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Complexity and Price Controls: A Bad Idea that Just Doesn’t Get Better

by Michael Rohwer

Managing healthcare with traditional methods is not working for us. Understanding the nature of the beast—healthcare as a Complex Adaptive System--is intrinsic to optimal productivity and real reform. In this seventh article, Dr. Michael Rohwer discusses the contribution of current payment methods to the problems we face in creating a viable future for healthcare, and addresses a first step in growing a sustainable and higher-performance system.

Changing a large and entrenched system like healthcare is difficult. The first step must be to introduce a transformational agent that is immediately useful. The Community Value System (CVS) is such a tool in that it enables true Value Based Payment (VBP) that operates from the bottom up to take advantage of natural Complexity. To show the relevance of this, I need to start with a very brief description of current payment methods.

Current payment methods

The first is fee for service (FFS) which makes separate payments for every component of care. It is highly individualized to each member, his or her specific problem, and the practitioner’s training and related bias. FFS payments are calculated using the Resource Based Relative Value Scale (RBRVS) that provides a relative value reference based on the effort required to perform the specific component of care. FFS creates an incentive to do more, yet at the same time its detail smothers transparency.

Bundled payment is a prospective payment approach that intends to rectify the untoward effects of FFS. Bundling is a single payment for the care required by a segment of the population. The specific population may be defined using one or more factors, including geography, health insurance, condition or episode of care. By naming what we are purchasing, it becomes a value-based purchase. Bundling redirects the incentive from providing more care to rewarding the minimum you can get away with. While bundles are becoming increasingly popular as Value Based Payment (VBP), they have several problems.

For one, they transfer insurance risk to providers. While providers are well equipped to manage clinical and professional risk, insurance risk is outside their expertise. In addition, actuarial analysis and member selection are also outside a provider’s control. Another component of Bundling that should give the consumer pause is that it creates a conflict of interest between the provider and the member by incentivizing the provider to withhold care. In the theoretical world, only unnecessary care would be withheld, but the real world contains overloaded schedules with complicated and difficult patients.

Healthcare uses price controls

FFS and Bundles both have a wide range of variation, but important from the societal perspective is what they have in common. Although it is hidden beneath multiple layers of complicated process and stupefying detail, they are both formula-based payment systems that implement price control. This is not immediately apparent because the health insurance industry is price competitive. This competition, however, is ineffective because healthcare delivery systematically prevents price competition.

Historically, price controls produce artificial scarcity and increasing cost, which is then aggravated when Utilization Management (UM) is used for cost control. In that role, UM supports scarcity by limiting the availability of certain important procedures because they are expensive. In so doing, it supports pricing that would fall in a free market, because normally cost falls to be well below the controlled price. It is ironic that if these procedures were inexpensive, we would not implement a complex, intellectually biased and error-prone regulatory process to limit their use in the first place.

Healthcare delivery operates under a price control system largely due to the public’s inability to judge performance. The ideal would be a natural free market, but that requires understanding regarding the product, and understanding requires substantial scientific knowledge and education. But the truth is that the scientific literacy of the public is exceptionally low. Jon Miller, a researcher at the University of Michigan Institute for Social Research, reported that in 2008 only 28% of American adults scored high enough to understand basic scientific ideas in the Tuesday science section of the New York Times. In 2014, a National Science Foundation survey found that 25% of American respondents didn’t know the earth revolved around the sun. In January of this year, a survey by the Oklahoma State University Department of Agriculture found that 80% of Americans would support mandatory labels on foods containing DNA. All the wonders of modern healthcare derive from scientific medicine. Yet despite the near miracles surrounding them, the public is still seduced by multiple forms of non-scientific quackery and magical thinking. Moreover rogue practitioners, who use their position to profit from nonsense, plague the medical community itself.

Complexity, the common ground of transparency, and the way forward

As noted earlier in this series, healthcare as a Complex Adaptive System needs bottom-up management aimed at maximizing the value delivered to the member. The barrier here is the same one that justifies price controls—namely, lack of transparent and actionable measures of value delivered to the member. Ironically, all over the country, clinical outcome measures have been created. What is lacking are the tools that will plant them in communities and begin to grow a common set of outcome measures that make sense to providers and members.

As discussed in the last two articles, the role of the Community Value System (CVS) is to take existing measures and convert them to local payment systems that will drive transparency and change for the benefit of all. While we cannot predict the final structure of any Complex Adaptive System—and healthcare is a Complex Adaptive System—we know that bottom-up management based on member-centric value transparency is the best and most natural way to a more effective, competitive, and responsive market.

Next: The organization we must create to guide our way forward.