By Carlos Fuentes
This is the fourth installment in a series of four articles that were summarized in “A Rigged Game,” published in the July/August 2017 issue of Contingencies, itself a follow up to “Winning or Losing the Game?” (Contingencies, July/August 2016), where a mathematical model was introduced to analyze the economic consequences of integrated delivery models. The first three installments of the series appeared in the August 2017, November 2017 and February 2018 issues of Innovators & Entrepreneurs, respectively, under the titles “Classical Thinking and Game Theory,” parts I and II, and “Human Nature and the U.S. Health Care System, Part III.”
The purpose of this series of articles is to illustrate the “soft” approach of Game Theory using Thucydides’ master work, The History of the Peloponnesian War (The History)1, and then apply it to analyze the strategic interactions of those who participate in the U.S. health care system, understand the root causes of the problem (cost, access, quality, efficiency), and draw conclusions about plausible mid- and long-term outcomes. Due to space considerations the study of Thucydides is limited to a few sections of the First Book of his magnum opus where he introduces his views on human nature, analyzes the causes of the war between Athens and Sparta, and recounts the justifications invoked by the belligerents. A few concepts of Game Theory are discussed to demonstrate how they are embedded in Thucydides’ thought. This approach should give an indication of how war colleges, military academies and courses on diplomacy approach the master.
The Players
Even the gods were included in the looting—The Annals of Imperial Rome, Tacitus
The list of players deserves close scrutiny:
- The public. It has been said repeatedly that insured patients demand immediate access to the best care, value freedom of choice and cost control. Even though the United States does not deliver on any of these criteria, the perception is that the systems of other countries are not as good. The fact remains that public opinion could force real improvements but in practice it does not because it is divided, manipulated and lacks an effective mechanism to impose its will.
- Employees and employers. Employers act rationally by shifting costs to employees as health care expenses reduce earnings to levels that are not acceptable to management and owners. In the process employers display their “negotiating” strength—force, some would say. Employees, with no real power to resist cost shifting, have seen their net pay reduced and are becoming more vulnerable to financial problems that range from manageable inconveniences to financial catastrophes. The corrosive effect of stress and fear of losing a job that provides some type of health benefit, although unquantified, takes a heavy toll. Employers understand that even with increasing employee contributions their share of benefits will continue to rise much faster than productivity and it will become unsustainable. For this reason employers are likely to support mechanisms that limit their financial commitment (not obligation) to provide benefits and, as a byproduct, to control health care inflation. This could mean, but it does not have to, rhetoric notwithstanding, that indirectly employers support initiatives to improve quality and efficiency.
- Politicians. Decisions in the political machinery respond to personal convictions, concern for the welfare of citizens, eagerness for support to remain in power (typically through monetary contributions) and desire for personal gain. Since money buys influence and money comes from interest groups, it is reasonable to conclude—like the authors of the Federalist papers did—that when the dust is settled, in the absence of effective counter-balances, private interests rule. The consequence is that an influential sector of the political apparatus will oppose changes that negatively affect the interests of its financial supporters.
- Providers/vendors. These are the key players on account of their ability (predicated on economic power) to influence public opinion and buy political clout. The list of providers/vendors is long and includes the usual suspects: insurance companies, physicians, hospitals and drug manufacturers, but also IT vendors, biotech firms, consultants, wellness programs firms and any group that profits from the health care industry. To be sure, certain products and services are highly valuable, priced fairly and fundamental to the proper functioning of the health care system. But others are not.
Cui bono? Providers/vendors and some politicians who receive contributions from them. This statement requires elaboration: Although anybody who derives pecuniary gains from the health care system is unlikely to support initiatives aimed at eroding his earnings, this fact, by itself, does not mean that such earnings are unreasonable or that social value—and in some cases great value—is not created. One can easily come up with examples of providers/vendors that have made enormous contributions to the well-being of Americans. In a similar vein, some politicians who receive contributions from providers/vendors may honestly believe that the interests of the country are aligned with the interests of contributors, and such assessment could be correct. Some of these politicians could be so committed to their views that they might pursue them with or without financial assistance.
In principle, then, providers/vendors who create social value are not part of the problem even though their driving force—like everybody else’s—is profit. No, they are, in fact, part of the solution. How can things go wrong? Brent James, Intermountain Health Care’s chief quality officer, and Gregory Poulsen, Intermountain Health Care’s senior vice president and chief strategy officer, show how in their article “The Case for Capitation” published in the July-August 2016 issue of the Harvard Business Review. James and Poulsen recount how Intermountain’s LDS Hospital in Salt Lake City reduced the mortality rates of patients with congestive heart failure and, in the process, lost $3.2 million a year in revenues. They also describe how obstetricians and neonatologists at Intermountain’s American Fork Hospital reduced the intubation rates of premature babies, thus curtailing the use of ICUs and, unfortunately, depressed revenues. The authors bluntly pose the question: “Should care delivery groups invest in quality improvements that reduce costs if it could mean their own financial demise?” Although the politically correct response is that savings somehow benefit everybody, the authors, committed to real as opposed to imaginary solutions, suggest an approach that allows for quality improvements and preserves provider/vendor earnings, and this is the key point: preserving earnings.
