Tuesday, January 19, 2010

A conservative safety net

When I think about proponents and opponents of "safety nets", in general I tend to think of liberals and conservatives, respectively.  Certainly the traditional safety nets of welfare, social security, and unemployment are typically on the liberal end of the spectrum.  Something like job training and relocation assistance for jobs lost to outsourcing are also liberal issues, I think, although they get some conservative support because they're often bundled with free trade advances.  (I think the biggest critics of bank bailouts have been conservatives, as well, although there's been criticism from across the political spectrum.  The conservative side, I think, views the bailouts as problematic because of moral hazard issues, while the liberal side views bailouts as problematic from an increasing wealth inequality perspective.)

So is it that liberals believe in a "theory of safety nets" and conservatives don't?  It seemed that way to me, but I think there's a very large counterexample:  medical tort reform.  In fact, I think it's a decent parallel to the issues of increasing incentives for investing.

Doctors are frequently accused of practicing defensive medicine, engaging in suboptimal processes in order to reduce expected litigation costs rather than improving expected patient outcomes.  It's a classic principal agent problem, where the incentives of the doctor are not aligned with the preferences of the patient.  So how do we incent doctors to make better medical decisions?  I think of the same choice set that I described earlier:
A.  Increase the benefits to good outcomes.
B.  Decrease the costs of bad outcomes.
C.  Increase the probability of a good outcome.

[An immediate concern:  outside of the extremes (death/full recovery), it is probably difficult to identify a good outcome from a bad outcome.  Even worse, it's probably very difficult to establish an appropriate benchmark.  For example, a patient comes in with poor health (let's think of video game terms and say they have 60 health out of a possible 100).  The doctor treats the patient and the patient subsequently has 55 health.  Is that a good outcome or a bad outcome?  The evaluation should be based on what the outcome would have been absent any treatment, or perhaps compared to other possible treatments, not to the original 60.  So it's a tough game to play.]

This is one case, it seems to me, that the conservatives fall squarely on the side of safety nets.  They want to enact tort reform so that if there's an unfavorable outcome the doctor is fairly protected:  a reduction in the cost of failure reduces the doctor's aversion to failing, which reduces the inclination to practice defensive medicine.  Seems pretty straightforward to me.

But, just as critics of welfare and social security point to the moral hazard problem (knowing that they will be supported by future taxpayers, individuals are likely to act irresponsibly and lazy), doctors who are shielded from the cost of failure are likely to act less carefully in their treatment.  

So why is it that proponents of tort reform believe that the incentive benefits outweigh the moral hazard costs?

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