A Small Essay on a Fundamental Tension in Health Care

By June 16, 2014 Commentary

A primary consequence of health care systems which disconnect payment for services from the recipient of the service is creation of an often adversarial relationship between the providers of medical care and the ultimate payers.  In the American system, about half of health care is paid for by government programs, primarily Medicare and Medicaid.  The remainder is largely paid by employers and their health plan surrogates or by individuals.  If the patient is paying directly, he or she must either accept, reject or have a discussion modifying the physician or other provider’s judgment about the necessity and appropriateness of recommended care.  Decisions about care and payment for the services are handled directly between the patient and the provider.

When someone other than the patient pays, the patient has much less incentive to question the provider’s recommendations, and often the provider is less sensitive to the cost of services, since the patient with whom they have a relationship isn’t directly bearing that cost.  And those who are paying, the government programs or employers and their intermediaries, inevitably will be concerned about whether the services being reimbursed were truly the most cost-effective and appropriate method of dealing with the patient’s medical need and whether the price for the service is fair.  So providers begin to feel that their medical judgments and the value of their services are being questioned and payers perceive that perhaps they are being taken advantage of by providers just looking to maximize income.

In the government programs this tension plays out largely in the political arena, with legislators and officials having to balance the cost of the programs and the taxes needed to support them with constituent demands for adequate access and ever-richer benefits and provider lobbying for higher reimbursement rates.  In the private health plan world, use of provider contracts or fee schedules that stipulate payment rates and application of various utilization management techniques have been the primary methods of controlling spending.  This leads to often contentious contract negotiations and to complaints and litigation around payer judgments of appropriateness of care.

A number of approaches have been tried to ameliorate or resolve this tension, particularly on the private plan side.  The most fundamental is to combine the provider and payment functioning one organization.  The original staff model health plans–Kaiser and the Group Health plans in several states–were based on this notion.  It is not apparent that over time they have been consistently less expensive than other health plan models and they appear to have only internalized the conflict, not eliminated it.  Accountable care organizations, captivated IPAs and other similar contractual approaches to having a set of providers take substantial financial responsibility for their patients are back in vogue.  These also may serve to internalize the conflict about cost-effective and appropriate care, but because they typically require an accumulation of a large number of providers, in already consolidated and consolidating markets, they tend to lead to higher negotiated prices over time.

The other large-scale trend to resolve this conflict is the movement toward greater cost-sharing for health plan members, epitomized by the spread of high-deductible plans.  This has demonstrated some capability to reduce utilization and spending, but the fear is whether consumers, particularly high-cost consumers, can adequately gather and use information to make good decisions about their health and health care.  Government programs, in some cases by their nature of serving low-income people, have not embraced this trend.   This seems to me to be the most promising approach, because it recombines the use and payment function back to the patient and even in the government programs, its use should be explored.  Nothing in the various reforms implemented to date seems likely to fully eliminate this problem.  Like a volcano, the tensions periodically seem quiescent, but they are always bubbling beneath the service and periodic eruptions seem inevitable.

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