A Method For Generating Good Outcomes through Correct Incentives in the Medical System

One of the worlds absolutely best run medical services is the General Practitioner’s private clinic in Denmark. I don’t have my cites nearby but it receives top marks in both level of service (including quality of medical care) and in efficiency (That is, level of service for the amount of money paid in.)

The cause of these top marks is that the Danish GP has a very good incentive structure. The details are not simple, but I will present a simplified explanation that should serve to illuminate quite well. Expect every single paragraph to contain at least one lie. Some paragraphs will be wholly false.

This post is specific to the GP’s private clinic. I will not cover specialist practitioners (e.g. dentists) who are run on a different scheme. Nor is it a claim that the GP’s private clinic is magically amazing – there are still problems, particularly in low-density rural areas and in inter-clinic cooperation. The danish GP is not perfect, it is merely the best in the world.

I will cover the background facts, the incentive structure and then some of the positive and negative knock-on effects this incentive structure has. I will briefly compare and contrast with state-owned hospitals, which are staffed by equally skilled doctors, trained in the same medical schools, and yet receive lower marks in both service and efficiency due to different incentives.

Background facts.

  • The GP’s Private Clinic is just that: Private. It is not the state but the GP who owns, or co-owns with other GPs, their own clinic. As a result, a GP is not salaried but paid from the surplus their clinic generates.
  • A citizen of Denmark has a right to some levels of free medical care. Additional levels of care can have some degree of subsidization. Further care can be purchased out of pocket or with private insurance.
  • For all non-emergency medical care and for some emergency medical care, your GP is your first point-of-contact with the medical system.

Incentive to Keep the Service Level High
The naive way for the government to grant free medical care at private clinics is to reimburse any receipt for a covered consultation. This is actually a terrible solution.

Instead, the government has created two schemes for covering medical care, Medical Insurance Groups 1 and 2. You, as a covered citizen, freely decide between groups 1 and 2 (There is paperwork involved. The vast majority of people are in Group 1, literally everybody I know is in Group 1.)

Reading my description of Group 1, you will notice it has some superficial similarities to a Taxicab Medallion Scheme. Taxicab Medallions are known to be terrible. Group 1 is not terrible. The reason is Group 2. Group 2 is the kind of magical edge-case solution you’d never have expected state bureaucrats to have invented. Until I get to the explanation of Group 2, Group 1 will look like it has all the same terrible incentives as Taxicab Medallions.

Group 1 rests on a piece of private property called a Provider Number. Provider Numbers trade at hundreds of thousands of dollars. This is because any GP who wants to get paid to service Group 1 patients (Again: Group 1 is almost, but not entirely, the whole population of the country) needs a Provider Number. The state does not pay any GP. The state does not pay any clinic. The state pays a Provider Number. A GP does not provide medical services. A Clinic does not provide medical services. A Provider Number provides medical services. Typically, the ownership goes like so: A GP or group of GPs own a Clinic, and the Clinic has a Provider Number.

Every citizen in Group 1 is assigned to a Provider Number. For each assignee, that number receives an annual payment Basis Fee. If an assignee needs a consultation, the Provider Number gets an additional Consultation Fee. You can do some fairly simple statistical math to the number of assignees and their age groups to calculate how many consultations you’re going to need to provide. If you provide fewer, your patients may become impatient and switch to a different GP with a different Provider Number.

Much like Taxicab Medallions, this means that Doctors would get more money if there were fewer numbers (Service being poor everywhere patients won’t change provider, so you can accept more patients for Basis Fee losing patients.)

One of the main reasons Provider Numbers are less terrible than Taxicab Medallions is that there are enough Provider Numbers. Unlike Taxicab Companies and Medallions, Doctors cannot succesfully lobby to artificially limit the number of Provider Numbers, because of Group 2.

Group 2 is for any patient unsatisfied with Group 1. If you are in Group 2, the state does not pay a Basis Fee for you to anybody. Instead, it reimburses you – up to a certain amount – for consultation fees you incur. Any Clinic can accept you, you can select any clinic, and then the fee is whatever amount you agree on.

Group 2 solves the incentive problem twofold, at both the Clinic and the State level. First, it improves service levels – Patients unsatisfied with Group 1 switch to Group 2, removing their basis fee from the GP they were unsatisfied with and adding a significantly higher consultancy fee to a GP who provides better service, solving the problem at the Clinic level. Second, it causes a floor on the number of Provider Numbers – because a G2 consultancy fee is higher than a G1 consultancy fee (and the state is paying), the state is incentivized to keep people in G1 by improving G1 service. If service is bad due to a too high patient/Provider Number ratio, it is trivially easy to create new Provider Numbers, solving the problem at the state level.

Because of this dual layer of solutions, issued Provider Numbers are rarely too few – the state doesn’t want to provide too few since that costs them money, and doctors don’t lobby for fewer because they won’t capture the overflow anyway.

Incentive to Keep the Efficiency Level High
GPs are private business owners who operate businesses called Clinics. Any gains caused by improvements they create are captured by themselves. If a consultation used to take half an hour and now takes twenty minutes, that’s 50% more consultations in a day. That gets you 50% more consultation fees and allows you to accept more Group 1 patients, securing their Basis Fee as well. This, in turn, incentivises the Clinic to hire the efficient number of secretaries, lab assistants and nurses.

Far more important, though: This incentivises a pushback against unnecessary bureaucracy. The previously mentioned Basis Fee and Consultancy Fee are not declared from on high. They are negotiated between the government and an organization representing the GPs. If the government wants to, for example, create a mandatory monitoring regimen for some disease (Perhaps in response to a recent scandal that was in the papers), the GPs are going to respond with “What an interesting idea for a service you haven’t paid us to perform.” When the state wants to impose paperwork on a private clinic, the bill is presented up front. The state, being the legal monopoly on force, can still impose such paperwork wihtout paying, but in turn nothing prevents a clinic from selling its Provider Number, going 100% private and referring all patients with that disease to other clinics.

Comparison with a State Run Hospital in the Same Country
When the state imposes paperwork on a state-run hospital, studies are needed to assess how much that increased costs (or, if budgets are locked, decreased service). This removes the immediate disincentive to impose paperwork while preserving the incentive to impose paperwork (That is, getting your face in the paper after somebody died due to lack of paperwork) Additionally, unlike the GP system, there is no Group 2 where you go to a private hospital if the service at your local state run hospital is poor. (Recent policy changes have slighlty mitigated this. Slightly.)

Second, nobody is properly incentivized to improve efficiency. Sure, administrators get a salary, but as state employees they get the same salary whether the hospital is run well or poorly. Much like the politicians in charge, it is far more important to them to stay out of the papers – and they cannot, unlike the private clinics, refuse to comply with regulations that don’t make sense.

I spent a lot of words on the Provider Number, mainly because it is complex. The important part, though, is the paragraph on bureaucracy pushback. David Friedman, in Machinery of Freedom (also other places) writes that the problem with good government that works for everybody is that it is a public good, and thus underproduced, while bad government that works for special interests (or in the service of the bureaucracy) is a private good and lobbied for. The magic of the system is that the incentives have been aligned so that bad law (unnecessary bureaucracy) disproportionally impacts a single actor (The organization of GPs) who therefore has a powerful incentive to resist, while good law (less BS paperwork) has become a private good with serious positive externalities.

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