Adam Smith Hospital

In my previous post, I discussed how, while we most often use the insights of economics to criticize the structure of government, there are similar problems in other large instutitions. The example was David Friedman's "Adam Smith University".

With my son in the Neonatal ICU for the last 3 months, my wife and I have now had a great deal of experience with hospitals. And, like a school, a hospital is a giant institution, often with a large disconnect between services provided and payment received. For example, from a parent's perspective, nurses vary widely in quality. Some are wonderful with kids, treating them as real people, while others clearly view them as just another piece of equipment to be managed, alarms to be silenced, demands that cut into coffee breaks.

It's tempting to blame the "bad" nurses for their behavior. But as Adam Smith described in the quote from last post, incentives matter. Professions with fixed rewards tend to select against people who want to work hard. And, for any given individual, a profession where hard work is rewarded will elicit more work than one with a fixed reward. I don't know exactly how nurses are paid, but I imagine that, like professors, it is much more a matter of education and seniority than quality of work. If a nurse doesn't get paid more for putting in extra effort to make her charges warm and happy, then she'll only do it from strong natural inclination.

Here is how things might work in Adam Smith Hospital.Nurses are mainly paid by parents, rather than the hospital. The first time any nurse works with a patient, it is a trial period, so he/she is paid at some low standard rate. After that, the patient enters a bid for how much they value the nurse's time. To make things easier, they could just give an evaluation of quality, with rates set elsewhere. Each shift, an auction takes place, with nurses assigned to the patient who bid/rated them the highest. (With a computerized assignment system, this is trivial to implement).

The result is that nursing becomes a market, with incentive to perform, and incentive for high-performing individuals to enter the profession. If there are qualities in nurses which patients directly value and hospitals do not, they will be selected for and rewarded. And like any market, this allows for specializations to address niches of customer demand. Rather than one-nurse-fits-all, where assignments are decided by rotation, nurses go to the patients who value them the most. Sounds awfully close to a Pareto improvement to me - or in layman's terms, a win-win.

One can make a good argument that patients should not be the sole judge of a nurse's performance. Some of the nurse's salary could be based on evaluations by medical professionals, perhaps a portion determined by the hospital. Alternately, the patient feedback on nurse quality could be used for bonuses, which is how performance incentives in many companies work. Whatever the system, some market feedback is better than none.

Machinery of Freedom's subtitle is "Guide to a radical capitalism". Radical capitalism is not just about refactoring government, it is about noticing and using incentives whenever possible to make our institutions efficient. Radical capitalism questions why, when we allocate most goods and services to the highest bidder, we allocate nurses randomly. There may be an incentive I am missing, in which case you, gentle reader, can correct me, but I suspect the problem is merely that large institutions are not good at optimizing small things or quickly incorporating new technologies, like the computerized allocation necessary for my scheme.

These applications are good to remember, because while the structure of government and its monopoly on coercion make reforming it very difficult, schools and hospitals are (to some degree) private. The barriers to founding Adam Smith University or Hospital are much lower than than those to founding Libertopia - an encouraging thought in our oft discouraging political world.

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I have a subscription to The

I have a subscription to The Economist. It strikes me that while I enjoy some of the articles, there's usually a few that I find substandard. Alas, the Economist doesn't attribute individual articles to specific authors. If only they identified who wrote what, then I could commission articles from those authors that I liked. Each author could publish their prices, either per word or per topic, and the reading public could bid for their journalistic services. Whoever collected the highest total bids would get published in each week's magazine.

Come to think of it, considering how inefficient the current authorship, editing, publishing, and sales model of the Economist must be, it's a wonder they're still in business at all.

Sarcasm off now.

You're overemphasizing agency problems and underappreciating the benefits of aggregation. Not everyone wants to be bothered with having to directly compensate, let alone evaluate the worth of, the services they receive from individual nurses. In fact, most people would pay a premium to be relieved from such minutia.

The next time you recieve substandard service, rather than wishing you could use your market power to produce better incentives and outcomes, you might try talking to the nursing supervisor. Not all channels of feedback and influence are monetary.

How would your system handle

How would your system handle patients who are too young, ill, or mentally incapacitated to rate nurses? I wouldn't want the worst nurses to gravitate to the sickest and/or most vulnerable patients.

