Changinghow doctors, hospitals, nursing homes, and other providers are paidis central to saving money and improving quality in health care.(Photo: Shutterstock)

Health-policy experts have long debated whether better outcomes and lower costs are achieved byputting more consumer “skin in the game” or by changing how providerssuch as hospitals and doctors are paid. It doesn't have to be oneor the other, but it's becoming increasingly clear that if forcedto choose, we should focus mostly on the incentives for providers.

A provider-centric approach to improving quality and reducingcosts is both hard-headed and soft-hearted. The hard-headed partreflects the accumulating evidence, including in a recentstudy of MRIs and a brand new study of nursing homes, that hospitaland doctor incentives matter more than consumer cost-sharing inaffecting overall health-care spending. Basically, in health care,we mostly get what the doctor ordered.

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Focusing on provider incentives is also soft-hearted. The morewe lean on putting consumer skin in the game, the higher the risksto family budgets from health-related surprises.

The new study, by Martin Hackmann of UCLA and Vincent Pohl ofthe University of Georgia, shows that Medicaid is a key player inthe market for nursing homes: The program pays for about two-thirdsof all days spent in these facilities.

The study uses comprehensive data on 1.4 million skillednursing-home stays between 2000 and 2005 in California, New Jersey,Ohio and Pennsylvania. It takes advantage of two facts. First,Medicaid payment rates to nursing homes tend to be lower, by about20 percent in the sample used, than private payers'. Second,Medicaid patients generally have minimal or no cost-sharing fornursing-home stays, whereas private payers typically havesignificant cost-sharing, so the incentives for consumers are muchdifferent depending on whether Medicaid is paying or not.

The study reaches three core conclusions. First, nursing homesare more likely to discharge Medicaid patients (for whom theyreceive lower payments) when they are at or near capacity than whenthey are not. The financial incentives thus seem to influenceprovider behavior: Nursing homes discharge Medicaid patients tomake room for better-paying private patients, unless they haveenough room for both.

Second, earlier discharges of Medicaid patients when nursinghomes are full don't seem to harm the patients — in terms ofmortality, rehospitalization or other measures. The implication isthat many nursing-home stays are unnecessarily long, since earlierdischarge doesn't carry negative consequences and since Medicaidpatients are held longer when other beds are available at thenursing home. (One could perhaps argue that the evidence just showsthat nursing homes are properly discharging patients only whenthey're ready, but the authors try to adjust for this possibilityin various ways. Fundamentally, Medicaid patients are unlikely tobecome magically healthier just as other available beds in thefacility disappear.)

Third, the authors extrapolate from their statistical analysisto assess changes in both provider incentives and consumercost-sharing. In particular, they examine increasing costs forpatients. They then compare the impact to a change in how thenursing homes are paid, moving partially away from the currentstructure of a payment per day (which encourages longer stays) andinstead making part of the payment a lump sum per admission. Asthey conclude: “providers react more elastically to financialincentives than patients, so moving to episode-based providerreimbursement is more effective in shortening Medicaid stays thanincreasing resident cost-sharing.”

The numbers are striking: Estimates suggest that taking 11percent of the Medicaid payment and giving it to nursing homes upfront (which then attenuates the incentive to extend stays) wouldreduce the average Medicaid stay by about a quarter, from 32 weeksto 24 weeks, and save more than $1,000 per stay.

We are in the early days of changing how Americans pay forhealth care, moving away from fee-for-service payments and towardpaying for value. But the results of studies like this stronglysuggest we should keep at it: Changing how doctors, hospitals,nursing homes, and other providers are paid is central to savingmoney and improving quality in health care.

Read more: 

• Consumer research, focus groups part of healthsystems' improvement plan
• Use of alternative payment models continues toincrease
• Changing the basis of payments: Driving sustainableinnovation in health care

This column does not necessarily reflect the opinion of theeditorial board or Bloomberg LP and its owners.