We need better incentives in Health Care

The Fundamental Incentives are Wrong

            In economics an incentive is a motivator for people to do something. The reason that people prefer lucrative fields such as medicine and law over teaching is due to the incentive of money. Most people will follow the incentives of the system that is created. Of course there are always exceptions to the rule. But when dealing with systems it makes more sense to look at the majority rather than the few outliers.

            Take for example a salesman at a paper company. The paper company gives him a very modest salary with benefits. They then attach the rest of his earnings to commissions (or a percentage of his sales). Therefore the more paper he goes out and sells the more money he makes.

            If the salesman decides to work incredibly hard he can make $100,000 a year, but if he is lazy, only $35,000. The salesman is encouraged to work hard because he is motivated by a desire to make money. This is a good thing for both the company and the salesman because everybody wins. The more money the salesman manages to sell the better the company does, and the better the salesman does. This is an example of properly aligned incentives. The paper company wants the salesman to work hard. So they have given him an incentive to work hard.

             Now let’s take a pipefitting company that hires a salesman and paid him a flat rate salary of $60,000 a year, with no incentives. But now the salesman only has the incentive to work hard enough not to be fired. Of course some people will be thankful for the job and will work hard anyway, but the company this time hasn’t provided any reason for the man to work extra hard, which would in turn benefit the company.

            Now lets take a third company, let’s say they sell electronics. Now this company hires a salesman (or saleswoman) but provides this salesperson with a different incentive. They have a decent starting salary of $40,000 plus benefits and receive an extra bonus in the terms of a one thousand dollar bonus for each percentage of sales that are retained year to year. This system would encourage the salesman to focus on retaining current clients rather than expanding the business. Because if he only has four clients but keeps all of them from year to year he would receive a bonus of $100,000, even though that wouldn’t really benefit the company very much.

            The reason I’ve given three examples is because they show different circumstances of different incentives systems. The first has a positive incentive to work harder and everyone benefits. The second salesman has no benefit to work harder, and the last salesman actually has an incentive to not work hard.

            The reason that this crucial to understand is because these basic tenets apply to the health care system. The fundamental and possibly fatal flaw of the United States Health Care system is that our incentives are not aligned with our goals. The goal of trying to ensure that patients receive the best care, and to keep costs down so that the system does not go bankrupt are not mirrored in the way we’ve incentives health care in this country. And unless proper incentives are put in place, there is no way to save healthcare.

            The incentives that people are responding to are wrong in several places. Doctors don’t have monetary incentives to provide the best care for their patients (although almost all doctors do want what is best for their patient), or to keep down unnecessary costs. Patients have little incentives to keep down the cost of their medical treatment by keeping themselves healthy. Insurance companies do have an incentive to keep down costs, but have no incentive to keep patients healthy unless it is as a means of keeping down costs. Unless we address those issues there will be no needed change in the American Health Care System.