Celestial Orbits and the Myth of Aligned Incentives

by Tom Robertson

Executive Director, Vizient Research Institute

A solar eclipse occurs when the sun, the moon and the Earth are perfectly aligned, causing the moon to completely block the sun’s rays, casting a shadow over the Earth while creating the telltale black circle surrounded by the sun’s corona. Partial eclipses are not rare globally but no more than two eclipses per year can achieve “totality,” that instant where alignment is complete.

The visible swath of any solar eclipse is only about 50 miles wide, meaning that for any given location on Earth, a total eclipse only occurs once every 100 years or so. The eclipse of 2017 was the first to span the continental United States from coast-to-coast since 1918. I live just outside of Chicago. Our last total solar eclipse was in June 1806 and our next will not occur until September of 2099. Complete alignment of the sun, moon and Earth is an infrequent and fleeting event…a concept with repercussions for health care policy.

We’ve spent almost 50 years believing that there is some mathematical formula that will align the economic interests of health care providers and their patients. Unfortunately, the math doesn’t work. The best economic interests of patients and providers has never been—and never will be—aligned.

When money moves to providers, it comes from patients in the form of insurance premiums, copayments or taxes. If genuine savings accrue to patients, those savings come from reduced provider revenues. The introduction of intermediaries like insurance companies pulls money from both providers and patients. While on the surface that may appear to align the interests of providers and patients against the insurer, the underlying dynamic is unchanged; efforts by providers or patients to optimize their own economic interests inherently come at the expense of the other.

Traditional fee-for-service payment systems induce providers to do more while capitation—the intellectual darling of the 1980s—induces them to do less. At either extreme, there is a risk of too much or too little. More recently, accountable care organizations (ACOs) touted “shared savings” as a form of aligned incentives. It seemed to elude the architects of the ACO movement that expecting providers to give up 4% of their revenue in exchange for the chance of getting 2% back was at odds with their best economic interests. The notion of providers and patients having aligned economic incentives is a well-intentioned but hopelessly elusive goal.

Providers regularly act in the best clinical interests of their patients. But when health care takes on the characteristics of other industries, driven by market share while setting prices at whatever the market will bear, providers’ economic interests inevitably diverge from those of their patients. As odd as it sounds, we need health care providers to actually work against their own financial interests if we hope to strike a balance with the patient’s economic wellbeing.

We aspire for health care to be a common good, like electricity or clean water. But we entrust its financing to the market, an instrument well-suited to private—not common—goods. Markets, by their nature, pit the economic interests of buyers and sellers against one another. Compassionate health care providers would rightly bristle at being viewed as sellers, and patients are reluctant buyers. Health care prices cannot be “whatever the market will bear” because desperately ill patients or parents will pay anything, especially if the money comes from everyone in the form of insurance. Efforts by health care providers to keep prices as low as are necessary to produce excellent results would provide the best chance to balance their financial well-being with that of their patients.

We cannot completely align the financial interests of providers and patients. Adopting the market to govern medical transactions while hoping that economic interests will somehow become aligned has led to five decades of failure. Altruism, not aligned incentives, is essential to the balance. Health care is not like other industries. Providers are not sellers. Patients are not discretionary buyers. Traditional market dynamics don’t work. We need the altruistic nature that attracted providers to health care and not to other industries.

Aspiring to economic alignment between providers and patients is not unlike looking up and hoping for an eclipse. The maximum duration for a total solar eclipse is seven minutes and 32 seconds. After that, it’s gone, not to return for another 100 years. From wherever you’re standing, the odds against seeing total celestial alignment are 99.9991%.

Food for thought.