Mechanism Design has demonstrated that the most efficient systems are created when everyone’s vested interests are aligned.
“An example is defense contracting. If you agree to pay on a cost plus basis you have created incentive for the contractor to be inefficient.
The defense contractor will build enough extra into a fixed price system to account for cost overruns. The cost overrun would be permitted in the rules if the price was transparent. If there were no cost overruns the contractor’s profit would be increased. It would provide incentive to be efficient.
“If you agree to pay a fixed price, you can come close to an efficient price if you have all the truthful information.”
A reader wrote,
History has proven over and over again that only the market mechanism of willing sellers and willing buyers is the optimal way to allocate economic resources. This presumes an informed buyer, and a willingness of sellers to compete for buyers. Adam Smith was clear on this in the Wealth of Nations.
If incentives are aligned and truthful price information is available an efficient system is created. Most stakeholders think they can do better by not sharing truthful information. If the rules of the game require truthful information the system can become an efficient market driven solution.
The healthcare system must become market driven. At present Read more »
*This blog post was originally published at Repairing the Healthcare System*