Key Economic and Ethical Issues in Healthcare Business Models

The historical context of commercializing medicine and its ethical implications within for-profit healthcare have sparked decades-long discussions. The convergence of profit-driven medicine and non-medical objectives challenges healthcare professionals in for-profit healthcare settings. As for-profit hospitals and corporate healthcare grow in prominence, addressing these issues becomes paramount due to healthcare's substantial contribution to GDP.

The healthcare industry is a complex ecosystem with diverse stakeholders, including patients, providers, insurers, pharmaceutical companies, and governments. Balancing these interests while ensuring equitable access to high-quality care poses a significant challenge. Economic considerations in healthcare, tied to matters of life, add to the complexity. This text aims to offer a concise understanding of these challenges to all stakeholders by exploring topics like funding, financing, pricing, equitable provision, competition, intermediaries, payment models, adverse selection, and ethical dilemmas related to equity and fair pricing in healthcare.

It's worth emphasizing that the individuals and entities within the healthcare system display a spectrum of behaviors, encompassing virtuous dedication to profit-driven decisions. This is a common characteristic across various sectors of the economy. Therefore, this text refrains from passing judgments on specific actors and rather acknowledges the diverse array of behaviors within the healthcare sector. However, it aims to shed light on some classical economic theories and business modeling practices that shape the discussions stemming from the intersection of for-profit motives and ethical concerns in healthcare.

Principal-Agent Conflict

The principal-agent problem is a pervasive issue across various sectors, and it arises from the inherent imbalance of knowledge, information, and interests between the principal and the agent. This misalignment often stems from the differences in information access, motivation, and goals of the two parties involved. The principal, often possessing less expertise or access to specific knowledge, relies on the agent to act in their best interest. However, agents may be driven by their self-interest, such as financial gain, job security, or career advancement, which can lead to actions that do not align with the principal's goals.

Let's delve deeper into this concept and explore more examples to illustrate its prevalence and underlying causes. Before focusing in healthcare, let me cite a few obvious examples:

·????? In the financial services industry, the principal-agent problem occurs between investors (principals) and their financial advisors or fund managers (agents). Investors trust their advisors to make investment decisions that align with their financial goals, but advisors may be motivated by commissions and fees.

·????? Within corporations, shareholders (principals) entrust company executives (agents) with the responsibility of managing the company in their best interests. However, executives may pursue strategies that prioritize their compensation and job security over shareholder value, leading to agency conflicts.

·????? When individuals hire lawyers (agents) to represent them in legal matters, the principal-agent problem can emerge. Clients rely on their lawyers to provide expert advice and act in their best legal interests, but lawyers might have financial incentives that encourage them to prolong cases or engage in unnecessary legal procedures, increasing costs for clients.

There are many other examples (e.g. politicians, car mechanics etc.). In healthcare, this conflict is often seen in the relationship between patients and healthcare providers. Patients rely on providers to deliver appropriate and cost-effective care, but providers may have incentives to over-treat or overcharge due to the predominance of fee-for-service payment models. This can lead to unnecessary tests and procedures, driving up costs.?

In summary, the principal-agent problem is a widespread issue across various sectors, driven by the disparity in information and incentives. Healthcare is not different. Recognizing and addressing these conflicts of interest is essential to ensure that the actions of agents align with the best interests of the principals they serve. Strategies like transparent communication, regulatory oversight, and performance-based incentives can help mitigate this problem in different contexts.

Payment Models

In a recent lecture by Professor Guy David at the University of Pennsylvania, I was introduced to Harold Miller's framework, "From Volume to Value: A Better Approach to Healthcare Payment." This framework, illustrated below, simplifies the discussion of healthcare per capita costs.

Using a mathematical trick, it facilitates the examination of components contributing to per capita healthcare costs (Healthcare costs divided by total population). To achieve sustainability, the focus should be on optimizing the right-side ratios, such as Prevalence of Conditions per Population and Episodes per Condition. This approach would allocate more funds to reduce specific conditions (e.g., diabetes) and help patients manage their health, thus decreasing acute episodes, which drive the majority of healthcare costs. Capitation and Condition-adjusted Capitation would be the preferred payment models for this vision of healthcare.

Conversely, the "Fee for Service" model, where providers are primarily compensated for the volume of services rendered, can incentivize overutilization and may not prioritize care quality. To mitigate the Principal-Agent conflict, there's a gradual shift toward value-based care models. Transitioning from fee-for-service to outcome-based models encourages providers to focus on quality and cost-effectiveness, potentially reducing overall healthcare expenses. Bundled payments can also align provider incentives with long-term patient health, though stakeholders' resistance, who fear revenue losses, needs addressing.

A McKinsey article published in December 2022, titled "Investing in the Era of Value-Based Healthcare," brings forth encouraging insights. It underscores a substantial uptick in investments within the realm of value-based healthcare models, with a particular focus on the United States. This surge is observed in both commercial and government-funded healthcare services. While primary care remains a central area of emphasis, the article highlights the increasing prominence of several specialties, including nephrology, oncology, orthopedics, and numerous others.

