The Nobel Prize in Economics Goes To…

Submitted by on Friday, October 24, 2014 - 01:38

The Nobel Prize in economics is often awarded to those who have developed simple insights about how behaviors and markets work…or don't – This year's prize went to Jean Tirole for his insights on how the principles of agency and game theories could apply to how regulators could manage tricky markets, in particular those with monopoly or monopsony players. One of his important insights is that the best possible solution for a regulator is not always the one that leads to the lowest price. What Tirole modeled is the well-known dilemma for many clinicians in the U.S. that no good deed goes unpunished. His conclusion is also obvious to us, that firms placed in such situations will simply stop cost-cutting efforts. In fact, the smart ones (this is where Game Theory kicks in) will realize that they might be better off artificially inflating their costs of production. The pertinence of Tirole's research is de rigueur as we observe the current work that public and private purchasers, along with providers, have engaged in with payment innovation. And especially pertinent to CMS' gerrymandering of the ACO and Bundled Payment programs.

What this means to you – For those who might have a small inclination to do so, we encourage a closer look at the acronym that is PROMETHEUS, and in particular the fourth letter in. It stands for Margin. And it's that great non-economist, Alice Gosfield, who made certain that this fundamental principle of equity be included in the overall design of that aptly-named bundled payment program. About a decade ago, way before anyone paid attention, we realized that the natural effect of bundled payments, which could/would/should become transparent prices, would inevitably lead those with bargaining power (let's call them the Big Payers) to keep squeezing down on the price to the point beyond the one at which providers could make any money. At that point, cost cutting and better patient management would become self-defeating. We surmised that when that point would be reached, the payment model would collapse and the efforts failed. And so we included an explicit allowance for provider margin. In other words, the policy that leads to the lowest price isn't always the best. This is a Nobel Prize-winning lesson that CMMI and its army of Beltway Bandits have failed to learn and seem unwilling to understand. The most recent example is the egregious way in which they have re-based the prices in the contracted bundled payment program (yes folks, they've actually unilaterally changed the negotiated price). Many of those who have spent well over a year re-engineering care are being punished for their good deeds. It's a bit more complex than that, but the upshot is the same and the outcome may very well be what we predicted several years ago…the collapse of the effort. It's mind numbing of stupidity that is caused by a blend of arrogance and ignorance; a toxic combination. So today we're hoping that the high-priced government consultants will use a small portion of their overpaid time to read up on Tirole's work before the great hope for change we had been promised turns into the sorrow of the same old stuff.