emanuel_behavioral economics and physician incentives

7/24/2019 Emanuel_Behavioral Economics and Physician Incentives

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Using Behavioral Economics to Design Provider Incentives

that Deliver Higher Quality and Lower Cost Care

Ezekiel J. Emanuela,b, Peter A. Ubelc, Judd B. Kesslerd,e, Gregg Meyerf, Ralph W.

Mullere,g, Amol S. Navathee,h, Pankaj Pateli, Robert Pearlj, Meredith B. Rosenthalk, Lee

Sacksi, Aditi P. Senb,e, Paul Shermanl, Kevin G. Volppa,b,e,h,m

aDepartment of Medical Ethics and Health Policy, Perelman School of Medicine, University of

Pennsylvania, Philadelphia, Pennsylvania; bDepartment of Health Care Management, The

Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania; cFuqua Business

School and Sanford School of Public Policy, Duke University, Durham, North Carolina;

dDepartment of Business Economics and Public Policy, The Wharton School, University of

Pennsylvania, Philadelphia, Pennsylvania; eLeonard Davis Institute Center for Health

Incentives and Behavioral Economics, Philadelphia, Pennsylvania; fPartners Healthcare

System, Boston, Massachusetts; gUniversity of Pennsylvania Health System, Philadelphia,

Pennsylvania; hDepartment of Medicine, Perelman School of Medicine of the University of

Pennsylvania, Philadelphia, Pennsylvania; iAdvocate Physician Partners, Chicago, Illinois;

jThe Permanente Medical Group, Oakland, California; kDepartment of Health Policy and

Management, Harvard School of Public Health, Boston, Massachusetts; lGroup Health,

Seattle, Washington; mCenter for Health Equity Research & Promotion, Philadelphia

Veterans Affairs Medical Center, Philadelphia, Pennsylvania

WORD COUNT: 3,481


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Funding: This paper was partially supported by a grant from the Commonwealth Fund.

Corresponding Author:

Ezekiel J. Emanuel, M.D., Ph.D.Telephone: 215-573-9384Email:[email protected]

Conflict of Interest: Dr. Volpp is a principal in the behavioral economics consulting firmVALhealth. The other authors do not have any financial conflicts of interest.

Some of the ideas delineated here were originally developed for the Kimball Lecture at theAmerican Board of Internal Medicine Foundation meeting in August 2013.
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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ABSTRACT

Behavioral economics can provide insights into how to improve the effectiveness of

physician incentives to deliver higher quality and lower cost care. Lessons from

behavioral economics suggest that the way in which incentives are structured and

delivered can shape behavior, as can thoughtful design of the choice environment

and infrastructure. We discuss nine principles of behavioral economics that can

inform the design of financial and nonfinancial incentives, including inertia, loss

aversion, choice overload, immediacy, and relative social ranking. These well-

accepted principles have been applied widely to improve incentives in areas

including personal health decisions, retirement planning, and consumer savings

behavior, but have been largely ignored in the design of physician incentive

programs. We argue that applying these principles to physician incentives can

improve their effectiveness by making them more salient to physicians and better

aligned with performance goals, without increasing their costs. We offer examples of

programs that apply lessons from behavioral economics and specific design

interventions to boost the effectiveness of financial incentives. The application of

insights from behavioral economics to the design of provider incentives is largely

untested and many outstandingquestions of design exist. We argue that a

systematic approach to assessing infrastructure changes, non-financial incentives,

and financial provider incentives is needed to design effective payment systems that

incentivize high-quality, cost-conscious care.


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The American health care system is undergoing tremendous transition. The

objective of this revolution is to control total health care costs while improving or

maintaining quality of care. A fundamental aspect of the transition is payment

reform.

While fee-for-service payment (FFS) remains the dominant form of payment,

the last few years have seen a major shift away toward alternative payment

methods as highlighted by Secretary Burwells recent announcement that Medicare

and Medicaid will be rapidly moving away from FFS in the next few years. There

now are hundreds of organizations, such as hospitals and large physician groups

functioning as accountable care organizations (ACOs), which are participating in

shared-savings payment programs, in which savings from a calculated baseline are

shared between providers and payers. Still others, including Pioneer ACOs, have

two-sided risk contractsincreasing potential for financial gains if they control

costs, but also taking financial risk if they fail to reduce costs. At the opposite end of

the payment spectrum from FFS are fully capitated delivery systems, of which there

are relatively few.