The driving forces behind this upward trajectory are multifaceted. They encompass the improved utilization of risk and prediction models, a shift towards cost-efficient locations and facilities, incentives to reduce readmissions, a reduction in variable costs within specialized medical fields, and a more judicious balance between invasive and conservative treatment options. Furthermore, the growing reliance on data and digital technologies is fostering a healthcare system characterized by increased transparency and a commitment to delivering value-based care.

Pricing

Healthcare pricing is complicated due to factors like price opacity, discrimination, and medical innovation costs. Price discrimination, charging different prices to various individuals or groups, can result in inequities in care access, particularly for those with limited purchasing power. Determining value for Health and Life involves moral and ethical considerations, further complicating healthcare pricing.

The lack of pricing transparency, a key component of “perfect competition” according to Economic Theory, poses a significant challenge, making it difficult for patients to find accurate information about medical costs. This opacity hampers competition and informed decision-making, leading, in some cases, to surprise bills and financial strain. Price disparities exist even within the same region due to provider contracts, reimbursement rates, and negotiation power differences. These disparities affect care access and outcomes.

Balancing equity and medical innovation are challenging, as policies to redistribute resources to underserved populations may discourage innovation. Pharmaceutical and medical device companies, for instance, invest heavily in research and development to develop life-saving treatments, requiring a balance between fair pricing to continue its R&D investments and ensuring access for all.?

Administrative Costs, Intermediaries, M&A and Monopolies

Intermediaries like insurance companies and pharmacy benefit managers complicate healthcare pricing and access, often prioritizing their interests over consumers'. Multiple intermediaries lead to high administrative costs, diverting resources from patient care.

A recent article in The Economist (Oct 8, 2023) revealed how insurers, drug distributors, and pharmacy-benefit managers profit from the complex US healthcare system, increasing their combined revenue share from 25% in 2013 to 45% in 2022. Despite not directly serving patients, UnitedHealth, the largest player, reported revenues of US$ 324 billion and a US$ 486 billion market cap in 2022. The article highlights vertical integration and potential monopoly practices inflating healthcare costs. Monopoly issues, although not unique in healthcare markets, must be addressed to prioritize population and patient needs.

Other Economic and Equality Issues for Healthcare

The impact of adverse selection on healthcare economics is another critical issue. Adverse selection occurs when high-risk individuals disproportionately select specific insurance plans, leading to imbalances, increased premiums, and financial strain on the insurance market. This, in turn, results in rising healthcare premiums, making insurance less affordable for healthier individuals, ultimately causing them to opt out of coverage, further exacerbating the problem.

In addition to adverse selection, healthcare grapples with a myriad of other economic and moral challenges. The relentless demand for healthcare services against the backdrop of finite resources and budget constraints presents an overarching dilemma in the realm of healthcare economics. Many healthcare systems are plagued by inadequate public funding, resulting in protracted wait times, restricted access to care, and glaring disparities in health outcomes.

The allocation of funds by governments often proves to be an arduous task, giving rise to concerns of fairness and equity. Furthermore, access inequalities persist as socioeconomic factors, geographic disparities, and systemic biases conspire to perpetuate disparities in healthcare outcomes, particularly among vulnerable populations. These issues collectively underscore the complex and multifaceted nature of challenges facing the healthcare sector in most countries.

Questions for Entrepreneurs and Intrapreneurs

Part of many innovations in healthcare are related to how they both improve outcomes while at the same time improve total cost of healthcare. Based on the text above, I believe that entrepreneurs leading startups or intrapreneurs should answer some of the following questions as they propose their business plans:

• Does the innovation/solution/business plan reduce prevalence of a condition within a specifc segment of the population?
• Does it reduce the number of episodes for a certain condition during a period of time?
• Does it provide previsibility and predictability in terms of a range of outcomes of a specific intervention?
• Are payments mostly related to volume or value or a mix of both?
• How does it foster inclusivity, equity and equitable access?
• Does it increase or reduce complexity and overhead costs?
• How does it impact total healthcare cost over time? Both in the short and long term

Final Remarks

The healthcare industry is a complex ecosystem with diverse stakeholders, including patients, physicians, providers, insurers, medical device & pharmaceutical companies, and governments. Balancing economic interests with the goal of promoting health and enhancing the quality of life creates inherent challenges. This text discusses key economic and moral & ethical issues related to healthcare business models, such as the principal-agent conflict, payment models, pricing complexities, administrative costs, intermediaries, monopolies, and adverse selection. It emphasizes that addressing these conflicts of interest is essential for aligning the actions of agents with the best interests of the principals they serve, and it explores various economic theories and concepts to analyze the dynamics in healthcare.

Additionally, we highlighted the importance of transitioning from fee-for-service to value-based care models to improve quality and cost-effectiveness in healthcare. It also underscores the difficulties in balancing equity and medical innovation in pricing and the role of intermediaries, including insurers, pharmacy benefit companies and drugstore chains, in inflating healthcare costs. The text touches on issues related to adverse selection, inadequate public funding, wait times, access disparities, and systemic biases, emphasizing the multifaceted challenges facing the healthcare sector.

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