Mechanism Design and the Repairing the Healthcare System
Stanley Feld M.D., FACP, MACE.
On November 11, 2007, I published the following blog: “Incentives and Mechanism Design.” The authors Leoid Hurwicz, Roger Meyerson and Eric Maskin were awarded the Nobel Prize in Economics for the concept in 2007.
I suspect few politicians know about Mechanism Design in 2019. I am certain Bernie Sanders and the “Medicare for All” crowd do not know anything about Mechanical Design.
In my last blog, I described how politicians and the mainstream media use Confirmation Bias to try to put the government in control of healthcare against the will and welfare of the public.
I think Donald Trump either studied the use of Mechanism Design and its mechanics or he intuitively uses its principles in his thinking.
Mechanism Design is a concept that tries to put science into social science. It mathematically evaluates vested interests of stakeholders in order to eliminate confirmation bias and line up all the stakeholders’ vested interests for the greatest good. It assumes all the stakeholders have expressed their vested interests truthfully.
The Democrats want to hold onto (fix) Obamacare. However, the Democrats understand Obamacare is not viable in its present form. I believe “Medicare for All” with central government control of healthcare will be a disaster as it has been in most single party payer systems.
I do not believe Obamacare is fixable. I believe President Obama and the Democrats believed that Obamacare would fail. Then the nation would beg either his public option or Medicare for All.
I think President Obama believes “Medicare for All” and the total government control of healthcare is the ideological solution to the problems in our healthcare system.
His confirmation bias overrules all of the examples of “Medicare for All” failed examples at home (Vermont California and Colorado), as well as Denmark, Sweden, England, and France.
In 2017, the Republicans with a slim majority in the Senate refused to repeal Obamacare. Whether the Republican failure to repeal Obamacare was because of intramural revenge or ideology is best to question is which system is best for the common good.
If our politicians understood the principles of Mechanism Design and were diligently working for the people who elected them benefit, America would be on the way to “Repairing the Healthcare System.”
Against this backdrop of a hostile Democratic Party, in control of the House of Representatives, Donald Trump and his administration is slowing working its way to “Repairing the Healthcare System” using the principals of Mechanism Design.
In November 2007, pre the Obama administration, I wrote:
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 the healthcare systems 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 Hurwitz contributed to the idea of incentive compatibility. His point is the way to get as close to the most efficient economic outcomes is to design a 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 an incentive for the contractor to be inefficient. If 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 means 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 do 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 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.
Twelve years have passed since 2007. America has not gotten closer to the solution to Repair the Healthcare System even though the solution is staring us in our eyes.
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The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.
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