Just under 15 years ago, I sat down in a conference room with one of my clients, the SVP of Benefits of a self-insured, Fortune 100 company. Like most large companies (his had about 300,000+ employees at the time), they were focused on reducing their health insurance costs as it had become an enormous line item for them that had the attention of their CEO. My company recently launched a product that helped large employers drive enrollment and engagement in voluntary benefit programs (things like smoking cessation, health risk assessments, fitness contests, nutrition counseling, etc.). Like many companies, my client had very low usage of these programs. I spent a few minutes telling him about our product, thinking that if we could increase usage of these programs, his employees would be healthier, bringing down their insurance costs.

Once I was done talking, he looked at me and told me the thing that large self-insured employers and health plans aren't supposed to say:

"Brian, the average employee's tenure at our company is 22 months. I don't want to spend time investing in driving usage in things that will make my employees healthy only to have them leave and have some other employer benefit from that investment."

And in those two sentences, he articulated the #1 structural problem with healthcare in the United States: incentive misalignment.

Misaligned Incentives

There are three major players in US healthcare: the patient, the provider, and the payer. And none of their incentives are aligned.

Patient: The patient's incentive is to live a long, healthy life.

Provider: The provider's incentive is to have lots of sick patients who need billable treatments.

Payer: The payer's incentive (or self-insured employer) is to cover lots of healthy patients who don’t get sick and don’t need treatment. But only for a short period. They only care if the patient is healthy while they're a member of their health plan. Members typically stick with the same plan for 2 to 3 years. Health plans have extremely high churn rates as employees change jobs, patients fall on and off Medicaid, move to lower-cost Medicare plans, etc. Payers don’t have a financial incentive to invest in the long-term health of the patient. They have no incentive to help the patient live a long, healthy life. In fact, they have a disincentive to invest in the long-term health of the patient if that payoff comes after the patient is no longer a member. This dynamic applies to the provider as well in a value-based care model where the provider is taking financial risk.

To be clear, when I’m talking about incentives, I’m not talking about ethical incentives. Everyone wants people to be healthy. I’m talking about financial incentives. They are not aligned. And that’s a real problem, as payers and providers are businesses that need to make responsible financial decisions.

For business models and systems to work well, they need incentive alignment. Take the iPhone ecosystem as a simple example. The user wants a great phone at a reasonable price with an unlimited number of functions. Apple wants to sell a lot of high-margin phones and high-margin apps. And the app makers want a huge audience to build apps for. It’s not perfect, but financial incentives are generally aligned, so this ecosystem thrives.

In a system full of problems, this lack of aligned incentives is the core problem in healthcare.

We need to get to a system where the entity caring for the patient and the entity paying for the care of the patient is financially aligned with the patient’s incentive to live a long, healthy life.

Solutions

Ideally, the government could help with some top-down structural changes such as incentivizing longer-term health investments through tax incentives, allowing plans to benefit from long-term preventative investments, or possibly universal coverage of some sort and changing the way care is paid for. However, a big change from the government will be difficult and come with its own complex set of sensitive tradeoffs. That said, It seems the use of HSAs, which allow employees to carry tax-free dollars that can be used for health expenses across employers, has expanded. I’m also very encouraged by the Individual Coverage Health Reimbursement Arrangement (ICHRA) that was launched in 2019, set up through a partnership between HHS, the Department of Labor, and the Department of Treasury, which allows employees to pick their plan outside of their employer and get reimbursed by their employer, allowing them to stick with the same plan as they change jobs. We need more of that.

The private sector has a huge opportunity to address the incentive problem through real business model disruption. The word “disruption” gets thrown around a lot, especially in health tech. But disruption doesn’t just happen through new technologies. It happens through fundamental business model transformation that changes the way business is done. The hotel industry wasn’t disrupted by the Internet or even by early Internet companies like Orbitz, Expedia, and Kayak. Those services just changed the way consumers book hotels and the way hotels do marketing. AirBnB was actually disruptive by transforming a gigantic B2C business into a peer-to-peer business. That’s disruption.

Of course, these business model transformations take time, and they almost always start by focusing on a very niche part of the market and scaling up from there. We’re seeing some signs of this in healthcare:

Longevity-focused solutions such as Function Health and Neko Health give the patient more control and take a longer-term, consumer-focused focus perspective on health.

Direct primary care models like Taro Health, where patients pay a flat fee for access to primary care services incentivizing providers to focus on preventative care for the long term.

In 2013, I wrote a post titled 15 Reasons Why Healthcare Has A Business Model Problem. Rereading it today, all of those problems still stand. Healthcare is a uniquely challenging problem for all of the reasons I listed in that post. And one thing I’ve learned over the years is that you can complain about it all you want, but when you have to turn your attention to solutions, you realize there simply are not great answers. It’s just a set of very complex, nuanced, and thorny tradeoffs.

As Charlie Munger said, “Show me the incentive, and I’ll show you the outcome.” The negative outcomes have been evident for years. While many of these approaches are early, and it’ll take time to get real traction, it’s exciting to see entrepreneurs focused on root cause incentive alignment to drive long-term and sustainable transformation. We need it now more than ever.