Perverse Incentives, Statesmanship, and the Ghosts of Reforms Past

We are on the verge of health care reforms aimed at increasing access for the uninsured while decreasing costs. Such reforms will require better integration and deployment of health care personnel and facilities. This will be difficult given the perverse incentives (in many cases, the residues of past reforms). Mirroring societal values, these incentives have resulted in a system skewed toward technologic and subspecialty solutions rather than preventive, primary, and long-term care. If the promise of this reform movement is to be realized, statesmanship will be required at all levels by all concerned.

We have entered one of those reform moments when the impossible seems possible. Although health care is the leading candidate for reform, Henry Aaron, an economist at the Brookings Institution and coauthor of the prescient Painful Prescription [1], has counseled against expecting passage of comprehensive legislation during the first hundred days of President Clinton's term of office [2]. The period may be too short to achieve a consensus among the competing factions [3, 4], even given the favorable climate. Pure and simple, true reform will require compromise and statesmanship by all concerned.

Most proposals are aimed at two competing goals: reducing costs and increasing access for the millions of uninsured. They principally involve some form of budget limitation or “managed competition” and the mandating of a yet to be defined universal minimum benefit package. Other possible reforms include insurer consolidation to reduce administrative overhead and the “hassle factor,” tax code changes to promote more equitable health insurance subsidies, and tort reform to decrease defensive medicine and to compensate fairly iatrogenically injured patients.

None of these proposals deals directly with the most fundamental and sensitive issue, namely how to achieve a more rational deployment of health care providers and services. Anyone asked to design an optimal health care system would not come up with our present system. Clearly, when the right patients meet the right doctors in the right settings, the results can be magical, but too often they are far from magical. Primary care and emergency medical services are not well distributed and are too often substandard. Long-term care, despite some improvements, is expensive and not a source of national pride. At the same time, full-service tertiary and even quaternary care centers compete within a few square miles of one another for the same insurance dollar. Still, there are few if any villains; indeed, as Gruenberg has said, many of our perceived failures are products of our enormous successes [5]. In addition, previous well-intentioned reforms created incentives that were initially helpful but became perverse in the 1980s, an era that championed greed, glitz, and activism.

One legacy of these reforms was a health care system based on acute care hospitals rather than on a primary care network. Indeed, until the early part of this century, most affluent individuals chose to be cared for and to die at home. Increased life expectancy from improved social conditions, immunizations, and antimicrobial agents along with advances in anesthesia, blood replacement, surgical techniques, and the like, changed society's perceptions of hospitals [6]. Conditions once regarded as fatal became curable. By 1929, teachers in Dallas were so concerned about acute-care hospital availability that they paid 50/c a month to assure receiving 21 days of care at Baylor's hospital, if needed; this small plan eventually became Blue Cross. In 1932, a Commission on the cost of medical care issued a final report confirming that many Americans simply could not afford medical care, even though catastrophic costs were measured in hundreds not thousands of dollars [7].

Debate about national health insurance was slowed by the Depression and interrupted by World War II. In 1947, the Hill-Burton Act redressed the maldistribution in acute care hospitals Table 1, by initiating an enormous wave of construction. This act provided jobs, increased access to hospitals, and enhanced community pride. In the early 1950s, the need for national health insurance was a high school debate topic. Yet, by then, it seemed no longer pressing because of the growth of private insurance systems. Indeed, the ideologic tenor of the time equated national health insurance with “socialized medicine,” something still heard today. Instead, employees were given pretax dollars to buy private health insurance (essentially for acute hospital care). This idea, which provided a proportionately higher benefit for the affluent, was eagerly embraced by employers, insurers, and the medical establishment. It worked well for a while but left in its wake an overbuilt and unintegrated acute hospital system, vulnerable to technology-driven cost inflation.

After the death of John F. Kennedy, decades of hard work by Wilbur Cohen and others came to fruition during another reform moment with the passage of Medicaid and Medicare. Although falling short of national health insurance, these programs addressed the needs of the poor and the elderly. Despite early successes, their emphasis on payment for acute care, and for long-term care only after impoverishment, no longer suits the needs of an increasingly older and chronically ill population. A compromise necessary to obtain support for Medicaid and Medicare has also come back to haunt us, namely the institutionalization of the fee-for-service system with its wide disparities in compensation and higher rewards for procedures. No one denies that those skilled and competent at curative or restorative procedures should be justly compensated. However, as medicine has become more specialized, marginally useful tests, drugs, and procedures that Lewis Thomas once called “halfway technologies” [8] have proliferated. With them have come concerns not just about overutilization and iatrogenesis but about the prolongation of dying and the creation of a technologic divide between patients and loved ones at a crucial moment. Ironically, some affluent people are again choosing to die at home.