Optimal provider payments will vary not only with an organizations position

along the payment spectrum but also based on its particular mission, culture, local

competitive environment, patient population, and contractual and financial

relationship with providers. Each mode of payment incentivizes different provider

behavior. Fee-for-service encourages overutilization of treatments, while capitation,

in theory, rewards underutilization. To promote appropriate high-quality

utilization informed by evidence-based guidelines, payers in FFS environments have


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often supplemented their payment mechanisms with pay-for-performance. But to

date, pay-for-performance has demonstrated little effect on physician behavior.1,2

This result likely reflects at least in part the relatively small size of the financial

incentives employed in most pay-for-performance programs to date.

But it may also reflect that most provider payment programs have been

exercising trial-and-error, uninformed by the best science of human motivation.

Generally, efforts to reform provider payment have been built on the assumption

that providers are largely rational and have not utilized insights from behavioral

economics, which has documented many ways that people's behavior does not

conform to rational norms..3,4The principles of behavioral economics have been

successfully used in the design of patient incentives for smoking, substance abuse,

obesity, and drug compliance.5-14Behavioral economics has also emphasized

thoughtfully structuring the choice environment and the use of non-financial

rewards and penalties to shape behavior.3,4,15,16

To facilitate consideration of how behavioral economics could improve

providers economic and non-economic incentives and as well as the practice

environment, we describe selected behavioral economics principles and elucidate

how they could inform the design of provider incentives. This guidance is

inherently preliminary and speculative because there has been little use and

evaluation of behavioral economics in provider payment schemes. We offer a

tentative framework to stimulate more systematic use and testing of behavioral

economics in the design of provider incentives.


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Behavioral Economics Principles: Nine Examples

The scientific understanding of human motivation has evolved over the last

30 years. Previously, much of economic theory was based on the assumption that

providing information to rational actors would usually lead to optimal behavior. In

this framework, the main driver of behavior is the size of the bonus or penalty

relative to the effort required to achieve the goal. More recently, behavioral

economics has revealed systematic ways in which human behavior is shaped not

merely by the size of incentives, but also by their design and how they are delivered.

For example, the same size incentive could have a significantly different impact on

behavior depending on whether it is constant or intermittent, framed as a gain or

loss, presented to people privately or in front of a group, and is perceived as fair or

unfair.15,16Because humans often make decisions that seem inconsistent with

getting the most from a fixed incentive, they often appear irrational from the

perspective of standard economic theory.3,4,17

Another important consideration is that people respond differently

depending on what type of tasks are incented. For pro-social activities, like

charitable giving, providing small incentives is likely to be worse than providing no

incentive at all because this displaces intrinsic motivation without supplying much

extrinsic motivation. In the realm of provider payment we are generally not

discussing small incentives, but this highlights why programs like P4P that are

grafted onto the FFS system may not work well and why alternative designs for

provider payment and the embedded incentives are needed.18


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To illustrate how behavioral economic concepts could be relevant in

influencing provider performance, consider the following nine principles of

behavioral economics (Table 1).

1. Limitations of Information Provision:Although information is necessary

for people to understand their options and to communicate social norms, it is

rarely sufficient to induce behavior change. Smokers know that smoking

causes illness. In fact, smokers may overestimate these risks.19But simply

informing smokers rarely induces smoking cessation. Similarly, menu

labeling is not always sufficient to lead people to significantly reduce the

calories purchased.20Merely telling providers the goal of changes is unlikely

to get them to change.

2. Inertia:When making choices, people often demonstrate a status quo bias,

following habits and settled practices which are typically the paths of least

resistance.21It usually requires explicit efforts and policies, such as

implementing new defaults, to change these habits and settled practices. For

instance, physicians with an order entry system that defaults to generics

rather than brand medications tend to order generics at higher rates.22

Similarly, in the Netherlands, where people must take an explicit action to

register as an organ donor, 27.5% of population does so. In neighboring

Belgium, where people are automatically registered unless they actively

refuse, 98% of Belgians are donors.23

Inertia highlights the importance of setting up providers choice

environments to make it easy to provide high quality, cost-effective care.


