Incentives – Page 16 – artdiamondblog.com

Perverse Incentives Undemine Air-Travel Efficiency

Source of graph: online version of the WSJ article quoted and cited below.

Why not solve the problem discussed below by privatizing airports, which would then have a profit-maximizing incentive to reduce congestion by charging more for landing rights? And if the prices were bid high enough, that, in turn would provide an incentive to build more airports.

(p. A1) The nation’s air-travel system approached gridlock early this summer, with more than 30% of June flights late, by an average of 62 minutes. The mess revved up a perennial debate about whether billions of dollars should be spent to modernize the air-traffic control system. But one cause of airport crowding and flight delays is receiving scant attention. Airlines increasingly bring passengers into jammed airports on smaller airplanes. That means using more flights — and increasing the congestion at airports and in the skies around them.

At La Guardia, half of all flights now involve smaller planes: regional jets and turboprops. It’s the same at Chicago’s O’Hare, which is spending billions to expand runways. At New Jersey’s Newark Liberty and New York’s John F. Kennedy, 40% of traffic involves smaller planes, according to Eclat Consulting in Reston, Va. Aircraft numbers tell the tale: U.S. airlines grounded a net 385 large planes from 2000 through 2006 — but they added 1,029 regional jets — says data firm Airline Monitor.

As air-travel woes have spread, some aviation officials and regulators, including the head of the Federal Aviation Administration, have begun saying delays could be eased if airlines would consolidate some of their numerous flights on larger planes.

Just two problems with that. One is that airlines like having more flights with smaller jets. The other is that passengers like it, too.

. . .

Former American Airlines boss Robert Crandall says Congress should let the FAA go back to controlling slots, matching scheduling to capacity. Airport overcrowding is "fixable, but it’s not fixable without major policy change," the former AMR Corp. CEO said at a recent conference.

Another proposal: Change the structure of landing fees. Airports now set them by weight. A small jet pays a smaller landing fee than a large plane, even though its use of the runway is the same. Why not charge a flat fee per landing, suggest some economists — or even charge the small jets more, to encourage airlines to shift to fewer flights on larger jets?

Yet another idea is to tie landing fees to the level of demand through the day, so they’d cost more at peak hours. This would encourage airlines to spread out flights and use bigger planes, says Dorothy Robyn, a consultant at Brattle Group and former aviation adviser in the Clinton administration. She says the current system "guarantees overuse of the air-traffic-control system because airlines aren’t charged the true cost."

For the full story, see:

SCOTT MCCARTNEY. "FREQUENT FLYING; Small Jets, More Trips Worsen Airport Delays FAA Likes Bigger Craft But Passengers, Airlines Prefer Busy Schedules." The Wall Street Journal (Mon., August 13, 2007): A1 & A13.

(Note: ellipsis added.)

Schumer Defends Rich Hedge Fund Democratic Donors, While Criticizing Selfish Republican “Plutocrats”

Hedge fund defender, and recipient of hedge fund donations, Democratic Senator Charles E. Schumer. Source of photo: online version of the NYT article quoted and cited below.

The story quoted below, reminds me of a story I told earlier about the famous democratic economist John Kenneth Galbraith ridiculing the wealth of Republicans.

Schumer’s behavior exemplifies the "public choice" theory of economics that suggests that the motives of politicians will generally be similar to the motives of the rest of us. In other words, incentives often matter.

(p. A1) WASHINGTON, July 29 — June was a busy month for Senator Charles E. Schumer. On the phone, at large parties and small gatherings around the nation, he raised more than $1 million from the booming private equity and hedge fund industries for the Democratic Senatorial Campaign Committee, of which he is chairman.

But there is another way Mr. Schumer has been busy with hedge fund and private equity managers, an important part of his constituency in New York. He has been reassuring them that he will resist an effort led by members of his own party to single out the industry with a plan that would more than double the taxes on the enormous profits reaped by its executives.

Mr. Schumer has considerable say on the issue. In addition to being the third-ranking Democrat in the Senate leadership, he is the only Democrat serving on both of the major committees, Banking and Finance, that have jurisdiction in the matter.

He has long been a pro-business Democrat and a fund-raising machine for the party, as well as a vociferous supporter of Wall Street issues in Washington, much the way Michigan lawmakers defend the auto industry and Iowa politicians work on behalf of corn farmers.

But in the case of the tax proposals, the strategy behind Mr. Schumer’s efforts is putting to the test another set of principles he is known for. He has regularly portrayed himself as a progressive politician who identifies with the struggles of the middle class and is sharply critical of the selfish “plutocrats” who he says control the Republican Party.

