A deep dive into the challenges of aligning the current thinking of the healthcare business with the underline economic models and incentives within.
In The Innovator’s Prescription, Clayton Christensen identifies one of the core problems in healthcare delivery: a mix of intertwined business models that create massive operational overhead and inefficiency. He describes three distinct business models in hospitals.
Healthcare’s 3 Distinct Business Models
1) Diagnostics and non-linear treatments – the process of diagnosing and treating many complex patients is a non-linear process. There are often many unknowns that cannot be predicted or understood without sophisticated testing and experimentation. With enough time, money, and energy, physicians can usually diagnose and treat the problem.
Christensen compares the diagnostic and treatment business to the strategy consulting business. Strategy consultants are rarely paid based on outcome, but rather based on the time and energy they put into solving the problem at hand. Consultants can’t guarantee an outcome on a pre-determined schedule because they simply can’t understand the depth of the problem prior to committing to solving it. They rely on specialized training to determine the root cause of problems and devise elegant solutions that balance the needs of all stakeholders.
2) Repeatable, known procedures – unlike the diagnostics described above, there is a massive sector of medicine that is highly knowable and repeatable. Physicians can guarantee outcomes for many procedures because the diagnostics and treatments are extremely well understood and formulaic. Providers can diagnose quickly against explicit, easily measurable criteria. With a well understood diagnosis in hand, providers can prescribe a treatment plan, and patients verify everything independently online; patients don’t need to rely on their physicians prescription, although many do. This is particularly common in surgery, as well as many office based procedures and cosmetics. Using Dr. Google, patients already do this today en masse. Dr. Google helps patients keep providers in check.
Christensen compares the procedural medicine business to the manufacturing business. Factories guarantee 99.X% of the widgets they produce will come out to spec. They even typically warrant that the widget will work for at least Y days, and offer refunds in the case of failure. Manufacturing businesses take a set of inputs and guarantee a set of outputs at a known cost. Similarly, many treatments have knowable inputs – the patient, diagnosis, and tools for the treatment – and can guarantee results with precision.
3) Wellness and chronic disease management – most of the attention and innovation happening in healthcare today revolves around wellness and chronic disease management. The premise of this business model is predicated on tracking and understanding one’s health on an ongoing basis to make better lifestyle decisions to avoid interacting with business models #1 and #2 described above.
The fundamental problem with chronic condition management is assuring adherence to the prescribed therapies. Most patients unfortunately don’t adhere to the prescribed policies that are intended to – and are generally effective at – preventing costly hospitalizations. Thus, the challenge of chronic condition management is really one of behavior modification and change. The most effective therapies for behavior change have been social in nature. Patient networks such as PatientsLikeMe, Alcoholics Anonymous, and others have proven extremely successful in changing behaviors at scale.
Unfortunately, healthcare insurers today don’t financially support and providers rarely prescribe these programs. Thus patients who need a chronic disease management system are forced to interact with a system that’s designed to treat acute conditions.
Christensen compares the chronic management business to other online-enabled networks such as eBay. The goal of the marketplace provider is to ensure rich, dynamic, and meaningful interaction between the market participants to maximize mutual value for both sides of the marketplace. If the marketplace provider fails to facilitate interaction, the market fails.
Do changing reimbursement models align with the underlying business models?
Providers are increasingly assuming risk for patient outcomes. There are a number of reimbursement models that allow providers to assume risk – capitation, bundled payments, shared savings, and more. Do these reimbursement align with the underlying business operations? Remarkably, the answer is “yes.” Below I’ll provide a broad description of the reimbursement models that the Center for Medicare and Medicaid Services (CMS) has authorized, and how each of those models works with the operational business models outlined above.
Shared saving models are reimbursement models in which providers bill in a traditional fee-for-service model. However, at the end of a given time period, typically 3 months, providers compare their billings with a predetermined benchmark given the risk-pool and size of the population they’ve been treating. If the provider bills less than the benchmark, the provider shares in some percentage of the savings (the insurance carrier – in many cases Medicare or Medicaid – shares the remainder).
Bundled payments is a model in which providers received a fixed payment for all care associated with a given episode of care. If the patient has complications or requires extra care as a result of the procedure, the provider must incur all of the costs associated with that care without additional reimbursement.
Capitation models are models in which providers receive a fixed amount of capital per patient per month that providers must care for. The rate is adjusted to accommodate for the risk associated with the patient population and regional differences in costs. Integrated delivery networks (IDNs) such as Kaiser Permanente and Geisinger are among the few delivery models that have achieved global – or in other words, 100% – capitation because they are both insurers and providers. Let’s revisit our three healthcare business models:
1) Diagnostics and complex treatments – it’s always been difficult to account for risk in consulting businesses. After all, the premise of consulting is to solve a challenging, not-yet-fully understood problem. Shared savings models are aligned with the consulting model. Shared savings models* accommodate the intrinsic risk associated with consultancy by not forcing providers to take on risk they can’t control for, but at the same time create upside opportunity for innovative providers who excel in diagnostics and complex treatments.
2) Repeatable, known procedures – bundled payments align incentives for knowable episodes of care. Bundled payments are analogous to warranties that come with widgets that factories produce. If the widget is bad for some reason, the manufacturer warrants that they’ll provide a new widget at no cost to the consumer. Similarly, bundled payments create incentives for providers to find ways to lower costs, improve efficiencies, and ensure repeatable, scalable quality. This model encourages quality and scale, enabling profitable privatization without fear of rationing and unethical, short term profitability-centric thinking. If there are complications, the provider must address the complications without any additional reimbursement. This model incentivizes providers to deliver high quality results every time. Patients win in a big way in this model.
3) Wellness and chronic disease management – capitation aligns with this model reasonably well, although capitation is plagued with a number of intrinsic incentive problems: capitation models create incentives for providers to fight with one another over the distribution of payments; capitation models also create incentives to ration care to achieve desired financial return. On the other hand capitation models create incentives for providers to pro-actively monitor and care for patients to help patients lead healthier lives and use fewer healthcare resources. If providers can work with patients change behavior to adhere to clinical prescriptions, hospitalizations can be avoided. In turn, providers, as the patients’ guide through the support groups and functions, can reap material financial reward.
It appears that the leadership at CMS has read Christensen’s writing. They’ve created reimbursement models that align with the three major business models present in healthcare delivery.
If only it were that easy.
Kyle Samani is a cofounder and CEO of Pristine, a VC-backed startup and Glass at Work certified partner based in Austin, TX. Kyle writes about technology, entrepreneurship, human computer interaction, and healthcare at kylesamani.com.
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