Wednesday, May 11, 2011

Bin Laden and Medical Costs

By Mike Dorf


Let's assume that some number of people in the Pakistani military and intelligence services knew where Osama bin Laden was hiding but either kept the information to themselves or took active measures to shield him.  What would have been their motives?  One possibility is ideological sympathy.  Pakistan is a large diverse country with radical Islamist elements in both the military and the intelligence services.  Another possibility is strategic calculation.  Some largely secular Pakistanis believe that India poses a more significant strategic threat to their national security than do radical Islamists, and that the latter should therefore be fostered as a means of countering India in Kashmir and elsewhere.

Without ruling out either of the foregoing possibilities, here I want to explore a third--one that I have heard floated in the days since the killing of Bin Laden: Financial interest. According to this view, one of the main reasons why American aid to Pakistan mushroomed over the last decade was so that Pakistan would help the U.S. find and either capture or kill Bin Laden.  Thus, Pakistani military and intelligence officials may have reasoned, once Bin Laden is captured or killed, the raison d'etre for American aid will disappear, and so will the aid.  In this view, Pakistan's military and intelligence communities were/are a kind of military/industrial complex that benefits from the continued perception of a security threat or a police department that gets its budget increased when crime rises.

I have my doubts about the application of this theory to the facts here, because U.S. aid to Pakistan has had other foci that, collectively, probably accounted for more money than the Bin Laden hunt, but knowing as little as we do about the actual decision-making processes inside the Pakistani military and intelligence services, it's certainly possible that some number of officials were motivated by a desire to keep the spigot open on the find-Bin Laden business and therefore did all they could to ensure that Bin Laden wasn't found.

Whatever the truth with respect to Pakistan and Bin Laden, here I want to note that the potential problem I've just identified can be found in numerous areas, especially where there is asymmetric information.  You go to an auto mechanic for a minor repair job.  In the course of doing the repair, he notices a worn part that would cost a few dollars to replace but which, if it fails, will result in a much more expensive job.  If he's honest, he'll replace the part and charge you the $5 now, but if he succumbs to the financial incentive, he'll leave it for a later, more lucrative job.  If he's really bad, he'll actually create a problem for fixing later.

What constrains auto mechanics in these circumstances?  Basic decency in most cases, one hopes, but also competition.  In a well-functioning economy, a shop that develops a reputation for costing its customers a lot of money over the long run will lose business to an honest shop.  But given information asymmetry--the mechanic knows a lot more than you do about how cars work--there is room for dishonesty, at least over the medium term.

The same dynamic can be found in the practice of law and medicine.  Lawyers and doctors who get paid for their services rather than for results have an incentive to provide services without much attention to results.  In both cases, one hopes that a sense of professionalism will lead lawyers and doctors to perform work based on what the client and patient need, but even a lawyer or doctor who sets out to be honest may find her calculation of what is good for the client or patient influenced by her financial interest.

How does the system respond?  For plaintiffs' lawyers, the contingent fee largely solves the problem by aligning the lawyer's incentives with those of the client; however, defense-side lawyers have traditionally billed by the hour. That's changing somewhat, both with new billing arrangements and with clients scrutinizing their legal bills more closely than in the past.

For doctors, however, the problem remains very large.  Information asymmetry with respect to medicine is at least as substantial as it is with respect to automobiles.  In addition, patients are often quite loyal to doctors: People get very upset about the prospect of health insurance in which they don't get to choose their own doctors, because they tend to find a doctor they like and stick with that doctor.  Now, if one thought that patients were choosing doctors based on their ability to discern good medicine at a good value, that would be a sign that the system works, but there is little evidence of that.  Patients value factors that do not strongly correlate with positive medical outcomes.  Moreover, patients who have good health insurance are largely indifferent to price, and even a patient who does care about price (either because she is uninsured or has a percentage-based co-pay) will have difficulty shopping based on price. Yes, there is medical tourism for big-ticket surgeries, but unless a patient is particularly aggressive, she typically will not be given any price information until after the relevant test or treatment has been administered.

The response of political/economic conservatives to the foregoing facts is to want to push more health-care costs onto patients, through higher co-pays and generally by giving them more "skin in the game."  This strikes me as at best responsive to only a piece of the problem.  Patients still suffer from enormous information asymmetry and will thus have a very difficult time making informed decisions.  Utilization rates might decrease under such approaches, but that's probably because financially strapped patients will simply forgo tests and treatments they can't afford, rather than making a judgment that the relevant tests and treatments aren't cost-justified.  Patients typically are not in a position to make such judgments.

The main actors in the system who do have the right incentives and the ability to make informed decisions are insurers--EXCEPT that insurers only have the right incentives if they are forbidden from dropping patients once they become so sick that they require expensive care.  In an ideal world, a health insurer would be paid  based on health-care outcomes.  The Patient Protection and Affordable Care Act moved us at least a little bit in the right direction but did not disrupt the basic fee-for-service structure of American medicine.

Reflecting back on Bin Laden, the discussion of health care costs suggests that what the U.S. should have done was to offer a bounty to Pakistan for his capture or killing.  There was in fact a bounty of up to $25 million on Bin Laden, but if what I have assumed here is correct, that was dwarfed by the billions that Pakistan received to continue pretending to look for him.

4 comments:

Justin said...
This comment has been removed by the author.
Justin said...

But no one individual could have received those billions (even assuming most of those billions were solely dependant on Bin Ladin continuing to be at large, which I doubt). So no one individual would have the incentive to withhold information about Bin Ladin. Such a bounty would be enough to get any particular individual to look for him - and practically no bounty would have been sufficient to get the Pakistani government as an organization to make hunting Bin Laden a legitimate #1 priority.

Michael C. Dorf said...

Justin,

A's I said, I too am doubtful about the accuracy of this theory, and was just using it to start the discussion of the broader topic. BUT, if we take it seriously, then we can easily imagine a large enough bounty to motivate the Pakistani govt as a whole. A's the punchline to the old joke goes, we're just dickering over price.

egarber said...

A variation of your observation that incentives don't always align relates to markets where demand is inelastic.

Take oil and gasoline for example. In the short-run at least, rising gas prices have little impact on demand; average families can't just decide not to purchase fuel, like they can with say, HD televisions. And it's not like they can just go buy a solar car when prices spike.

So the incentive for oil / gas companies is to ride out high prices, which add directly to profit margins. Indeed, there's a reason no refineries were built in the 90's amid all the cheap energy: oil companies wanted prices to increase. And for all the hammering about the need to drill, oil companies are already sitting on thousands of permits they're not using -- again, at least partly because they benefit when limited supply props up prices.

Tying this to the Pakistan / Bin Laden example, you could say that our "demand" for Pakistan's effort is very "price inelastic."