Stanley Feld M.D.,FACE,MACE

Dick Swersey is a Columbia College C’59 classmate. He is extremely intelligent. He has commented on my blog Repairing the Healthcare System in the past. He is a strong free market advocate. In response to my blog post Mechanism Design and Repair of the Healthcare System he wrote the following:

“Stanley:

I wouldn’t necessarily dismiss a role of government in this arena. Fully 20% of the Wealth of Nations is a section called “The Role of the Sovereign”. You might want to look at that section to see if there are any relevant principles. I’ll do the same.”

Dick is absolutely correct. The government is there to make the rules of the game. These rules need to be constructed so that they are fair to all. The rules have to align everyone’s incentive for the basic goal of the endeavor.

In medicine the basic goal should be the welfare of the patient. The goal should be the delivery of quality medical care at the most affordable price. The patients and not the insurance company should decide on what their needs are. The rules can not interfere with free choice. If a seller is unwilling to sell according to the rules they should not be forced to sell. However, they can not play the game. They need to play in another game. If there is an unwilling buyer to buy he should have the option to buy elsewhere. Both the buyer and the seller should be entitled to pursue their self interest within the rules of the game. All transactions should be transparent so the buyer knows exactly the quality of care he is buying and the price he is paying for it. The rules for defining quality of care and price have to be clearly stated. If the rules of the game are broken the party who breaks the rules should be penalized.

The distortion in the Healthcare System is the opacity of pricing and payment by the healthcare insurance industry, the hospital systems, and sometimes the physicians. Additionally, the consumer does not have the option to choose the products he feels he needs. (Access to care)

The healthcare system needs revision of the rules of the game. Consumers must own their healthcare dollar and drive the healthcare system. They should be able to buy high deductible insurance and deposit the initial at risk dollars in a tax free trust so they can pay for their initial care. If they do not spend the money in their trust account they should not be required to use it for healthcare expenses in the future. The trust account can be set up by their employer, themselves, or the government for them. Money not spent in the trust account should accumulate tax free and be used for retirement.

The self employed would be able to set up the trust with pre tax dollars just as the employer can. This would encourage young people who are well to buy insurance so that they have another source of forced savings for retirement. It is foolish for the young well person to be uninsured because illness can strike at anytime. It would also nullify the healthcare insurance industry’s complaint that the healthy young choose to be uninsured because they are paying for a higher risk pool.

Another required rule change would be the way premiums are calculated. The calculation should be based on community rating and not the archaic actuary calculations now used.

The “sovereign” should make the appropriate rules and then get out of the way and let the marketplace do the work.

Stanley Feld M.D.,FACP,MACE

Last month the Nobel Prize in economics was awarded to Leoid Hurwicz, Roger Meyerson and Eric Maskin . They were awarded the Nobel Prize for developing the economic theory of “Mechanism Design.” My first reaction was “what is that?”

After some research I discovered the power of Mechanism Design. It is a brilliant economic theory that could solve many economic problems. Mechanism Design applied to our healthcare system could solve many of the problems.

What is it? “ In economics, mechanism design is the art and science of designing rules of a game to achieve a specific outcome, even though each participant may be self-interested. This is done by setting up a structure in which each player has an incentive to behave as the designer intends. The game is then said to implement the desired outcome. The strength of such a result depends on the solution concept used in the game. It is related to metagame theory, which is the theory of games the play of which consists of developing the rules of another game.

Mechanism designers commonly try to achieve the following basic outcomes: truthfulness, individual rationality, budget balance, and social welfare. However, it is impossible to guarantee optimal results for all four outcomes simultaneously in many situations, particularly in markets where buyers can also be sellers[1], thus significant research in mechanism design involves making trade-offs between these qualities. Other desirable criteria that may be achieved include fairness (minimizing variance between participants’ utilities), maximizing the auction holder’s revenue, and Pareto efficiency. More advanced mechanisms sometimes attempt to resist harmful coalitions of players.”

Lodi Hurwicz contributed the idea of incentive compatibility. His point is the way to get as close to the most efficient economic outcomes is to design mechanism in which everyone does best for themselves. He says this can be achieved by sharing information truthfully (Price Transparency). It is easy to understand that some people can do better than others by not sharing information or lying.

If everyone’s incentives are aligned you have a much more efficient economic system. An example is defense contracting. If you agree to pay on a cost plus basis you have created incentive for the contractor to be inefficient. I you agree to pay a fixed price you can come close to an efficient price if you have all the truthful information. If you do not you have incentives aligned and truthful information you create the incentive to be overcharged. Most people can do better by not sharing truthful information. If the rules of the game require truthful information you can get close to an efficient market driven solution.

The concept of Pareto efficiency means no one can be made better off without someone becoming worse off. Therefore the incentive is to maintain your dominance by not being truthful at the expense of others. Hurwicz observed as others had that the dispersion of information was at the heart of the failure of a planned economy. He observed that there was a lack of incentive for people to share their information with the government truthfully. The free market mechanism was far less afflicted than central planning bureaucracy by such incentive problems. The free market economy was by no mean immune to this defect. He observed that the free market economy can get us closer than central planning to incentive compatibility because the end consumer can drive the discovery of truthful information.

The customer creating rules of engagement in a market driven economy can get you closer to the ideal of Mechanism Design. Since the customer determines success of an enterprise by creating demand in a transparent environment they can get closer to incentive efficiency. They create the rules of the game for compatible incentive.

