By Anthony Ogorek
Buffalo, NY – There is an old saying that "you get what you pay for." In our line of work, which often times makes astrology look respectable, we like to say that you get what you incentivize. Most of the challenges that America faces today are not by any means intractable. They are just incentives improperly applied.
One of the best examples of misapplied incentives comes from the securities business. For as far back as anyone can remember, the securities business was known as a transaction driven enterprise. In other words, the only way a stockbroker got paid, was by buying or selling a stock or bond. Hence, there was a tendency for transactions to be done not because they made financial sense for the client, but because they made financial sense for the broker.
Gradually, this approach to investing is being replaced by what is known as an AUM model for assets under management. Under the AUM model, an advisor is paid not for the number of transactions that are made, but by the performance of the portfolio. If the account balance goes down, the advisor makes less and vice versa.
It is apparent that under an AUM model, the interests of the advisor are aligned with those of the client, which is as it should be. Not everyone has adapted the AUM model, but a sufficient number of clients appreciate the fact that their advisor's economic interests are aligned with their own.
This, unfortunately, is not the case in the medical field. There is a great debate going on right now in Congress concerning how to cope with the staggering cost of dispensing medical care in this country. What is most disconcerting is that no other country spends as much on health care as America does, on a per capita basis; and our results are no better, on average, than countries that spend considerably less.
In all of the commentary on this debate, we hear precious few words on resetting current incentives to achieve the goals we all favor. In our experience, most physicians are altruistic individuals who want to do the right thing for their patients. Unfortunately, the incentive system that they function under creates a tremendous amount of waste.
In essence, physicians are compensated like the stockbrokers of yore in that brokers were paid by the transaction, and the physician is paid by the procedure. If we desire a moderation in the cost of health care, we need to reset the incentives to diminish the number of unnecessary procedures. We need to compensate many of our health care professionals not by the procedure, per se, but by the outcomes that they achieve. This was done in the securities business, and I imagine that something similar can be achieved in medicine.
For this to work, the physician must also have an incentivized patient. We believe that if the incentives for physicians as well as their patients are properly aligned, both parties will act in their respective self interests.
To incentivize patients, we must change "health insurance" contracts to cover only expenses that exceed a certain threshold. New contracts would be cheaper than they are today. Employers could rebate the difference in premium back to the employee. The employee would then be in a position to negotiate with the physician for direct payment of first dollar costs.
Physicians would accept lower fees because their collection costs are less. Patients would have a real financial interest in whether a procedure was worth the cost, and capitalism with a small "c" would again be injected into a system that is far too wasteful and inefficient. In the end, all of us get what we incentivize. Why continue to incentivize waste in our medical system?
Listener-Commentator Anthony Ogorek is principal of Ogorek Wealth Management in Williamsville.
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