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Defaults on electronic health records, physician orders, or office flows should

facilitate achieving performance metrics. For instance, when a systems

oncologists agree to a preferred care pathway, a specific first-line

chemotherapy regimen, and laboratory tests for metastatic lung cancer, it

should be installed as the default in the physician order set within the

electronic health record (EHR); thereby simultaneously reducing the need

for providers to manually input orders and maximizing the likelihood

patients will receive the best care. Changing the choice environment often

requires some initial effort; in fee for service environments there has been a

disincentive to change the choice environment toward high-quality, cost-

effective care. Shifts in payments toward bundles or episode-based payments

and population health will accelerate the use of defaults that can change

settled practice to make it more cost effective.

3. Choice Overload:More choice is not necessarily better. When confronted

with too many selectionsor overly complicated optionspeople often

avoid making choices.24,25 For instance, too many performance metrics, or

too many patient alerts in the electronic medical record, can induce less

rather than more behavior change.26 Choice overload suggests a challenge in

determining the right number of metrics used to determine provider

incentives. Too few can induce providers to focus only on those evaluated

while too many can trigger inertia. Similarly, if clinicians face one set of

metrics from one payer, and another set from another payer, they could face

metric overload that causes them to ignore both sets of metrics.


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4. Immediacy:Immediacy enhances response and delayed gratification dulls

impact. People tend to over-weight the immediate costs and benefits of their

actions while discounting delayed benefits.27Consequently, when providing

the same incentive, delayed gratification is usually less effective than

immediate gratification.28 Similarly, when providing performance feedback,

immediate information is more effective than delayed feedback in inducing

behavior change. The optimal feedback frequency is unknown. Obviously,

the value of immediacy needs to be balanced by the need for sufficient

numbers of cases for statistical precision. Nevertheless, giving clinicians

interim feedback monthly or quarterly, rather than annually, provides them

an opportunity to modify their behavior and get quicker feedback on

whether their modifications improve their performance measurement.

5. Loss Aversion:How people feel about options can be strongly influenced by

whether the options are framed as gains or losses. For example, people feel

more positively about medical interventions described as providing 90%

survival rates than ones described as having 10% mortality rates. Closely

related is the endowment effect. Simply owning somethinga sports ticket

or a mug increases its value to the person above its monetary value. Due to

loss aversion and the endowment effect, people work harder to retain a

provisionally awarded bonus than they do to receive a yet-to-be-awarded

bonus. For instance, teacher performance in Chicago schools improved when

they were awarded bonuses at the beginning of the year that were at-risk

compared to teachers given year-end bonuses.29Similarly, the Massachusetts


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General Hospital used loss aversion by giving an incentive to everyone in one

year so that in the subsequent year it would feel like a loss not to get the

incentive.30,31

6. Relative Social Ranking:People are heavily influenced by their perception

of how their performance compares to those around them. This influence

has been shown in contexts ranging from giving people feedback on how

their energy consumption compares to their neighbors to giving providers

feedback on their relative performance to their peers.32-34Physicians highly

value personal competitive success. This competitiveness can be deployed by

using anonymous rankings or by distributing identified rankings to providers

within ones group, or even to the general public. For example, Dean Clinic

in Wisconsin found that releasing anonymous rankings had little impact on

physician behavior while the release of monthly performance data by name,

visible to every other Dean physician in their division, was much more

effective (Allison Mooney, Dean Health System, personal communication). In

addition, organizational awards, conferred publicly, for outstanding

performance and ranking, emphasize the organizations norms and priorities

while providing status and social recognition for physicians.

7. Goal Gradients:As people approach a goal they try harder to achieve it. This

has been observed with frequent flyer miles, rewards cards, and bonus cards

for free coffee.35 Closely related is the threshold effect in which human

behavior changes after a threshold is reached. For instance, people dont

typically try as hard once they are above the threshold.36 One consequence is


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that incentives may have to increase over time to encourage continued effort.

