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Rheostats, Capacitors and Health Care Demand

08/12/19

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Tom Robertson, Executive Director, Vizient Research Institute

If you’ve ever driven a car in a light rain and struggled to match the timing of your intermittent windshield wipers to the rate at which the rain was falling, you’ve crossed paths with Robert W. Kearns. Mr. Kearns received multiple patents in 1967 for his design of intermittent windshield wipers, which utilize an electronic gadget called a capacitor. Capacitors store electricity until they reach their maximum capacity, at which point they release the electricity in a pulse. By varying the size of the capacitor, you can alter the lag time between swipes of the wiper blades.

Another gizmo used to alter the steady flow of electricity is a rheostat. By altering the level of resistance in a circuit, a rheostat can increase or decrease the current running through the wires. When you slide a dimmer switch in your living room and adjust the brightness of the lights up or down, you are using a rheostat. Capacitors and rheostats influence the rate at which electricity travels through wires, increasing or decreasing the brightness of lights or introducing periodic pauses in the operation of windshield wipers. So what does this have to do with the demand for health care services?

The watch word of the decade in health care is value. We have what the government calls value-based payments. Consultants insist that the system is undergoing a shift from volume to value. And business school professors teach students that value equals quality divided by price. At the root of all of this enthusiasm over the concept of value is the assumption that consumers (or payers, on their behalf) can optimize the relationship between quality and price.

Implicit in that assumption is the belief that consumers can understand and appreciate marginal increments of quality and then make rational decisions as to whether or not one more increment of quality is worth the incremental increase in price that comes along with it. Assumed but unproven is the premise that quality, in the minds of consumers, is a continuous function and that buyers can move along that continuum until they reach a price where one more unit of quality is not worth the added cost.

Most health care consumers rely almost entirely on the opinions of friends or relatives and not on objective scientific data when evaluating the quality of doctors or hospitals. Star ratings on Google or Yelp vastly outweigh official quality statistics such as those reported by CMS. Even more importantly, consumer ratings in health care are considerably more polarized than is the case for other industries. Nearly two-thirds of health care ratings are either one star or five stars, and health care providers are much more likely than service providers in other industries to receive a one-star review. The reliance by consumers on peer reviews as a proxy for quality – it’s the only measure they fully understand – and the polarity of those reviews in the health care sector have profound implications for demand and the relevance of value.

When consumers evaluate doctors or hospitals, their impression of quality derives from the star ratings in social media. Enough five-star reviews, and a provider is deemed to be good. Enough one-star ratings, and a consumer immediately moves on. In the end, a provider is either good enough or they aren’t, and that determination is made almost entirely on the basis of what other consumers think. Quality, in the mind of the typical consumer, is a binary variable, not a continuous function – good enough or not. Unlike a rheostat, where the brightness of the lights is adjustable, health care demand is more like an on/off switch.

The consumer’s buying switch is on if there are enough five-star reviews, and it’s off if there are too many one-star reviews.

If quality is a binary variable to the average consumer, the concept of value – and in particular the theory of consumers optimizing a value equation – is fatally flawed. Consumers cannot move along a continuous quality function, rationally stopping where an equilibrium price corresponds to their preference for another increment of quality, if their appreciation of quality is actually binary.

I’m old enough to remember cars before intermittent windshield wipers became standard equipment. On days when it drizzled, or when rains fell unevenly, your choice was to turn the wipers on or turn them off. If it was barely raining, the wipers made a screeching sound like nails on a chalkboard. Turn them off, and every minute or two you could no longer see the road ahead. Variable speed wipers were a vast improvement. If consumers could distinguish increments of quality the way a rheostat adjusts the brightness of lights, it would be far more convenient for the theory of value. For better or worse, however, consumers view quality the way old cars wiped windshields … all at once or not at all.

About the author and the Vizient Research Institute™. As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for 20 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.

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