How Incentives Go Bad
There are many misconceptions about how the world works. We may not know them all, but we see them every time a product or program delivers mostly unintended consequences.
Curandi's work is providing structured collaboration support through a unique open network of local human and social service providers. Financial incentives are common in healthcare but often don't work as we think they should. This is a disconnect that we need to consider more carefully. Incentives are important tools but come with no guarantees; this is especially true in complex social environments.
This blog builds on "Two Kinds of Purpose," where we compare the intended purpose with the system's actual purpose—what it does. This time, we want to consider the relationship between incentives and purpose. When an incentive rewards something other than the intended goal, its execution continually reframes its purpose away from what we want.
A good example is the reengineering of healthcare in the 1970s and 1980s, which aimed to provide better patient care at lower costs. Despite good intentions, after four decades, only some patients receive excellent care. For most, it has led to higher costs and limited services.
Many may be surprised that medical costs were not high when this radical change was proposed. Medical cost growth in the 1960s and 1970s was consistently near or below the overall consumer price index, and the care delivered was state-of-the-art.
The following graph from the research site at the St. Louis Federal Reserve Bank shows costs near CPI when Nixon signed the HMO Act of 1973. In 1985, when adopting the new plan was sufficient to see its effects, costs consistently grew faster than the CPI.
The reorganization was proposed in the early 1970s when business and financial interests led by Dr. Paul M. Ellwood, a pediatric neurologist in Minneapolis, argued that the system was fragmented and created unnecessary care, producing unnecessary costs. They argued for structural reform based on market forces and managed competition to maintain control.
This radical idea moved healthcare away from the professional responsibility of a physician for their patient. In its place, the responsibility for patients and society's overall health would fall to massive, industrialized institutions exercising top-down command and control in pursuit of lower cost with acceptable quality. They believed a new incentive would wring unnecessary costs out of the system, bring physicians in line, and improve quality.
The idea was simple. Reducing unnecessary care saved money, and part of that money would return to physicians and hospitals as an incentive to find more. The shared savings model existed in many forms, but the idea was the same: Get paid more for only doing what was needed. The problem is that what is necessary is a slippery concept in this context. The promise was that data-driven research would provide standards and rules. What happened is in the following chart.
The following graph from Peterson KFF Health System Tracker shows inflation-adjusted per-capita costs for major cost categories rising consistently:
This story is not about bad people. Everyone I have known in healthcare since 1981 believes in what they do and does their best. This story is about a system designed to improve medical outcomes at a socially acceptable cost, but it unintentionally went off track due to unrealistic beliefs about financial incentives.
At every level, we need to recognize that complex system behavior is algorithmic and defined by feedback loops, unknowable events, and prevailing myths. Financial incentives should not directly connect to broadly defined financial results in social systems. It is an open invitation to gamesmanship in the gamiest part of town.
How can we do better with social determinants of health?
An incentive should have a specific goal and reward within the same context as its achievement. For example: A social incentive and reward for achieving a social goal.
Suppose we seek to increase the number of families moving from the street to transitional housing. In that case, we provide social recognition within human and social services for the agencies or providers who achieve that goal.
Everyone inside the context understands its reality and will validate or correct the results.
If the work is good, everyone will learn how to do or support this activity.
Financial support is the power required to accomplish the work of social achievement. The marketplace is social. Fiscal responsibility is needed to help the community meet its needs.
Investment in social system integration is required to create the infrastructure necessary for success.
The justification of investment is the economic impact of the social condition. This calculation can be problematic but will incrementally improve with system integration.
Financial incentives come in the form of budget increases consistent with the ability to deliver social goals and economic impact.
In this way, we keep each system and its knowledge operating within the best domain.
The Curandi way reduces the distance between the network of human and social caregivers and those they serve. We work to match the algorithmic behavior of complex systems with a self-organizing community adapting to deliver desired change.
Curandi is a public benefit, non-profit way of integrating our work to create desired outcomes. Join us.