What’s in it for me anyway? – incentives in healthcare

Incentives, as some economists would suggest, drive the world. Whether someone is doing things to fill their stomach, pocket, ego, heart, there are underlying motivations that initiate and then sustain someone’s actions. I’ve found that a clear understanding of these incentives is critically important in life.

More specifically, if I wish to analyze healthcare systems and processes, without a good understanding of financial incentives, my analysis and conclusions will be incomplete, not well received and implemented poorly.

Let’s explore three examples of financial incentives in healthcare.

How healthcare is paid for

Fee For Service (FFS): this is where a doctor/hospital receive a new payment for every additional service provided to a patient. This creates the incentive for doctors and hospitals to provide more services. Examples of over servicing under FFS are easily found, see thisthis and that.

FFS is still the primary modality of payment for healthcare services around the world, although more advanced markets have moved away from FFS into other modes, e.g. case rate and capitation.

Case rate refers to where a doctor/hospital received a fixed fee for an encounter, such as a hospital admission, say a knee replacement procedure. Doing this removes the incentives to keep the patient in hospital for more days and/or over utilizing drugs, medical devices and services. Read this piece to understand DRGs.

Capitation refers to where an insurer/payer pays a fixed fee to a health system, (medical group or hospital system) for all medical costs that a patient requires in one year. That includes all drugs needed, doctor visits, hospitalizations etc. This shifts even more incentives onto health systems to limit the amount of health services patients receive.

To prevent over limitation of care insurers/payers put in place quality of care and service metrics to ensure patients are denied needed care. CMS the custodian of Medicare and Medicaid in the US, has put in place penalties to hospitals for too many readmissions post hospital discharge.

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Research bias

Who funds research has an influence on the outcome of the research. While the majority of the research community perform well designed, ethically conducted, scientifically sound research projects, some amount of bias is hard to avoid. Ben Goldacre’s TED talks highlight some of these.

You may have come across this phrase, “Lies, lies, damn statistics.” The truth is that if a researcher finds results that make the sponsor of research look bad, e.g. finding a drug ineffective or cause harm, it’s unlikely that the research institution will receive future funding. Blaming either the sponsor or researcher will not correct these natural, explicable incentives that influence them. This is why tax funded, nationwide research sponsors such as NIH, have been created (I’m not talking about whether it’s effective here).

Non-monetary influences on research also exist, e.g. where researchers wish to put their work in the best possible light by deliberately highlight strengths and downplay weaknesses of their work.

Research biases will never go away. The key is to remember to actively scrutinize research funding, and methodologies / assumptions, to judge the quality of the research.


Pharmaceutical companies are often public/listed companies whose objective is to develop drugs that generate ROI on capital for their shareholders. Given that objective, why would anyone be surprised to find that their focus is on developing drugs that generate a lot of revenue, e.g. cancer drugs, and not cheap vaccines?

The issue becomes a lot more complicated if you consider how much influence the pharma lobbists have on Capitol Hill, how complex/opaque the drug supply chain is, and how much/little gain society is getting from the billions invested into drug development. So complicated that I’m going to comment only with respective analytics.

When you analyze pharmaceutical data, know that what you see on a claim line is merely a small piece of the whole supply chain. Going from R&D to production, to wholesale, to retail, and then accounting for rebates and discounts to Pharmaceutical Benefits Manager (PBMs)/Insurers, cost sharing paid by patients, subsidies from state/federal agencies will be an onerous task.

Thanks for reading.

Let me know what other topics you wish to learn more about.

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