Newtown, CT – March 9, 2012
"Assuming technical risk and offering a warranty is an effective way for providers to reduce information asymmetries" – this powerful insight by Michael Hicks of Pinnacle Partners summarizes the way in which health care can be transformed in a manner similar to other industries. We all know that defects are bad. They're bad because they cause harm and they're expensive. By extension, bad quality increases costs. It's a simple concept and one that consumers have come to understand in all aspects of their life. And yet in this most important one – matters of health – there is no way to determine ex ante the potential for defects nor their cost. It's a massive information asymmetry that leaves the consumer in much the same state as they were decades ago before the "Lemon Laws" took effect. Earlier this week a study by Judy Hibbard, Shoshanna Sofaer and colleagues illustrates how this simple concept of defects can help guide consumers to making the right value choices in selecting physicians. Barring any other indicator, price becomes a substitute for quality – the higher the price, the better the quality. When somewhat traditional quality measures are introduced, consumers accept that signal, but the price signal is still strong. However, when presented with information on defects and their associated costs, then high quality is equated to lower price because better quality contains less defects. While that axiom is true when comparing physicians managing chronic illness, it's not always true when comparing physicians and hospitals performing certain procedures.
What this means to you – In a recent Issue Brief, we examined the variation in total knee replacement episode prices and found that the higher cost cases were most often more expensive because of the cost of potentially avoidable complications – defects. However, there was still a lot of variation in typical costs, much of it driven by implants. In fact, stay costs were significantly higher for private sector payers than for Medicare, for the exact same procedure. So yes, accepting technical risk and providing a warranty is, in fact, a very powerful way of solving the information asymmetries in healthcare, and the Hibbard/Sofaer study confirms that. Our Issue Brief also suggests that bundled payment would create the mechanism for such a warranty to be triggered, and help contain implant costs. As providers across the country sift through the dozens of files recently received from Medicare as part of the CMMI Bundled Payment pilot, they will have an opportunity to quantify their opportunity to accept technical risk, implicitly offer a warranty and declare to consumer-patients that the 1975 Magnuson-Moss Warranty Act might finally be applicable in healthcare. To help analyze all those files, with the help of our colleagues from Brandeis, we've created a free analytic package. Use it, apply to CMMI for the Bundled Payment pilot, and see how Michael's powerful insight can help reshape healthcare for the benefit of all patients.
Francois de Brantes
Health Care Incentives Improvement Institute, Inc.