For the full story, see:

RAYMOND HERNANDEZ and STEPHEN LABATON. "In Opposing Tax Plan, Schumer Breaks With Party." The New York Times (Mon., July 30, 2007 ): A1 & A14.

Prominent Transplant Surgeon Endorses Market for Kidneys

Source of graphic: online version of the WSJ article quoted and cited below.

(p. A1) Amid a severe kidney-donor shortage, an idea long considered anathema in the medical community is gaining new currency: payments for people willing to give up a kidney.

One of the most outspoken voices on the topic isn’t a free-market libertarian, but a prominent transplant surgeon named Arthur Matas.

Dr. Matas, 59 years old, is a Canadian-born physician best known for his research at the University of Minnesota. Lately, he’s been traveling the country trying to make the case that barring kidney sales is tantamount to sentencing some patients to death.

"There’s one clear argument for sales," Dr. Matas told a gathering of surgeons earlier this year. The practice, currently illegal in the U.S., "would increase the supply of kidneys, save lives and improve the quality of life for those with end-stage renal disease."

The doctor supports a regulated market only for kidneys, since live donors can give one up and survive without excessive health risks. (Transplants of other organs, such as livers and lungs, pose greater complications to a living donor.) And Dr. Matas doesn’t rule out financial incentives for the families of deceased donors.

For the full story, see:

LAURA MECKLER. "Kidney Shortage Inspires A Radical Idea: Organ Sales As Waiting List Grows, Some Seek to Lift Ban; Exploiting the Poor?" The Wall Street Journal (Tues., November 13, 2007): A1 & A22.

Source of image: online version of the WSJ article quoted and cited above.

Unwashed Hospital Worker Hands Often Spread Disease

"A special light reveals deadly bacteria." Source of caption and photo: online version of the NYT article quoted and cited below.

If health care in the U.S. were a free market, with unregulated entry, and real consumer choice, it is hard to believe that some Wal-Mart-of-health-care wouldn’t come along that would gain huge market share and profits by providing its employees incentives to wash their hands.

(p. A1) PITTSBURGH — At a veterans’ hospital here, nurses swab the nasal passages of every arriving patient to test them for drug-resistant bacteria. Those found positive are housed in isolation rooms behind red painted lines that warn workers not to approach without wearing gowns and gloves.

Every room and corridor is equipped with dispensers of foamy hand sanitizer. Blood pressure cuffs are discarded after use, and each room is assigned its own stethoscope to prevent the transfer of microorganisms. Using these and other relatively inexpensive measures, the hospital has significantly reduced the number of patients who develop deadly drug-resistant infections, long an unaddressed problem in American hospitals.

The federal Centers for Disease Control and Prevention projected this year that one of every 22 patients would get an infection while hospitalized — 1.7 million cases a year — and that 99,000 would die, often from what began as a routine procedure. The cost of treating the infections amounts to tens of billions of dollars, experts say.

But in the past two years, a few hospitals have demonstrated that simple screening and isolation of patients, along with a relentless focus on hygiene, can reduce the number of dangerous infections. By doing so, they have fueled a national debate about whether hospitals are doing all they can to protect patients from infections, which are now linked to more deaths than diabetes or Alzheimer’s disease.

. . .

(p. A16) Dr. Richard P. Shannon, who championed a program to reduce catheter infections at Allegheny General Hospital in Pittsburgh, was able to show administrators that the average infection cost the hospital $27,000. He demonstrated that reimbursement payments for weeks of extended treatment were not keeping pace with actual costs. “I think it was assumed that hospitals didn’t mind treating these infections because they were getting paid for it,” Dr. Shannon said.

A major emphasis at the Pittsburgh hospitals has been hand hygiene. Studies have consistently shown that busy hospital workers disregard basic standards more than half the time. At the veterans hospital, where nurses have taken to pushing elevator buttons with their knuckles, annual spending on hand cleaner has doubled.

For the full story, see:

KEVIN SACK. "Swabs in Hand, Hospital Cuts Deadly Infections." The New York Times (Fri., July 27, 2007): A1 & A16.

(Note: ellipsis added.)

In the photo on the right, Pittsburgh nurse Bill Cunningham, "puts on a gown and gloves before approaching patients with infections." Source of graph, caption, and photo: online version of the NYT article quoted and cited above.

Cuba’s Best Doctors Not Blind to Incentives Offered by “Communist” Government

"Patients at the Ramón Pando Ferrer eye hospital in Havana." Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A4) Cuban doctors abroad receive much better pay than in Cuba, along with other benefits from the state, like the right to buy a car and get a relatively luxurious house when they return. As a result, many of the finest physicians have taken posts abroad.

