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Posts Tagged ‘economics’

Perverse Economic Incentives II: Ignoring Best Practices

You’ve heard this before: the more solutions you have for a single problem, the less likely it is that the true solution has been discovered. Once a real, conclusive solution is discovered it is accepted and implemented by essentially everyone who is presented with that particular problem. This process occurs unfettered in an open market or open system, and the cost of a particular solution depends on a combination of need for the solution and the economic incentives that exist to solve the problem.

Unfortunately, in healthcare in the U.S. this “rule” is not always the case.

Here’s a story about a solution that is NOT being used to the extent it should because private surgery centers are punished financially if they do the right thing. This example is truly a case of perverse economic incentives violating what we think of as a law of nature, that the discovery of a solution for a vexing problem will be adopted by all who suffer the problem if it is shown to be superior to all other solutions. Let’s look at the “Floppy Iris Syndrome” (AFIS) in cataract surgery.

The iris is the colored part of your eye, and the pupil is simply an opening in the iris, much like the shutter of a camera. The pupil is dilated prior to cataract surgery so that the cataract, a clouding of the lens that sits in back of the iris, can be reached and removed. Six or Seven years ago cataract surgeons began to be ambushed by pupils which spontaneously constricted or shrunk like a pursestring closing, or by an iris that started to billow like a parachute placed over a fan. Dubbed the “Floppy Iris Syndrome”, it turned out that it was caused by exposure to a certain class of medicines used for the seemingly unassociated problem of urinary retention in men with enlarged prostate glands; it has since been found to be caused by an increasing number of other medicines. It was a disaster. The complication rate for surgeries with AFIS was 10X or greater than those with a normal iris and pupil.

The search for the cause was important because cataract surgeons could now be forewarned that they might encounter AFIS during surgery if their patient had ever been on one of the medicine culprits. Once the cause and the extent of the problem were known the race was on to find a solution. Unfortunately, all of the intra-operative tactics we’d used in the past to handle small pupils were largely ineffective against AFIS. In fact, some of the standard ways to address a small pupil actually made the surgery MORE difficult because of the floppy, flaccid iris. Every week brought one or two new ideas to add to the dozens already on the table, proving the rule that many solutions means that no true answer has been found.

Enter Dr. Maluygen and his marvelous eponymous ring. The Maluygen Ring essentially solved the entire problem by simultaneously expanding the pupil and stabilizing the iris, and it was both vastly superior to all other solutions available and technically within the capabilities of pretty much every cataract surgeon. Bingo. QED. Kudos, heartfelt thanks, and a bit of profit to Dr. Maluygen and the company that marketed his Ring, right?

Not so fast there, Cowboy. Every week we STILL see articles on how to deal with AFIS in surgery despite the fact that not a single surgeon has stated, on or off the record, that there is anything that is as good as the Maluygen Ring. Here is where the perversity begins. It turns out that only hospital owned surgery centers can bill insurances for additional or special items used during surgery, and the $125 that the Maluygen Ring costs is extra and therefore not reimbursed. The majority of cataract surgeries in the U.S. are performed in private surgery centers, mostly owned by surgeons who operate in them. To begin with, private surgery centers are paid roughly 60% of what hospital-owned surgery centers are paid. $125 represents in most cases 50% or more of the gross profit (before interest, taxes, depreciation, etc)  generated in a case.

That’s right, there is a 50% financial penalty for using the best and safest method to avoid a preventable complication.

It’s no wonder that the owners of surgery centers continue to look for an alternative solution to the problems cause by AFIS. In a misguided attempt to save money, Medicare has led the charge to pay independent surgery centers less than hospital owned centers, and along the way has stripped the independent centers of the ability to pass on the cost of items that represent the “best practices” for certain situations. Rather than use the acknowledged superior solution (the Maluygen Ring) we continue to see inferior techniques utilized despite the fact that they often prolong the surgical case and fail to completely solve the problem. All because policies are created by non-clinical personnel who are only  empowered to save money.

We should be mindful of these perverse economic incentives as our American system of curing disease undergoes an historic upheaval. Do we really want doctors and others considering the economics of utilizing true, proven best practices? Do we really want non-clinicians creating policy that turns medical decisions into economic ones?


