What the Stock Market Crash Reveals About Medical Errors

by Tom Liu

Proponents of high-deductible health plans want to give patients more skin in the game, to solve our system’s problem of escalating costs. Should our system have more skin in the game to do right by our patients?

The Best Risk-Management Rule Ever?

It is not only economically efficient, but morally imperative, to have “skin in the game”. That’s what Nassim Taleb, author of Fooled by Randomness (2001) and The Black Swan (2007), argues in a recent paper and interview on EconTalk.

Dr. Taleb opens by recounting the “eye for an eye” philosophy of Hammurabi’s code—or, in his opinion, “the best risk-management rule ever.” Three thousand years later, Immanuel Kant posed it in a slightly less morbid way through his notion of a “categorical imperative”: “Act only according to that maxim whereby you can, at the same time, will that it should become a universal law.” Or put more simply, do unto others as you would have them do unto you.

Corporate managers, academics, predictors, warmongers, and politicians, Dr. Taleb argues, are exempt from this moral imperative. They take risks and stand to benefit from the upside of those risks, but are shielded from the downside.

The Moral Hazard of “Fat-Tailed” Phenomenon

In fact, this problem is particularly severe for phenomena Dr. Taleb defines as “fat tailed domains”. A fat-tailed phenomenon is one in which an extremely rare but high-impact event dominates the effect of all other events. Repeated instances of a fat-tailed phenomenon (such as stock market outcomes every year) might look like this (source):

fat tail

A problem exists in that the reputation of market forecasters is based on how often they correctly predict the direction of the market movement, and not by how accurately they predict the final value of the market. (More technically, they are judged by a “binary metric” for what is actually a very skewed distribution.) A forecaster who is frequently right wins widespread admiration, even as people who follow that forecaster’s predictions ultimately see their savings wiped out by that rare, “blow-up” event. The forecaster, meanwhile, is insulated from the full pain of the investment loss.

The more skewed the phenomenon, the easier it is to hide the true impact of a mistake behind a façade of “pretty good performance”.

“Forecasters with steady strings of successes become gods.” –Taleb and Sandis, 2013

Skin in the Game for Patient Safety

Medical errors are a prime example of a fat-tailed phenomenon. For 98.6-99.4% of hospitalizations in the U.S., the patient is discharged without a lethal adverse event. But for the family of the patient who falls into that 0.6-1.4% of hospitalizations, getting killed due to medical error is an extremely “high-impact event”. I would imagine that the physician and care team—if they were aware that their error had caused the patient’s death—would feel very terrible. I’m sure even the hospital administrator would feel pretty bad as he/she looks over their adverse event reports. But will their suffering come close to what the patient’s family feels from the loss?

I’ve previously written about why we haven’t eliminated medical errors. News flash: hospital errors don’t cause 44,000-98,000 deaths each year, as we previously thought. They cause 210,000-440,000 deaths per year. That makes hospital error the number three killer in the U.S., after heart disease and cancer.

Slow innovation is arguably one of the most effective ways to spur adoption of safer practices. But it is, by its very nature—well, slow. The nation’s third leading cause of death may warrant a bit more urgency. And that brings us back to the moral imperative of skin in the game. Today, individual hospitals and clinicians are rarely judged by the impact of their medical errors. When they are, they are evaluated based on the frequency of their medical errors—a binary metric (error vs. no error) for a very skewed phenomenon (the magnitude of suffering to the patient and family). Given the immense suffering caused by medical errors, it would seem that providers should share the burden in some way—perhaps not literally by Hammurabi’s standards, but, as Dr. Roberts suggests, “substitut[ing] the physical eye for the economic value of the eye”. And yet, the vast majority of public and private payers today are still paying hospitals (even rewarding them) for medical errors.

Dr. Ashish Jha recently wrote an article arguing that incentivizing hospitals for patient satisfaction more than patient safety has led them to invest in lavish amenities over patient safety improvements. To be fair, Medicare finalized a rule this August that will penalize hospitals in the lowest quartile for medical errors or hospital-acquired infections by withholding 1% of their overall payment. But that may not be a strong enough incentive to catch hospital executives’ attention, as Dr. Jha points out in this blog post. If we believe that market forecasters should invest in the same stocks they predict, and that warmongers should be subject to the draft themselves, then why shouldn’t health care providers have some skin in the game when it comes to patient safety?


Tom is a health care researcher with experience in public health and blindness prevention. Follow him on Twitter at @tliu14 or check out his blog.


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