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A Comment On Mechanism Design

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:


History has proven over and over again that only the market mechanism of willing sellers and willing buyers is the optimal way to allocate economic resources. This presumes an informed buyer, and a willingness of sellers to compete for buyers. Adam Smith was clear on this in the Wealth of Nations.

But he expressed an additional concern. I am paraphrasing here but he said it was dangerous for craftsmen of the same trade (i.e. doctors and/or hospitals) to get together, even for merriment, that the event turns into a conspiracy against consumers. This thinking was 115 years before the Sherman Anti-Trust Law was enacted.

So, here’s the dilemma: we have long passed the point of sellers of medical services colluding (in the broadest sense). How do we get market power back into the hands of consumers?

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.

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