TAYLOR CHRISTENSEN – The Health Care Blog

Why Financial Incentives Oppose Quality Improvement Projects in Healthcare

Jan 16, 2025

By TAYLOR J. CHRISTENSEN

When I attended the Institute for Healthcare Improvement’s 2024 annual forum in Orlando, Florida, one of the best parts of the conference, as always, was talking to the other attendees. Every time I would sit down to eat a meal or sit down in a session, I would talk to the people around me. And I heard about so many different quality improvement (QI) projects!

After several conversations, I started to notice a pattern: Many of the projects were fighting an uphill battle because they were going against financial incentives. Or, at a minimum, they were not supported by financial incentives. All of this got me thinking about a new exhaustive, mutually exclusive categorization . . .

All QI projects can be divided into three categories:

Category 1: Supported by financial incentives

Category 2: Neutral to financial incentives

Category 3: Opposed by financial incentives

Determining which category a potential project will fall into is important for predicting how much support from hospital leadership a QI project will have.

So how do you determine which category a potential project is in?

Remember that seeking profit (or “surplus” if you’re a non-profit organization) is what drives most behavior in all organizations, even in healthcare. And whatever is profitable is what organizations have a financial incentive to do. Here’s a simple formula for profit:

Profit = Revenues – Costs

In most industries, providing a higher-value product or service (Value = Quality / Price) compared to competitors will earn that organization greater market power, which they can use to extract greater profits either by keeping prices the same and winning more market share or increasing prices while maintaining the same market share. Either way, that greater market power turns into greater profit.

In healthcare, however, higher value does not lead to greater market power. The reasons for this have been explained elsewhere, but it really comes down to patients not making value-sensitive decisions when they are choosing where they will receive care.

Thus, quality improvement efforts that result in a healthcare provider delivering higher-value care are not automatically financially incentivized. Instead, the only factor that matters from a financial incentives standpoint is whether the QI project increases revenue or decreases costs.

So, if a project will increase revenue and/or decrease costs, it’s in Category 1; if it will not have any net impact on profit because either it doesn’t change revenues or costs or it increases or decreases both of them equally, then it’s in Category 2; and if it increases costs or decreases revenues, it’s in Category 3.

This all probably seems heartless–we’re talking about quality improvements that can save lives and quality of life here, and all I’m focusing on is money?

Congress Is Getting the Transition to Alternative Payment Models Wrong

Sep 23, 2020

By TAYLOR CHRISTENSEN

Alternative payment models (APMs) are a hot topic these days, and everyone seems to agree that we need to transition toward them and away from fee for service (FFS). But how should we do it?

First, let’s think about this task as government policy makers would think about it.

They would probably start by saying, “We need to find a way to give incentives to providers and payers to try out these different APMs.” This would be fairly easy to do through Medicare, so they would create some Medicare APM programs and structure them in a way that makes the benefits of joining large enough that lots of providers will want to participate.

And for the sake of uniform provider incentives, they would also want to encourage private insurer-provider diads to start using APMs, preferably ones as similar to the Medicare APM programs as possible. And so they would probably have to offer private insurers and/or providers money to do so.

Why Isn’t Price Transparency Working in Healthcare?

Nov 7, 2019• 23

By TAYLOR CHRISTENSEN, MD

I strongly believe that getting people the information and incentives necessary to choose higher-value providers and insurers is the solution to improving value in healthcare (see my Healthcare Incentives Framework). But, you say, we’ve tried that and it doesn’t work, and current efforts are a waste of time!

Here’s an example of some great research that you might use to support your opinion:

Examining a Health Care Price Transparency Tool: Who Uses It, and How They Shop for Care (Sinaiko and Rosenthal, Health Affairs, April 2016)

The news media would see this and report the main findings–that only 3% of enrollees used Aetna’s price comparison tool–and argue that even people who have the opportunity to shop for care will not do it, which they will interpret to mean any “consumer-driven” healthcare effort is proven through evidence not to work. People can wrest information to prove whatever they want.

But what if you actually read the study?

Sinaiko and Rosenthal found that only about 60% of enrollees even had a claim during their study period. And of those 60%, I’m guessing a large percentage of those were outpatient visits (primary care or specialty) with established providers, which are claim types that people historically do not shop for. Think about it, if you have your favorite hairdresser who knows you best, you have a relationship with that person, and you like how they cut your hair, are you going to price shop every single time you need to get your hair cut?