Wednesday, October 26, 2011

Rational economic creatures?

I heard a wonderful talk by Abhijit Banerjee, economics professor at MIT, about his and Esther Duflo's new book entitled, Poor Economics.  Here is a short summary, accompanying this video interview of the authors.

Why do the poor remain poor despite a million different strategies to counter poverty? Well, perhaps because policies that deal with poverty alleviation are often based on cultural and literary stereotypes of how the poor are "lazy or enterprising, noble or thievish, angry or passive, helpless or self-sufficient." And therefore we often rely on over simplistic policies with readymade formulae - "Free markets for the poor," "Make human rights substantial," "Give more money to the poorest." A new book, Poor Economics, tries to make one key point - let’s stop staring at data and theories, and understand instead the coherent story of how really poor people live their lives.

The authors present several examples of policy and programmatic interventions that have failed because policy-makers do not take the time to understand how things work on the ground in these poor communities.

I am struck by the similarity to many proposed interventions in health care.  In the last several days, I have discussed this with regard to penalties for failure to meet certain metrics regarding patient readmissions to hospitals.  But it is a broader issue.  For example, a move to capitated rates of pay is viewed by some as the sine qua non of health care policy.  I have noted that there is little empirical support for this approach, even if it might have a sound economic rationale.

But does it have a sound economic rationale?

Still feeling the after-effects of a morning at MIT, where I first learned the term over four decades ago, I propose we conduct a gedanken experiment.  That is, let's consider a hypothesis for the purpose of thinking through its consequences.

I put forth the following thought experiment.  Advocates of capitated, or global, payments argue that the current system of fee-for-service medicine leads to overuse, in that doctors and hospitals have a financial incentive to conducts tests and procedures to generate revenue.  The economic underpinning of a global payment system is that hospitals and doctors are rational economic creatures.  Setting a per-patient budget, it is argued, will cause the hospitals and doctors to work within that revenue envelope to deliver care more efficiently.  They are at risk for any over-spending and they get to keep the surplus if they beat the budget.

But, answer me this.  Let's say, we have a system where, say, 25% of the patients are on a global budget and the remainder are on a fee-for-service payment plan.  

If the economic theory is correct, that the hospital and doctors are rational economic creatures, shouldn't we notice a difference within the same provider network in how the global patients are treated from how the FFS patients are treated?

Let's turn away from the thought experiment briefly to review real data.  I pose a question for my readers:  Has such a difference been documented in those systems that have this mixed payment regime?  I think not.  But if you have counter examples, please provide cites to support your answer.

But now, pretend you are running that hospital and physicians network.  As suggested above, you believe that professional ethics should not allow your system to treat people differently based on the kind of insurance plan that covers them.  So, you instruct everyone to think about all patients as though they are covered by the global fee.  You do this even though you suffer revenue losses from the FFS patients, who, by the way, remain the majority of your patients.

If we do this, haven't we just disproven the hypothesis that doctors and hospitals are rational economic creatures?

So, which is it?  Are they rational economic creatures, willing to treat identical patients differently based on pricing?  Or, are they not rational economic creatures -- treating all patients alike -- in which case the theoretical basis for global payments appears to be problematic?


Hongming Xu said...

From Facebook:
The problem is that good economic sense is not necessarily pegged down to social sensiblity (rationality), as in the case of a medical institution which has an interest in both the private and the public. To solve the problem, is a greater question of whether we are ready to reinvent the business model and to align the interest of both the parties.

John W. said...

Why wouldn't the hospital choose to treat everyone as FFS patients and take the profit from the real FFS patients to cover the losses from the global fee patients? Unless my global fees are much lower than than the ones for FFS I should still make a profit when averaged over all my patients. This might also prevent lawsuits that are based on different treatments for the same patient diagnosis.

Paul Levy said...

Right, same idea.

Barry Carol said...

