Healthcare and the tragedy of the commons

Land grab

In more pastoral times, town layouts might include a designated area of public land on which anyone was free to let their livestock graze. An early example of this was Boston Common, originally a pasture for cows before its transformation into a prime urban park, whose name still echoes its original shared purpose.

Bostonians soon realized that unfettered access by those with larger herds would overwhelm the land. Some restrictions were needed to ensure a few wealthier neighbors didn’t ruin the ground for everyone, because the incentive for any individual would be to add animals to their flock regardless of the broader effects. Crowding would make finding suitable forage harder for all, but most of the incremental burden would be borne by the other owners.

If this bovine arms race reached its natural conclusion the result would be nothing but an unsightly dirt patch. Although societies grasped this intuitively, the process was first formally described in the 1800s by a British economist, and in a seminal journal article a century later received the memorable descriptor of “tragedy of the commons”.1 The concept has gone on to enduring explanatory fame in economics and ecology, among other disciplines.

In a subtle way, this phenomenon underpins one of the most dysfunctional parts of the American economy: the healthcare sector.

In 1960, the United States spent the equivalent of just over $1,200 per year in total health expenditures per person.2 Surprising to anyone acquainted with current costs is the fact that this includes funds from all sources—government programs, private insurance plans, even out-of-pocket payments. In the last 50 years there has been a steady mushrooming of expenditures, until today the comparable per-capita figure is over $11,000.

There have certainly been significant, expensive advances in medicine in recent decades that add quality to life, and a generally richer nation will have higher disposable income to spend on things like healthcare.3 But no measure of outcomes suggests the population is receiving value commensurate with a ten-fold increase in spending.

All that money winds its way through various baroque processes to end up in someone’s pockets, and their incentives are pretty well aligned with grabbing a little more despite the consequences for the overall economy.

Side effects

Drugs are often of limited benefit to many patients who take them, but when you’re getting paid by the pill there isn’t much motivation to look into those results too closely—doing so would be a net benefit to the general population and a gross disservice to the executive whose bonus is based on sales.4 What’s more, lifestyle changes may be of far greater help to a patient than any therapeutic invention, but how exactly do you charge for that?

Physicians labor under the Hippocratic oath, but it surely wouldn’t do any harm to run that additional test, which also happens to be compensated quite handsomely. Nor would investing in a new facility dedicated to a subspecialty that insurers are unusually generous with.

Hordes of consultants, lawyers, administrators, venture capital investors, entrepreneurs, and assorted hangers-on have also brought their multiplying herds to this fertile common. Unlike in the agricultural example, instead of collapsing under their demands this one has slowly expanded to take over an ever-larger swath of the economy, currently approaching four trillion dollars and crowding out many other things that a society might find valuable, like salary increases for the average worker.5

The exasperating coordination problems inherent in a system of this size give rise to numerous specialized players that sit astride torrential flows of data and money, and in the process some of the latter will be directed into their coffers, thank you very much.6

Most clear-eyed observers look at this state of affairs and realize it can’t continue like this, just as the Massachusetts colonists did when some proto-Boston Brahmin added yet another sheep to the Common. Unfortunately, in healthcare no one is really in charge of fixing it, because while the costs are diffuse and abstract the rewards are as real as that new Lexus at the end of your flagstone driveway. Eventually the commons will fail, but until then what’s the harm of one more cow?

Share the road

Regardless of your industry, it’s worth recognizing that your organization is woven into a system that collectively has greater influence than any single player. It can be exceptionally hard to behave in a way that maximizes long-term overall good, even when narrow self-interest means hastening the demise of the system.

Consider the alternative path taken by a leader in another industry. Rightly lauded for its production genius, Toyota was a pioneer of manufacturing processes that resulted in enviable levels of quality. One reason for this success was how the company viewed its role within the larger automotive ecosystem. It could have sought to extract maximum value from each transaction with supply chain partners. Instead it pursued a more collaborative approach, realizing that stable suppliers would help ensure the long-term health of its own operations.

Rather than aggregating its usage of specific parts and hitting vendors with volatile orders that would require frantic effort to fulfill, Toyota smoothed out its production of different model variants. Although this added complexity to its own assembly line it supported the flourishing of its partners, allowing them to plan better and ultimately creating a healthier industry. It opened its processes to vendors that could then work with Toyota in the common cause of quality, despite their fundamental customer-buyer relationship.

The fragmented nature of the healthcare industry means that no single player has been able to similarly catalyze rethinking of the how care is delivered and paid for. A mutual pact of self-regulation and focus on overall well-being appears unlikely. Most who make their living in the system are content to put in their hours, claim the paycheck, and never consider how unstable the whole edifice might be. Eventually those in power must realize that the path is unsustainable, or the choice will be made for them.

This land is our land

Stewarding the commons for the future is especially critical since it evolves in unpredictable ways, potentially supporting activities far more valuable than what came before. Boston Common’s shared purpose continues while the grazing has long since ceased. It serves today as the jewel in a system of public parks, greatly boosting the value of surrounding real estate. A vibrant metropolis is of much higher worth than being able to sustain a few more head of cattle.

For companies that exist in web of relationships, which is just about all of them, consider what your behavior does to the potential for future growth. Squeeze every penny from those you engage with and you might win a deal and simultaneously compromise the shared platform that allows your industry to thrive. As with Toyota, for your own firm to prosper suppliers and other partners need to as well.

On a micro level, you may be leading an organization grounded in the shared reputation of a brand painstakingly built up over time. Extending trust to your employees means that some may take shortcuts and consume collective resources in ways that further their own careers at the expense of the whole. If everyone goes off on their own mercenary adventure the consequences can be catastrophic. Constraining behavior by putting up fences is one approach, hiring those with a sense of the greater good is far better.

For the healthcare industry in the U.S., the problem of the commons remains unsolved. The most probable path appears to be some form of collapse in the status quo, followed by a regulatory framework that more clearly demarcates who can claim what land. Some larger payers are beginning to explore some coordinated activity that can reverse the trend, but it’s too soon to tell if they will show results before the commons reaches its limits.7

What commons does your organization rely on, and how are you acting to preserve it?

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References

U.S. health cost data from the National Health Expenditure dataset, adjusted using inflation figures from the Bureau of Labor Statistics. Analysis by the author.

The U.S. National Park Service has a short history of Boston Common.

Harvard Business School has a classic case on Toyota Motor Manufacturing from 1995.

The article coining the phrase Tragedy of the Commons was published in Science in 1968.