A ‘winner’s curse’ in the healthcare game
Mom always said to be careful what we wished for, lest we actually get it. The warning is apt now that the health care reform debate in Congress seems headed into the home stretch, or maybe just the back stretch.
Several big players in this extended national drama should look over their shoulders. Health insurance companies are one. You might be another.
The insurance companies won a major skirmish last week when two attempts to add a so-called public option to the Senate health care reform bill were defeated.
A trio of House committees has approved reform bills that contain public option plans; it’s too early to say whether insurance companies can hold on to what they won last week.
But if health care reform were enacted without a public option, insurance companies could be setting themselves up for what the noted Princeton University health economist Uwe E. Reinhardt describes as a “winner’s curse.”
Many of us think about economics as only dollars and cents. But economics — particularly a branch called game theory — provide interesting insights into the health care reform debate, starting with the winner’s curse.
It describes the tendency of a winning bidder at an auction to overpay for an item. That usually occurs when competing bidders vie for the same prize, escalating the price.
Mr. Reinhardt applies it in a slightly different way to the health care debate in referring to the generally weak cost controls in the reform bills and the so-called individual mandate that requires everyone to buy health insurance.
The public option is designed to help control health care spending by serving as a competitive counterweight to higher health insurance premiums.
Without it, there may not be enough in the reform bills to constrain spending — or premiums.
A few years from now, consumers who faced a mandate to buy coverage and then pay soaring premiums could decide that their insurance companies are to blame. That could lead to even more radical reforms that target for-profit insurance companies.
The companies would have won the battle, but they would end up losing the war. That defines Mr. Reinhardt’s winner’s curse.
Two other economic principles help to explain parts of the current debate. James Surowiecki describes them in a recent New Yorker article.
The first is called the endowment effect. That’s the tendency of people to overvalue assets they already own.
The second is what economists call the status-quo bias, the tendency in financial matters to leave things the way they are. That happens because people feel the loss of something they own more acutely than rewards that they enjoy from disposing of it.
In the case of health care reform, that means many Americans overvalue their current coverage and underestimate benefits they could accrue from reform. Special interests have played on those fears with ads warning that some people could “lose the coverage they have now.”
But the ads fail to mention that if reforms aren’t enacted, many people could lose coverage as premiums continue their stratospheric climb.
Some of the loudest voices in the opposition to health care reform actually have the most to gain from it — and the most to lose if it fails.
Be careful what you wish for.
I have a friend in the printing business. He says every job is an auction and the winner loses money. I think this is slightly different. The way for private insurance to be effective is to empower, okay require, patients to become more active in keeping costs down. I saw Uwe Reinhardt speak earlier in the year and he showed examples of various basic operations which ranged in cost from $1500 to $30,000 for the same operation. He suggested the answer was to set a basic price, say $3000 and tell patients if they want the $30,000 operation, they would have to pay the difference. He suggested that in two years, every hospital would be charging $3000. Clearly, a man suffering a heart attack is going where the ambulance driver takes him, but for most surgical care, competition will bring prices down, as we’ve seen in elective surgeries like LASIK where we’ve seen prices decline 50% and outcomes improve. Probably what we will see is something like this. You quoted Dr. Frist in another editorial. His family was the financial beneficiaries to the Columbia/HCA fortune. While he would vote for this bill, the man who made him all his money, Rick Scott, the former CEO who is spending millions of his own dough to campaign against Obamacare, would not. I watched Rick show a staid hospital industry how it is possible to use efficiencies to make a profit without compromising quality, where others could not. His strategies in surgery centers involved standardizing equipment to use buying power to get lower pricing from vendors, scheduling cases to maximize staffing, etc. . Columbia/HCA used to do 10% of al the cataracts in America. When possible, they would buy all the interocular lenses from one vendor. Virtually all such lenses give the patient a great outcome, but surgeons have personal preferences, company relationships, etc. that tend to drive the costs up, even though the patient doesn’t know the difference, or care. By using these types of strategies, insurance companies requiring patients to shop for places that will accept their reimbursement thresholds can make money and bring costs way down at the same time. When required to do so, American business will deliver.Right now, no one is requiring them to do it.
Like social security and medicare, the public option is just one more scheme to take in real money today in return for the promise of a phantom payback tomorrow. Now the collapse of those “programs” is near there’s an urgent need to find some new suckers, and the public option is merely the marketing vehicle. Anyone who believes otherwise would have also believed Bernie Madoff when he told the return of their investment was in the mail.
To Safer,
I’m not sure about the public option as they haven’t defined it sufficiently yet. But single-payer which is what we should be looking at is not a Ponzi scheme and works well in most to the developed world. I’m sick of guys like you saying otherwise. Why else are nations that have a certain amount of development adopting it instead of the clusterf&*%^^* that we have?
