The problem with America's health care system is not primarily one of costs, though reform should contain them, or one of care, though reform should improve it. It is one of incentives. The question is this: How do you incentivize better medicine?
The problem with incentives, as 35 years of research in psychology shows, is that you get what you pay for. Teachers incentivized to produce higher test scores get higher test scores but not better-educated students. CEOs incentivized to improve the performance of the company's shares improve the performance of the company's shares but not the performance of the company. The common dynamic at work is simple: You incentivize something that is both a good index of the thing you really care about and is easily measured. Standardized test scores are an index of learning; share price is an index of company performance.
Before long, however, people subjected to these incentives find ways to improve their standing on the index while also changing the index so it is no longer a reliable measure of the thing it was created to evaluate. Teachers teach to the test, and CEOs operate with very short time horizons. Then, when institutions malfunction, our first impulse is to blame not the people themselves but the "dumb" incentives. This kind of criticism was common in response to the near collapse of our financial system. And it is common in response to the high cost of our system of health care.
Take the example of health care reform in Massachusetts, where health insurance is mandatory and is costing more than the state can afford. Massachusetts currently has a fee-for-service system, which gives doctors an incentive to order more tests, which cost more money. So a state panel has recommended that Massachusetts move to a per-capita system, where patients pay a set fee. If their medical costs turn out to be less than their fees, the provider network would keep what remained as profit. Insurers would then have an incentive to keep costs down.
If this scheme looks familiar, it should. It amounts to a so-called "capitation" plan. This approach to financing health care became popular about 40 years ago with the rise of HMOs. As sociologist Paul Starr points out in The Social Transformation of American Medicine, HMOs started out as nonprofits inspired by a noble vision of medical care. The idea was to charge patients (or their insurers) annual fees and cover everything—with an emphasis on prevention and well-patient care. Do more doctoring when it's cheap so that there will be less to do when it's expensive. What quickly happened is that idealistic, nonprofit HMOs were driven into the margins of medical practice by the for-profit variety. In nonprofit HMOs with a fee-for-service plan, doctors have an incentive to do more. In for-profit HMOs with a per-capita plan, doctors have an incentive to do less.
Given this history, one wonders why the Massachusetts commission expects a different result this time around.
Massachusetts' attempt to create incentives that are "smarter" is probably doomed. It's relatively easy to eliminate incentives that are dumb, but it's amazingly difficult to come up with incentives that are smart enough to do the job. After all, the incentives that contributed to our financial fiasco were hailed, just a generation ago, as a brilliant feat of human engineering. Yes, in principle, share price can be a reflection of the general health of a company. But once you incentivize share price, smart people can find a way to move it up without really improving—or sometimes even jeopardizing—the overall health of the firm.
By the same principle, incentivizing doing less can induce doctors to practice good medicine rather than expensive medicine. But you can be sure that over time, good medicine will morph into cheap medicine. And our objective in reforming health care should be neither more medicine nor less medicine, but better medicine.
The truth is that incentives are just too blunt an instrument to do what is being asked of them. If we want doctors to practice good medicine, then we have to inspire them to practice good medicine—not because it "pays" but precisely because it's good medicine. In short, we need people who want to do the right thing because it's the right thing. And it is here that incentives can become not just ineffective, but malign.
When day care centers fine parents who are late to pick up their kids, lateness increases. Why? Because the fine turns a moral obligation (come on time!) into a service for a fee (we'll take care of the kids if you pay us more!). Another example: When Swiss citizens were offered an incentive for agreeing to have a toxic waste dump in their community, their willingness to accept it fell by half. Why? The offer of an incentive induces them to ask What's in my interest? instead of What are my responsibilities as a citizen? And when people offer a stranger a token payment for help unloading a couch from a moving van, strangers are less likely to agree than if offered nothing. Why? Because the offer of money has turned the assistance from a favor into a job.
For doctors who want to practice good medicine because it's the right thing to do, demoralizing incentives can be a disaster. Yes, tinkering with incentives may be the way to go for those doctors for whom the practice of medicine has already been demoralized. But they will never substitute for the desire to do the right thing. And if, as seems likely, they actually undermine that desire, our efforts to make things better with the help of incentives may actually make them a good deal worse.
It is tempting, in light of our argument, to ask how can we incentivize good medical practice, so that we get more of it. Our answer is simple but perhaps unsatisfying: Good medical practice should be, and can be, its own reward. Almost all doctors want to practice good medicine—at least before they get socialized by the grind of medical school, residency, student debt, malpractice premiums, and the like.
Yes, of course, they want to make a good living, but many—perhaps most—doctors would happily trade high compensation for a chance to practice medicine as it should be practiced. So the most important thing to do about incentives is this: Cease and desist. Stop thinking about incentives as the way out of the health care cost explosion.
Think instead about how medical training and practice can nurture and sustain the fragile desire to do the right thing that most students bring with them into medical training.