Perverse Health Incentives

I spend a fair amount of time commuting by train and by car.  Unlike many commuters, I actually look forward to this time because it’s my chance to catch up on podcasts, particularly EconTalk.  Anyway, I recently discovered a gem of an old interview (recorded in 2007) with George Mason University’s own Robin Hanson. [1]

I’m not exactly well versed in the medical literature, but I was surprised to hear Hanson mention an important study in the podcast that I had never heard of before.  The study I’m referring to is the Rand Health Insurance Experiment (HIE).  As Hanson puts it in this post, “If you remember only one medical study, it should be the RAND health insurance experiment, where from 1974 to 1982 the US government spent $50 million to randomly assign 7700 people in six US cities to three to five years each of either free or not free medicine, provided by the same set of doctors.”

Do you want to venture a guess as to what the result of this study was?  Not surprisingly, the thousands of people who were randomly given free health care consumed more of it.  However, shockingly, these people were not “healthier” by any objective measure.  Wait a minute, can that possibly be true?

Apparently people consume more of something when it’s cheaper, but that doesn’t necessarily make them healthier.  It turns out that medicine is one of these things  — go figure!  In a PBS documentary called Money and Medicine Roger Weisberg reiterates this point: “And as we look at medical evidence, comparative effectiveness, and outcomes research, we’re discovering that often places that do less have better health outcomes for their patients.” [2]

Here’s an interesting thing to think about: doctors are, in many important ways, very similar to auto mechanics.  For example, doctors and auto mechanics have a pecuniary incentive to act as salesmen.  In other words, doctors, again like auto mechanics, don’t make money unless they sell you something.  Doctors get paid for every surgery, every procedure, and every pharmaceutical they prescribe, but they don’t get paid for giving you negative advice.  That’s right, what makes for a good business opportunity doesn’t necessarily make for a good health outcome — such is the nature of a capitalist system.

When it comes to the future of public health in places like the United States I expect to see an increase in expenditure on health care and a decline in healthy individuals.  Call me cynical, but the evidence thus far supports my speculation.  At the end of the day, this podcast reminded me that most of us worry far too much about not receiving enough health care and worry far too little about receiving too much.  Although our ancestors had myriad other problems, they didn’t have this one.

As a general rule of thumb (and in my humble opinion), the things with the greatest efficacy when it comes to improving your health (like fasting) are not advertised because there is nothing to sell.  As Baltasar Gracián wrote in The Art of Worldly Wisdom: “It takes a wise doctor to know when not to prescribe.”  Wise doctors do exist, but I think it’s going to take the elimination of perverse pecuniary incentives in the health care system to get most doctors to know when not to prescribe.  Worse yet, I’m not sure this is even possible given the economic framework we are operating in.


[1] Listen to this podcast called “Hanson on Health”.

[2] See this transcript.


4 Comments on “Perverse Health Incentives”

  1. Mercman185 says:

    Right on the money I have felt this way for years I think dentists are also prime examples of this .Why is it that suddenly every adolescent in North America needs braces ? 

  2. Janel Booker says:

    My beliefs 100% They want you to be medicine dependant, they won’t ever prescribe a healthy diet, which is the solution to most people’s probably. Then they lie to you and tell you that your disease is hereditary so you are convinced that your family history is the cause of your sickness. NO. Is your family history of bad eating habits is the cause of your problems. People need to wake up to the truth.

  3. Alexander Spray says:

    What about considering the lopsided cost distribution of health expenditures? Is it the case that a relatively small number of “catastrophe cases” account for a large portion of “true” costs (those which are actually necessary)? If so, then the goal should be first to create incentives for preventive screenings that can drastically reduce the cost of dealing with such issues, and second to discourage the over-consumption of other heath services (insure one but not the other?). Call it a minimalist approach to socialized healthcare.

    As for encouraging a healthy lifestyle… well, your guess is as good as mine. Having moved from one of the healthiest states (CO) to one that is significantly less healthy (OK), the only suggestion I could give would be to have everyone move to the mountains ;).

    • Greg Linster says:

      I’m not sure how the total costs would would be distributed.  I’m also not sure that preventive screenings really prevent much of anything, but they also have a downside that often outweighs any benefit.  Colonoscopies, in my opinion, are one such example.

      As for lifestyle and diet, which are arguably the most important components of health, perhaps we should start by not subsidizing things that aren’t healthy, like corn. 

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