Chargemasters and Used Cars

Recently there's been a lot of discussion about the use of chargemasters in hospitals. It's an often baseless fiction used for bargaining, and the growth in healthcare costs has been attributed to it. This bothers people, not without reason.

Other industries use price shrouding, but this is something altogether different. The situation is most similar to car salesmanship. Opaque pricing, line items that no one can explain, made-up additional charges, and initial prices that everyone knows are not the final prices. This results in consumers generally not being happy at the end of the car-buying process, and a poor reputation for car salespeople. Why is this? Is it just totally path-dependent cultural inertia that has made the pricing in these industries so bizarre and (some would say) unethical? Or is there something inherent to each that encourages it? There are similarities and differences.

In both, people are making large infrequent purchases. They're spending a lot of money without experience in this specific domain. Furthermore they may not know what they should be paying in the first place; this problem is worse for healthcare consumers. When you buy a car you can get some idea what this Toyota model is going for in this area by doing research online, although the salesman hopes you haven't, and you'll have some ballpark idea even without that research - whereas in the hospital, you certainly have no idea what a paracentesis should cost in your city. What probably makes things worse is that most hospital admissions are not planned. If you're in the hospital, it probably wasn't on your calendar ahead of time (unless you were getting an elective surgery, but that's still a small minority of patients.)

Another problem comes from a collision of values, between trade and the value of human life. We see this every time trade - a dispassionate, utility-calculating way of thinking - collides with a highly limbic behavior, involving immediate pleasure or pain, family, tribal identity, or human life. You can see this best illustrated by the goods and services that are most likely across polities to be banned on moral grounds, or those which are socialized. Healthcare is one of those. (If this collision is still not clear: can I pay you $20 to hop on one foot for 1 minute? Sure, I would take that deal. Okay, now what's the price to sell your child? Disgusting and we shouldn't even be discussing it, right? There's the collision.) To begin with, even when they have time, people don't look up hospital quality ahead of time (let alone cost) as with other businesses - we spend more time on ratings sites for restaurants. For one thing, if your kid needs an operation, do you ask yourself "Is the extra $12,000 at the slightly more highly rated hospital across town really worth it?" If you do, you might feel guilty - anyone who has ever negotiated wedding or funeral costs has had a similar experience. But the other side of the coin is that healthcare providers are not trained as profit maximizers, but as life maximizers and pain minimizers. The ED physicians and nurses have no idea what's on that chargemaster, and they don't care. The system would be a lot worse if this were not the case - that is, if hospital physicians were compensated like car salesmen - because they could take much more horrible advantage of patients if they were incentivized. That said, there should be no surprise that healthcare costs go up, because the service providers are ignorant of the cost and there's no feedback loop.

Human Capital-Intensive Fields That Sort Talent Poorly

Since human capital (Adam Smith's labor component) is becoming more and more important as economies develop, sorting talent has followed suit. It becomes a concern of economists to ask if the people with the potential to become the best doctors and pilots and software engineers are in fact becoming those things, or if there are barriers (passive and active) preventing this. No doubt we are nowhere near 100% in any field; education is still uneven, there are still active barriers like gender- and ethnicity-based discrimination in most parts of the world; and there are passive barriers, like crude talent-detection tools.

I'm just finishing my third year in medical school, and I've noticed something interesting about how people choose specialties (or how specialties choose them). A very brief description of how medical education works in the U.S. is in order: first, you go to college and get an undergraduate degree in something, usually some science. Then you apply to medical school, which lasts four years. During this time you get a general medical education with experience across most fields and specialties, regardless of whether you're pretty sure you know what you want to go into. (The surgeons have to do psychiatry and vice versa.) Then when you graduate medical school after those four years, you are a physician, but you haven't been trained in any one area. Toward the end of those four years of medical school, you choose - do you want to go into family practice, neurology, emergency medicine, etc. and you apply for a residency, where for 3-7 more years you are trained in that area. At the end of that, you are finally a family physician, or psychiatrist, or surgeon, or whatever.

