This gap allows plans that can better predict beneficiary costs to game the system by selecting beneficiaries who are expected to cost much less than their risk-adjusted payments. (Plans do not always want the least-expensive beneficiaries, but rather those who are the least expensive compared with their risk-adjusted payment. The implication is the same, though: Plans can beat the risk adjustment, and be overpaid.)
—Peter Orszag, “Private-Market Tooth Fairy Can’t Cut Medicare Cost,” Bloomberg View, Aug. 20, 2012
I urge all to read through Orszag’s “Tooth Fairy” in its entirety. Both Left and Right should use a pencil with an eraser. Those in support of Romney-Ryan are allowed to break said pencil—often.
(For a primer on game theory, might I suggest Chapter 10, “Thinking Strategically,” Frank & Bernanke, Principles of Microeconomics, 4th edition. This includes a sidebar in which our august Fed chairman considers “Why do people shout at parties? Tit-for-Tat and the Repeated Prisoner’s Dilemma.”)
The above paragraph absolutely nails the heart of our many budget debates. Whatever the politics. Whatever the economics. The distinction is game theory. Discuss.