I just spent 3 days in Wash DC with people from all over the world. One woman from Egypt explained to me how their nationalized health care system worked. Answer: it didn’t. Their health care system is slow and dirty. The very rich could afford to by-pass the system and get private doctors. So please take your socialist utopian vision and stick it where the sun don’t shine. WE DON’T WANT YOUR PATHETIC EXCUSE OF AN IDEOLOGY SHOVED DOWN OUR THROATS! GOT IT? See you in Nov 2010…
To Mr. Brown and other “public option” fans………..look deeper. Every so-called public option…….welfare programs, social security, medicare, medi-cade are BROKE……that holds true with public plans now being run by a few of the States….MA or example….BROKE. Government run programs all around us are BROKE and always asking for more operating money..i.e Post Office, Fannie Mae, AIG, GM, etc………BROKE, Insolvent and reliant on higher taxes to feed the beasts……..That is where we are headed with the whole healthcare structure with this insane Congressional/Government takeover……BROKE
And….yes Mr. Brown…it is a Madoff Ponzi scheme……..promises of high returns but totally dependent upon sucking in more and more people to keep it afloat………why are they threatening fines and prosecution to those who want to chose no coverage…….they must have more suckers paying in to keep the Ponzi alive………except, there is always a day of truth…witness Social Security….under 34…don’t plan on benefits…BROKE
tartan,
Is not healthcare (insurance industry) broken? The Medicare industry needs revamping because of changes in the population of the risk pool. Nothing under the sun can stay the same and not change with the times. You people don’t seem to get that. You seem to want things to stay the same until things completely fall to pieces and that is not smart.
The health insurance industry also needs to get out of Medicare and Medicaid and is a big part of the problem.
Our lawmakers nor are the insurance companies looking to the future or what is best for our citizens, they are looking to the now squeezing every last drip of blood out of society until their system of things completely collapse and sooner than later it will. Too many people as it stands can’t be serviced by the insurance company because it would not be profitable enough to them and this is a shame. Change is very much needed and the time has come for PROFIT to be taken out of healthcare, it has become an unworkable model.
I understand how hard it is for that industry and those on Wall Street to see the healthcare insurance industry change drastically but it will no matter how long it is prolong, but prolonging it is not good for this country or its citizens and is only a benefit to those how only care about squeezing every profitable red cent left to be squeezed out of society.
Just as it must have hurt when the slave industry profits left many in America, same with the healthcare insurance industry, it must change and it will fail because it is just plain unethical and immoral. The perfect name for that industry is “Sick For Profit”.
http://sickforprofit.com/
@Rich,
I’m not sure I can add much to what Tartan has already said. To me, those who speak of the “successes” of medicare, social security or single payer health care systems around the world are willfully or otherwise blind to the reality that those programs are almost without exception swamped in obligations they’ll never be able to pay.
It’s little different than my declaring myself to be a great success because I live in a big house whose mortgage I can pay today but never tomorrow. All ponzi schemes are great successes until they aren’t, and the young people currently paying into medicare and social security will never see the level of benefits enjoyed by those who came before them. Simple math has always been the enemy of good intentions, and Obamacare is just the latest example of our government attempting to “fix” broken programs by foisting upon us a “new and improved” one of the same.
I’m all for filling the holes in our health care system (and to me that cannot be honestly attempted without including tort reform, but any solution that is the equivalent of taking out a bigger mortgage in order to get out from under the one I already can’t afford is no solution at all. And even if the math did make sense, why in the world would I trust our government to run it?
> A few years from now, consumers who faced a mandate to buy coverage and
> then pay soaring premiums could decide that their insurance companies are to blame.
Nah, that’s who the Post-Dispatch will blame. Anyone with a bit of analytical ability will blame Congress, who will heap a bunch of new regulations on health insurers, then blame the victims for the cost of meeting those regulations. For example:
* Prohibiting exclusion of pre-existing conditions
* Mandatory issue
* Community rating
* Restriction of premium differential for older insured
These mandates alone could double or triple insurance premiums. Right now, I can easily afford my $700 a month premium, which provides excellent coverage for my wife and I, and our two children. If that increases to $1,500 or $2,000 a month, I won’t be able to afford it anymore. Then what?
Personally, I’d be happy if they could just actually write the bill, debate it fairly in public, and vote on it.
That they refuse to write the bill before voting on it should be a major brake on all legislation. There is no law that is too important to be passed before it is written, and yet this is exactly what happened with the stimulus, cap and trade, and now healthcare.
It would be one thing to come out and say you want a public option and simply bring it to the floor. It is quite another to say you want to vote for some vague reform, when no one knows what it will look like.
It’s a mockery of the legislative process. And it’s instructive that the Post Dispatch editorial board is willing to defend this healthcare reform without being able to actually know what it does.
The Democrats have all the power. Why don’t they simply pass it? Why have they taken so long? They know the bill is not designed to fix healthcare. And politicians who vote for it know it will be their last term.