Incentives – Page 19 – artdiamondblog.com

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.

Doctor and Patient Incentives, and Lack of Competition, Fuel High Health Costs

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

Why are so many lumbar fusions done, in spite of the absence of evidence for their efficacy? Well, doctors find the procedure lucrative. Patients do not pay for it themselves, so they have little incentive to look hard at the effectiveness. And health care providers, through licensing and government regulations, have largely insulated themselves from competition from low cost providers.

(p. C1) In Idaho Falls, Idaho, anyone suffering from the sort of lower back pain that may conceivably be helped by the fusing of two vertebrae is quite likely to have the surgery. It’s known as lumbar fusion, and the rate at which it is performed in Idaho Falls is almost five times the national average. The rate in Idaho Falls is 20 times that in Bangor, Me., where lumbar fusion is less common than anywhere else.

These numbers come from the wonderful Dartmouth Atlas of Health Care. The Dartmouth researchers adjust the numbers to take into account age, race and sex, which is another way of saying that there is no good explanation for the huge variations they find. Doctors in the Idaho Falls area are probably just being more aggressive than doctors elsewhere.

But it’s not clear that their patients are any better off. The evidence for lumbar fusion is incredibly mixed. It seems to help people with certain kinds of pain, but many others recover just as well without the surgery. Of course, doctors are almost always better off if the surgery is done: The typical hospital bill for lumbar fusion is roughly $50,000.

This is about as good an example as you can find of the health care mess. The number of lumbar fusions performed in this country has more than tripled since the early 1990s, and Medicare now spends more than $600 million a year on the procedure. It’s one reason your health insurance bill has gone up.

For the full commentary, see:

DAVID LEONHARDT. "ECONOMIX; Health Care As if Costs Didn’t Matter." The New York Times (Weds., June 6, 2007): C1 & C8.

With Right Incentives, Workers Make Better Tech Purchases Than Managers

(p. A7) Corporate technology managers usually pick laptops, software and other technology for employees. Now some tech managers are finding workers can do a better job when they choose and buy the equipment themselves.

At KLM Royal Dutch Airlines, a unit of Air France-KLM SA, employees had expressed frustration at the company’s policy of providing and supporting only one type of laptop, the Lenovo A30 (formerly IBM), and one smartphone, the Nokia 6021. Last November, Martien van Deth, a senior technology officer in the Amsterdam office, tried a new system: He gave 50 information-technology staffers an allowance of $203, covering two years, to buy cellphones for corporate use. Those who picked more expensive phones paid the extra. Those who chose cheaper phones kept the change. As long as the phone ran Microsoft Corp.’s Windows Mobile version 5 or 6 operating system, KLM guaranteed access to corporate email. The catch: Users had to deal with technical problems themselves and replace phones that broke.

Not only did the program cost less than the $231 the company paid (p. A9) for phones and support over the same period, it was a hit with employees — some of whom bought phones with fancy ringtones and video players. Now "no one can complain that their corporate phone doesn’t have a camera," says Mr. van Deth, who plans to offer a tech allowance to KLM’s entire 1,000-person IT department later this summer, and wants to take the program companywide. He’s also about to start a tech-allowance program for laptops.

For the full story, see:

BEN WORTHEN. "Office Tech’s Next Step: Do It Yourself." The Wall Street Journal (Tues., July 3, 2007): A7 & A9.

Creating Incentives for Quality Health Care

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

The experiment described in the article excerpted below sounds promising. Such experiments would be easier, and more common, if health care were not so highly regulated, and if the government did not create such large barriers to entry in the practice of medicine.

(p. A1) What if medical care came with a 90-day warranty?

That is what a hospital group in central Pennsylvania is trying to learn in an experiment that some experts say is a radically new way to encourage hospitals and doctors to provide high-quality care that can avoid costly mistakes.

The group, Geisinger Health System, has overhauled its approach to surgery. And taking a cue from the makers of television sets, washing machines and consumer products, Geisinger essentially guarantees its workmanship, charging a flat fee that includes 90 days of follow-up treatment.

Even if a patient suffers complications or has to come back to the hospital, Geisinger promises not to send the insurer another bill.

Geisinger is by no means the only hospital system currently rethinking ways to better deliver care that might also reduce costs. But Geisinger’s effort is noteworthy as a distinct departure from the typical medical reimbursement system in this country, under which doctors and hospitals are paid mainly for delivering more care — not necessarily better care.

. . .

Under the typical system, missing an antibiotic or giving poor instructions when a patient is released from the hospital results in a perverse reward: the chance to bill the patient again if more treatment is necessary. As a result, doctors and hospi-(p. C4)tals have little incentive to ensure they consistently provide the treatments that medical research has shown to produce the best results.