Roger Meyerson contributed the revelation principle, a mathematical model that simplifies the calculation to create the most efficient rules of the game. The mathematical model gets people to reveal their truthful private information leading to aligned incentives.

Eric Maskin’s breakthrough was in perfecting Mechanism Design with his “implementation theory.” His theory clarifies how to design mechanisms that heighten incentive alignment and efficiency.

How does Mechanism Design relate to the Repair Of The Healthcare System? We have to set the rules of the games so that we align all the stakeholders’ incentives without one stakeholder takes advantage of another. The insurance industry is taking advantage of the patients, doctors and hospital systems. The hospital systems are taking advantage of the patients, doctors and insurance companies. Doctors are taking advantage of the insurance companies, hospital systems, patients and the government. The government is taking advantage of the hospital systems, the doctors and the patients. Employers who pay the insurance bills for their employees are taken advantage of by the insurance companies. The drug companies are taking advantage of patients and unduly influencing physicians.

In our healthcare system everyone is pursuing his vested interest in a game that has rules that does not lead to “incentive compatibility.”

Some politicians think central planning will straighten out the rules. Historically, central planning has not worked. The winners of this year’s Nobel Prize in economics have proven this fact.

I believe the consumers can fix the rules of the game so that all the incentives are compatible. Consumers have to have incentives to force politicians to fix the rules of the healthcare game. Consumer driven healthcare system will achieve the alignment (incentive compatibility) using the ideal medical saving account.

Stanley Feld M.D.,FACP,MACE

“Critical” What We Can Do About The Healthcare Crisis is a book by Tom Daschle, Scott Greenberg and Jeanne M. Lambrew. It provides a more detailed outline of the Democratic Party’s approach to overhauling American health care than either Mr. Obama or Hillary Clinton has offered on the campaign trail.

“The most important proposal in “Critical” is the creation of a “Federal Health Board,” explicitly modeled on the Federal Reserve Board. Its duties would include “recommending coverage of those drugs and procedures backed by solid evidence. It would exert influence by ranking services and therapies by their health and cost impacts.”

I knew this was the way the Democratic Party and Hillary Clinton are thinking. The thinking is dead wrong in my opinion. Increasing regulation and price control would lead to a more dysfunctional healthcare system.

“The Federal Health Board duties would include “recommending coverage of those drugs and procedures backed by solid evidence. It would exert influence by ranking services and therapies by their health and cost impacts.”

Previous rankings have had errors. I suspect these measurements will have errors also. It sounds as if the government is going to dictate the kind of care patients will have access to. It will not be the care the patients’ physicians think is best. Generic medication will replace newer medications. Innovation and inventiveness will be suppressed. Some medical devices will not be available unless the board says it is cost effective.

This is essentially price control and controlling access to care. Past experience has shown these maneuvers do not work. The creation of incentives generates innovation.

The principles of Mechanism Design would create a system of rules fair to all stakeholders with patients being the most advantaged.

“What about the uninsured? Mr. Daschle wants to open to all Americans the Federal Employee Health Benefits Plan — a menu of private-insurance options now accessible only to government workers. He would offer, in addition to the current plans, a government-run program, presumably similar to Medicare, although he provides few details. There would also be some form of means-tested premium support (or tax benefits) for Americans who couldn’t afford one of the available plans.”

The good thing is access to care will be available to all regardless of preexisting illness. The bad thing is it will not create a competitive market place healthcare system so badly needs. It will create another level of bureaucratic complexity.

“Most of Medicare’s costs are borne by doctors and hospitals that must meet the requirements of a host of regulations; if they do not, they may face federal investigations and lawsuits for noncompliance.”

Tom Daschle’s (the Democratic) vision creates a punitive atmosphere for stakeholders that inhibit innovation and usually leads to higher costs.

“Medicare has employeed a mere handful of mostly generalist clinicians reviewing its coverage and payment decisions.”

There is no way a handful of generalist clinicians are able to understand the nuances of complicated disease processes and enforce the new bureaucratic rules. The only way reform will be successful is if the patients force competition for their healthcare needs.

“Mr. Daschle federal health-board proposal is not exactly a new idea. Mr. Daschle himself proposed it as part of the failed American Health Security Act of 1993.”

This was translated into (Hillary Care) a program that assured the government as a single party payer dictated access to care and choice of provider. It failed because public opinion opposed it before it got started.

“Tom Daschle admits that the board is based on the National Institute for Clinical Excellence in Britain and the Federal Joint Committee in Germany. Both are charged with managing the public’s access to higher-cost drugs, medical devices and procedures. But both are growing increasingly unpopular in their home countries — precisely because they’ve become a triumph of cost-containment over patient access and choice.”

Americans had the same experience with HMOs. They failed because of public disenchantment with the system that eliminated choice and access to care. Public opinion turned against HMOs.

“Mr. Daschle proposes a dozen or so “experts” who would be “chosen based on their stature, knowledge, and experience, ensuring that the decisions they make have credibility across the health-care spectrum.”

I have outlined a system that puts the patients in charge. If Americans are given the appropriate incentives and the correct education they can make wise healthcare choices.

The trick is to not let the politicians sneak a defective system into law in the middle of the night.

I hope if Mr. Obama becomes President he does not fall for the Democratic Party’s folly. So far he has camouflaged his intentions.