Incentive distortions in cancer treatments

I have blogged recently about market failures associated with health insurance which is a consequence of the inherent problems with health care. Nowhere is this more evident than in the case of cancer treatment.

Cancer screenings - mammograms for women and prostate cancer screening for men - have emerged as among the most controversial areas in healthcare, representative of the information asymmetry related market failures that characterize the sector. NYT writes about the difficulty of making screening calls,

"When doctors screen for early cancer, all the incentives — cultural, financial, professional and legal — line up in one direction: Don’t miss it. As a result, doctors overreact to even the tiniest abnormalities, which leads to the two basic harms of screening: false-positive tests and overdiagnoses.

False positives are really common in both breast and prostate cancer screening... Approximately 15 to 20 percent of women and men who are screened annually over a 10-year period will have to undergo at least one biopsy because of a false-positive mammogram or PSA — prostate-specific antigen — test...

Overdiagnosis is less common, but much more consequential because it leads to unnecessary treatment. Screening finds abnormalities that meet the pathological definition of cancer, yet will never go on to grow or cause any symptoms, let alone death. Sometimes patients choose to wait and see if the cancer grows, but most opt to treat it; once you’re told you have cancer, it’s difficult to wait and see what happens next.

Patients who are overdiagnosed are the big losers here. They undergo surgery, radiation and chemotherapy unnecessarily. And then there are the associated complications: chemotherapy can cause nausea and radiation can burn normal tissue; breast surgery can be disfiguring, and prostate surgery can lead to bladder and sexual dysfunction.

Doctors don’t know which patients they are treating unnecessarily, but they know how the unnecessarily treated patients got there in the first place — because they were screened for cancer.

Now let’s consider the winners — those who have avoided dying from breast or prostate cancer by getting screened. While there is some debate about whether they really exist, my reading of the data is that they do, but they are few and far between — on the order of less than 1 breast or prostate cancer death averted per 1,000 people screened over 10 years. That’s less than 0.1 percent.

Overall, in breast cancer screening, for every big winner whose life is saved, there are about 5 to 15 losers who are overdiagnosed. In prostate cancer screening, for every big winner there are about 30 to 100 losers. "

The incentives of all sides are aligned towards overtreatment. At the slightest suspicion of cancer, the patient is subjected to screening by a risk averse and liability claim fearing doctor. This impulse gets amplified if the doctors gets an incentive for every diagnostic test done, as is most often the case. The anxious patient is ever eager to get himself cleared off any suspicions and therefore willing, even demanding, that all tests be done. In any case, since he is insured, he bears no or little expenditures on those tests. The inusrers too prefer an early diagnosis, since they believe it would save them of the much greater expenses from the treatment once the case turns malignant.

India Vs China graph of the day!

Fascinating graphic that shows the number of years that have elapsed since China passed the development milestones that India has now reached.

Contract re-negotiations in power sector

I have blogged earlier raising concern about the growing trend of contract re-negotiations in competitively bid out tenders, especially in power sector. If successful bidders renege on their contractual obligations when faced with risks they were supposed to have mitigated but actually did not, what is the sanctity of contracts?

First the Reliance's Coastal Andhra Power Ltd (CAPL) stopped work at its Krishnapatnam Ultra Mega Power Project (UMPP) and served force majeure notice citing higher fuel costs due to the Indonesian government's decision making all coal exports mandatorily at international prices. Now Tata Power is following suit on the same grounds for its Mundra UMPP. If two of the flagship UMPP tenders on private participation in power sector are being revisited on the most fundamental of risks in any power generation project - fuel risk - then it does not speak well about the regulatory/governance environment in the sector.

Equally objectionable is the input cost escalation argument being invoked to demand renegotiations on transmission projects. This is a classic case of failure to mitigate construction risks. The most applling though is the decision by Essar Power Gujarat Ltd, a subsidiary of Essar Energy, to terminate its 25 year PPA to supply 800 MW of power to Gujarat Urja Vikas Nigam Ltd (GUVNL) (at a levelized tariff of Rs 2.80 per unit) from its coal-fired Salaya II power station on the specious condition that GUVNL failed to satisfy certain conditions under the PPA withing the required timescale.

Now, most people aware of such contracts will agree that these small failures in adhering to commitments are commonplace and are mostly resolved through negotiations without revising the contract itself, leave alone terminating it. Even more curiously, in this case, the decision comes a day after the firm secured a 25-year PPA with the Bihar State Electricity Board to sell 300 MW from its Tori power station in Jharkhand at a significantly higher levelized tariff of Rs 3.28 per kWh. Incidentally, this higher tariff itself was a result of contract reneogtiation on a previous contract with the Bihar government.

All this gives the unmistakable impression that generators can fall back on contract re-negotiations if their aggressive (and even reckless) bidding strategy fails. Interestingly, they appear to believe that they have the choice of forcing re-negotiations not only if they end up facing a situation where they have not effectively managed their risks but also when they have a contract which they find is less profitable than what they want. The Essar example is a clear manifestation of how much the power sector (and its participants) have fallen down the slippery slope of moral hazard arising from contract renegotiations.