Thus it can be important to recognize both achievement of absolute ranking

and improvement in the rankings. Otherwise, poorer performers, concluding

they cannot reach the targeted threshold, may become demoralized and stop

trying to improve. Recognition of significant improvement in performance

can mitigate this demoralization.

8. Limits of Willpower:Exerting willpower tires people out and makes them

less likely to exert effort on subsequent tasks.37 Thus, relying on providers

vigilance to achieve optimal performance is unlikely to produce sustained

improvement; providers tire from having to constantly focus and exert

energy. Infrastructure that uses defaults to make the right action the path of

least resistancewill keep providers from having to deplete willpower to

continually remember to make the highest value choice.

9. Mental Accounting and Salience:People react very differently to the same

amount of payment if it is separate and visible as opposed to packaged

together with much larger sums of money.38,39 A $100 incentive is more

powerful if disbursed as a separate check than if it is folded into a paycheck

and electronically deposited into a bank account. A 15.5% sin tax on

unhealthy food is more effective when decoupled from the price of an entre

than when folded into the total price of the dish.40

These behavioral economics principles have been used with great effect in a

variety of contexts ranging from consumer savings behavior, retirement planning,


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personal health behavior, and enrollment in health insurance.14-16,41-45 To date they

have been used by some health systems, but they have tended not to be

systematically incorporated in the design provider incentive programs. However, as

systems try to change provider behaviors to focus more on quality and cost-effective

care, approaches informed by behavioral economics could make provider incentive

and feedback programs more effective and efficient.

Behavioral Economics and the Formulation of Financial and Non-Financial

Incentives for Providers

With few directly applicable studies, delineating the implications of these nine

behavioral economics principles for the design of efforts to influence providers to

provide higher value carewill inherently be theoretical and speculative.

Nevertheless, the principles do suggest at least four broad lessons for designing

such provider-focused initiatives (Table 2):

1. The Limits of Information:Simply providing information to individual

providers about the organizations goals or their own performance is

unlikely to be sufficient to stimulate sustained behavior change.

2. The Limits of Standard Economic Incentives:Standard economic

incentives incorporated into fee-for-service reimbursement tend to

encourage overuse of services and have been highly effective in doing so. P4P

type programs within the US have not been effective in encouraging a focus

on quality and cost-effective care, though much larger P4P incentives have

been effective in the UK.46 Designing financial incentives that account for


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common decision errors will likely have more impact in inducing providers

to focus on quality and cost-effective care.

3. The Importance of Infrastructure:Changing infrastructure to both remove

barriers to optimal performance and make desired behaviors the default can

effectively change behavior often without financial incentives.

4. The Synergy of Incentives:Using non-financial incentives, such as social

comparisons, and leveraging behavioral biases, such as loss aversion and

immediacy, can stimulate behavior change alone and magnify the impact of

financial incentives.

To illustrate one of these lessons, the importance of synergy, Advocate used

to release physician performance quarterly, but, because of immediacy, the results

are now available on-line in real time. In addition, using the power of relative social

ranking, individual performance rankings are visible to all providers in their

practice group. Advocate also holds a public awards ceremony for outstanding

performance annually where, invoking mental accounting and loss aversion, it

distributes paper checks for rewards, including a report on unearned dollars and

what would have needed to occur to receive the additional incentive (Pankaj Patel

and Lee Sacks, Advocate Physician Partners, personal communication).

These principles also suggest four specific interventions in the design of

provider incentives and practice environments. First, the principle of choice

overload highlights the importance of keeping financial incentives simple. Fee-for-

service that incentivizes securing the highest possible RVUs has this virtue. In trying


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to design incentives to reward high quality and cost consciousness, keeping it

simple will be more challenging because of the need for sufficient measures to know

quality has in fact improved.

Second, mental accounting and relative social rank suggest that financial

rewards should not just be folded into a regular paycheck and hidden from both the

recipient and peers. For incentives to have their maximal impact, they should be

given as a separate payment. Payment separated from the routine electronic

paycheck deposit can enhance the impact of the incentive. For instance, the

Massachusetts General Hospital prints checks and mails them home.30,31This allows

the providers family to see the recognition and the financial payment and provide

emotional reward to the provider. This can generally only be done with incentives

that are structured as rewards and not penalties.