Researchers estimate that roughly half of American patients never get the most basic recommended treatments — like an aspirin after a heart attack, for example, or antibiotics before hip surgery.

The wide variation in treatments can translate to big differences in death rates and surgical complications. In Pennsylvania alone, the mortality rate during a hospital stay for heart surgery varies from zero in the best-performing hospitals to nearly 10 percent at the worst performer, according to the Pennsylvania Health Care Cost Containment Council, a state agency.

For the full story, see:

REED ABELSON. "In Bid for Better Care, Surgery With a Warranty." The New York Times (Thurs., May 17, 2007): A1 & C4.

Providing a warranty provides the hospital to provide higher quality care, as evidenced, for example, in this nurse counting sponges to make sure that none have been left behind in the patient. Source of photo: online version of the NYT article quoted and cited above.

Why CEOs Are Paid So Much More than Other Near-Top Execs

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

(p. A1) Like most companies, Office Depot has long made sure that its chief executive was the highest-paid employee. Ten years ago, the $2.2 million pay package of its chief was more than double that of his No. 2. The fifth-ranked executive received less than one-third.

But the incentive for reaching the very top of the company is now far greater. Steve Odland, who runs Office Depot today, made almost $12 million last year, more than four times the compensation of the second-highest-paid executive and over six times that of the fifth-ranking executive in the current hierarchy.

As executive pay has surged in most American companies, attention has focused on the growing gap between the earnings of top executives and the average wage of workers in cubicles or on the shop floor. Little noticed, though, is how much the gap has also widened between the summit and the next few echelons down.

. . .

The pay of chief executives, analysts say, is being driven by superstar dynamics similar to those that determine the inordinate rewards for pop stars and athletes — a phenomenon first explained by Sherwin Rosen of the University of Chicago in (p. C7) 1981 and underlined more than a decade ago by the economists Robert H. Frank and Philip J. Cook in their book “The Winner-Take-All Society” (Free Press, 1995).

As American companies, American hedge funds — and even American lawsuits — have grown in size, it has become ever more valuable to get the “best” chief executive or fund manager or litigator. This has fueled a fierce competition for talent at the top, which has pushed economic rewards farther up the ladder of success, concentrating the richest pay levels even more.

“There is an interaction between technology and scale which is true in all these businesses,” said Steven N. Kaplan, a finance professor at the Graduate School of Business of the University of Chicago. “One person can oversee more assets, and this translates into more money.”

. . .

As companies grow and expand globally, the value of the top executive can grow exponentially. In a study last year, two economists, Xavier Gabaix of the Massachusetts Institute of Technology and Augustin Landier of New York University, argued that the fast rise in pay of corporate C.E.O.’s mostly reflected the growing size of American corporations.

Processing reams of data, the economists estimated that hiring the most effective chief executive in the country would, statistically, increase the stock value of a company by only 0.016 percent, compared with hiring the 250th chief executive. But at a company like General Electric, which is worth about $380 billion, that tiny difference would amount to $60 million.

This, the economists argued, helps explain why that top chief executive earned five times as much as the 250th. “Substantial firm size leads to the economics of superstars, translating small differences in ability to very large deviations in pay,” the economists wrote.

For the full story, see:

EDUARDO PORTER. "More Than Ever, It Pays to Be the Top Executive." The New York Times (Fri., May 25, 2007): A1 & C7.

(Note: ellipses added.)

Ethanol Subsidies Reduce Incentives to Build New Oil Refineries

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

(p. A1) “If the national policy of the country is to push for dramatic increases in the biofuels industry, this is a disincentive for those making investment decisions on expanding capacity in oil products and refining,” said John D. Hofmeister, the president of the Shell Oil Company. “Industrywide, this will have an impact.”

The concerns were echoed in a recent report by Barclays Capital, which said the uncertainty about the ethanol growth “will do little to accelerate desperately needed investment in complex United States refining units.”

“Indeed, it is likely to deter and further delay investment, if not rule out many refinery investments completely.”

. . .

(p. A15) As a result of the push for biofuels, and encouraged by federal subsidies and grants, dozens of ethanol distilleries are being planned. These investments should double the annual production of ethanol from corn to 15 billion gallons by 2012 from about 6 billion gallons today.

But given farmland constraints and the need to use corn for food, that is as much ethanol as can possibly be produced from corn, according to the ethanol industry’s own calculations. Ethanol producers recognize that it is not clear how an additional 20 billion gallons of ethanol — President Bush has called for 35 billion gallons of biofuels by 2017 — would be produced from cellulose or biomass.

