Brother, Can You Spare a Thousand Dollars?

In game theory, the diner's dilemma is the situation where, when people agree to split a restaurant bill evenly, the average bill goes up.  People in this situation tend to pick a more expensive meal than they otherwise would have, at best hoping the other diners will subsidize their meal, and at worst not wanting to get stuck subsidizing the similarly more expensive meals ordered by their companions.  Everyone loses.

The embedded video below nicely explains it:

Health insurance is, essentially, an example of the diner's dilemma writ large.

Imagine, if you will, one of your neighbors.  Not your next door neighbor, not a neighbor you are best friends with, just a neighbor you know well enough to wave hello to but perhaps not well enough to invite to dinner.  You almost certainly wouldn't ask them to pay for a cleaning service, or to pay for your new windows, but if you had a fire that wasn't covered by your homeowners' insurance, you might ask them to help out.

Now imagine that the next time you have a health expense, you have to knock on their door and ask them to pay for it.  I suspect that if it is something catastrophic, something that is time-limited, most of us would pony up at least something (I've discussed this previously).   But to pay for your routine exams or even moderately expensive services, well, most of us probably wouldn't just hand over a check.

Except, of course, when that check is delivered out of our health insurance premiums.

Whenever you file a health insurance claim (or, more likely, one is filed by the provider for you), you are essentially asking someone else to pay for your care.  Those other someones are the people in your health insurance pool, who could be -- to name a few -- other people in your company/union/association, other people with the same individual health coverage as you, or other taxpayers.  

To be fair, some portion of your costs are paid for by your own premiums, but if you are one of the 80% with relatively low claims, that portion is pretty small; most of everyone's money goes to paying for the small percentage of people who are unfortunate enough to have very large claims.  This skewed distribution has been recognized for some time now, at least by people with good math skills and/or above average interest in the problem.

With health insurance, we're in the diner's dilemma.  If we don't use health care services, our health insurance premiums are just going to be spent by other people, leaving us as the sucker who pays for other people to get more services than they might have otherwise.  So we end up doing the same, and everyone's premiums go up as a result.

That's why it cracks me up when I read about Bernie Sanders acting like a "Vermont auctioneer" by asking people at his rallies to shout out their health insurance deductibles, everyone outraged by having to pay several thousand dollars of their own money before coverage kicks in.  Whose money do they think it should be?  Mine?  Yours?  Our grandchildren's?

Yes, certainly for some people even routine health expenses are beyond their ability to pay, but (private) health insurance was never intended to act as a wealth transfer, nor should it.

Maybe health payers have simply been doing things wrong.  Adam Koppel, a Biogen VP, claims that Google's view of traditional actuarial math is: "it's like the 19th century," and that they believe they could do much better using their Big Data analyses.  As a result, he says, Google wants to become a payor; indeed, according to Mr. Koppel, "They want to take over CMS."

They could hardly do worse.

Certainly analytics could make huge impacts in spotting fraud and overutilization, both of which have been the usual suspects for cutting "waste" for at least the past 30 years, but neither of which seem to have been greatly impacted yet.  New research has found that the variations in both price and utilization are even more pervasive than we'd already known.  CMS has just announced new rules that would make it easier to pool public and private claims data to help attack this, and better analyses of more data should be a potent weapon.

For example, a recent report found that one percent of doctors account for 32% of malpractice claims.  I'm willing to bet that a relatively small percentage of physicians also account for a disproportionate share of spending (analogous to the statistics on patients), and that if we could identify the intersection in the Venn diagram of those three circles we'd find some easy targets for significant interventions.  The question is who will be the first to figure that out; maybe that will be Google, maybe not.

Mr. Koppel believes the changes in the payer sector go beyond Google's interest in it; he flatly says, "Payers are essentially becoming health IT companies."

Certainly payers have long been big in health IT, such as for their claims and other operational systems.  Those systems have, though, often been criticized for being clunky legacy systems that rely on imperfect data.  But the payer leaders are moving well beyond these, especially in terms of analytics expertise: Aetna bought ActiveHealth in 2005, Anthem bought Resolution Health in 2008, and United's huge Optum subsidiary had as its kernel Ingenix.  The Blues are now all pooling their data in BCBS Axis.

Aetna has further gone into the health IT space by acquiring health information exchange vendor Medicity and health app maker Healthagen (both 2011), while United picked up its own H.I.E. vendor Axololt in 2010, as well as Connextions (2011) and MedSynergies (2014).  So maybe Mr. Koppel is on to something.

Payers, though, tend to be big battleships, slow to turn and already struggling to make the shifts to ACOs/value-based purchasing/consumerism, so expecting them to behave more like nimble health IT companies may be expecting too much, at least in the short term.  On the other hand, expecting health IT companies to remain as nimble in the rocky waters of provider contracting, employers as customers, and consumers always wanting their plan to pay more is also asking a lot.

I'm all for better analytics, new entrants in the payer space, and new paradigms about what health insurance even is, but if we don't do something about our version of the diner dilemma, we may be wasting our time.