The doctors and nurses left in Cuba are stretched thin and overworked, resulting in a decline in the quality of care for Cubans, some doctors and patients said.

For the full story, see:

JAMES C. McKINLEY Jr. "Havana Journal; A Health System’s ‘Miracles’ Come With Hidden Costs." The New York Times (Tues., November 20, 2007): A4.

Von Hippel Promotes User-Driven Innovation

"Eric von Hippel of M.I.T., left, and Dr. Nathaniel Sims, with hospital devices Dr. Sims has modified. Mr. von Hippel says users can improve on products." Source of caption and photo: online version of the NYT article cited below.

Some innovation is done by the devoted for free. But in his books, and in the article excerpted below, I think von Hippel puts too little emphasis on the entrepreneur and the entrepreneur’s profit motive, as drivers of innovation.

One example is the Moveable Type free program that underlies this, and many other blogs. It is often described as one of the best blog platforms, but it is hard to use for a non-techie, kludgey, and very limited in some obvious ways. For example, there apparently is no way that I can make comments to the most recent 10 entries visible on the main blog page. And there is only limited backup capabilities. And the spell-checker does not have "blog" in its dictionary, and asks me if I really meant to type "bog."

You can bet that if Moveable Type was produced for profit, they would have provided users these obvious capabilities. And I would rather pay for a more capable program, rather than get a less capable program for free.

(p. 5) DR. NATHANIEL SIMS, an anesthesiologist at Massachusetts General Hospital, has figured out a few ways to help save patients’ lives.

In doing so, he also represents a significant untapped vein of innovation for companies.

Dr. Sims has picked up more than 10 patents for medical devices over his career. He ginned up a way to more easily shuttle around the dozen or more monitors and drug-delivery devices attached to any cardiac patient after surgery, with a device known around the hospital as the “Nat Rack.”

. . .

What Dr. Sims did is called user-driven innovation by Eric von Hippel, a professor at the Massachusetts Institute of Technology’s Sloan School of Management. Mr. von Hippel is the leading advocate of the value of letting users of products modify them or improve them, because they may come up with changes that manufacturers never considered. He thinks that this could help companies develop products more quickly and inexpensively than with their internal design teams.

“It could drive manufacturers out of the design space,” Mr. von Hippel says.

It is a difficult idea for research and development departments to accept, but one of his studies found that 82 percent of new capabilities for scientific instruments like electron microscopes were developed by users.

. . .

One problem with the user-innovation model is that it can run into intellectual property rights protections. . . .

. . .

. . . , Mr. von Hippel’s ideas are up against more conventional forms of user-aided design, such as sending anthropologists to study how people use products in their daily lives. Companies then translate their research into new designs.

Even some of Mr. von Hippel’s acolytes remain cautious. “A lot of this is still in the category of, ‘You could imagine this working out really well,’ ” says Saul T. Griffith, who as an M.I.T. engineering student was part of a group of kite-surfers who developed products for their sport that have since become commercialized. Mr. von Hippel wrote about Mr. Griffith in his 2005 book, “Democratizing Innovation.”

For the full story, see:

MICHAEL FITZGERALD. "Prototype How to Improve It? Ask Those Who Use It." The New York Times, Section 3 (Sun., March 25, 2007): 5.

(Note: ellipses added.)

von Hippel has two main books in which he defends his user-driven innovation ideas:

von Hippel, Eric. The Sources of Innovation. New York: Oxford University Press, 1988.

von Hippel, Eric. Democratizing Innovation. Cambridge, MA: MIT Press, 2005.

Incentives for Organ Donations Would Save Lives

Sally Satel is a medical doctor and a resident scholar at the Amerrican Enterprise Institute. Source of photo: http://www.aei.org/publications/filter.all,pubID.25785/pub_detail.asp

(p. A12) At the annual meeting of The American Society of Transplant Surgeons this winter a straw poll revealed that 80 to 85% were in favor of studying incentives for living donors, according to society president Arthur Matas. In 2003, the American Medical Association testified on behalf of legislation that would have permitted pilot studies of incentives for deceased organs.

The public seems receptive as well, according to a new Gallup poll on attitudes toward donation of organs after death. The most striking results were among 18 to 34 year olds wherein an impressive 34% said that incentives would make them "more likely" to donate while 6% said less likely. . . .

. . .

