Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?



  • Being a data junkie and always wanting to see the numbers for myself, I decided to look at actual trends in US healthcare expenditures to see where the dollars are actually going. I went to the US Health and Human Services website and downloaded annual expenditures on healthcare from 1960 through 2007.

  • The configuration of our current healthcare system is a product of its history: It has evolved into its current form as a consequence of two primary sets of factors. First, the healthcare system has evolved into its current form due to historical laws and regulations that have generally catered to the interests of healthcare payers and providers. And second, the system has evolved based on self-serving actions taken by payers, providers, and patients in response to those laws and regulations.


    On the Patient Side

    The current healthcare system is extremely convoluted, in large part because laws have been established to achieve an “unnatural” – inorganic – outcome: the cross-subsidization of healthcare for the old, sick, and poor by the young, healthy, and rich. Under a system of cross-subsidization, some groups (the young, healthy, and rich) pay more than their “fair share” of the total costs to support others (the old, sick, and poor) who pay less than their “fair share.” What is problematic with the current system is not the use of cross-subsidization per se. Many systems do fine with reasonable amounts of cross-subsidization between payer groups. Rather, the problem is the extent to which the level of cross-subsidization has evolved. Over time, the lower cost groups in our society – the young, healthy and rich – have been forced to take on increasing portions of the costs incurred by higher costs groups.

    A victim of the increasing extent of cross-subsidization in the current system is any meaningful relationship between risk and payoff for different sets of participants in the system. The loss of this risk-reward relationship has created massive moral hazard situations for parties in the system. More specifically, people don’t bear the full healthcare costs of their risky – unhealthy – lifestyles. As such, they choose to take on more risks and unhealthy behaviors than they would if they had to pay the full costs of doing so. Our unhealthy populations simply offload their higher associated healthcare costs onto the rest of society. This has created a vicious cycle: As people have become less healthy, healthcare costs have increased. But costlier groups haven’t been able to afford to pay the costs they have incurred, so the degree of cross-subsidization has further increased. In turn, this has further decreased the portion of costs paid for by the unhealthy, which has led them to make even poorer choices.

  • This analysis considers how the US healthcare system would change if we were to transition from the current multi-payer system to a single-payer system. The analysis first presents facts that will be important in considering what a single-payer system might look like. Then, given these facts, the analysis considers specific issues about the transition. 



    1. Four factors affect a person’s risk of premature death.

    Behavior, genes, environment, and healthcare services are the four factors that Impact people’s risks of premature death (Kaiser Family Foundation) (see Figure 1).

    Figure 1

    1 impact factors on death 

    (i)  Behavior: 40%

    From Kaiser Family Foundation: “Health behaviors, such as smoking and diet and exercise, are the most important determinants of premature death.”

    According to OECD, “Health at a Glance 2015”

    While genetics is a risk factor, only about 5% to 10% of all cancers are inherited. Modifiable risk factors such as smoking, obesity, lack of exercise and excess sun exposure, as well as environmental exposures, explain up to 90-95% of all cancer cases.

    (ii)  Genes: 30%

    (iii)  Social and Environment: 20%

    Figure 2 (from Kaiser Family Foundation) displays specific social and environment factors contributing to health.

    Figure 2

     2 social determinants

    More from the OECD report:

    Recent analysis shows that, although overall spending on social services and health care in the United States is comparable to other Western countries, the United States disproportionately spends less on social services and more on health care.

    (iv)  Health Care: 10%

  • Inducing Adoption of New Technologies by Network Members

    Creating Sub-Network Competitive Advantage


    A recent article in the NYT, “E-Records Get a Big Endorsement” by Steve Lohr, describes how hospitals are seeking a competitive edge” by offering subsidies to doctors to join the hospitals’ digital networks:

  • Current Doctor-Patient Communications Involve Miscommunications

    Suppose a patient damages his knee. He goes to see an Orthopedic Surgeon. The surgeon conducts some tests and concludes that the patient has torn his meniscus and needs arthroscopic surgery to fix it (see Figure 1)

    Figure 1

    1 mensicus


    After informing the patient of this, the patient then asks the surgeon, “How much will this surgery cost me?”

    The surgeon replies to the patient’s question with something akin to, “I have no idea,” or “I can’t tell you.”