Third, it could be important to deliver financial incentives at times when

those incentives are particularly salient. For instance, Advocate pays its incentives

around tax day, April 15th, and the Massachusetts General distributes checks at the

start of December in time for the winter holiday shopping season.

Finally, it is important to align provider financial incentives both with the

incentives of their organization, with those of managers, and ideally with those

faced by their patients. Aligning incentives between providers and their

organizational leadership makes sense to facilitate coordination where there might

otherwise be conflict in the choice of performance metrics and the necessary,

infrastructure changes. Having benefit designs that reinforce the goals of the

provider incentive system might be effective for health metrics, such as weight


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control and medication adherence, that may be more under a patients control than

a providers.

Outstanding Issues in Applying Behavioral

Economics to Provider Incentives

The guidance from behavioral economics on provider incentives leaves much

that is, as yet, empirically untested. Indeed, a major issue is which combination of

infrastructure, non-financial and financial incentives works best in which types of

health care organizations and at what stage along the payment spectrum. It is

unlikely that the same combination of provider incentives will be effective in

shifting physicians from fee-for-service to shared savings models as will be effective

in shifting physicians from capitated models to models that emphasize quality of

care. Determining which combination of incentives is optimal for different

organizations is an important open question.

A second unknown relates to the distribution of incentives between

individual providers and their provider group. Achieving many performance metrics

requires collaboration among providers and not just performance of individual

providers. Yet incentives to individuals can drive individualistic behaviors that are

inimical to the support of the group. Conversely, incentives to groups may not lead

each group member to exert him- or herself as much as under an individual

incentive program. Advocate began providing 70% of the incentive based on the

individual providers performance and 30% based on his or her group. Conversely,

the Permanente Medical Group allocates almost all incentive dollars at the


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department or module level, limits the total dollars to less than 10% of annual

salary, and applies them only to quality and service measures, not cost. It is not

known whether dividing performance rewards between individuals and groups

enhances performance, and whether the 70-30 or 90-10 split is optimal and needs

study.

Third, using incentives to induce cost consciousness raises public concerns

about skimping on care. This may be one reason some health systems have focused

provider incentives on improving quality and patient safety rather than reducing

use of low value services. An important area for future development is to identify

areas in which quality gaps and excessive costs coexist, so that changes in incentives

could produce quality and cost saving outcomes simultaneously. Such examples

might include the care of diabetic foot ulcers, medical interventions that are proven

to be of equal clinical effectiveness in randomized trials but of lower cost, such as

the use of hypofractionated radiation for early stage breast cancer, or in which cost

savings do not affect quality, such as dispensing generics or 90 day supplies of

medications.47,48

Fourth, we should investigate the size of financial incentives needed to

change different types of behaviors. In the Medicare Acute Care Episode bundled

payment model, orthopedists were able to receive a maximum of 25% payment

increase per procedure to improve their compliance with quality metrics.49 Other

organizations have used 2%, 5%, or 20% of base salary, and for each of these

approaches anecdotal evidence points to multiple successes.30Still others have

offered set dollar amounts ranging from $1,000 to $5,000 per physician in annual


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incentive payments. To move from anecdote to science, the association between the

size of incentives and behavior change, and where there are diminishing returns,

needs to be more rigorously evaluated.

There are myriad other issues, three of which we mention here. Instituting

an appeals process for providers is important as a signal that the social ranking and

any other incentives are done fairly. Second is the question of when to retire a

performance metric and its associated incentive. The optimal time is when the

performance is hard wired and has become a habit or default behavior, requiring

little or no willpower for adherence, or when it is literally built into the

infrastructure, as in electronic prescribing. Practices which are supported by

defaults are less likely to regress when no longer directly assessed or incentivized.

Finally, the optimal combination of the different behavioral economics principles is

unknown. It may be possible for health care organizations without significant

financial resources to achieve substantial change in performance by focusing on

infrastructure and non-financial incentives, such as changes in office flows and

public recognition of superior performance, rather than financial incentives. Careful

empirical testing of the potential synergy of different complementary strategies is

imperative.

