Published in Standard-Examiner, August 1, 2008
Vijay K. Mathur
During President Bill Clinton’s administration health care controversy began with an intelligent and serious debate among its supporters and opponents about the merits and demerits of the proposal to reform health care. However, as time progressed the debate degenerated into a politicized, “caricaturized” circus sideshow with Harry and Louise in a television commercial as its main characters.
Interest groups championing their own self interests lost sight of the main issues in the debate, like how to provide health insurance, quality medical care, drugs at a reasonable price. My intent here is to point out that the parties involved in the debate and the general electorate must take lessons from the “prisoners’ dilemma game” so that they do not repeat the same mistakes when the new President takes over and makes a health care reform proposal.
Game theory – a branch of mathematics – is the study of conflict and strategic interactions between thoughtful, rational, “untrusting”, and sometimes deceitful and uncooperative opponents motivated by self interest. Prisoners’ dilemma game, an experimental game, was invented in 1950 at the Rand Corporation. Simply put, the game demonstrates that self interests of two criminals, partners in a crime, who know their guilt (charged with the same crime and held separately), persuade them to adopt the strategy of confessing to the crime and thus suffering heavier punishment. Had these criminal trusted each other and adopted a cooperative strategy of not confessing to the crime, both could have gotten off with lighter sentences.
The parties in the health care reform debate are politicians, small businesses, big businesses, insurance industry, doctors, hospitals, AMA, drug industry, right-to-life and right-to choice groups, religious institutions, and other consumer groups like AARP, women’s groups and labor.
If these groups defect from the reform and pursue their self interests we will all face escalating medical care cost, insurance cost and inadequate care. Decisions based on self interests in the market place promote individual as well as society’s welfare only when private decisions do not impose significant costs or benefits on others (labeled as spillover effects). Health care market fails due to spillover effects, because many individual decisions on health care impose costs and benefits on the rest of the society. For example, those who do not buy health insurance and show up in emergency care increase insurance cost of others. Hence, health care reform requires a cooperative strategy.
There are many prisoners’ dilemma games in the on-going debate. For example, small businesses do not want employer mandates, but big businesses consider them “free riders”; many religious groups would not want abortion as part of the health care or health insurance packages, but certain women’s groups would like it to be included; AMA would like its members’ merger activities and price fixing activities to be exempt from antitrust laws, but insurance industry may oppose the idea. If the parties involved do not follow a cooperative strategy, they and the general public will lose and end up facing higher costs for same or less health care.
Health care reform does not have to be a “zero sum game”, like a recreational game where one party wins and the other loses. With a cooperative strategy, reform could be a “net win” for all parties concerned, especially in the long run. In addition, unlike the prisoners’ dilemma problem where criminals have to make the decision to confess or not confess to the crime unaware of the others’ decision, the parties in the health care reform game do not face this problem. They can see the benefits of their cooperative strategy as well as the losses if any one defects.
Society is better off if all parties surrender their narrow self-interests in order to gain the security of health care at reasonable costs to all. Conservatives and liberals alike in and out of Congress have to realize that the way out of the prisoners’ dilemma is to adopt a cooperative strategy, because defection from health care reform could be tragic to the nation. Prosperity of a nation over the long run is closely tied to human capital formation, and health of the people is the primary input in that formation.
Mathur is former professor of economics and chair, and currently professor emeritus of economics in the economics department of Cleveland State University, Cleveland, Ohio. At present he resides in Ogden Utah.
Saturday, July 4, 2009
Health care reform must address problems
Published in Standard-Examiner, June 30,2009, Ogden, UT
VIJAY K. MATHUR
The vigorous debate in the U.S. Congress and in the public arena seems to indicate that there are good chances of passage of a health care reform bill this year. I hope President Obama, before signing the bill, makes sure that the final bill represents reform not in name only, but as a fundamental change from the status-quo.
