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BUSINESS OF
MEDICINE

Payment

systems

INCENTIVES AND MOTIVATION

By Dana A. Forgione, PhD, CPA, CMA, CFE

People do what we pay them to do. Sounds pretty basic. I often Because that’s what the government is going to pay you to do.
present my students with the following scenario. I’m a Congress- And that’s essentially what the government did when it started
man. I have a large voting constituency. They all need ball-point the Medicare program in 1963 based on cost reimbursement. It
pens. So I got a new law passed that will provide ball-point pens opened a great big valve in the bottom of the U.S. Federal treasury
to all Americans. The federal government is now authorized to and dumped trillions of dollars on the healthcare sector for almost
contract with any manufacturer who will provide pens to the 20 years. Until about 1983, when we started to realize that it was
American public. The government will reimburse all of your costs bankrupting the country.
to produce the pens, including interest on any money you borrow,
a return on equity for your investors, all of your research and de- PRICE-CONTROL SYSTEM
velopment costs, depreciation on your buildings and equipment, So we implemented prospective payment systems (PPS) for
all of your distribution costs. Everything. Now you are all business hospitals, physicians, nursing homes, ambulatory care facilities,
students. What are you going to do? etc. We implemented fixed-fee for service schedules. So, we
I’m usually dumbfounded when they sit there pondering and straightened the revenue curve for providers. Now it no longer
don’t immediately jump at the opportunity. So I prod them a lit- arcs exponentially upward with cost growth. Instead, it is a
tle. What are you going to do? You’re going to sell stock, borrow straight, upward pointing diagonal line — where we pay more
money, build factories, invest in research and development, and for more services provided, but at pre-determined prices. So what
produce the greatest abundance of the most fabulous, high-tech, will you do? Provide more service. So we stopped paying providers
state-of-the-art, ball-point pens you can possibly produce. Why? to increase their costs, and started paying providers to increase

36 San Antonio Medicine • February 2014