When the rock band Radiohead offered its latest album for download, letting fans pay whatever price they considered appropriate, several writers raised the question why pay for what you can get for free? and concluded that it was irrational to pay anything for the download. In fact, the situation is analogous to a classic problem in game theory, the Prisoners Dilemma: two criminals are arrested, but theres not enough evidence for a conviction. A prosecutor makes the following offer to each. You may choose to confess or remain silent. If you confess and your accomplice remains silent I will drop all charges against you and use your testimony to ensure that your accomplice does serious time. If your accomplice confesses while you remain silent, he will go free while you do the time. If you both confess I get two convictions, but Ill see to it that you both get early parole. If you both remain silent, Ill have to settle for token sentences. Let me know your choice by morning.
This problem has been studied by logicians and philosophers, turned into a computer program (serendip.brynwr.edu) a novel (Golem in the Gears by Piers Anthony), and an episode of the television series Numb3rs. You can download Radioheads album for free, but it means that no popular band will make the same offer. Or you can pay a bit less than the usual price, and hope that many more people will take the download (at the discount) than would pay full price for the album, assuring that there will be more offers like this in the future. In practice, only 38% of the downloaders paid anything.
This has direct implications for health care financing. The best strategy for a society is for everybody to pay something even if its heavily discounted. Everybody contributes, and everybody is covered. Yes, some people will feel theyre paying for something they dont need, but the optimal system, the one thats best for the vast majority, is to have everyone cooperate. Anyone who enjoys perfect health until theyre hit by a toilet seat falling from a space station (Dead Like Me is still in reruns on basic cable) loses, but its still the best deal for almost everyone.
Theres a second part to how to run a good health care financing system, and that shouldnt take computer simulations or philosophy just a sort of knee-jerk reaction and a few words beginning with what the and ending with is this? On Dec. 7, William McGuire, who, on short notice, became the former chief executive of United HealthCare, announced that he would forfeit at least $418 million worth of backdated stock options, on top of the $198 million he had previously agreed to refund. Backdating stock options is a way of assuring corporate executives that they get something for nothing, and in many cases its illegal. Issuing stock options, the right to buy shares in the company at a set price, was intended to reward executives for making the market price go up. If the price rose higher than the option price, the executive made money if not, a CEO might have to live on his salary. But, if the market price hadnt gone up, some companies simply restated the date the options were issued to some date on which the price had been lower. So, Mr. McGuire was being given $616 million for turning up for work. Before anybody gets too sympathetic, he gets to keep about $800 million. David Lubben, who had been United HealthCares top lawyer, agreed to give back $30 million, and the company reached a settlement with the IRS for $55 million which means they probably owed a lot more.
So, the question becomes, how profitable should selling health insurance be? Is there a difference between selling luxury items that nobody needs, and selling a necessity? If youre selling raspberry chocolate Frappuccinno® light blended créme then by all means set the price as high as you can and the best of luck in your endeavors. The same rule applies to wristwatches and flat-screen televisions but do we want to set the same standards for kidney transplants and drugs to prevent strokes and heart attacks?
Radiohead (and the 62% of people who didnt even provide a token payment) and William McGuire demonstrate a lot about human nature, and thats why the Republican warnings against the evils of socialized medicine may have some influence, but theres a world of experience to show that people can learn the value of cooperation and self-restraint. We can live longer, healthier lives and save money too, as soon as we learn to cooperate.
Sam Uretsky is a writer and pharmacist living on Long Island, N.Y.
From The Progressive Populist, February 15, 2008
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