Whether and where you get into medical school is based on your GPA as an undergrad and your MCAT, which is a general science and writing test. And it's my impression that this process does its job fairly well: medical students seem highly motivated, highly generally intelligent people capable of doing well in medicine. But what I find disillusioning is that there is not a really strong talent detection tool to select for aptitude at the next step, when people are choosing their specialties. So how is it determined what specialty you go into? For the most part, you choose what you liked the most during your third year of medical school, and except for the most competitive specialties, most American medical graduates will get into a program in their chosen field, somewhere in the country. What differs is how competitive of a program you get into, which does affect where you go from there. And the inputs there are the disillusioning ones. It's basically, in this order: First, how well you score on the first part of your boards and how competitive is the area you're going into. Second: did the people you worked under in that specialty during medical school like you? (Yes, it's pretty much that subjective; there are grades but they only vaguely reflect effort and competence.) A distant third: did you not screw up the specific test they gave you at the end of the relevant rotation in medical school? Notice how little effort there is to really discriminate the specific talent of the person in that particular specialty among their peers, and how under-emphasized it is in the grand scheme.

I'll address #2 first. Microsoft commissioned a study where they determined how long it took people to form their impressions of a professional's competence, and found that they often do it before the professional opens his or her mouth, based (apparently) entirely on how much the person matches preconceptions of the appearance and behavior of a someone in that profession. So imagine my chagrin when I overhear, repeatedly, students being told by their superiors that they (the superiors) thought the student was going into specialty X, because "you just look like an X". (Seriously.) No doubt personality match and culture in each specialty make a huge difference to how engaged and effective someone will be during their careers, but this seems to be missing something important. Older students are often valued in psychiatry, and fortunately my "life experience" will benefit me in the specialty that most appeals to me. But if I had innate talent as a surgeon and chose that path, I would have had a hard road, because a guy my age with a fully formed ego not bound up in medical status hierarchy doesn't fit the idea of a young nose-to-the-grindstone surgeon in training. I don't look like a surgeon, regardless how much I would've wanted to be one. (Fortunately for all involved I was never in any danger of becoming a surgeon.)

As for #1: certain specialties are much harder to get into than others (ortho surgery and dermatology are extremely competitive for example). So in a way, your board scores do determine which specialties you can go into, but only by how good they are. (It's not like programs really break the score down by subsection, they just look at the main number.) So if you do really well, you have a shot at anything you want. If not, well, you're not going to be a dermatologist. And here's the interesting thing: 20 years ago, you almost couldn't pay people to apply to derm residencies. But then the reimbursement structure of medicine changed quickly, plus medical students gradually got wise to this and realized that in derm, here's a specialty that had excellent hours and great pay, and to hell with the status hierarchy. What this means is that (no offense to the great dermatologists I've worked with) based on their scores, your average dermatology resident today is more competitive globally than a derm resident 20 years ago. Is this appropriate? That is, have there been so many advances in dermatology in 20 years that derm residents have had to get smarter to keep up, or is it something completely separate from the field itself - and therefore, the talent of the people going into it? This is all to say that stratifying applicants based on their general board score is not finding the best dermatologist or OBGYN. It's sorting people based on the general aptitude, and then there will be a tendency for the top scorers to go into whatever is perceived as high-status and/or well-reimbursed at the moment.

Two asides. First, letting people choose what they like is probably the best part of the whole process, although this doesn't tell you how many people are choosing on status and money in the specialty rather than talent. Also, obviously there are many medical skills you can't evaluate with a traditional test, so to really find out who the surgeons are (for example) vs. the medicine docs or the neurologists, we would need simulations. Yes, this is difficult and imposes more time and expense on the medical education process, but I think it's worth it so that institutions (and medical students) know that the best-suited people really are going into each specialty, and anyway we already do have a patient simulation test for step 2 of our board certification.

My point: of course the reality is these sorts of inefficient sorting mechanisms exist many places in life. But in human-capital-intensive fields like medicine with socially valuable outputs, you would hope that the search mechanisms would be more robust. I suspect this is partly an artifact of antiquated medical education conventions, and my hope is that it will improve.

Preference Falsification and Cascades

Preference falsification is the masking of one's real preferences in order to conform to "received" preferences, that is to social norms, often to avoid a cost of nonconformity; e.g., social ostracism or criminal punishment. One of the effects of the phenomenon is that each person who is falsifying, that is who holds a preference different from the received preference, does not know who else might also be falsifying. They could be surrounded by other people who also think that social/government/religious belief X is B.S., or they might be the only one, but in this situation, it's hard to know, since even bringing up questions about X might reveal their actual preference regarding X. When suddenly the fact of widespread preference falsification is obvious - everyone realizes that everyone else thinks that X is B.S. - things can change very quickly, and in fact this explanation has been advanced to explain "surprising" revolutions (Iran in 1979, the Eastern Bloc in 1989, etc.) This is called a preference cascade; its opposite is a spiral of silence.

