If this Nobel prize winner is right we are in serious trouble

Vernon L. Smith, Nobel Prize winner in economics from 2002, is not very encouraging on the subject of health reform. Writing in the Wall Street Journal (The ABC Dilemma of Health Reform), he states:

The health-care provider, A, is in the position of recommending to the patient, B, what B should buy from A. A third party—the insurance company or the government—is paying A for it.

This structure defines an incentive nightmare. You do not have to be an economist to realize that, when phrased in this way, nobody knows how to solve this problem. Hence the many experiments, all of which have been deemed less than satisfactory.

I don’t know whether this problem has a solution. If it does, I think it requires us to find mechanisms whereby third-party payment is made to the patient, B, who in turn pays A, supplemented with any co-payment from B for services. Hence, from the moment B seeks services from A both know who is going to be paying A for what is delivered.

I don’t want to knock this guy’s intelligence but I don’t think we should hold our  breath hoping for his solution to kick in and save us. What is he really talking about anyway?

I much prefer the kind of economist referred to in this little joke, which my dad told me when he was trying to discourage me from studying economics:

An economist, an engineer, and a physicist are marooned on a deserted island. One day they find a can of food washed up on the beach and contrive to open it. The engineer said: “let’s hammer the can open between these rocks”. The physicist said: “that’s pretty crude. We can just use the force of gravity by dropping a rock on the can from that tall tree over there”. The economist is somewhat disgusted at these deliberations, and says: “I’ve got a much more elegant solution. All we have to do is assume a can-opener.”

October 19, 2009

3 thoughts on “If this Nobel prize winner is right we are in serious trouble”

  1. After providing a marked up expensive service to patient B, provider A sends a bill for $50,000 to insurance company C. Insurance company C denies payment and sends check for $30,000. Provider A appeals and eventually contacts Insurance Department D. After ruling in favor of Provider A, Insurance company C sends the balance of $20,000 to patient B and tells him to pay the provider A however much he believes the provider deserves and keep the rest.

    The point being that this can opener may have some merit……

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