American health care is undergoing significant change toward a greater focus

on quality and cost-effective delivery of care. Many health systems now have

contracts that link payment to demonstrably higher quality and lower costs. They

are challenged by how to change providers behaviors to align with these new

payment models. Hundreds of billions of dollars are spent annually in the US on


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provider payment with only a small handful of trials and limited data providing

guidance on how to optimally improve the outcomes of the payment system.

Systematically incorporating the principles of behavioral economics could enhance

the impact of provider payment systems to improve quality and reduce costs and

pay enormous dividends. To move off haphazard approaches, we need a systematic

program assessing infrastructure changes, non-financial incentives, and financial

provider incentives so that by 2020, healthcare delivery systems can adopt proven

incentive programs with a much better sense of the likely impact of those programs.


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TABLE 1: Principles of Behavioral Economics relevant to Provider Payment

Principle Description Examples in Health and Health CareLimitations ofinformationprovision

Providing information isnecessary and reflectssocial norms, but is rarelysufficient alone to inducebehavior change.

Smoking: smokers know that smokingcauses cancer but many despite thatcontinue to smoke

Menu labeling: In New York City, therewas no significant change in meannumber of calories purchased beforeand after menu labeling of calories.

Inertia orstatus quo bias

People tend to favor thestatus quo and current

practices rather thaninitiating change.

Generic prescribing: When genericsare the default in CPOE there is a

significant increase in the prescriptionof generic drugs.

Organ donation: When people mustactively sign up to donate organs ornot, such as in the Netherlands 27.5%of population does. In neighboringBelgium, organs are procured unlesspeople actively refuse. Consequently98% of Belgians are listed as donors.

Choiceoverload

Too many choice optionsor too complex choicesinduce paralysis and lackof action. Fewer, simplechoices are more likely toinduce behavior change.

Health plan choice: Choosing from theuniverse of health plans is difficultwithout someone prescreeningchoices and narrowing down thechoice to a smaller number

Immediacy People respond morestrongly to immediateincentives rather thandelayed incentives.

Using the gym: People are more likelyto go to the gym if given feedbacktoday rather than at the end of theyear

Loss aversion People react more stronglyto the same situation,framed in terms of losses,than framed in terms ofgains

Physician bonuses: Paying providers abonus at the end of the year may beless effective than giving them thebonus at the beginning of the year andmaking keeping it conditional onimprovement in performance

Relative socialranking

People care about howthey compare to others

Release of provider performance data:Providers do not want to be viewed as


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especially when thosepeople are known and inclose proximity to them.

a low performer relative to their

peers.

Goal gradientsand threshold

effects

People try harder whenthey are close to achieving

a goal and tend not to tryas hard far from the goal.

Provider performance effort:Providers who are near a threshold

target (e.g. 80% of patients who getbeta blockers) will try hard to getthere; those who are far away willview the goal as too difficult to reach

Limits ofwillpower

Willpower is anexpendable resource. Themore people need toexercise willpower in oneactivity, they less likelythey are to have willpowerin other activities.

Provider effort: Having to constantlyremember to prescribe a generic isless likely to be effective than settingthis up as a default within an EMR

Mentalaccounting andsalience

The incentive is stronger ifgiven distinctly andexplicitly rather thanfolded into a regularpaycheck.

Distributing provider financialbonuses: $1,000 in a separate check ismore noticeable than $1,000electronically deposited as part of apaycheck


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Table 2: Four Lessons from Behavioral Economics Principles

Lesson Description

The limits of information Providing information aboutperformance goals or optimal

performance is likely to beinsufficient to stimulate sustainedbehavior change.

The limits of standardeconomic incentives

Common decision errorssuch asloss aversionpowerfully influencehuman behavior and poorly designedfinancial incentives will be less potentthan ones that account for sucherrors.

The importance ofinfrastructure

Changing infrastructure to bothremove barriers to optimal

performance and make desiredbehaviors the default can effectivelychange behavior often withoutfinancial incentives.

The synergy of incentives Leveraging non-financial incentivesand behavioral biases can bothstimulate behavior change alone andmagnify the impact of financialincentives.


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