Health Care Incentives Can Work

05/28/2010 10:28 am ET | Updated May 25, 2011

In the past few months, the Bloomberg Administration abandoned a controversial program that paid students to study harder and get better grades. The program was dropped because students who received the incentives did not perform better than students who did not.

Physicians seem to be more attuned to financial incentives--in a good way--than the students in the educational experiment. New York State's Medicaid program recently announced an incentive program that would pay physicians approximately $23 more per visit for certain types of patients if the physicians incorporated electronic records and care coordinators into their practices to enable patients to help manage their medical conditions. This incentive is leading many physicians throughout the State to transform their practices into what are called "patient-centered medical homes" that use state-of-the-art management practices shown to keep people healthier, and to reduce hospital and emergency room use.

Should we have to pay physicians to use management practices that keep people healthy? I would argue that this is a different use of incentives than in the case of students because the $23 per visit that will be paid to physicians in part supports the extra costs of using the sophisticated management practices. Electronic health records and care coordinators cost money and physicians should be reimbursed for the additional expense.

More important, paying extra for a better type of care and better patient outcomes is worthwhile because it improves population health and lowers health costs. A study published recently in Health Affairs showed that a medical home project in Colorado that focused on pediatric care reduced hospitalizations by 18%. Pilot projects for other types of patients with chronic diseases, like diabetes, asthma, and heart disease, have produced comparable results in North Dakota, Utah, Pennsylvania, Washington, North Carolina, and Vermont.

Improving care and lowering costs doesn't necessarily mandate a huge investment--just a smart one. In North Carolina, providers received approximately $10 per month per patient for operating as a medical home and saw $516 in annual savings per patient, along with a 40% reduction in annual hospitalizations among asthma patients.

There are more opportunities to use health care dollars smartly. Medical homes ensure that physicians have the correct processes in place to manage patients. But, we can also measure actual outcomes for patients and give providers financial incentives on good outcomes. Why not reward physicians if they get 80% of their diabetes patients' blood sugar levels and blood pressure under control? Evidence shows that when patients achieve these clinical outcomes, they have significantly fewer complications from their diabetes--complications that drive up the use of hospitals and other expensive health care if not prevented.

To control health care costs, we should start paying physicians for outcomes rather than for the volume of services they provide. Such payments reward physicians for spending the time and energy necessary to keep people healthy and often prevent the need for more expensive care.