Incentives: Perhaps they ought to be considered in the health care debate

Towards the end of the 18th century, England began sending convicts to Australia. The transportation was privately provided but funded by the government. A lot of convicts died along the way, from disease, poor nutrition, and little or no medical treatment. Between 1790 and 1792, 12% of the convicts died, to the dismay of many good-hearted English men and women who thought that banishment to Australia shouldn't be a death sentence. How might captains be convinced to take better care of their human cargo?

You might lecture the captains on the cruelty of death, and the clergy from their pulpits did just that. You might increase the funds allotted by the state provided to the captains based on the number of passengers they carried. You might urge the captains to spend more of those funds for the care of their passengers. (Some entrepreneurial captains hoarded food and medicine meant for the convicts and sold them upon arrival in Australia.) You might urge the captains to spend the money more carefully. You might try to shame them into better behavior. But these approaches did not work.

What did work was when the government decided to pay the captains a bonus for each convict that walked off the boat in Australia alive. This simple change worked like a charm. Mortality fell to virtually zero. In 1793, on the first three boats making the trip to Australia under the new set of incentives, a single convict died out of 322 transported, an amazing improvement given that in some cases as many as 33 percent of the convicts died from transport. Did the captains become more compassionate? No, they were just as greedy and mean-spirited as before. But under the new regulations, they had an incentive to act as if they were compassionate. Convicts were suddenly more valuable alive than dead. The captains responded to the incentives.

What are the current incentives in health care? Doctors are paid for procedures -- paid by Medicare and Medicaid. Doctors also face lawsuits when they do not diagnose a disease or problem. Consumers want the best care possible at no cost. They are treated for anything with a small co-payment when they have insurance. They utilize emergency rooms when they don't. There are no incentives for consumers to save because what they buy, they are not buying with their own money. Suppose employer based health insruance was eliminated so that anyone could buy personal insurance. Consumers would be offered a smorgasboard of options -- no copyament or deductibles at very high premiums to very high copayments or very high premiums (so-called catastrophic insurance) for much lower premiums. Then consumers would have to be concerned with what tests are undertaken when visiting the doctor or whether to visit the doctor in the first place.