Finally, in the 1970s, Congress mandated capitation payments to increase medical school class size aimed at correcting a perceived physician shortage (really a maldistribution in numbers and types of physicians). Given the large student debt and the disincentives to practicing primary care especially in the inner city and rural areas, capitation's major effect may have been to produce more subspecialists. This program illustrates how ideas are often implemented out of context and with no means of self-correction. In this case, there was no easy way to initiate student debt abatement, to increase primary care reimbursement, or even to pay medical schools to reduce class size (decapitation if you will). Still, it took more than the skewing of the delivery and training systems by these perverse incentives to reach our present health care situation. The dismantling and starvation of the municipal and state health care systems (including mental health facilities) as well as the accompanying increase in AIDS, drug abuse, violence, unemployment, homelessness, and tuberculosis were the coups de grace.

As we enter this “reform moment” then, we need to consider how we got here, and that many of the perverse incentives in the health care system mirror those in our society. One major factor is what Professor Renee Fox called the medicalization of society [9]. When once we turned to our families or the clergy to help us with certain problems, or even took personal responsibility for them, now we turn to medicine for absolution or a quick technologic fix. Furthermore, we did not invent greed. In a pluralistic society with fewer and fewer shared values, money has become a unifying goal and standard of worth. It is commonly believed that anyone who does not maximize his or her income is a fool.

Finally, it is the doers not the preventers who reap rewards. Prevention is too invisible and even boring. Watching a fire is more exciting than watching a smoke detector. Accidents make news, not the tire-marked medians indicating that another motorist did not cross into oncoming traffic or careen off an exit ramp. Billions of dollars are available for military interdiction of drug shipments and for care after drug users destroy their bodies, but only a pittance is available to help people kick the habit or to revitalize drug-infested neighborhoods [10].

Similarly, paying for tests is easier to justify than paying for a primary care physician's time. The x-ray and test results are tangible evidence of “health”—never mind that the marginal information gain may be zero and that the costs may outweigh the benefits. We live in a “just-do-it” society. Some of our activity is legitimate but much, as in the rest of our commercial society, involves meeting induced demand. Clearly, having something completely paid for lowers the threshold for its use by patients as well as by physicians.

Enactment of even necessary reforms has been accompanied by a lowering of this performance threshold. The end-stage renal disease program, instituted to make access to renal dialysis more equitable, spawned a growth industry. The program, estimated to cost only a few millions, has cost billions. However, who can blame subspecialists for emphasizing potential benefits and doing what they are trained to do, like to do, and get paid to do, especially when restraint is unrewarded and may be seen as posing moral as well as legal hazards [11].

In summary, we need to take into account these perverse incentives, not only because of what they tell us about the present but also of what they tell us about the likely unintended effects of new initiatives. They also warn us about the danger of hubris and the need to revisit any reforms in a timely manner. Many who preceded us thought they had the answers too and they may have for a while. Furthermore, the need for statesmanship cannot be overestimated. Many reforms are likely to directly affect health caregivers and specific consumer groups; others will affect them indirectly. For example, the greatest cost reduction and health improvement will come through programs aimed at nurturing children and curbing violence, joblessness, drug abuse, and undereducation. To accomplish these goals, fewer dollars in the short-term will be available to the health sector.

Amitai Etzioni has suggested that President Clinton gather all the lobbyists in one stadium and ask that they give up one privilege before they leave [12]. Though idealistic, it underscores that what is most needed are changes in attitudes and priorities, not laws. Mr. Clinton appears ready to move us away from “me-ness” and the mortgaging of our children's futures by uniting us rather than dividing us by generation, income, race, and geography. Such statesmanship will be necessary at the regional and local level when institutional representatives are asked to put aside long-standing rivalries and to cooperate in sharing a reduced pie, using measures of effectiveness, efficiency, and quality rather than self-interest as guides. It will be easier for communities, like Rochester, New York, that have already started down that road; for others, it may be rancorous. Yet we Americans are championing far more difficult revolutionary reforms in Eastern Europe and the former Soviet Union. Should we ask less of ourselves?

• Copyright ©2004 by the American College of Physicians