Follow the Incentives

I often tell people that in failing organizations like the government or GM, most of the folks who are "part of the problem" aren't bad people, they just have bad incentives.  I have to remind myself this all the time when dealing with government bureaucrats who are making it impossible for our company to make progress in some area.  These folks did not grow up imagining a life in which they block all growth and innovation, they simply found themselves in organizations  which provide strong incentives to act in this way.  Such consequences may be unintended, but they certainly aren't unexpected when one studies incentives.

To this end, the incentives in the new Baucus health care bill do not look good.  Here is one example:

Because Baucus and the Dems apparently can't be bothered to post the bill online, the Washington Examiner had to get a copy the old fashioned way.  When they did, here is what they found on pages 80-81, "hidden amid a lot of similar legislative mumbo-jumbo":

"Beginning in 2015, payment would be reduced by five percent if an aggregation of the physician's resource use is at or above the 90th percentile of national utilization."  Translated into plain English, it means that in any year in which a particular doctor's average per-patient Medicare costs are in the top 10 percent in the nation, the feds will cut the doctor's payments by 5 percent.
[...]

This provision makes no account for the results of care, its quality or even its efficiency.  It just says that if a doctor authorizes expensive care, no matter how successfully, the government will punish him by scrimping on what already is a low reimbursement rate for treating Medicare patients. The incentive, therefore, is for the doctor always to provide less care for his patients for fear of having his payments docked. And because no doctor will know who falls in the top 10 percent until year's end, or what total average costs will break the 10 percent threshold, the pressure will be intense to withhold care, and withhold care again, and then withhold it some more.  Or at least to prescribe cheaper care, no matter how much less effective, in order to avoid the penalties.

The result can't be anything but an incentive for doctors to provide less care to those who need it most, and, when they get tired of getting their pay cut for doing their job, leaving the medical profession altogether.  The article goes on to point out that nothing is done in the bill about the worst incentive to increase medical costs doctors face, the threat of unreasonable tort actions that causes doctors to order ever test and procedure imaginable to combat future second-guessing in front of a jury.

  • Very nice Catch on this!!

    This is why Democrats don't want the public to read the bills they pass! It is also another reason Americans are so angry right now ( http://www.conservativeblog.thewebinfocenter.com/conservative-blog/three-reasons-america-is-angry )

    Americans believe that their government is not listening to them (they are right!). Passing health care reform over the objections of most voters is a betrayal of the representative system of government. Pelosi and the rest of the leftist leadership should not expect anything less than greatly elevated outrage if this thing is allowed to pass.

  • Pops

    Good post. As I see it, the underlying principle is that the behavior of organizations is intrinsically tied to their structure. One can make all the promises one wishes regarding a socialist health-care plan, for example, but at the end of the day it will behave as a socialist enterprise dominated by lack of feedback, misplaced incentives, and corruption.

  • artemis

    Please double check this thought

    Someone will ALWAYS be in the top 10%

    If we always penalize the top 10% with a 5% cut then we will enforce a shrinking price cap of .5% per year. This is even ignoring incentives to avoid the top 10%, likely making the shrinking cap much larger.

    Did I do my math wrong?

  • Allen

    Artemis, I was going to point out the same. Heck, they could be .00000013% above the median payout but their will always be those in the top 10%. And if 10% get hit every year with a 5% reduction, it's going to cause some interesting behaviors.

    For example, if the bill actually tracks not by doctor but by practice you could see a lot of new practices being set up each year.... and others closed down. Or if it is by doctor, for those who own a practice together, let's say 3 of them, they may pick one of them to be the fall guy and that guy gets all the of the worst Medicare cases. Technically they take the payment hit. But it ensures the others keeps theirs higher. And they could of course take that into account when diving up the proceeds from the practice they all own.

    Then again, with so the supply for actual caregiving under medicare already so low, how many more hits can it take?

  • This is somewhat like the "bottom 5% out" applied to employees every year in some corporations. If the rule is applied absolutely uniformly, then Jim who has all great employees will have to get rid of someone, just like Caroline whose team is mediocre. And Linda who is working on a high-priority project will have to get rid of someone just like Donna who really could afford to lose an employee with no harm done.