The idea of combining organ donation with material gain can make people queasy. Yet the mix of financial and humanitarian motives is commonplace. No one objects, for example, to a tax credit for charitable contributions–a financial incentive to complement the "pure" motive of giving to others. The great teachers who enlighten us and the doctors who heal us inspire no less gratitude because they are paid. An increase in the supply of kidneys will ameliorate suffering and prevent needless death. This is more important than whether an organ has been given freely or for material gain. . . .

For the full commentary, see:

Satel, Sally. "Doing Well By Doing Good." The Wall Street Journal (Fri, March 16 2007): A12.

(Note: ellipses added.)

Testing Incentives

When W. became president, he had two major education initiatives: vouchers, and "no child left behind." It is unfortunate that in the face of formidable Democratic opposition, he abandoned vouchers, and stuck with "no child left behind." The latter policy’s intent is noble, but some of its unintended consequences are perverse.

Mandatory testing results in educational inefficiency: teachers teach to the tests, and as the commentary quoted below reports, tests get jiggered to show good results.

The main harm though, is that some of the most important results of good education, like resilience, self-discipline, and creativity, are not readily measured in standardized multiple choice tests. So programs, such as Montessori, that encourage such results, end up under-appreciated and under-rewarded.

What we most need is for parents to be free to choose in education. That would result in far greater innovation and improvement in education than the current "no child left behind" standardized testing.

(p. A31) If teachers, administrators, politicians and others have a stake in raising the test scores of students — as opposed to improving student learning, which is not the same thing — there are all kinds of incentives to raise those scores by any means necessary.

. . .

A study released last week by the Thomas B. Fordham Institute and the Northwest Evaluation Association found that “improvements in passing rates on state tests can largely be explained by declines in the difficulty of those tests.”

The people in charge of most school districts would rather jump from the roof of a tall building than allow an unfettered study of their test practices. But that kind of analysis is exactly what’s needed if we’re to get any real sense of how well students are doing.

For the full commentary, see:

BOB HERBERT. " High-Stakes Flimflam." The New York Times (Tues., October 9, 2007): A31.

Columnist Bob Herbert. Source of photo: online version of the NYT column quoted and cited above.

Incentives, and Unintended Consequences, in Medicine

A clever image, but is it apt, since the article claims doctors are extracting money, rather than injecting it? Source of image: online version of the NYT article quoted and cited below.

If patients paid for their own care, doctors would have a greater incentive to improve overall care that is valued by patients. The perverse incentives of the current government Medicare reimbursement rules would be gone.

One main lesson from the article below is to show how fundamentally hard it is for the government to get the incentives right: they tried to re-jigger the reimbursement rules, but the law of unintended consequences once again bit them in their collective ass (or more accurately, alas, it bit us).

(p. C1) When Medicare cracked down two years ago on profits that doctors made on drugs they administered to patients in their offices, it ended a windfall worth hundreds of thousands of dollars a year for each physician.

The change, which mainly affected drugs to treat cancer and its side effects, had an immediate effect. In all, cancer doctors billed about $4.4 billion for chemotherapy and anemia medications in 2005, down from $5.6 billion in 2004, with Medicare covering 80 percent of the bills in each year. The difference mostly represented profit that doctors had made on the drugs.

But the change did not reduce overall federal spending on cancer care, which increased slightly. And cancer doctors say the change did nothing to reduce a larger problem in cancer treatment.

Some physicians say that cancer doctors responded to Medicare’s change by performing additional treatments that got them the best reimbursements, whether or not the treatments benefited patients. Those doctors also say that Medicare’s reimbursement policies are responsible.

“The system doesn’t value the time we spend with patients,” said Dr. Peter Eisenberg, a cancer doctor in Greenbrae, Calif., and a former director of the American Society of Clinical Oncology. “The system values procedures.”

The ballooning cost of cancer treatment, one of Medicare’s most expensive categories, offers a vivid example of how difficult it may be to rein in the nation’s runaway health care spending without fundamentally changing the way doctors are paid.

. . .

(p. C6) Now, oncologists are lobbying Medicare officials and members of Congress to reverse some of the changes and again raise the prices the government pays for drugs.

But Dr. Robert Geller, who worked as an oncologist in private practice from 1996 to 2005 before leaving to become senior medical director at Alexion, a biotechnology company, said that increasing drug reimbursement might raise oncologists’ profits but would not relieve the system’s deeper flaws.

As long as oncologists continue to be paid by the procedure instead of for spending time with patients, they will find ways to game the system, however much money they make or lose on prescribing drugs, he said.

“People go where the money is, and you’d like to believe it’s different in medicine, but it’s really no different in medicine,” Dr. Geller said. “When you start thinking of oncology as a business, then all these decisions make sense.”

