Posted by Marc Hodak on December 24, 2010 under Politics, Reporting on pay | 
U.S. regulators are considering new or expanded curbs on bonuses in accordance with regulations created by Chris Dodd and Barney Frank to prevent another financial crisis (I will never get over the irony that). The law generally prescribes that compensation plans should be designed so as to not encourage excessive risk taking. One of the key design elements to implement that mandate is the deferral of bonuses. The nominal theory is that deferral of awards will create an incentive for the traders to think beyond current period performance, thus avoiding the “swing for the fences” bets that the comp critics insisted were central to the financial crisis.
The assumption that perverse incentives contributed to the financial crisis is reasonable. It does not logically follow that changing those incentives is either necessary or sufficient to prevent another financial crisis, but seeing that would require understanding the root causes of the crisis which, perversely enough, neither Dodd nor Frank had any incentive to do.
But this law assumes two other things that challenge reason:
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Posted by Marc Hodak on December 16, 2010 under Unintended consequences |
For the second time in a month, I received the following note from Dun & Bradstreet:
Dear Hodak Value Advisors:
We are contacting you regarding a change in your D&B business credit file. Our records indicate your suppliers and vendors have reported a change in the way your company pays its bills.
Please call 1-866-487-xxxx immediately to learn more about the information in your business credit profile.
The note then proceeds to tell me about the benefits of a credit monitoring program they are selling.
Hodak Value Advisors has very modest credit needs. We know exactly who our creditors are, and our relationship with every one of them is stronger than ever, reflecting our perfect record on bill paying. So, it’s plain to me that this message is bunk.
It’s worse than bunk. My assistant was concerned enough when she got this that she had to spend about five minutes checking up on whether there was anything for us to be worried about before being reassured that there was nothing to it. I want D&B to pay me back for that wasted time. The irony is that this note was signed
Sincerely,
Dun & Bradstreet Credibility Corp.
This note, of course, has blown their credibility with me.
Posted by Marc Hodak on December 8, 2010 under Invisible trade-offs, Patterns without intention |
Here’s an article about the use of a new technology to treat prostate cancer:
Roughly one in three Medicare beneficiaries diagnosed with prostate cancer today gets a sophisticated form of radiation therapy called IMRT. Eight years ago, virtually no patients received the treatment.
The story here is about what is behind that trend, i.e., the fact that some groups stand to gain financially from the adoption of a new treatment that has proven at least somewhat effective.
Taking advantage of an exemption in a federal law governing patient referrals, groups of urologists across the country have teamed up with radiation oncologists to capture the lucrative reimbursements IMRT commands from Medicare.
Under these arrangements, the urologists buy radiation equipment and hire radiation oncologists to administer it. They then refer their patients to their in-house staff for treatment. The bulk of Medicare’s reimbursements goes to the urologists as owners of the equipment.
While I’m obviously a big fan of perverse incentives stories, I know enough about them to be wary of narratives that only look at surface incentives and behaviors without getting down to the root causes. This story, in particular, blames doctors for rationally reacting to the pricing structure created by Medicare, which is like blaming children for chasing a Good Humor truck down the street that is accidentally dropping ice cream boxes out the back. This becomes a story of “self-referral,” with greedy doctors pushing patients into more expensive treatments. One doctor whom the writers place in the role of “defense” encapsulates his position as: “Our credo in medicine is not, ‘spend the least money,’ It’s, ‘first do no harm.’ ”
The story then goes after the politicized decision making on how reimbursement rates for these treatments were set, and how congressmen caught between physician and patient groups have no incentive to control costs. All those costs, of course, are ultimately born by the taxpayer. The story ends with the plaintive quote: “how are we going to pay for that?”
Then it stops.
I once recall reading a story about profiteering in shoes in the Soviet economy. For the benefit of its western readers, the story began with the fact that in the Soviet system the supply and distribution of shoes were largely controlled by the state. It described how bad the shoes were, how hard it was to get them, how the state blamed “profiteers” for the shortages. It described how bureaucrats were continually coming up with more and more rules to circumscribe the increasingly dysfunctional behaviors in shoe distribution, and how the scoundrels in the supply chain were continually working around those rules for their own enrichment.
What struck me was how a reader outside of the Soviet system, one who understood how a market-driven system could create an entirely different set of incentives and constraints, would read that story and say, “What a hopeless case. They need to dismantle the state-controlled system,” but a reader from inside the Soviet system would react by blaming the scoundrels and bureaucrats.
It occurs to me now that any description of our current medical system has us blaming the scoundrels and bureaucrats, not the central planning system in which they operate. And that is why journalists have taken up that narrative, even in the WSJ, and stopping before they question the system of treatment prices set by central planners, and paid for by anyone but the patients.