    That simple statement goes a long way towards killing the patient’s trust of the doctor. And without trust, patients are less likely to comply with the doctor’s recommendations, which, in turns leads to worse patient outcomes, less satisfied patients, fewer patient referrals, and more billing disputes.

    And all this happens due to a miscommunication between the surgeon and the patient.

  • Source of Healthcare System Errors

    Barriers to Error Reporting

    Characteristics of an Ideal Error Reporting System



    A 1999 study, “To Err Is Human: Building a Safer Health System” by the Institute of Medicine reports “that that at least 44,000 Americans die each year as a result of medical errors,” and “the number may be as high as 98,000…Total national costs (lost income, lost household production, disability and health care costs) of preventable adverse events (medical errors resulting in injury) are estimated to be between $17 billion and $29 billion, of which health care costs represent over one-half.”

    A May 2009 study, “To Err is Human – To Delay is Deadly: Ten years later, a million lives lost, billions of dollars wasted” by the Safe Patient Project laments that since the 1999 report was issued, nothing has changed, and “we believe that preventable medical harm still accounts for more than 100,000 deaths each year – a million lives over the past decade.”

  •  A recent article in the NYT, “Weighty Choices, in Patients’ Hands” by Laura Landro, discussed the difficult choices patients face in making healthcare decisions, as treatment options become more complex. Due to the overwhelming nature of the information and the inability of physicians to provide patients with the ins and outs of all their options, some medical services providers are providing patients with “coaches” to help educate them about the upsides and downsides of all the patients’ choices and to help guide them in preparing relevant questions for the patients’ doctors. In the excerpt that follows, I’ve highlighted in blue the results reported in the article for this new patient education process.

  • Healthcare Markets Are "Less Rational"

    Clearly, the Current System Has Problems

    How to Solve the Current Healthcare Problems


    Healthcare Markets Are "Less Rational"

    Over the past several months there has been an absolute deluge of articles in the media regarding how out-of-hand US healthcare spending has become. Many are convinced that the provision of healthcare involves various unique situations, which make the private markets unable to efficiently provide healthcare. For example, Jim Heskett of the Harvard Business School presents 10 reasons why participants in the healthcare market may be "less rational" than participants in other markets:

    1. Consumers have personal fears and lack of information that don't exist with food and fuel,
    2. They equate cost with quality, turning the idea of rational markets upside down,
    3. Individuals' decisions regarding wellness affect the rest of us,
    4. Rationing is necessary but difficult to achieve,
    5. There is an agency problem when neither payers nor providers (including pharma) are penalized by higher costs,
    6. There is a "fee for services" vs. a "fee for results" payment system,
    7. The U.S. has too many high-cost specialists performing work that could be performed more effectively by general practitioners and registered nurses,
    8. High levels of liability encourage the practice of "overly-safe" and expensive medicine,
    9. Providers have fragmented and often incomplete information, and
    10. Consumers either have too little information with which to make rational decisions or don't make good use of the information they have.
  • Food Engineering

    Description of the Consumer Food Game

    Types of Solutions to the Obesity Problem that Won’t Work

    Types of Solutions to the Obesity Problem that Are More Likely to Work


    Everyone knows that America has a weight problem. According to one source, “More than two-thirds of U.S. adults are overweight or obese.” Everyone also knows that all you have to do to lose weight is to consume fewer calories than you burn off. So why can’t so many people just do it?

  • A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    The healthcare industry has been undergoing a massive state of transition recently, especially since the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law in 2009, and the Affordable Care Act (ACA) (Obamacare) was signed into law in 2010.

    The ARRA required healthcare providers to adopt electronic medical records in order to continue to receive current levels of Federal reimbursements. More specifically, “Federal Mandates for Healthcare: Digital Record-Keeping Will Be Required of Public and Private Healthcare Providers” states:

    As of January 1, 2014, all public and private healthcare providers and other eligible professionals (EP) must have adopted and demonstrated “meaningful use” of electronic medical records (EMR) in order to maintain their existing Medicaid and Medicare reimbursement levels.

  • A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    In Part 1 of this analysis, I described the main issues facing Doctors: (i) decreasing reimbursements, (ii) divergent reimbursements by location, (iii) transition from fee-for-service to pay-for-performance, (iv) increasing costs, and (v) increasing regulations.

    In this part of the analysis, Part 2, I describe the main isssues facing Patients and Payers.

