The Distinction Is Game Theory

The Distinction Is Game Theory
If it were only so simple (Photograph by Christian Thomas )
Photograph by Christian Thomas

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.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE