My colleague Joanne Kenen ended a post earlier this week with the thought, "It's the Incentives, Stupid!" MedPAC basically reached the same conclusion (albeit worded more diplomatically) in its June report, Improving Incentives in the Medicare Program. I already posted on Accountable Care Organizations and on how Medicare can bring about changes in physician training, particularly residencies, to further our national goals of improving primary care and care coordination across settings, in and out of hospitals. Today I'll conclude with a look at incentives for physicians and beneficiaries.

"Incentives matter" is a basic rule of economics. All other things equal, when the price of a good or service goes up, people buy less; when the price goes down, people buy more. Yes, there are exceptions. As Mark Twain summed it up, "...in order to make a man covet a thing, it is only necessary to make the thing difficult to attain." (Hat tip to Dan Ariely's Predictably Irrational.)  Alas, medical imaging is not difficult to attain (if your are insured). But I'm getting ahead of myself.

On the supply side, if the price of something goes up, people will produce more to earn more. If the price drops, people will either produce less so they can devote their time to other things (whether relaxation or producing something more profitable) or they will produce more to try to maintain the income they had under the old price.

Let's look at the supply side. I wrote about imaging recently, so let's start there. 

MedPAC found that patient episodes with a self-referring physicians (defined as those who perform at least 50 percent of the imaging they order) were more likely to receive at least one imaging service compared to patient episodes with no self-referring physician. The findings were statistically significant for 21 of the 22 disease episodes studied. 

Imaging services are well reimbursed by Medicare. Doctors who can both order and perform them seem to do so quite a bit. MedPAC considers, but does not recommend, two solutions. The first is to "encourage greater adherence by physicians to appropriateness criteria developed by specialty societies." The second is to "increase the size of the unit of payment in the physician fee schedule to include bundles of services that physicians often furnish together or during the same episode of care."

I'm in favor of appropriateness criteria for everything in life. Yes, there should be exceptions allowed for shades of gray. But if numerous studies have proven that something is not clinically effective, it shouldn't be covered. If something is expensive and only as effective as an older option, we should consider cost sharing for the expensive option. In promoting adherence to evidence-based guidelines, reform-minded physicians sometimes hear their colleagues say, "That's not the way we do it here." That's not a good enough answer.

The second solution suggested by MedPAC would better address the price incentives for physicians. We should give physicians the benefit of the doubt: Medicare does not pay well for E&M (evaluation and management) services, ie. regular office visits or time consuming conversations about treatment alternatives and prognosis. Additionally, it can be easier for a doctor to do something than to send the patient elsewhere. The doctor can expect nearly 100 percent patient compliance and there's no need to go tracking down results for tests or imaging performed somewhere else. 

But what MedPAC is proposing is quite similar to what we do for inpatient hospital stays, so it shouldn't be viewed as radical. Medicare pays based on diagnoses, not (with some special cases) length of stay. It doesn't matter whether the stay was five days or eight days. If we simply reduce the payment for imaging, we run the risk of encouraging more tests as those who self-refer attempt to maintain their income. We need to change the incentives.

So let's think about how to blend the solutions. How about moving physicians to a bundled episode payment that incorporates appropriate image usage, in line with the criteria developed by specialty societies. That will right the incentives for the docs, and result in more quality health care, instead of more services. It could also reduce patients' exposure to radiation. It's the incentives, smarter.