    In the real business world, successive levels of management usually have enough discretion to move the targets around a bit at the lower levels..Jim and Linda can protect their teams but Caroline and Linda will each have to fire *two* people...as long as the targets are met at the higher level. It's doubtful if this kind of discretion of feasible or desirable in a government environment.

  • And some people want to create a public plan where the government will eventually apply this to all care.

    Of course, in government speak a cut isn't actually a cut, it is reduction of an increase. http://www.healthexpertease.org

  • Dr. T

    "I often tell people that in failing organizations like the government or GM, most of the folks who are “part of the problem” aren’t bad people, they just have bad incentives."

    Having spent over four years working for the federal government (and ten years working for state governments), I strongly disagree. Bad people are attracted to bureaucracies. People with limited skills, surly attitudes, or a streak of vindictiveness love becoming bureaucrats with the power to fuck up peoples' lives. The nasty workers at the DMV didn't adopt nastiness due to perverse incentives, they took the positions because they could be nasty without being punished. I watched a worker in the VA travel office (that compensates rural veterans for having to drive long distances to get medical care) treat veterans like they were shit on a shoe. She just liked being mean, especially to men. And, between federal laws favoring employees (over supervisors) and unions protecting employees from anything short of strangling the union president, it's impossible to get rid of such workers. The VA did fire a male nurse who had verbally abused numerous patients (in front of witnesses), but a judge overturned the dismissal and put him back on the job.

    It seems clear to me that many of the most trying people we deal with in bureaucracies, particularly government bureaucracies, took their jobs in order to be difficult to people, to exercise petty power over others, or to be nasty with minimal risks of retaliation.

  • Exactamundo. Incentives are the gravitational motive force of economics (and that’s why you’re so good at it Coyote, even though you’re an engineer by training).

    I part ways here: they are bad people. They are stupid people, because 1) they do not have the introspective sense to ask themselves, “what is really going on here?” and 2) they reflexively gravitate to solutions which impose restrictions on others, and 3) [say it with me……] THEY DO NOT UNDERSTAND ECONOMICS.

    That’s bad. They are intentionally taking a position which will result in the loss of not only freedom, but very likely life here.

    It is also why everyone who thinks healthcare reform is a good thing is seriously mistaken. Remember, these are lawyers writing this legislation (see #3 above).

    Economically, it is a looming disaster.

  • Douglas Foss

    Actually, the new incentives favor an increase in malpractice claims. As physicians react to the new incentives by withholding care, more circumstances providing grist for malpractice claims likely will occur, which, in turn, likely will generate more claims (with attendant expense even if the claims are unsuccessful) and potentially more recoveries (because withholding of care might in fact be a departure from accepted medical practice). Then, if you think about it, withholding of care might generate more adverse outcomes for the patients receiving treatment, which, in turn, will require more medical treatment, with additional expense. Physicians will be squeezed from two directions - the intended one from the reimbursement formula and the unintended one from higher malpractice premiums. Fortunately for them, but unfortunately for the rest of the country, they will receive relief in the form of additional reimbursement required to deal with adverse outcomes that might have been avoided had they not skimped on care in the first place. One would think that physicians would be frustrated by the competing pressures of penalties for ordering what might otherwise be best practice and rising malpractice premiums, a wave of new demands for care resulting from expansion of the pool of patients without a corresponding increase in supply, and adverse outcomes for their patients as a result of such difficult tradeoffs.

  • DN

    Very nice Catch on this!!
    This is why Democrats don’t want the public to read the bills they pass! It is also another reason Americans are so angry right now ( http://www.conservativeblog.thewebinfocenter.com/conservative-blog/three-reasons-america-is-angry )
    Americans believe that their government is not listening to them (they are right!). Passing health care reform over the objections of most voters is a betrayal of the representative system of government. Pelosi and the rest of the leftist leadership should not expect anything less than greatly elevated outrage if this thing is allowed to pass.