The Great Depression: Lessons for the Medical Profession

An earlier version of this article had some unsubstantiated information taken taken from newspaper articles as well as a statement based on rumour which was inappropriate to post on a public forum. This version has been edited to remove the contentious content.

A recent article in the Journal of the American Medical Association reminded me of an article I had written for 'Borborygmi' and later posted (with permission) on my Quora blog. The article in JAMA points out that the 'pay for service' model of compensation for doctors creates a 'perverse incentive' to perform unnecessary investigations or procedures. A fixed salary seems like the best model with a degree of accountability built in.
http://jamanetwork.com/journals/jama/fullarticle/2623619

My article is reproduced below.

The Great Depression, Perverse Incentives and Liver Transplantation

 I spent five years in the US from 2002 to 2007 at a time when the country was preparing to descend into one of the most severe economic depressions in decades. I don’t know much about economics but I was curious about many things which seemed strange, bordering on insanity. I recently read ‘Fault Lines’ by Raghuram Rajan and ‘Beyond Outrage’ by Robert Reich to try and understand what happened. It seems that much of what happened can be explained by a single word, ‘greed’. I saw a microcosm of what was happening in the country, happen in one of the iconic transplant centers in Pittsburgh and I see something very similar playing out in India now. Those who do not learn from history are condemned to repeat it. Unfortunately, those who learn are sometimes condemned to stand by helplessly and watch others repeat it.

I initially moved to the Bronx in 2002 as a Research Associate in a lab at the Marion Bessin Liver Research Center of the Albert Einstein College of Medicine. The cost of living was high for someone earning $28,000/- a year with a family to support. The college provided subsidized accommodation but the cost of medical insurance was a shock. After 2 years at the lab during which I took the USMLE exams, I moved to Pittsburgh to begin my fellowship in transplant surgery. The salary was better and the cost of living much lower. I was told something I could hardly believe, “You should buy a house rather than rent one. It will be cheaper.” This sounded crazy to me. Why would a bank give me a loan to buy a house? How could I be sure I could sell it when I finished my fellowship? I was told “the price of property always goes up. You will be able to sell the house for more than you bought it for.” I was not convinced and insisted on renting during my 3-year stay in Pittsburgh.

As far as someone with no connection to finance can figure out, the problem can be roughly simplified as follows. Banks wanted to make money. They make money by giving loans and charging interest on the loans. They gave their agents incentives to negotiate loans. The more loans the agent was able to get, the more money they would make. The agents would approach people who needed loans to buy a house. Those who could afford to buy houses (those who could afford to make the monthly payments on the loans) were now literally pursued by agents wanting to give them loans.

Once the people who could afford the houses were exhausted, the agents turned to those who could not. The incentive was now definitely perverse as it would harm the bank and it would harm the people who took these loans which they could not afford. They were persuaded to take loans beyond their means to pay back. The logic was similar to what I had heard “if you find yourself in financial trouble, you can sell the house. The cost of property always appreciates.” People were encouraged to state incomes beyond what they were actually making in order to qualify for the loans. Since the incentive was to create more and more loans, there was little effort to verify the statements of income and loans were given to people who could obviously not afford the payments.

The banks probably realized what was going on and they re-packaged these dubious loans as ‘financial instruments’ and sold them all over the world (hence the bankruptcy of retirement funds in Iceland for instance). The rating agencies were in cahoots with the banks (since they derived their income from them) and rated these toxic repackaged and mixed ‘financial instruments’ with the highest aaa ratings.

Eventually people who had been living in homes they could not afford started defaulting on their payments. Eventually the banks moved to foreclose on the properties. These foreclosed properties then hit the market. The bubble burst and the unthinkable happened. The prices of property began to drop. Now it was no longer possible to sell the property and recover the loan. People were bankrupt and their properties were being sold for a pittance or lying unsold. Businesses were going bankrupt as people were no longer able to afford the services or products they sold thus adding large number of unemployed people to the population. We now had more unemployed homeless people and empty homes. The ‘financial instruments’ were being revealed as worthless and people were losing their savings all over the world. We know how that turned out.

Much the same manner of perverse incentive works in the world of liver transplantation in India. A substantial part of my practice consists of reassuring patients who have been advised a liver transplant that they do not actually need one. Each transplant translates into cash in the bank (and sometimes cash in the pocket) for the transplant surgeon. The more transplants they perform, the more they are paid. Perverse incentive indeed. The hospitals meanwhile are looking at the one metric they care about. How much are they billing per bed per day. For a medical admission this may be no more than Rs 5,000/-. For a liver transplant, this would typically be Rs 1,00,000/- per day.

Both the economic depression and the transplant situation suggest that ‘perverse’ incentives do not work in the long term. What does work in the long term is quality medical services allied with innovation, teaching and research. We have enough examples in our midst. Or perhaps ‘enough’ is malapropism. Will we learn from them?