Aligning Incentives to Reduce Healthcare Costs and Improve Quality

by David Edman

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A few years ago, I was watching John Stossel on ABC News on Friday night as he reported on the crisis of rising healthcare costs. “Suppose you go into a food store carrying a plastic card that lets you buy whatever you want at someone else’s expense. Under such circumstances, why would anyone buy the ground beef if they can have the filet mignon?” That, according to Stossel, is what’s wrong with our healthcare system.

Over many years, we’ve turned our employees (and everyone else for that matter) into those individuals carrying the plastic cards and demanding filet mignon, whether they need it or not. Providers are happy to serve the filet mignon—it goes down easy and margins are better. And insurers don’t really care because they simply pass the costs on in the form of higher premiums. And what happens when you eat too much filet mignon? You get fat. And we are now a society facing an obesity problem, both literally and figuratively.

Using the “Donut Hole” as Incentive to Control Healthcare Costs
You also get fat by eating too many donuts. But let’s focus for a moment on the donut hole, and I refer you to Figure 1 below. The concept of a “donut hole” was introduced with the Medicare Prescription Improvement and Modernization Act of 2003. You can argue the political wisdom of the program, but its economics made sense—provide for basic, lower cost drugs (with incentives to use appropriate generics), and provide high-end coverage for those with major needs, but use the donut hole in the middle (“skin in the game”) to incentivize patients to control utilization and cost.

Figure 1.

The concept of the donut hole serves to align incentives among patients, providers, and payers around reducing costs and improving quality. So what are the steps an employer can take to achieve this alignment? We recommend:

1. Educate Your Employees. They need to know that the health insurance system is broken. According to the Institute of Medicine, 30% of spending is wasted on unnecessary, inappropriate and poor quality care—overuse, underuse, or misuse of the healthcare system. Employees will keep paying more if we don’t work together to address this situation.
   
   
2. Give Employees “Skin in the Game.” This is accomplished with consumer-driven models, such as Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs).
   
   
3. Commit to Primary Care. We encourage employers to pay for reasonable levels of primary care services through HSA/HRA self-funding mechanisms. The new paradigm is to self-fund for primary care services via HSAs and HRAs because these services are relatively low cost and predictable. On the other hand, buying insurance only for serious illness and injury is high cost and unpredictable. As we reported in a previous newsletter article (Comparative Performance Data: HSAs vs. Traditional Plans), this model really works to contain costs.
   
   
4. Empower Patients with Information and Decision-Making Tools. Be sure to tell your employees about consumer information Web sites (e.g., WebMD, MedLine), as well as resources available from your insurance carrier (health risk assessment, personal health records).
   
   
5. Promote Prevention and Wellness. Institute prevention (e.g., smoking cessation) and wellness programs at the workplace. For example, take a look at the programs that RMP’s Wellness Coach offers. Plus, consider incorporating financial incentives for your employees to encourage them to adopt healthy behaviors.

The concept of the donut hole has proven to be controversial as public policy, and the government is currently moving towards removing some or all of it. As a practical matter, though, it works and is worthy of your consideration.