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August 8, 2023

Part 2: Perverse Incentives & Health Care

Written by:  Carl Byron, CCS, CHA, CIFHA, CMDP, CPC, ICDCT-CM/PCS, OHCC   

This article follows The Cobra Effect article also written by Carl Byron.  Whether it is the Cobra Effect or Perverse Incentives, gaining insight into these “syndromes” can help administrators minimize negative unintended consequences. 

The Perverse Incentive or Cobra Effect?

Although the Cobra Effect and Perverse Incentives terms are loosely used together; they actually are different.  A perverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentionally rewards people for making the issue worse. Now, let’s take a closer look perverse incentives.

The Oxford Dictionary defines “perversely” as “in a way that shows a deliberate and obstinate desire to behave in an unreasonable or unacceptable manner; “in a manner contrary to what is expected or accepted.”

Perverse incentives arise from real or imagined problems or constraints from honest workers and intimate knowledge of gaming the system for the unscrupulous ones. When any organization’s people do not understand the environment, capabilities, technology and impact of external forces, they can and do make plans which are incomplete. If they do not involve the people who are the experts in the areas of concern the plan may already be doomed or “dead”.

Health Care Examples of Perverse Incentives

  • Physician compensation arrangements incentivizing doctors to order diagnostic tests (result is increased revenue to the organization, increased provider wages but contributes to over utilization and health plans rate hikes).  Also, because physicians are paid for doing things, they are being incentivized to provide services patients might not need.
  • The hospital offers a monetary bonus to workforce members with perfect attendance, resulting in a dramatic reduction of absenteeism.  This is what the company intended, so the incentive worked.  Now, did the hospital set-aside the necessary bonus funds in the budget?

Cobra Effect with a decision tree extension - a self-initiated Perverse Incentive

This is a scenario most of us have experienced or at least can relate.

  • You’re late leaving home for work.  At the end of the street, you can take a right or left to get to work. You decide to take a right (which is a little faster than taking a left) and drive about 50 feet and pow – an accident happens just in front of you!  Lucky you were not on time (it could have been you) – but now you look in the rearview mirror and see that if you had turned left instead, green lights as far as you can see with virtually no traffic.
  • Walking into work, the boss catches you and states your presentation has been moved up to later this morning and must be done ASAP.
  • Irritated, you finish the presentation and, in your hurry, decide to take your anger out on the project, making it sound unnecessarily aggressive.
  • You present later that morning and at least some of the wording irritates the audience. So instead of showing your superiors you have a comprehensive plan with considered solutions, you have now just decreased their confidence in you, and they tell you so.
  • Now you are into damage control and rebuilding your image.

Decisions we make are based on any number of variables (depending on circumstances, knowledge and capabilities): but in the scenario above, we only have ourself to blame.  The presentation affected more people negatively than just you or your time. Was it you? Was it chance/fate? Where was the perverse part inserted?

Even without more detail we can say it at least began with being late for work (lack of morning time management) and the problem became compounded when the decision was made to take that right at the intersection. Then more poor decisions were made due to controlling your frustration and changing the approach on your presentation, resulting in more trouble.

Stuff happens – but what mitigating factors, if employed, could have produced a better outcome?  Was this an automatic Cobra Effect scenario? Perhaps not. This gets into another gray area, mitigation.

We are already late for work and know it: you still take the right, because it has proven to be faster in the past. The accident still happens. Now what?

  • Call Your Boss - tell s/he you are at the scene of an accident.
  • Get ahead of any impending situation by asking if there is anything pressing.
    • Then you are informed that your presentation is moved up to that morning.
    • Ask if there have been any changes, updates or news you need to be aware of.
  • Use your cell to Email or call others in your immediate circle so they know you are stuck on the road.
  • As soon as you arrive, seek out your boss and let s/he know you arrived.

Now for that presentation. Only the boss knew the presentation was moved.  Pause, collect your thoughts and knowing most of the presentation was done already, modify your approach to meet the tight deadline and present it with passion.  The day may not have gotten easier but it certainly got BETTER: and in the midst of it all, was a successful day.  Your boss will notice your resilience.

This scenario is so minimal it could pass as just another day in the life of: but it shows the results of small decisions and how one failure can snowball into several or many depending on the methodology used to solve it.

Do any of these effects absolutely require a bad actor? No. With getting to work, the problem was we were late: the solution not only made us later; it had a downstream effect of making a poor presentation choice that to this point we were pretty well prepared for.  There may be any number of variables that must be considered and discussed but there are even “sub-variables” which can still take the human element out and produce greater negative outcomes even when the designers of the plan or incentive have only best interests at heart.

Where Do we Go from Here?

Avoid the Fire! Ready, Aim syndrome

If dedicated workers possessing expertise in his/her field are left out of the drafting phase but are given a plan with orders to just “make it happen”, the executors of the plan may, even though they have the best interests of the organization at heart, feel forced to cut corners or disregard some issues in order to be compliant with the plan or policy forced on them. I call this the Fire! Ready, Aim syndrome.

The workers are forced onto a known undesirable track but their superiors will not hear counter arguments. These workers rather than implement the plan fully (compliant), implement the plan arbitrarily (perversely). This plan, whatever it was set up the perverse incentives by not looking at critical elements to ensure compliance. The workers were forced to perversely execute the plan.

The unethical workers are far worse and often cause far more disruption and trouble that are longer lasting and openly invite criminal investigations and prosecutions rather than corrective actions. Although in this scenario the perverse incentive is prewritten in the plan (due to the organizers’ omissions) the perverse incentive is immediately pursued. A workable, compliant result is not even considered.

About the Author

Carl Byron is part time on the professional staff of the American Institute of Healthcare Compliance and a full-time health care auditor for the Department of Defense.  He is a certified coder with AAPC and AHIMA, and is certified by AIHC in compliance, auditing, investigations, clinical documentation improvement and as an ICD-10-CM instructor.

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