Interesting idea, Patri. One

Interesting idea, Patri.

One real world issue is that almost nobody actually pays for things in a hospital. Instead, the insurance company pays. They're much more likely to take whichever nurse is cheaper instead of picking the friendly ones.

This seems like a petty objection to a cool idea, but I think this sort of problem exists in structural ways in our society. There are incentives for organizations to get big, and giant organizations inevitably would rather avoid making decisions based in individuals if they can help it, since otherwise the complexity of the system becomes hard to manage.

I suspect that this is a problem even in a relatively unregulated society -- the successful insurance companies get big, their size helps them keep costs and therefore prices down, but in return they impose institutional controls on their environment. See also universities, banks, etc.

eddie, while it is true that

eddie, while it is true that some people don't want to carefully choose their purchases of goods and services, or pay premiums for higher quality, lots do. And it is the demands of satisfying discriminating customers that drive quality up and prices down in a market. That so many people think patient care somehow operates under a different reality is baffling to me.

I would have much more confidence in the efficacy of reporting a nurse to her supervisor, if that supervisor had a stronger incentive to do anything about it. Does the supervisor get any extra pay for running a tight ship? Not likely. So what's her incentive to help? The same as the nurse's incentive to perform well in the first place: good will and the threat of punishment. What about the supervisor's supervisor. His incentive is the same. This goes all the way up to the head of the hospital. Her incentive is good will and the threat to her good name, or being punished by some board of directors. And the directors? Same thing: good will and the threat to their good name.

Do you really think all these people, running on the fuel of basic decency and just trying to keep their heads down are going to be as demanding of excellence as an outfit run by people striving to get that raise, to retire somewhere nicer, to have their kids go to school somewhere better. If you do, you don't understand human nature.

The difference between using

The difference between using this analysis on governments as opposed to on other large institutions is that competition between say universities or hospitals drives them to an efficient level of aggregation while governments always have an incentive to maximize aggregation regardless of efficiency. In this case, as eddie comments, maybe customers prefer that hospitals judge the effectiveness of their own nurses. It is possible that even a maximally capitalist hospital may choose to do so if the patient's excess cost and reduced ability to monitor exceed the incentive effects of patient's paying their nurses.

Eddie - there is a reason

Eddie - there is a reason that I read blogs and not magazines - because I can pick the authors instead of buying the bundle. To me, that is far superior, but I am probably an atypical consumer.

We did talk to the supervisor, and got less of the bad nurses. But I doubt they'll fire them. Or pay them any less. So why would they get better?

Nancy - the system can always default to a standard wage, or one based on the nurse's average rating.

Dave - I definitely agree with your first two paragraphs. The third, I'm not so sure. But it exemplifies the whole agency problem of insurance. I think in my dream world, insurance doesn't pay for anything. Instead you have Arnold Kling's system, where medical insurance works like life insurance or employment insurance. If X happens, you get $Y, and you choose how to spend it on your medical care. This provides the "protection against disaster", while avoiding the agency problems.

nelziq - there is certainly a huge difference between private businesses and governments. But while I like the market, I don't like it so much that I think its found the perfect solution for every business problem. Ironically, I think it may miss a lot of places where there should be more markets!

I can even back this up with a reason. Take the whole evbio/folk economics thing. People have naturally bad economic intuition based on our tribal environment. Naturally they apply this when designing businesses and processes. People with better intuition outcompete them, yes, but there are only so many people with the right capabilities.

However, I must admit that it could be that this cuts in the other direction. It may be that such extreme, market-based systems don't work because most people don't think that way and wouldn't want to use them.

Eddie & Nelziq - you may

Eddie & Nelziq - you may well be right that the benefits of aggregation outweigh the costs for hospital. I am much less convinced of the benefits of Adam Smith Hospital than Adam Smith U. Mostly, I had a bad experience, and came up with a way to fix it that seemed like a win-win. But it may not be possible just because most people wouldn't want to participate in such a system.

On the other hand, when places like ebay and amazon system institute (admittedly crapppy) reputation systems (buyers, sellers, reviews), plenty of people seem to use them. So maybe people just need to be given a chance?

The amazon and ebay systems

The amazon and ebay systems are crappy? Maybe this is news to me because I've only bought a couple items off of ebay.