One point missing from the discussion relates to how doctors are evaluated for bonus compensation purposes. If they are salaried and have no incentive to order additional tests, that’s one thing. However, if management is measuring their revenue generation or relative value units billed and makes it clear that it’s a significant factor in determining bonuses, that’s another. As I understand it, among large group practices and hospital systems, only Mayo and Kaiser do NOT look at individual physician revenue generation in determining compensation. At Mayo, the individual doctor generally has no idea what insurance, if any, the patient in front of him has. While fee for service should incentivize providing more care rather than less, other factors such as the perception of the local standard of care and the medical tort litigation environment are likely to be more important factors. At the same time, the incentive to provide less care rather than more in a capitated environment could be mitigated by the achievement of measurable quality metrics and good patient satisfaction scores.

Ideally, if the payment model is moving toward capitation, CEO’s should try to build a culture that strives to provide high quality cost-effective care with a cost structure that is consistent with the culture. Most important, revenue generation at the individual physician level should NOT be a factor in determining bonus compensation.

Andy said...

As an economist myself, I have to take issue with a few aspects of this analysis. First, you're using the term "rational economic creature" when you actually mean "profit-maximizer". Treating all patients alike is not profit-maximizing behavior in the strictest sense, but it remains rational behavior in the scenario you described. Your scenario merely suggests that hospital administrators value other things in addition to profits. This is an idea that has a long history in the economics of health care (Joe Newhouse put together a nice framework in 1972).

I suppose my question to you is, given that you need to treat all patients equally, what's your next step if capitation expands? Presumably you can't lose money on a larger and larger percentage of your patients. In the case of capitation for all patients, what should I expect your hospital administrator to do?

Anonymous said...

Barry, it's been about 4 years now that I have been wishing you were running the Central Committee to Fix Health Care. You're just too rational, is the problem. :)


Jesse Wagner, MD SFHM said...

I believe the hypothetical situation you wrote about regarding whether or not physicians act as rationale economic creatures may miss the point.

It is likely that the bulk of physicians do not look at what insurance someone has when deciding what tests and treatment to order, especially if they are part of a larger organization. (Though I am sure some do). Thus their behavior will be driven by what the bulk of their patients have as insurance, or at least by what they believe the payor mix is.

So, if they are 75% FFS and 25% capitated, it likely still makes sense that they will treat everyone as FFS as the extra revenue from the 75% may well outweigh the loss taken on the 25%.

However, it really isn't a matter of how each individual patient is treated. The efficiency of the care they provide will be based on how their systems are set up. Thus in the current FFS based system, there is no incentive to consider whether a test is "worth it" or not, in fact there is a disincentive. Moreover there's an incentive to do "every test" based on the fear of litigation. There is also an economic incentive to "do more" in general. Thus the systems most physicians work in are not set up to provide care in the most efficient way possible.

It is only when the bulk of the patients are capitated that it becomes an economic necessity to change the systems under which the physician functions to ones that are more efficient. Thus, when it becomes 75% capitated and 25% FFS, the organization the physician is working in will have an imperative to figure out how to make it's systems supportive of evidence based efficient care, and then the physicians will work that way.

I agree there is no proof that a system of capitation drives more efficient care, but the rationale is strong. My personal experience ion the 1990s was working in a largely capitated system (Hitchcock Clinic in New Hampshire, where I believe about 65-75% of our patients were capitated). There we understood the need to provide efficient care for the survival of the organization. Unfortunately I don't think there was enough of an understanding of system functions. Thus we tended to rely on the "individual" to "do the right thing". Just like with patient safety, so long as we continue to rely on the individual (and blame them when something goes wrong) we'll never make progress until we start designing systems that make the right thing the easy thing to do, and make it difficult if not impossible to do the wrong (or inefficient) thing. We did not do that. This, I believe, had a large part in the backlash against managed care at the time.

Anonymous said...

This is currently being evaluated and debated in a 3-year Medicare demonstration project: