlate—as well they should.
But until then, one should question if price really equates to quality in healthcare.