Dr. Kenneth Davis is an advisory board member for Healthy Returns , CNBC's new health-care innovation conference that will take place March 28, 2018, in New York City.

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Government-funded Medicare and Medicaid account for more than $1 of every $3 of U.S. health-care spending and $1 of every $4 in the federal budget.

Medicine currently follows the capitalistic model of other American industries: A fee is paid whenever a service or good is delivered. This incentive-based approach works well in most every industry, but not in health care. Fee-for-service encourages more tests and treatments, some of which are completely unnecessary. More health care does not mean better health care. Instead of volume, we need to incentivize value by rewarding better health outcomes resulting from efficiently delivered, proactive care that keeps patients healthy. When providers are incentivized to maintain health rather than respond to illness, they treat patients earlier in low-cost environments, like neighborhood clinics, before health problems become serious and require expensive care in a hospital setting. Those who can deliver more value by keeping patients healthy should be able to share in the savings of the health-care expenditures they have reduced. Providers who spend more than would normally be expected for a given patient should receive no incentive payments. Furthermore, in this shift to value, there is appropriate fiscal support and incentive for the care that needs to happen in between physician visits (for example, disease education, health coaching and other ongoing care-management work). In this kind of system, the interests of payers, providers and patients become aligned.

Keeping patients healthy and out of the hospital

It can be done. Kaiser Permanente, which serves patients in eight states and the District of Columbia, combines hospitals and outpatient clinics with its own nonprofit insurance plan. Kaiser has a fixed annual amount to care for each member, so there is an inherent incentive to keep patients healthy and out of the hospital, where care is most expensive. Because its structure aligns the interests of payers, providers and patients, Kaiser operates efficiently and they are not alone. In fact, many other health systems, including the Mount Sinai Health System, are creating the same incentive model in partnership with private health plans.

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