For the full story, see:

ALEX BERENSON. "A Stubborn Case Of Spending On Cancer Care." The New York Times (Tues., June 12, 2007): C1 & C6.

(Note: ellipsis added.)

Source of graph: online version of the NYT article quoted and cited above.

Perverse Incentives in Medicine

Source of graph: online version of the NYT article quoted and cited below.

(p. A1) Stark evidence that high medical payments do not necessarily buy high-quality patient care is presented in a hospital study set for release today.

In a Pennsylvania government survey of the state’s 60 hospitals that perform heart bypass surgery, the best-paid hospital received nearly $100,000, on average, for the operation while the least-paid got less than $20,000. At both, patients had comparable lengths of stay and death rates.

And among the 20 hospitals serving metropolitan Philadelphia, two of the highest paid actually had higher-than-expected death rates, the survey found.

Hospitals say there are numerous reasons for some of the high payments, including the fact that a single very expensive case can push up the averages.

Still, the Pennsylvania findings support a growing national consensus that as consumers, insurers and employers pay more for care, they are not necessarily getting better care. Expensive medicine may, in fact, be poor medicine.

“For most consumers, the fact that there is no connection between quality and cost is one of the dirty secrets of medicine,” said Peter V. Lee, the chief executive of the Pacific Business Group on Health, a California group of employers that provide health care coverage for workers.

. . .

(p. C4) And the survey found that good care can go unrewarded. One Philadelphia area hospital, Main Line Health’s Lankenau center, which performs a large number of bypass surgeries and has a high success rate, according to the survey, was paid an average of $33,549 by private insurers. That was less than half the nearly $80,000 in average payments received by the other hospitals, with poorer track records.

. . .

“The current reimbursement paradigm is fundamentally broken,” said Dr. Ronald Paulus, an executive with Geisinger, who says there is no current financial incentive for a hospital to provide the kind of care that leads to better outcomes and lower payments.

. . .

The problem, according to some health policy experts, is that the hospitals may, in fact, be rewarded for poor care: keeping patients too long because they caught an infrection or had a complication. That, they say, could be the main lesson of the Pennsylvania survey.

"What this highlights is the assumption that more money means better care is flat-out wrong," said Mr. Lee, the chief executive of the California employer group. "It’s easy to pay for bad quality, and we pay for it every day."

For the full story, see:

REED ABELSON. "In Health Care, Cost Isn’t Proof of High Quality." The New York Times (Thurs., June 14, 2007): A1 & C4.

(Note: The last three paragraphs, and the last sentence of the fourth from the last paragraph, of the print version of the article, are missing from the online version.)

(Note: ellipses added.)

The Case for Patent Law Reform

The author of the commentary quoted below is the head lawyer for Intel. I believe that the evidence is strong that patents can provide strong incentives for innovation. But the devil is in the details. I have not studied the Patent Reform Act of 2007, so I am not sure whether, overall, it is an improvement over the current rules. But the case for reform is strong, and the topic is one that highly deserves further research.

(p. A15) The U.S. patent system is beginning to show its age; outpaced by the swift evolution of technology and commerce, it increasingly favors speculators over innovators, impeding innovation and economic growth. Fortunately, the bipartisan "Patent Reform Act of 2007," introduced in both the House and Senate, would improve the process for granting patents, and rebalance court rules and procedures to ensure fair treatment when patents wind up in litigation. The Senate Judiciary Committee will take up S.1145 today.

Congress needs to pass this bill, during this session, as the need for reform is clear. Nationwide, the number of patent lawsuits nearly tripled between 1991 and 2004, and the number of cases between 2001 and 2005 grew nearly 20%. Until 1990, only one patent damages award exceeded $100 million; more than 10 judgments and settlements were entered in the last five years, and at least four topped $500 million. One recent decision topped $1.5 billion.

The number of questionable, loosely defined patents, moreover, is rising. One company holds patents that it claims broadly cover current technologies that allow people to make phone calls over the Internet. Another has staked a claim on streaming video over the Internet generally and has pursued colleges for royalties on their distance-learning programs. In 2002, a five-year-old boy patented a method of swinging on a swing.

Unfortunately, under current law, parties that want to innovate in areas covered by questionable patents have only two options, both of them bad: an ineffective, rarely used re-examination process, or litigation — the average cost of which is, by some estimates, $4.5 million. This impedes innovation, as the FTC noted: "One firm’s questionable patent may lead its competitor to forgo R&D in the areas that the patent improperly covers."

For the full commentary, see:

BRUCE SEWELL. "Patent Nonsense." The Wall Street Journal (Thurs., July 12, 2007): A15.