    In the last part of the analysis, Part 3, I will discuss the tensions (conflicts) between the different sets of players that are engendered by the different incentives each player faces.

  • A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    In Part 1 of this analysis, I described the main issues facing Doctors.

    In Part 2 of the analysis, I described the main isssues facing Patients and Payers.

    In this last part of the analysis, Part 3, I discuss the tensions (conflicts) between the different sets of players that are engendered by the different incentives each player faces.

  • Healthcare Premiums under Alternative Scenarios

    Players' Actions

    The Obama Healthcare Plan


    Healthcare Premiums under Alternative Scenarios

    I was thinking about the various situations and implications associated with the current healthcare system and some of the changes that have been proposed. I wanted to get a better handle on what, exactly, each of the issues means in terms of dollars spent by people paying into the healthcare system. To this end, I created a little numerical model that lets me play with the different scenarios to see what they each mean in dollar terms.

    The assumptions I’m making that form the general layout of the model are:

    • There are 100 people in the population.
    • The population is distributed into three classes, high, medium, and low, based on the level of lifetime healthcare spending per person.
    • Each person in the population that pays into the healthcare system makes a payment every month for healthcare from the time they are 18 years old until the time they die.
    • The monthly payments made by the portion of the population that pays into the system exactly cover the total lifetime healthcare costs of the population.
  • A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    Infectious diseases are the second leading cause of death worldwide. Since their discovery in the 1940s, antibiotics have been the primary treatment for infectious diseases. However, over time, many diseases have become resistant to the antibiotics that have been used to treat them, causing tens of billions of dollars in added treatment costs and millions of deaths globally.

    This analysis analyzes the factors (game) involved in (i) the supply and use of antibiotics to treat disease, and (ii) the eventual resistance of many of these diseases to the use of antibiotics.

  • A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    In Part 1 of this analysis, I provided a brief description of the Microbial Resistance Game, and I described the various pathways of microbial resistance to antibiotics.

    In this section I describe the players involved in the Antimicrobial Resistance Game (as illustrated in Figure 1), together with their incentives.

  • Is There a Market Failure in the Market for Prepared Foods?

    Is There a Costs vs. Benefits Rationale for Government Intervention?


    A recent article in the NYT, “Citing Hazard, New York Says Hold the Salt” by William Neuman, discusses how the government of New York City plans to “encourage” manufacturers to decrease the salt content in their prepared foods:

    On Monday, the Bloomberg administration plans to unveil a broad new health initiative aimed at encouraging food manufacturers and restaurant chains across the country to curtail the amount of salt in their products.

    The plan, for which the city claims support from health agencies in other cities and states, sets a goal of reducing the amount of salt in packaged and restaurant food by 25 percent over the next five years.

    Public health experts say that would reduce the incidence of high blood pressure and should help prevent some of the strokes and heart attacks associated with that condition.

    … the changes it [the city’s salt campaign] prescribes require cooperation on a national scale, city officials said, because major food companies cannot be expected to alter their products for just the New York market.

    And removing salt from many products can be complicated. Salt plays many roles in food, enhancing flavor, preventing spoilage and improving shelf life. It helps bread to rise and brown.

    … While most food companies say they agree at least with the goal of reducing salt, some medical researchers have questioned the scientific basis for the initiative, saying insufficient research had been done on possible effects. While agreeing that reducing salt is likely to lower average blood pressure, they say it can lead to other physiological changes, some of which may be associated with heart problems.

  • Consider how the different groups of players in the healthcare system are connected to one another:

    hc game

    Healthcare Industry Trends

    Trends in society and in the healthcare industry over time have led to 

    • Increases in medical information 
    • Increases in numbers and specialties of service providers
    • Increases in numbers of available medical devices and pharmaceuticals
    • Increases in malpractice attorneys and healthcare regulations
    • Consolidation of payers
    • Consolidation of providers
    • Increases in consumer access to healthcare insurance
    • Increases in incidences of chronic disease in consumers

    All these trends in the healthcare industry have led all the different sets of players to become more interconnected to one another in their actions and payoffs. As players become more interconnected, small changes to one piece of the system increasingly ripple through and affect all other parts of the system. In other words, you cannot change one part of a system without that change rippling through and causing changes in other parts of the system.

