Open Letter to Entrepreneurs Trying to Fix Healthcare

Misaligned Incentives

Misaligned incentives arise because a clinician is treating a patient who does not pay and has an adversarial relationship with the payer. The cost-insensitive patient and the physician both want the best, often defined as the most expensive, treatment. The payer, which often isn’t even in the conversation, is stuck with the bill. The employer, who wants employees happy and healthy, chooses the payer they can best afford and that employees prefer. This convoluted relationship has resulted in a system where the clinician is incentivized to do more, patients are incentivized to ask for more, and payers are desperately trying to ring-fence utilization. The structure disincentives efficiency. If our energy industry worked this way, our appliances would still be energy guzzlers, our power grid would be obsolete, we’d suffer frequent outages, and every year prices would go up!

We need to streamline the incentives. We need to ensure that between each stakeholder (the patient, the physician, the health plan/payer, and the employer) there is a reciprocal relationship. Unlike previous attempts to change the incentive structure, I’m optimistic our current attempt will stick.

In the past, we tried to change the structure of insurance. “Hillary Care” of the early 1990s focused on closed networks (HMOs). That helped the payer->provider misalignment, but not the provider->patient or patient->employer misalignment. In the 2000s we focused on technology decreasing administrative cost, without recognizing that administrative complexity existed in order to govern the bad behavior arising from misaligned incentives! In the 2010s we’ve been focusing on provider->patient misalignment by having patients pay more of their medical costs directly, but not payer->provider misalignment.

Importantly, the new incentives provide for a mutual relationship among all of the stakeholders. For example, while the clinician is mainly paid by the health plan, the patient also pays a meaningful amount, theoretically making them sensitive to the cost of the treatment. Similarly, while the health plan still pays the clinician, a portion of that pay is held back and tied to overall spending and value. This is important for companies selling into healthcare. Now they must address multiple stakeholders. Gone are the days when a company can sell the latest technology to technophile clinicians (and eager patients) who then pass the cost to the patient’s insurance company. Companies are catching on and offering product guarantees to justify their price to physicians and payers: Abbott guarantees its drug eluting stent Xience. If the product fails to keep a heart vessel open, they’ll give another one for free. Novartis offers rebates if its new heart failure drug Entresto doesn’t work well for a patient.

This time we have a three-legged stool supporting durable incentive change: 1) Providers will be paid by their result (health), not by each action (treatment). This is a change catalyzed by Medicare VBP (described above), which commercial insurers will follow. (caveat: some commercial insurers have tried this, with mixed luck, several times over the past 25 yrs.) 2) Patients will share the cost of their own health expenses. 3) We can cheaply build solutions to track, analyze, and alert, in real-time, when care is sub-optimal.

Sick-care versus Healthcare

In a fee-for-service world, providers are paid based on volume. If a patient gets more tests, a clinician collects more revenue — even if the additional tests did not bring any additional value. In this world, clinicians are paid for treating sick patients. There is no value to treating healthy patients or to keeping patients healthy, because there is no associated revenue. You don’t give a healthy patient an MRI or perform esoteric blood tests. In fact, there’s no such thing as a healthy patient, they are a healthy consumer!

Not surprisingly, our healthcare system is built on the principle that clinicians are revenue-centers. It’s a simple math equation: number of patients x number treatments or visits/patient x price/treatment. So, clinicians focused on increasing the number of patients they saw and, where appropriate, increasing the number of treatments. They couldn’t change the price, because that was contracted with the payer/health plan. The result is a system that always rewards “more.” A system that focuses on sickness.

The movement towards value-based payments (VBP) or pay-for-value changes this. The extreme version of VBP, as I describe in a previous blog post, is capitation. Under capitation, a clinician gets an annual payment per patient and is charged with keeping the patient healthy while staying within that budget. Think of it as an allowance.

Under capitation, clinicians are cost-centers, not revenue centers. The math equation here is equally simple: allowance - number treatments or visits/patient x price/treatment. Instead of trying to increase the number of patients or number of treatments, the clinician is trying to minimize it. With one change, the entire system was flipped on its head!

Certain institutions have long acted this way. The integrated delivery systems, where the system is the payer/health plan as well as the provider, have this model. We can look at systems like Kaiser Permanente or Intermountain Healthcare to see what this new paradigm might look like. But only a small minority of health systems in the US are fully integrated closed plans like Kaiser. Most are loose affiliations of doctors, each of whom might have 20–25 payer/plan relationships.

As a result, while the paradigm of clinician as the cost-center will sustain — driven by incentive change that makes doctors the stewards of health, not sickness — the organizational manifestation will be different. Companies like Aledade and Privia Health are helping primary care physicians become the quarterback of patients’ healthcare, taking financial risk in the process. Other companies like Lumeris, Evolent, and Valence focus on health systems and help them organize care to keep patients healthy.

The transformation from sick-care to healthcare eliminates waste not just by reducing the amount of unnecessary care and unnecessary testing, but also by re-framing what it is that a clinician does: keep patients healthy. This presents an enormous opportunity for entrepreneurs, who want to “fix” healthcare. An entire new vertical is opened.

Administrative Complexity

Administrative complexity has long been the main target for eliminating waste in healthcare. In the commercial insurance market, $0.30 of every dollar spent on healthcare goes to administrative overhead — at insurance companies, at doctors offices, at hospitals, etc. Deloitte estimated that the administrative cost from payers/health plans alone is >$400B/yr. Largely, this is because our system is so complex — thousands payers and health plans, 5,500 hospitals, 1 million doctors, millions of allied health professionals, etc.

We have made progress in tackling administrative complexity at the margin, but until the incentives were aligned and clinicians started focusing on health rather than treating sickness, administrative streamlining looked more like administrative policing.

Historically, our approach to rationalizing administrative complexity had focused on decreasing the cost of adjudicating claims (determining that the claims should be paid, for how much, and then paying them). To scope the problem, the average commercially insured person in the US has 8 medical claims, including pharmacy prescription claims. There are over 2B claims submitted in the US each year. While 85% claims are submitted and paid electronically, costing almost nothing, adjudication of a manual claim can be hundreds of dollars per claim. Estimates of the average cost of adjudicating a claim differ, but $10–20/claim is a reasonable estimate. Thus, we spend $20–40B/yr just on adjudicating claims. While that is a lot, if we could get that to $0, it still wouldn’t make a huge dent in the waste in our system.

Thus, we need to tackle administrative complexity at every level — in the hospitals and physicians offices, at the insurance companies, and with the patients. As the goals are shifting to keeping people healthy and the incentives are increasingly aligned, I’m optimistic we can eliminate a lot of administrative complexity. We don’t need a single-payer system to do it!

Several companies are already working on this. Bauxy, in our own portfolio, is focusing on streamlining supplementary insurance claims. Aver allows payers and providers to create, implement, and reconcile episodes of care. Lumity is focused on combining claims data with consumer data to help companies make better and more informed decisions about health plans. Vericred sells the detailed plan data to power all of this. Finally, companies like Wellthie, in our own portfolio, are helping insurers and brokers streamline their own processes, including online enrollment and using smarter analytics to suggest better plans to potential enrollees.