Aligning Incentives Across Disparate P&Ls

Posted on September 8, 2014 I Written By

Kyle is CoFounder and CEO of Pristine, a VC backed company based in Austin, TX that builds software for Google Glass for healthcare, life sciences, and industrial environments. Pristine has over 30 healthcare customers. Kyle blogs regularly about business, entrepreneurship, technology, and healthcare at

My company sells solutions that typically span multiple avenues of care. We’ve encountered a unique problem: incentives to improve care coordination rarely align when disparate P&Ls accrue to different players across the continuum of care. In other words, split P&Ls pose a destructive risk to care coordination and ultimately outcomes.

How does this play out in the real world?


Most health systems do not own or operate their own ambulances (Atlantic Health System and NS-LIJ being notable exceptions). Instead, ambulances are typically run by local governments or private companies. Why is this a problem? Many of the most critically ill patients arrive to hospitals via ambulance. Many of these patients are are in time-critical conditions. Ambulances should have the best tools to help save those patients and improve outcomes and suffering. All of the care that ambulances provide should be coordinated with the receiving hospital.

However, ambulances, especially publicly-operated ambulances, run on extremely tight margins; they can’t afford to invest in many new technologies. Hospitals won’t invest in tools for ambulances – even for at-risk patients – since hospitals won’t actually control the deployment of the technology to ensure they impact outcomes for at-risk patients.

But what if hospitals owned the ambulances that fed the hospitals? In this model, as hospitals move towards risk-based care-delivery models, incentives will be aligned to deploy mobile technologies into ambulances to improve time-to-care, diagnostics, and even triage patients to avoid hospitalizations entirely. Specifically, what if every ambulance was equipped with a mobile X ray, CT, EKG, ultrasound, and a suite of standard diagnostic tools (blood pressure, thermometer, stethoscope, etc? Upon arriving at a non-emergent patient’s home, the paramedics could locally diagnose and triage the patient with a virtual physician’s input and avoid non-essential ER admissions.

But that can only happen if incentives – specifically P&Ls – are aligned across the continuum of care.

Outsourced physician Management Services (e.g., EmCare)

Many hospitals contract with physician groups to staff service lines in the hospital. Although these groups provide real value – e.g., more flexible hours and operational processes – than employed physicians these groups also break up how P&Ls are accrued.

For example, many anesthesiologists align as a group to contract with hospitals. Within their practice, these MDs may find a new automated anesthesia monitor that enables more effective management of residents and CRNAs across multiple ORs. In turn, anesthesiologists should be able to extend the MD:mid-level ratio, drive improvement in patient safety, and make more money. But, concerns about damage, theft, and losing the hospital contract render these same anesthesiologists unlikely to ever buy the equipment themselves. Hospitals will also be reluctant to invest since they won’t accrue the financial benefits of improved labor productivity since the financial benefits accrue to the anesthesiologist group, not the hospital.

But Modularization Works In Other Industries

Indeed, most value-chain centric industries are highly modular. Each layer of the value chain can independently optimize itself and control how it interacts with the layers of the value chain above and below it. A few examples:

In the movie value chain, movie production studios don’t own and operate theaters; theaters are independent

In the retail value chain, retailers usually don’t act as distributors, and distributors don’t usually act as producers

With the exception of Apple (who by no means control the entire value chain), most of the computing value chain is modular; retailers like Best Buy have no hand in chipset design, chipset manufacturing, OEM design, OEM manufacturing, operating systems, Internet infrastructure, internet service providers, or cloud services.

Modularization In Healthcare Delivery: Can it work?

Healthcare delivery is not a linear value chain. Each player in the healthcare delivery system doesn’t build incremental, linear value on top of its suppliers. Rather, healthcare delivery involves the coordination of a breadth of disparate resources to A) diagnose, B) treat, and, C) manage chronic conditions / maintain wellness (these are the three different businesses that Clayton Christensen astutely observes in his excellent book, The Innovator’s Prescription).

Healthcare could perhaps be modularized if a certain set of providers acted to diagnose a patient, then handed off the patient to another set of providers for treatment, who in turn would transfer the patient to another set of providers whose job it was to manage ongoing chronic care. However, this arrangement is only tenable if: 1) the boundaries between these three different businesses are clear and distinct, and 2) the providers in each have a high degree of confidence in the “output” from their “suppliers” (e.g., an accurate diagnosis).

What are your thoughts? Have you seen other scenarios where disparate P&Ls lead to mis-aligned incentives? Have you seen risk-based payment models that successfully bridge disparate P&Ls?