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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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.