    The healthcare system has become an intricately interconnected web of players. Furthermore, each player acts in seemingly perverse ways — given his particular set of incentives — to optimize his payoffs. Actions in one of the system lead to unexpected outcomes in other parts of the system.

  • Information Sets

    Faulty Sampling


    A recent article in the NYT, “Weighing Medical Costs of End-of-Life Care” by Reed Abelson, uses the cases of two hospitals, UCLA and the May Clinic, to discuss the issue of how to provide cost effective medical care:

    [C]ritics in the Obama administration and elsewhere who talk about how much money the nation wastes on needless tests and futile procedures. They like to note that U.C.L.A. is perennially near the top of widely cited data, compiled by researchers at Dartmouth, ranking medical centers that spend the most on end-of-life care but seem to have no better results than hospitals spending much less…

    According to Dartmouth, Medicare pays about $50,000 during a patient’s last six months of care by U.C.L.A., where patients may be seen by dozens of different specialists and spend weeks in the hospital before they die. By contrast, the figure is about $25,000 at the Mayo Clinic in Rochester, Minn., where doctors closely coordinate care, are slow to bring in specialists and aim to avoid expensive treatments that offer little or no benefit to a patient…

  • Underlying Issue

    Trends in Total US Healthcare Expenditures

    Trends in Personal Healthcare Expenditures

    Trends in Healthcare Expenditures by Condition

    In Sum



    Underlying Issue

    The total annual costs of healthcare paid by each individual is the sum of the healthcare premiums he pays and the out-of-pocket costs he incurs:

    Total Cost of Healthcare = Insurance Premiums + Out-of-pocket Costs

    Roughly speaking, the annual insurance premium an individual pays is the average of the total annual costs paid by his insurance company for the healthcare costs incurred by all individuals in his (age) group. What this means is that if the healthcare costs of one individual rise, then that individual does not bear the full burden of the costs increase, but rather, the burden is shared by all members of the group. This is the very nature of risk-pooling, and it works fine when all the members in the group face the same risks.

    Out-of-pocket costs for healthcare depend on the type of coverage an individual has, plus the amount of healthcare individuals use.

    Moving on, the amount of healthcare an individual will use/need during the year depends on several factors:

    • Genes: People will end up using more healthcare services to the extent that they have “bad” genes.
    • Luck: People will end up using more healthcare services to the extent that they have bad luck or are otherwise accident prone.
    • Lifestyle: People will end up using more healthcare services to the extent that they have an unhealthy diet, don’t exercise, smoke, don’t take safety precautions (e.g., wear seatbelts), or otherwise lead more risky lifestyles.
    • Compliance: People will end up using more healthcare services to the extent that they don’t comply with their doctors’ recommendations (e.g., take medication, lose weight, stop smoking, etc.)

    Obviously, people can’t control whether they have bad genes or bad luck. However, they can control the type of lifestyle they live and whether they comply with their doctors’ recommendations.

    This begs the following question: To what extent are healthcare costs attributable to factors that people cannot control (bad genes and bad luck), as opposed to factors that they can control (lifestyle and compliance)?

    Most people would probably agree to have society (government) subsidize healthcare costs associated with factors people cannot control. However, to the extent that people choose to not control those factors over which they do have power, then to what extent should society be responsible for subsidizing those people’s higher healthcare costs?

    Clearly, the issue becomes more important as the costs of healthcare have increased so dramatically over the years.

  • Healthcare Expenditures Are Concentrated

    High-Cost Healthcare Users

    Causes of Common Chronic Conditions

    Addressing the High Costs of Healthcare


    In my previous blog entry, Why Are Healthcare Costs So High? - Part 1, I presented data indicating that

    • US healthcare expenditures have been increasing over time (see Figure 1 below reproduced from my previous blog entry),
    • There seems to be a shift during the 1980s, in which annual personal expenditures on healthcare started increasing at a faster rate (see Figure 1 below reproduced from my previous blog entry),
    • Healthcare expenditures for treating the top 20 medical conditions account for 75% of expenditures captured in surveys of healthcare expenditures for hospital inpatients, patients treated in physicians’ offices, and prescription medication, and
    • The increases in spending for the top 20 diseases are due mostly to increases in the number of people being treated for (chronic) diseases, rather than to increases in per-patient costs of treatment (see Figure 2 below reproduced from my previous blog entry).

    In this blog entry I examine the distribution of healthcare spending across different portions of the population.