MAD, Stuart Smalley and Unintended Consequences: When Payers and Providers are at Odds (Part I of IV) | Marc D. Paradis | Healthcare Blogs Skip to content Skip to navigation

MAD, Stuart Smalley and Unintended Consequences: When Payers and Providers are at Odds (Part I of IV)

June 19, 2009
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The 1980s and 1990s were a challenging time for many physician practices and hospitals. Managed care was on the rise and for-profit insurance companies were effectively employing divide-and-conquer tactics at the negotiation table. Although Integrated Delivery Systems (IDS) in health care had been around for a while, Kaiser Permanente being one of the oldest examples, an explosion of mergers in the 1990s yielded as many as 850 IDS’ in the US by 2000. Along with this rapid growth came some confusion as to the exact definition of an IDS but the basic goal of most IDS’ was to provide an effective counter-balance at the negotiation table. Once an IDS reached a certain size, a for-profit insurer could no longer afford to walk away from the negotiation table. This threat of mutual assured destruction allowed all parties to play hardball while guaranteeing a shared interest in fair and executable contracts (with kudos to John Forbes Nash of “A Beautiful Mind” fame for writing the formal equations that describe this type of equilibrium).

From this perspective, patients would benefit, hospitals would benefit, doctors would benefit, and healthcare would benefit, as Adam Smith’s “invisible hand” corrected the excessive profit margins and zealous managed care cost-cutting pressures which had been exerted by the for-profit insurance companies. Pharmaceutical and medical equipment manufacturers, as an ancillary benefit of the creation of IDS’, awoke to a new balance of power at the negotiating table as well. While the mutuality of destruction was not as guaranteed with the pharmaceutical and equipment manufacturers, IDS’ now became large and prestigious accounts. As such, the external competitive pressures of similar drugs and alternate technologies forced the manufacturing account executives (salespeople) to craft more balanced proposals for negotiation.

Speaking of salespeople brings us to the next link in the story. One thing that I learned very quickly as a pre-sales consultant supporting the account executives of a large, multinational software corporation was that account executives were a lot like Stuart Smalley from the Saturday Night Live skits of the 1990s (and I hope that none of my former colleagues are reading this!). Where Al Franken, as Stuart Smalley, would stand in front of his mirror and say “I’m good enough, I’m smart enough, and doggone-it, people like me”, the account executive stands in front of a (metaphorical) mirror and says something like “I’m a good enough salesman, I’m smart enough to control this sales cycle and doggone-it, Company X will buy product from me”.

The basic problem is this: Company X has all of the money, Company X controls the meeting calendar and clock, and Company X has the ultimate, and only binding, say on whether or not a deal is done. In other words, the Golden Rule restated: “They who have the gold, make the rules”. Over the last hundred years or so, thousands upon thousands of books have been written, seminars delivered, and even scientific research published, in an attempt to refute or obscure this basic fact – all other things being equal, in a negotiation of dollars for goods and/or services, the party or parties with the dollars have the upper hand.

In the end, as a salesperson, the quality or your relationship with the customer, the strength of your close, or the value of your solution is not as important as internal company politics and finances, the vagaries of their legal department, the competitive landscape the company lives in and/or the macroeconomic tide that the company is riding on. Despite what neoclassical economic theory says, individual actors/companies are not rational decision makers, nor do they always act in accordance with either their short- and/or long-term interests.

It turns out that for essentially all of the modern medical era (whether you want to start that with the first operation to use ether (1846), the introduction of sterile technique (1867) or the first use of antibiotics (1930), providers were not rational decision makers either. During this period, medicine was largely practiced by ritual, superstition and tradition. Dr James Bagian has a fascinating, and scary, story from his surgical training where he was taught by a senior surgeon that “the only way”, with strong emphasis on only, to close a particular abdominal incision was with a suture of specific shape, geometry, size, and stitch. Upon completion of his training, he then went to an institution across town and while closing the same type of abdominal incision proudly announced to the primary surgeon the shape, geometry, size and stitch to be used. He received a withering stare and was told that “the only way”, strong emphasis on only, to close this type of incision was with a suture of a completely different shape, geometry, size and stitch. A few miles of distance within the same city dictated two contradictory courses of care, based solely on the capricious rituals, superstitions and traditions of two senior surgeons.


Ritual, superstition and tradition have been around probably as long (or longer) than there have been humans to practice them. However, while often emotionally comforting, rituals, superstition and tradition ultimately fail to accurately and precisely explain the physical world. As with most things philosophical (at least in the Western world), the Greeks got there first. Aristotle rooted his natural philosophy in sensory observation of the physical world, thus laying the groundwork for the rise of empiricism in 17th and 18th century Europe (via Medieval Scholasticism, oops!), culminating in Charles Sanders Peirce’s formalization of the modern scientific method based on cycles of hypothesis-generation by generalization, hypothesis-testing by observation and hypothesis-refinement by discussion. In other words, there is only one way to close that abdominal incision, and the correct observational tools and analytical frameworks will identify the correct shape, geometry, size and stitch to be used.