“The current thinking is that based on today’s technology, we suspect corn-based ethanol will generate at least 15 billion gallons,” said Brian Jennings, the executive vice president of the American Coalition for Ethanol, an association of ethanol and corn producers. “Beyond that, it’s uncertain. The marketplace will make that determination on where it will come from.”

Yet some members of Congress would like to make the president’s goal for biofuels a mandatory target — the equivalent of 2.3 million barrels a day that would, in effect, create an ethanol industry roughly the size of world-class oil producers like Kuwait or Nigeria.

The economics of cellulosic ethanol, made from nonfood crops and agricultural waste, are also unclear. Since cellulosic ethanol, still at an experimental stage, is twice as expensive as corn-based ethanol, there are currently no commercial-scale cellulosic plants.

Lawrence Goldstein, an energy analyst at the Energy Policy Research Foundation, an industry-financed group, has been warning for nearly a year that the government’s twin goals of encouraging refiners to increase production and promoting increased supplies of biofuels work against each other.

“These two policies are not complementary,” Mr. Goldstein said. “These policies are in conflict.”

In addition, Mr. Goldstein said, an emphasis on ethanol might lead to increased volatility in fuel prices.

“If we get a bad corn crop, we will end up paying for it at the pump and on the food shelves,” he said. “We are not buying security. We are increasing volatility.”

For the full story, see:

JAD MOUAWAD. "Oil Industry Says Biofuel Push May Hurt at Pump." The New York Times (Thurs., May 24, 2007): A1 & A15.

(Note: ellipsis added.)

A trucker getting ready to fill his tanker at a Mississippi refinery. Source of photo: online version of the NYT article quoted and cited above.

Incentives Matter in Medicine, But Profit is Not the Problem

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

In the article excerpted below, the profit motive in medicine is painted as the villain of the piece. But the problem is not the profit motive. The problem is that government occupational licensing and regulation in medicine raises barriers to entry for low-cost competitors to enter, innovate, and compete.

(p. A1) Two of the world’s largest drug companies are paying hundreds of millions of dollars to doctors every year in return for giving their patients anemia medicines, which regulators now say may be unsafe at commonly used doses.

The payments are legal, but very few people outside of the doctors who receive them are aware of their size. Critics, including prominent cancer and kidney doctors, say the payments give physicians an incentive to prescribe the medicines at levels that might increase patients’ risks of heart attacks or strokes.

Industry analysts estimate that such payments — to cancer doctors and the other big users of the drugs, kidney dialysis centers — total hundreds of millions of dollars a year and are an important source of profit for doctors and the centers.

For the full story, see:

ALEX BERENSON and ANDREW POLLACK. "Doctors Reap Millions for Anemia Drugs." The New York Times (Weds., May 9, 2007): A1 & C4.

Bernice Wilson’s kidney dialysis treatment includes the anti-anemia drug Epogen. Source of photo: online version of the NYT article quoted and cited above.

The Mexicans Are Not What Is Wrong with Mexico

Gerardo on the left; me in the middle; and Jenny in the right lower corner. Photo by Jeanette (who you can just barely see in the mirror over Gerardo’s shoulder).

In downtown Cancun we dined at a wonderful restaurant called Labná. The food was authentic, varied, and delicious. The service, from Gerardo (above) was attentive and replete with gracious good-will.

The restaurant itself was an oasis of order in a milieu of disorder and decay.

As one tours Mexico, one has the sense of an enormous waste of human time and talent. The incentive to act and the ability to get things done, is sucked away by an enormous cadre of parasitical rent-seeking hangers-on, who are either part of the government or who are privileged by government rules and regulations.

When the roof of our home in Nebraska was damaged by hail several years ago, it was replaced by a crew of Mexican workers.

Our retired neighbor Howard had the habit of carefully monitoring all of our outdoor contractors. Old, reliable, helpful, curmudgeony Howard (may he rest in peace) was much more likely to offer complaint than praise. But Howard told me, with genuine respect and admiration in his voice, how impressed he was with how hard the Mexican crew had worked, especially through the oppressive heat of the summer days.

The Mexicans are not what is wrong with Mexico. What is wrong with Mexico is the Mexican government.

In most areas of government activity, the Mexicans would benefit from a lot more of what Edmund Burke called "salutary neglect."

(Note: Leonard Liggio reminded me of the wonderful phrase "salutary neglect" at the April 2007 meetings of the Association of Private Enterprise Education in Cancun.)

(Another note: The address of the Labná restaurant is Margaritas 29. It is near a run-down park, where I purchased an OK cup of flan from a vendor for 10 pesos–the best flan I ever had for less than a dollar!)