According to the most recent published data for 2000-2006, unadjusted for price changes, growth rate in total national health care expenditure has averaged 8 percent per year as opposed to 5 percent average growth rate of Gross Domestic Product (GDP); public expenditure grew at the rate of 8.6 percent per year. In relation to our capacity to pay, total expenditure increased from 13.8 percent to 16 percent of GDP. A report issued by the Council of Economic Advisors (CEA) on June, 2009 states that if health care cost keeps rising at historical rates, its share of GDP will reach 34 percent by 2040, an obviously unsustainable burden on the economy. Hence President Obama has stated two main goals of health care reform, 1) cost containment and 2) covering all uninsured people.
Health care faces four different market-inefficiency problems which require government intervention. Those who are fearful of encroaching socialism lack understanding of these problems. The first is "free-rider problem" where those who do not buy insurance get a free ride on emergency health care either in hospitals or in free clinics. It results in higher premiums for the insured and requires more tax revenue to support other medical care institutions supported by Medicaid funds.
Free rider problem could be mitigated if all people are required to buy insurance, the so-called mandate. Even low income household should be required to pay for insurance according to their ability to pay and the difference between the market price for insurance and their payment could be subsidized. This could ultimately eliminate the need for the Medicaid program. This universal insurance program would also ameliorate costs imposed by uninsured on insured when they spread infectious diseases.
Two other market failure problems in health care are "adverse selection" and "moral hazard." Insurance premiums increase due to adverse selection when an insurance company ends up with people in the pool who require more than average medical care. In other words, the health risk is not diversified with an appropriate mix of young and old people. Data show that during 2005-06, the highest percentage of uninsured Americans were 18 to 34 years old. On average, young people do not require more frequent medical care as do those above the age of 60. Hence, young people lack incentive to buy insurance, not only due to high cost of insurance but also because they can free ride on emergency care. A broader mix of people in the insurance pool will reduce risk and insurance premiums.
Moral hazard also contributes to higher insurance cost. If the insurance coverage is generous relative to premiums, insured people have a tendency to engage in risky behavior resulting in adverse health outcomes, e.g., smoking, obesity. If the insurance coverage is less relative to premiums, insured people will bear most of the health risk and hence will opt out of the insurance market. Thus, we will face increasing ranks of uninsured and less than efficient level of coverage for insured. Insurance companies in general pass costs of risky behavior by increasing deductibles and co-pays.
Besides deductibles and co-pays in insurance contracts, any reform proposal must relax laws so that insurance companies are encouraged to provide more positive incentives to the insured to make lifestyle changes, e.g., to reduce the incidence of cardiovascular diseases, obesity, diabetes. Even under current laws, self-insured Safeway Inc. is successful in implementing such an incentive program and reducing cost of medical care.
The last problem source is the "principal-agent" problem. A physician is supposed to be the agent of his or her patient (principal), representing the patient's interests in dispensing quality care at least cost. However, the fee-for-service compensation structure creates divergence of interests between patients and doctors, thus resulting in high cost without significant changes in the quality of medical care.
The principal-agent problem is more acute when physicians have commercial interests in clinics, hospitals and pharmaceutical companies. Evidence-based medicine, doctors on salaries, fixed payment for a bundle of services, capitated payments over a specified period of time and payments based upon health outcomes are attempts to minimize this problem and control cost. This problem also occurs when employer is the sponsor of a health insurance plan and employees have little choice in picking an insurance plan which suits their needs.
The health-exchange proposal should provide choice to all, including employers, between private and public insurance, with the added feature of portability within and across state lines. If private health insurance industry is more efficient in its service they need not fear public insurance and if they are not, they should become more efficient.
Congress must take the bold step in solving this lingering health care problem which is gradually eating away our material and human wealth.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also an adjunct professor of economics at Weber State University, Ogden, UT. He resides in Ogden, UT.
VIJAY K. MATHUR
The vigorous debate in the U.S. Congress and in the public arena seems to indicate that there are good chances of passage of a health care reform bill this year. I hope President Obama, before signing the bill, makes sure that the final bill represents reform not in name only, but as a fundamental change from the status-quo.