Rational Self-Interest

At the root of behavioral economics is a rather simple concept: people will tend to make choices based on rational self-interest. Given the rules of any given situation, most people will behave in a manner that results in either some benefit for themselves, or one in which they are least likely to suffer some unpleasant consequence.

I first came upon this concept in the fascinating book “Non-Zero” which seeks to explain social evolution through the prism of game theory. But it was Alex Tabarrok’s introductory lecture in Econ 101 that best illustrates both the definition of rational self-interest and some of the unforeseen consequences that arise when one doesn’t remember this rule.

In the early to mid 1800’s Great Britain was suffering from the inconvenient combination of too many criminals and too few jails. In earlier times this would not have posed so much of a problem—the worst of the criminals would simply be hanged. This being a more enlightened age, however, made this an untenable situation, one that needed a more genteel solution. Enter Australia! During this time of expansion in the British Empire (despite those rascals in North America), the powers that be realized that the government was long some land just past Africa. Thus was a new nation born, populated by the misfits and miscreants shipped out of England, out of sight and hopefully out of mind.

This whole penal colony thing turned out to be pretty good business for the merchant marine industry in Great Britain. Ships were hired and captains engaged to deliver the human cargo to Australia. Indeed, large sums of money were paid to both the ownersand captains of the ships to deliver the prisoners alive, new citizens in the ever-expanding United Kingdom. After all, if your not gonna execute them at home, it made sense to get some benefit from keeping them alive;  colonizing yet another corner of the globe seemed a fair trade for avoiding execution.

A funny thing happened on the “road” to Australia: most of the prisoners died en route, and those who survived the trip arrived very much worse for the wear. This confused the British officials since they were paying top dollar, hiring only the best captains and working with the most reputable shipping companies. Both crew and cargo, human and otherwise, seemed to make the return trip with no difficulty. Fearing that this was an issue of economics the government officials increased the fees paid to the captains, theorizing that this would incentivize them to deliver the prisoners alive.

Alas, ‘twas not to be. Despite the enhanced payments the majority of the prisoners continued to die en route.

After some years of this pattern a rather low-level functionary in Australia took it upon himself to interview the surviving prisoners upon arrival. They told tales of incredible deprivation. Weeks upon weeks of rations that were below sustenance level. Horrid sanitation below deck where the prisoners were housed. Terrible beatings inflicted upon any who protested. Interestingly, all of these things seemed to WORSEN after the fees for passage were increased.

It turns out that the issue really was one of economics after all. The captains were given funds to pay the crew and to provide provisions for both crew and captives. They were paid UP FRONT! Any money left over went to the captain, and if he was smart some to the crew. No only was there no incentive to deliver their cargo alive, there was actually a strong DISINCENTIVE to do so. The less money spent on keeping the prisoners alive and well, the more money left over for the captain and crew.

Rational self-interest. Ugly? Yes. Inhumane, for sure. But irrational? Not hardly.

I know you are wondering, how is it, then, that Australia isn’t simply a huge landmass still populated only by its Aboriginal citizens? Well, armed with the knowledge that prisoners were not being fed, given exercise, or treated for any maladies that might arise, the business model of populating the penal colony was turned on its head. The ship shipping companies and their captains were given the equivalent of working capital sufficient to supply ship, crew, and cargo with the necessities to arrive alive and well, and wages were paid upon successful delivery of healthy, living prisoners to their new homes.

Voila! Problem solved. The expansion of the British Empire was saved by understanding the concept of rational self-interest.

So what’s the take home message? In most circumstances one can analyze the actions of the participants and gain a more clear understanding of why they behave in a particular manner by seeking to understand their actions through the prism of rational self-interest. For example, it always amazes me when business owners are surprised when their employees always turn out to be sick the exact number of sick days they are allowed each year.  It is certainly in the business owner’s interest for them to work if they are healthy, but when you turn that on its head and think about the worker…

Heroism and other forms of altruism do exist; they’re just really rare. People do stuff that looks crazy on first blush, but when you dig a little deeper it’s usually nothing of the sort. It’s usually rational self-interest that you simply missed.

