Charlie Munger: Show me the incentive and I will show you the outcome.

Most of our healthcare system operates under a model called fee-for-service, where a payer (e.g insurance company) pays a fee for each covered item individually. Under this model, providers (e.g physicians) are incentivized to provide more service or more expensive services regardless of the outcomes.

We need to transition to value based care, where providers are incentivized to provide the best health outcomes at the lowest cost. But this is not as simple as it sounds. An episode of care often is made up of a disparate group of otherwise unrelated actors, loosely anchored around a patient. Coordinating and integrating this group’s behavior is an immense task.

And it is a task that our infrastructure is poorly suited for; our fragmented IT systems were designed with fee-for-service in mind and are optimized for one-off, standardized, and straightforward transactions. Though it is possible, this misalignment between our infrastructure and goals makes it difficult to realize value based care. We’re slowly dragging our healthcare system towards value based care, but it’s a brutal and long process.

Blockchains can be a critical tool to help facilitate this transition. Blockchains are complex, but in short, they combine cryptography and game theory such that a network of computers reach consensus on a single state. In the Bitcoin network this state is essentially a ledger of who has what amount of Bitcoin. Other networks, following Ethereum’s lead, have extended this state beyond money to support more general applications.

In the most simple implementation of this technology, smart contracts can be programmed to send out rewards when certain actions are taken or outcomes are met. Slightly more complex examples would be representing discrete assets, whether that be data, goods, or services, as tokens on a blockchain and creating supporting economic systems around those assets. Lastly, using cryptoeconomic games we can design innovative new incentive structures and coordinate disparate groups of people in new ways. A working example of this today would be MakerDAO. These are all new tools we have that will help enable value based care.

Blockchains are often referred to as enabling the “Internet of Value” for their native ability to store, transfer, and program value. A critical enabling innovation are “smart contracts,” which are in essence automatically executing computer code. Leveraging smart contracts and the native value transfer of blockchains we can program value, enabling us to design systems to coordinate in ways and at a scale that were not possible before.

An example of where these tools could be leveraged is in value based agreements. Against a backdrop of massive and rising healthcare costs there has been backlash towards life sciences companies for the perceived value provided. In an effort to control costs, reduce risk to payers, provide patients access to medication, and generate evidence, pharmaceutical manufacturers are entering into agreements with payers to link payment to pre-specified outcomes. These are broadly referred to as valued based agreements. Here are two examples:

  • On an individual level a manufacturer of an HIV drug agrees to pay an additional rebate if a patient uses more than 7 scripts in a given year.
  • On a population level a manufacturer of an anti-hypertension drug agrees to pay an additional rebate if less than 75% of eligible patients reached their target blood pressure.

These contracts are examples of payment model innovations that seek to align otherwise maligned incentives. While these are powerful tools for creating value for patients, they have not been scalable. A huge amount of administrative burden is required to implement and execute these agreements, and often times it requires you to put a huge amount of trust in your counterparties or a third party. That makes them unattractive when compared to traditional discount or rebates. Moreover, our siloed infrastructure has limited the data we use and our ability to measure and monitor outcomes.

Ethereum can’t solve all of these problems, but it could drastically reduce the costs of executing and adjudicating a value based agreement. No longer do would you have to wait months for a rebate, instead value can flow freely across multiple parties in real time. Terms of a contract can be programmed into a smart contract, applying business logic and updating the contract when actions are taken as well as when outcomes are met. All of this would be adjudicated by a neutral and shared protocol; ultimately helping us scale value based agreements.

What’s even more exciting, combining this with advances in interoperability will let us innovate in contract design. Moving beyond only using claims data, we can leverage EHRs and new data sources like wearables, IoT devices, and more. The participants in a contract can also increase: physicians, patients, or even administrative staff can be included. With programmable value, more and new types of data, and new counterparties we are drastically broadening the design space of value based agreements.

Moving to value based care will require new infrastructure; the status quo was made with fee for service in mind and those incentives informed its design. Blockchains provide a better way. We can use blockchains to automate administrative overhead, solve problems of trust, link payments to outcomes, create transparent markets with digital assets, innovative on our payment models, and ultimately design new systems of incentives to better coordinate care.