According to the most recent published data for 2000-2006, unadjusted for price changes, growth rate in total national health care expenditure has averaged 8 percent per year as opposed to 5 percent average growth rate of Gross Domestic Product (GDP); public expenditure grew at the rate of 8.6 percent per year. In relation to our capacity to pay, total expenditure increased from 13.8 percent to 16 percent of GDP. A report issued by the Council of Economic Advisors (CEA) on June, 2009 states that if health care cost keeps rising at historical rates, its share of GDP will reach 34 percent by 2040, an obviously unsustainable burden on the economy. Hence President Obama has stated two main goals of health care reform, 1) cost containment and 2) covering all uninsured people.
Health care faces four different market-inefficiency problems which require government intervention. Those who are fearful of encroaching socialism lack understanding of these problems. The first is "free-rider problem" where those who do not buy insurance get a free ride on emergency health care either in hospitals or in free clinics. It results in higher premiums for the insured and requires more tax revenue to support other medical care institutions supported by Medicaid funds.
Free rider problem could be mitigated if all people are required to buy insurance, the so-called mandate. Even low income household should be required to pay for insurance according to their ability to pay and the difference between the market price for insurance and their payment could be subsidized. This could ultimately eliminate the need for the Medicaid program. This universal insurance program would also ameliorate costs imposed by uninsured on insured when they spread infectious diseases.
Two other market failure problems in health care are "adverse selection" and "moral hazard." Insurance premiums increase due to adverse selection when an insurance company ends up with people in the pool who require more than average medical care. In other words, the health risk is not diversified with an appropriate mix of young and old people. Data show that during 2005-06, the highest percentage of uninsured Americans were 18 to 34 years old. On average, young people do not require more frequent medical care as do those above the age of 60. Hence, young people lack incentive to buy insurance, not only due to high cost of insurance but also because they can free ride on emergency care. A broader mix of people in the insurance pool will reduce risk and insurance premiums.
Moral hazard also contributes to higher insurance cost. If the insurance coverage is generous relative to premiums, insured people have a tendency to engage in risky behavior resulting in adverse health outcomes, e.g., smoking, obesity. If the insurance coverage is less relative to premiums, insured people will bear most of the health risk and hence will opt out of the insurance market. Thus, we will face increasing ranks of uninsured and less than efficient level of coverage for insured. Insurance companies in general pass costs of risky behavior by increasing deductibles and co-pays.
Besides deductibles and co-pays in insurance contracts, any reform proposal must relax laws so that insurance companies are encouraged to provide more positive incentives to the insured to make lifestyle changes, e.g., to reduce the incidence of cardiovascular diseases, obesity, diabetes. Even under current laws, self-insured Safeway Inc. is successful in implementing such an incentive program and reducing cost of medical care.
The last problem source is the "principal-agent" problem. A physician is supposed to be the agent of his or her patient (principal), representing the patient's interests in dispensing quality care at least cost. However, the fee-for-service compensation structure creates divergence of interests between patients and doctors, thus resulting in high cost without significant changes in the quality of medical care.
The principal-agent problem is more acute when physicians have commercial interests in clinics, hospitals and pharmaceutical companies. Evidence-based medicine, doctors on salaries, fixed payment for a bundle of services, capitated payments over a specified period of time and payments based upon health outcomes are attempts to minimize this problem and control cost. This problem also occurs when employer is the sponsor of a health insurance plan and employees have little choice in picking an insurance plan which suits their needs.
The health-exchange proposal should provide choice to all, including employers, between private and public insurance, with the added feature of portability within and across state lines. If private health insurance industry is more efficient in its service they need not fear public insurance and if they are not, they should become more efficient.
Congress must take the bold step in solving this lingering health care problem which is gradually eating away our material and human wealth.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also an adjunct professor of economics at Weber State University, Ogden, UT. He resides in Ogden, UT.
Subscribe to:
Posts (Atom)