Another implication of the theory is that secret ballots as we have in the United States should also occasionally lead to such surprising shifts, since behind the curtain you can vote to legalize marijuana or take voting rights away from ethnic/gender group X or whatever it is that you're otherwise afraid to admit in front of your neighbors, and hey, what do you know - everyone else voted that way too. On referenda in the U.S., such surprising preference cascades don't happen very much; I can't think of many examples. Yes, Washington and Colorado just legalized marijuana, but that wasn't a preference cascade, since people told the pollsters they were going to. Another way of saying this is that if the polls were predictive of the actual voting in a secret ballot (as they almost always are in the U.S.) then there was no preference cascade. This may represent a problem with the theory, or reflect that in the U.S. we don't falsify our preferences very often, or that referenda involving highly falsified preferences are somehow kept from the ballots.

The strongest example, indeed one of the only examples, that I can think of in recent U.S. politics is the Bradley effect, where Tom Bradley was projected to win the California gubernatorial race based on polls results, but he lost. The revealed preference here? Tom Bradley was black, and it was thought that many voters falsified their racial preference to pollsters but not at the ballot. Note however, that even in this case, the unmasked preference did not result in a cascade of Californians suddenly becoming open about refusing to vote for black candidates.

A second and dare I say humorous phenomenon is observed where the received preference is subject to central control. Think of a dictatorship that modifies its propaganda, or a steep status hierarchy in business or academia. This is different from the usual situation that obtains in that centrally-controlled received preferences are dependent on very few nodes in the network and therefore much more likely to shift rapidly, versus the "normal" situation (i.e. with social norms) which are held or at least claimed by large numbers of people and are inert over time. The game then becomes changing stated preferences to keep up with the fast-changing centrally-controlled ones. For a concrete example: "Eastasia is the enemy! Wait, MiniTruth says Eurasia is the enemy? I misspoke just now; what I meant was that Eurasia is the enemy, and always has been!" A logical next step in this game is a kind of truce where everyone agrees not to point out each other's very recently endorsed and now obsolete received preferences.

Based on the signal you want to send to the central node which has changed the preference, there are two ways to play this game. If the central node can be convinced that you actually believe the new preference, and cares whether you do, then it becomes very important to avoid looking like all you're doing is repeating the received preferences - since that gives away that you probably don't. This is the case in academia or business. In my medical training, very often I've heard an attending object to a resident's treatment plan for a patient, and the resident will change his or her mind - but rather than say "Okay, you're higher on the ladder than me so I'll do what you want", the resident will say, "Oh, uh, well, you're right, I hadn't thought of that and now that I thought of it I realize that's a better idea, let's do it that way." You can't just be a yes-man, you have to look like you really believe it. (I'm always struck by how few residents are willing, even in private, to admit that most of the time, the decision has everything to do with agreeing with your attending, and little to do with evidence.)



On the other hand, in an authority structure where you just want to signal to the central node that "I'll do it your way no matter what" or they just don't care what you really think as long as you keep your mouth shut, then being overt and clumsy about your publicly stated preference-shifting may actually be a good thing. (See above for a terrifying example where Saddam Hussein purged the government and ministers were suddenly leaping to their feet shouting their newfound and obviously motivated loyalty.) Then the central node knows you'll endorse whatever preference they tell you to - and there may even be some effect of dampening or confusing conflicting internal preferences by this constant shifting. This is also more likely to be the case where the stated preferences are more ethereal or ideological - i.e. religious or ideological claims - versus those which you expect to directly, practically affect decisions you're making on a daily or hourly basis as in business or medicine.

Another Euthanasia Program in the U.S.

Oregon already has such a law - interestingly, it was enacted when an MD was governor - and now Seattle has a pilot program. It's a cliche to observe the irony that we understand when it's time to end suffering when extending a pet's life is futile, but it's a very strong argument for extending the same values to our fellow human beings.