Skip to main content

Time to end the incentives to overmedicalize

In his book Being Mortal, author/physician Atul Gawande complains of “overmedicalization” in the US health care system, our pattern of opting for expensive and invasive medical procedures when actually doing less would lead to a better quality of life at less cost.

A related and frustrating pattern is that public and private health insurance will pay for expensive medical procedures when far less costly non-medical approaches can fix or prevent the underlying problem. For instance, the government, through Medicare and Medicaid, is willing to pay tens of thousands of dollars repairing a hip fracture after an elderly person falls, and thousands more for a nursing home if that person lacks the resources to remain at home. Yet funds are often not available to provide apartment modifications such as grab bars to prevent falls, or to cover social services and better transportation that can make less-expensive recovery or aging at home more feasible.

Why does this happen? An important reason is that economic incentives are awry.

For instance, the cost-benefit calculation for non-health spending typically does not fully include potential health cost savings It’s a no-brainer to spend money on modifying apartments in a government-assisted housing complex to reduce falls if that would pay for itself many times over in reduced Medicare or Medicaid spending. But because the modification is a cost to the housing authority with no increase in revenue, the landlord’s accountant is likely to declare the modifications “uneconomic.” Not including the benefits of reduced health or housing spending can likewise lead to a social services department not providing the help needed to enable a person to age at home rather than in an expensive nursing home.

It might seem simple enough for agencies to share information in order to take into account these benefits, and even for a health agency to “invest” some of its budget in housing or social services in order to reduce its own costs. But that is rarely easy. Agencies tend to be silos, lacking incentives to work with other agencies, and are reluctant to admit that some of their money might be better spent within another agency. In federal and state government, this reluctance is usually exacerbated by the structure of committees of jurisdiction –one committee resists sharing budgeting authority with another.

Payment regulations and professional licensing requirements often compound the incentive problem. A hospital physician may appreciate that it makes both medical and economic sense to help coordinate housing or care services in order for a discharged patient to recover quickly and return to work. But private and public insurance rarely pays for non-medical services, even when they hasten recovery. Moreover, if the medical staff spends time on the coordination of those non-hospital services, it won’t be long before the chief financial offer starts to complain. Meanwhile, in an attempt to maintain high standards of quality – and to protect jobs – many routine health-related services, such as actually placing pills into the hands of an elderly patient or monitoring certain vital signs, are often restricted to highly trained and licensed professionals. The result: alternatives to costly hospital care end up being unnecessarily expensive.

What can be done to realign economic and bureaucratic incentives to help reduce costs and overmedicalization? It’s not easy but some strategies are promising.

One approach is counter-incentives to induce more sensible patterns of behavior. An example of this is the hospital “readmission penalty,” included in the Affordable Care Act, which works like this: For certain medical conditions, such as heart attacks or pneumonia, if a hospital discharges a Medicare patient and that patient is readmitted to any hospital within 30 days, then the discharging hospital is essentially fined by Medicare. That makes hospitals focus on what happens outside their walls, not just within them. Indeed, the penalty is beginning to push many hospitals to explore ways they can help improve the recovery of discharged patients by working with housing and social services, and increasingly with community-based organizations so that there is patient follow up.

An attractive practical feature of the readmission penalty incentive is that it does not require money to be actually spent by one silo (say, a housing department) to reduce costs in other (Medicare). Rather, the penalty gives hospitals the incentive to improve their bottom line by devoting the time of some of their personnel to help provide services in other, non-medical sectors. That’s helpful because it avoids the bureaucratic resistance to moving money between agency silos.

Another approach is through the use of waivers in federal programs, which can soften silo walls by permitting ground-level experimentation rather than mounting a futile frontal assault. For instance, the Medicaid program allows states to request from the federal government modifications of the rules governing the way money is used and the populations covered. While these so-called “1115 waivers” generally apply only to revisions and budget flexibility within the health sector,  waivers and federal demonstrations programs are now also being used in limited ways to blend some health and housing money. Moreover, the federal Department of Housing and Urban Development, and the Department of Health and Human Services, are jointly conducting demonstration projects that combine some health and housing funds in a voucher-style manner. These demonstrations enable people to use Medicaid money for community-based housing and social services that enable patients to move from expensive hospitals and nursing homes into a community setting.

True, small changes like the readmission penalty, or using waivers, are a very limited and indirect way of addressing the institutional silos and perverse incentives that get in the way of using funds in the most cost-effective way. But these small steps do permit data to be collected that can be used to make the case for larger change, and they also build constituencies that press for more rational incentives. Occasionally the planets do align and more sweeping change is possible. But unfortunately in our health system, getting the right incentives in place will continue to require incremental steps.


Get daily updates from Brookings