The fact of the matter is that anybody or almost anybody who would be worse off with spending reductions, whether well-thought or ill-conceived, will oppose them. Just as in the Peloponnesian War, in the U.S. health care system personal gain trumps the common good. This is the crux of the matter and the reason why The Tragedy of the Commons is such an important model in Game Theory. This is why costs in the United States are out of control and will remain so until the country faces a major crisis that forces the common good ahead of private interests, just as it happened to several European countries after World War II.
The Future
The future depends on what you do today—Mahatma Gandhi
The future is an unknown, but a somewhat predictable unknown. To look to the future we must first look back upon the past. That is where the seeds of the future were planted—Albert Einstein
Why would a strong player relinquish an advantage? Justice or moral concern for others, perhaps? Thucydides, the realist, doesn’t believe so although he is the first to concede that honest conviction and altruistic behavior do exist—just not in enough measure to oppose successfully what human nature is earnestly bent on doing. In this context, the likely catalysts to change the game are emergencies, tragedies, and social and political crises.
A trivial observation and a few corollaries that in some contexts are ignored or disputed go a long way to glimpse at potential futures. The observation: Human nature, unchanged over thousands of years, will remain so in the foreseeable future, certainly in the next few decades. The corollaries:
- Human nature manifests itself in the health care debate as it does in any other situation that involves substantial gains or losses. Therefore, much can be learned from history to understand the present and make reasonable inferences about the future;
- Most of the time the desire for profit and power trumps moral considerations;
- Individual motives are stronger than societal goals (The Tragedy of the Commons).
Existing and new players will continue to seek opportunities to grow, making the industry more complex and expensive. Complexity artificially worsens the situation and helps justify spending on patchy solutions to self-inflicted problems that no other industrialized country faces. Patchy solutions generate unintended consequences and an endless cost spiral. Short periods of moderation notwithstanding, medical inflation won’t be controlled and the United States will continue to lag behind other industrialized countries in key macro-economic indicators. Cost shifting to employees is here to stay. The modern equivalent of invocations to the goddess of the Bronze House will be as common as they have ever been and effective.
It is difficult to imagine the political will to tackle the real problem head on. Change forced by a catastrophe is more likely. The catastrophe could be war, epidemics, crop failure, flooding, droughts, depletion of natural resources, pollution, mass migrations, overpopulation, financial meltdown, political crisis—any of a number of conditions with the potential of forcing society to optimize resources and protect its members. A catastrophe could change the rules of the game and the balance of power. For one thing, in such a situation the public would be likely to loudly, perhaps violently, demand social protection including health care.
Several scenarios are possible: an expansion of medical care via a government program or private insurance or a combination; perhaps universal health care or at least a universal safety net supplemented with private insurance. Forced to produce results within the constraints of a budget, the political apparatus would have to take effective actions, in the process overhauling a system that was never designed to be cost-effective nor high-performing.
When will this happen? This question is difficult to answer. Almost certainly within the 21st century, perhaps by 2050. In the current political landscape, maybe sooner. Following the pattern already established by the current health care system, much suffering can be expected from vulnerable groups and maybe from large sectors of society.
A Beautiful Mind
Words without thoughts never to heaven go—Hamlet, William Shakespeare
Many concepts of Game Theory are derived from commonsense observations about human behavior and framed in theoretical constructs to facilitate their applications. The game theorist employs mathematics to go beyond the “soft” approach, with a level of sophistication that is inaccessible to most people. The payoff varies depending on the problem at hand, but for many real-world situations technical knowledge is supplemental to shrewd reasoning grounded on a solid understanding of what motivates people and institutions. The serious strategist never falls in the two traps that have misled economists: the first, making simplifying assumptions that allow for the mathematical formulation of problems that do not exist in the real world and whose “solutions” belong to the realm of fantasy2; the second, attempting to make reality fit an absurd theory3. With these caveats, it can be asserted that Game Theory is a tool that helps understand the game and increases the chances of winning it.
Carlos Fuentes, FSA, FCA, MAAA, MBA, M.S., is president of Axiom Actuarial Consulting. He can be reached at carlos-fuentes@axiom-acturial.com.
Endnotes
1Thucydides (460–400 BC) is arguably the greatest historian of all times. See The History of the Peloponnesian War, translated by Martin Hammond, Oxford University Press, 2009. References to Thucydides’ work follow the standard convention.
2There are many examples. Take the widespread simplifying assumption of a “representative agent” under which all individuals make the same decisions, or the decisions of a group are the same as the decisions of the representative agent.
3According to Classical Economics, involuntary unemployment does not exist: unemployment can be only frictional (due to the short period of time between jobs) or voluntary (when workers can find jobs but prefer to wait for salaries that meet their expectations). The conclusion defies common sense.