Arguing on healthcare costs.

The current issue of HBR has two essays on healthcare finance. — Porter & Kaplan arguing for bundled payment models focused on health conditions and patient segments while James & Poulsen make a case for capitation focused on population based payment. One argument is being made by lifetime academics and the other is made by practitioners. Both have motherhood and apple pie statements that weaken their case.

Personally I don’t believe that either of these models are a panacea for controlling healthcare costs- capitation and bundled payment models can safely coexist. However, the James-Poulsen argument comes across as well reasoned and less beholden to the almost naive business school dogma of ‘ Competition- Free Markets’ that permeates Porter-Kaplan’s 10 page essay. One of dominant weaknesses of the Porter- Kaplan essay is it’s inability to understand behavioral economics of healthcare consumers.

It is, however, surprising that both essays seem to focus so little on the patient’s role in costs of healthcare. I have always wondered why so much of the management literature on costs of healthcare conflates conceptual boundaries between preventive, episodic, chronic, acute, emergency, interventional and catastrophic scenarios for care. A financial model that interlinks all of these into a holy grail of healthcare economics, is just not going to be sustainably successful and tends to make assumptions similar to those who love centralized planning. James- Poulsen make a more nuanced and well-developed argument with better data as well as an operational case for how capitation rewards competence and aligns incentives for providers and Payers in ways that consistent with the competencies you expect from each of those in their roles.

I am more convinced by the idea that waste elimination will proliferate fast and stem rise of healthcare costs than I am by the idea that somehow a truly free and competitive market will emerge for healthcare based on complex payment bundles.

Consolidation of profit pools is a quicker and stronger motivator for entrepreneurial opportunities — patients will often have less influence on the decision flow that goes into high impact high cost choices. Providers on the other hand, will learn to do everything to eliminate waste if they can partake in the process of related savings.

P.S — Porter- Kaplan essay is a 4 page argument stretched out to 10 pages and reminds me of how I felt when I first finished reading ‘ Competitive Strategy’.