RFP, Arnold Kling et al

Consider this an official “Request For Proposals” from Arnold Kling to design a health care plan. And just so Dr. Kling doesn’t think I’m picking on him, what the heck, let’s hear from Tyler Cowan and René Herszinger, to0. While I’m at it, I have a certain health care policy rock star brother-in-law, Jim, and I’d love to hear what he has to say about it. Let’s toss in that blogger Maggie Whatever-Her-Name-Is, and why not invite one of the smartest guys I’ve ever actually chatted with, guy named Barry Cooper in Louisville. I’m ready to appoint each and every one of you, and anyone else who’d like to take a shot, as uncontested Health Czar for a large group of people. This is a Request For Proposals to design a health care plan from scratch.

Let’s see who’s got game.

This isn’t something I just made up; this is actually a real group and a real possibility, although it’s highly unlikely that the real players have either the imagination or the balls to really do something new. Nonetheless, it’s very cool to apply imagination and balls to this question. The group consists of 250,000 individuals, 95% men, between the ages of 20 and 60. The average age is 45. Once they become part of this group they essentially remain so for their entire working career. They have a single labor representation, and while they work for a number of different companies there are four major employers. Health insurance has been part of their negotiated contracts for decades.

You have carte blanche to design a health care program for this group. You are not bound by any ERISA regulations, and you will “participate” in any financial savings you might create. Let’s say that it will be a 10 year trial, and in year one you have the average amount of money actually spent on healthcare over the past three years for this group. Each year the funds available to you will increase by only the CPI, inflation in the general economy and no more.  In years one through five any money that you do not spend is yours to keep. Remember, the members of this group do not come in and out, and any investments you make in the early years that reap savings in latter years will come to you and not another provider or payer. In years five through 10 you will share any savings with the employers, the payers.

As part of this proposal you must not only try to save money, to provide health care in a more cost–and efficient manner, but you must also achieve superior health. In years one and two the health outcomes of your 250,000 members must be no worse then the aggregate outcomes across the United States for individuals in a similar demographic. However, in years three through 10 you must demonstrate superior health outcomes for your group, each year better than the last. In other words, you must design a program that will not only save money but will also produce superior health.

That’s it. No other rules. You may use economic incentives with the members, both positive and negative. You may put together what ever type of provider group, physicians and physician extenders, hospitals and clinics that you wish. Pay the healthcare providers any way you’d like (probably ought to be sharing the lion’s share of any savings with this group, if you wish to be successful). You only have to do two, simple things: make these 250,000 men healthier, and spend less money doing so.

Wadda ya think, Dr. Kling? You in?

I don’t want to sound like I’m picking on Dr. Kling because it was actually his short manuscript, “A Crisis of Abuncance” that really got me to thinking about the barriers we have erected in our healthcare system to actually providing healthcare, providing for the creation of health. The best example of what you CAN do, as well as what happens now when you DO do, is the Mayo Clinic program designed to take care of patients with kidney failure. Given free reign to design a program that would accomplish exactly what I am asking for with my 250,000 member group, the Mayo Clinic did just that. By creating a team that was given free reign to utilize best practices, the Mayo Clinic designed a program for kidney care that resulted in fewer mortalities, fewer complications, and greater health, all with a lower price tag.

So why, you might ask, do we not know more about this program? Why is this not the gold standard for ALL medical care, let alone chronic kidney disease care in the United States? The sorry fact is that the Mayo Clinic actually LOST money on this program despite the fact that their patients had BETTER health by doing less and doing it better, thereby resulting in the need for LESS work still, The Mayo Clinic essentially cut off its nose to spite its face. Not willing (and reasonably so) to lose money, and unwilling to practice medicine any way less than what they have shown to be best practices, the Mayo Clinic has now declined to care for Medicare patients in some of its satellite locations.

But you guys don’t have to worry about that. I’ll let you keep the cash! So, what do you say, folks? Ask your friends. Everyone can play. We might even catch the attention of the real, live people who are presently negotiating new labor contracts for this very group. Here’s a chance to start saving the American healthcare system. This is a formal Request For Proposals.

The lines are now open…