Evidence-based medicine is the practical application of the scientific method to patient care. The emphasis on practical is crucial as the scientific method provides little clinical benefit where observations are too sparse, existing analytics too crude and/or prevailing hypotheses too weak. Therefore, “(e)vidence based medicine is the conscientious, explicit, and judicious use of current best evidence (emphasis mine) in making decisions about the care of individual patients.”

While evidence-based medicine is neither a scientific nor a philosophical revolution, it is a medical revolution. By itself, it will undoubtedly vastly improve and standardize the quality of healthcare and health outcomes. But the chaos and energy that impel revolutions is nearly impossible to harness, there are inevitably unintended and unanticipated consequences (lo and behold Adam Smith again).

Pay-for-Performance in healthcare is one such unintended consequence. Codified treatment guidelines, whether as checklists, protocols or order sets, are essential to the practice of evidence-based medicine. Implicit in the creation of a guideline is the establishment of at least one, and more likely, many goals. With the existence of a defined goal, all of the tools of the disciplines of performance management and performance measurement may be brought to bear.

These are well understood disciplines in the business world and for-profit health insurance businesses were quick to realize that the tables had once again turned, this time well in their favor. The quality of healthcare delivered by providers could now be quantified, “performing” and “non-performing” providers could now be identified through a simple post-hoc analysis of their performance measures. Surely, the insurers reasoned, non-performers should be penalized. After all, the performers are just doing their job, no reason to pay them more. These penalties are known as “withholds” amongst providers, while payers call them “performance incentives”.

In the Mutual Assured Destruction (MAD) scenario of the 1990s and early 2000s, neither payer nor provider could afford the financial and political costs of being perceived by the court of public opinion as having walked away from the negotiation table. This insured that both parties were aligned in achieving a mutually-agreeable, and therefore reasonably fair and balanced, contract.

I have put together the cartoon schematic below to graphically represent this scenario. Caveat Lector! This schematic does not include Patient Share or Supplier Share, nor does it purport to chart any actual share relationships, it is intended simply to illustrate my point. The red line in this schematic shows 5 possible outcomes. Payer share $0.50/provider share $0.25 represents the outcome where the providers walk away from the table and are subsequently penalized, while payer share $0.25/provider share $0.50 represents the outcome where the payer walks away from the table and is subsequently penalized.

Payer share $0.75/provider share $0.25, payer share $0.50/provider share $0.50 and payer share $0.25/provider share $0.75 represent the range of outcomes where both payers and providers can meet their costs plus an acceptable, minimum profit margin. The red line here represents the contractually agreed upon payment for any healthcare event or series of events. Providers invest their services, infrastructure and supplies in these event(s) and then look to the payer for reimbursement (note again that the Patient Share and Supplier Share of the healthcare dollar are not included here – those are the subject of future blog series).

The solid red arrows represent pressures exerted by the payers while hatched red arrows represent pressures exerted by the providers. Note how they all conveniently balance out at a 50/50 split (it is my cartoon schematic after all)!

In the Pay-for-Performance (P4P) scenario of today it is a zero-sum game and the court of public opinion is currently leaning heavily towards penalizing non-performers. This dramatically changes the cartoon schematic.

Note that now at every point along the blue line payer share + provider share = $1.00. This is what makes it zero-sum. Note also that the line runs all the way from payer share $1.00/provider share $0.00 to payer share $0.00/provider share $1.00. However, because existing negotiated contracts sat somewhere between payer share $0.75/provider share $0.25 and payer share $0.25/provider share $0.75, there is essentially no outcome below payer share $0.25/provider share $0.25.

Furthermore, P4P is implemented as a withhold for non-performers effectively shifting the negotiation pressure significantly towards the payers advantage (i.e. towards payer share $1.00). Additionally the withhold penalty is supported by the weight of public opinion and the net effect is to dramatically increase the pressure which payers can exert at the negotiation table (represented by the large blue arrow). Once again, providers are getting shoved around at the negotiation table, although this time, the long-term outlook is significantly worse for providers than it was in 1990s.

More about that in my next post in this blog series – “MAD, Stuart Smalley and Unintended Consequences: What happens when Providers are Forced to Toe the Line (Part II of IV)”. Part III of the series will discuss “Why Payers and Providers Must Align”, and finally Part IV will explore “Where Business Intelligence and Data Warehousing Intersect with Payer-Provider Relations”.

For now though, I’d love to hear your thoughts and feedback on Part I.

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