Thursday, March 16, 2023

Mis-aligned incentives in healthcare?

 Fortune Magazine thinks it has absorbed the lessons of chapter 1, i.e., "Make sure employees have enough information to make good decisions, and the incentive to do so."

The article points to this as evidence of incentive misalignment between payers (insurance companies) and patients:

...hepatitis C can be cured 95% of the time with pills in as little as eight weeks. Yet fewer than one in three insured people diagnosed with hepatitis C receive the cure within a year of their diagnosis, according to an August report from the Centers for Disease Control.

If we can believe the CDC stats, the article implies that payers would rather stall, i.e., avoid paying $30,000 for the cure because, patients could switch suppliers.  Lets do some benefit-cost analysis to check out the plausibility of this story.  If the payer does not pay for the cure, it faces the risk of having to pay for treating the symptoms of the disease.  

From the insurer's point of view:
  • Buying the pills costs $30,000, cures the patient, and there are no further costs.
  • Not buying the pills risks having to treat the patient for hepatitis C which can cost 10 times as much as the pills, e.g., a liver transplant costs $500,000
To model this trade-off, let p be the probability that a patient stays with the insurer.  We assume that premiums are small relative to the costs of treatment, and we ignore them.  

If the article is correct, then a $30,000 cure today is more costly than the expected costs of treating the symptoms of hepatitis C tomorrow.
  •  30,000 > p*$300,000
Unless the probability of the patient staying with the insurance company is less than 10%, it is more profitable to pay for the cure.  

BOTTOM LINE:  I don't see the misalignment. 

HT:  Justin


  1. The liver transplant would usually come many years down the road. Does this analysis effectively account for the time value of money? Also, what about the incentives of the executives making these decisions? Perhaps short-term profitability is more important to them than what happens many years down the road.

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