Complex systems are the result of interactions of experiential learning system and complicated learning systems. Complicated learning systems are created by scientific innovation. Managing the interaction effectively results in efficiencies and success.

On November 11,2007 I wrote about Mechanism Design and the Healthcare System. This Economic Theory won the Noble Prize that year. Few people have ever heard of the theory of Mechanism Design.  

Many of the stakeholders in the healthcare system have some excellent ideas. I would include Dr. Donald Berwick and President Obama on that list.  Problems usually arise from conflicting ideology and method of managing the complexity of competing ideologies.

The key is to align all the stakeholders’ vested interests in a fair and equitable way. It is important for all the stakeholders to agree with the method of managing the complexity created.

It is important to start a sensible discussion on how to Repair the Healthcare System. President Obama has a very difficult time the forcing adaption of his plan to Repair the Healthcare System because of conflicting ideologies.    

The managing of the healthcare system and it many complicated parts have to be approached in a different way.

 The key question should be who is the healthcare systems customer?

The people are the customer. President Obama’s believes the central government is the customer.

Consumers and physicians believe President Obama’s Healthcare Reform Plan is punitive. President Obama has disregarded their views.

I wrote in 2007,

“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 realized the power of Mechanism Design. It is a brilliant economic theory that could solve many of our economic problems. Mechanism Design applied to our healthcare system could solve most of the dysfunction.

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.

Everyone in a free country tries to defend his/her vested interest. It is noble to defend the vested interest of others. Unfortunately, it does not work in reality. Rules can be constructed to serve all the stakeholders vested interest with consumers being the key stakeholder.

 Setting up a structure in which each player has an incentive to behave as the designer intends does this. 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 playing of which consists of developing the rules of another game.

This is a complex thought. If the rules of the metagame are impossible to comprehend, follow or are total opposed to the participants’ vested interest the fallback position is the rules of the first game.

Mechanism designers commonly try to achieve the following basic outcomes: truthfulness, individual rationality, budget balance, and social welfare.

This should be the goal of everyone in a rational society.

 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

A rule to the advantage of the seller can be a disadvantage to the buyer. The stakeholders need to figure out an appropriate tradeoffs.

 Thus significant research in mechanism design involves making trade-offs between these qualities.

The tradeoffs can be reasonable. They must be shown to be to the advantage of all the stakeholders.

 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.”

Pareto efficiency can be understood in the following graphic.

 In essence when stakeholders are fighting neither B or C neither wins nor achieves total victory. The result is approximately position A. If managing complexity can convince both B and C they would be better off in position D the system has aligned incentives. Both are better being at position D.

 “Looking at the Production-possibility frontier, shows how productive efficiency is a precondition for Pareto efficiency. Point A is not efficient in production because you can produce more of either one or both goods (Butter and Guns) without producing less of the other. Thus, moving from A to D enables you to make one person better off without making anyone else worse off (rise in Pareto efficiency). Moving to point B from point A, however, is not Pareto efficient, as less butter is produced. Likewise, moving to point C from point A is not Pareto efficient, as fewer guns are produced. A point on the frontier curve with the same x or y coordinate will be Pareto efficient.”

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 himself or herself. 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.

Truthful information (Price Transparency) is a huge issue in the healthcare system. Hospital systems, physicians, drug companies, pharmacies, the healthcare insurance industry and the government hide behind the opacity of information.

There is a mutual distrust among stakeholders.

This mutual distrust must be overcome and price transparency achieved before any progress can occur.

Everyone claims they are afraid to be sued because of regulations. Tort Reform and regulation simplification is a must for price transparency.

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 a fixed price and price transparency with incentives aligned, you create the incentive to be overcharged.

 The fixed pricing in healthcare must be flexible for all stakeholders. All the variables cannot be controlled during a disease process.

The variables are the patient’s responsibility for their own care, the skill of physicians to guide that patient's care and the ability to communicate information (Technology/ electronic communication) with patients and other stakeholders to increase the efficiency of the first two variables.

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.

At present there are several impediments to ideally increasing efficiency. In fact, the incentives are present to decrease efficiency. There are numerous examples where central control has not increased efficiency.

Patients are the consumers of healthcare. Consumers must drive the healthcare system. This is the only way to maximize efficiency. 

The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.