This trend raises serious questions about the sanctity of the Union Government's decision to make competitive tariff based power purchases mandatory for distribution utilities across the country. More importantly, they are certain to vitiate the governance environment in power sector and thereby adversely affect the growth of private participation in the sector. It is also another example of how irresponsible private sector participants and complicit governments are altering clearly defined policy frameworks and distorting incentives all-round.

On a related note, the demand for fuel price based renegotiations does raise questions about how the fuel risk should be structured in future contracts, especially where the fuel is imported. Clearly, some form of tariff pass-through is inevitable, as it has become clear that the existing private generators do not have the capacity to adequately hedge for such risks. The inherent nature of the global coal market, where long-term contracts are not available, makes fuel price risk hedging a difficult proposition.

Country out of recession, people still in recession?

The NYT has this (see article here) excellent graphic that captures the incongruity of any formal declaration of the end of recession in the US. Adjusted for inflation, median household incomes have continued to fall unabated despite the formal end of recession.



Then there is the biggest problem facing the US economy, an unprecedented jobs crisis. Unemployment rate appears to have hit at plateau at around 9%. As the graphic below shows, rate of non-farm job creation has declined precipitously in comparison to the nineties.



Ironically, even as households are bearing the brunt of the recession and the jobs crisis shows no signs of an end anytime soon, the rest of the economy appears to have made smart recoveries. The profits of non-financial corporations has recovered to pre-crisis levels and non-financial businesses are sitting on cash surpluses worth more than $2 trillion.



And Wall Street, especially the bigger institutions, appear to have regained much of lost ground - financial sector profits and executive compensation are back to business as usual.

The new middle-class deprivation?

I have an op-ed in Mint today which argues that food and consumption necessities are being replaced by education, health care, housing, and energy as the new markers of deprivation for urban middle class across the world.

Analyzing India's Cricket Debacle - A Black Swan Event?

I have been thinking of posting this all through India's disastrous recent cricket tour of England. It was Chris Dillow's excellent post about cognitive biases in football that finally got me around to writing it.

The dismal performance of India's cricketers has been variously attributed to IPL, England emergence as the successor to the great West Indian and Australian teams of the past forty years, India's "club-side" like bowling attack and the inability of its batsmen to cope with the swinging ball, and so on.

Without going into the merits of each of these, if we view this performance in its true perspective - the sheer magnitude of the defeat, the recent relative performances of both teams, and an individual assessment of the players from both sides who played in the series - none of the aforementioned explanations appear convincing.

Consider these. India's 4-0 defeat, apart from being its worst ever against England in 15 series there, was also its worst test loss margin ever. In fact, even the great West Indies, with all its great bowlers and batsmen, or Australia of the last two decades, could not inflict a test defeat of such magnitude, even in series with more tests. Undoubtedly much weaker Indian teams, both in batting and bowling, have performed more creditably against far better teams than the current English team, even in conditions atleast as adverse as that in the recent series. A logical performance-based explanation would lead us someway down the conclusion that the current English team is among best ever cricket team or conversely this Indian team is among the worst ever team assembled by the country!

In the build-up to the series, both teams had equally impressive recent test records. If anything, India's performance was superior, both in terms of the fact that its successes were for a longer period of time and was against slightly better opposition. The No 1 test ranking was a just reflection of India's superiority. Apart from its big success in Australia last winter, England's recent victories have been against the lesser teams (nothing in Pakistan, Sri Lanka, India, and South Africa).

Interestingly, it needs to be borne in mind that the same set of English bowlers have played in all the last three test series between the two countries, two of which were in England, and two of which were won by India and one was drawn. James Anderson (in four) and Stuart Broad (in two) led the English bowling attack on these tours. This brings us to the English bowlers themselves. While Anderson is arguably one of the finest exponents of swing bowling in friendly conditions today, his place among the greats of swing bowling is questionable. Stuart Broad's place was itself under threat, though it can be argued that his best years may be ahead. Take out the performance of the last one year, and the averages speak for themselves.

Man to man, given the fact that Graeme Swann was hardly a factor in the first three tests, the South African attack of Dale Steyn and Morne Morkel, against whom the same Indian batting line-up fared with great distinction less than a year back, is far superior. In terms of every imaginable measure of a bowler's art, Dale Steyn is far superior to James Anderson. Morne Morkel is similarly superior to Stuart Broad. Although England's third seamer, Chris Tremlett or Tim Bresnan or Steve Finn, is superior to South Africa's, the added presence of Jacques Kallis evens up things on this front. So, if South Africa's bowlers are superior to the English bowlers, there is something amiss about attributing the extraordinary English performance to the excellence of their bowlers.

I have three explanations for the triumphalism of English cricket writers,

1. Statistical coincidence - As Chris Dillow writes, events occasionally turn out such that one team enjoys the rare confluence of all fortunate factors, while the other team suffers the exact opposite. England had all its players playing at the peak of their form and free from injuries (and given their otherwise normal averages, it cannot be denied that England enjoyed one of the rare runs of all players being in great form), conditions favorable to its bowlers, its batsmen facing a weak and demoralized bowling attack, and so on. India had exactly the opposite - the injury toll, even with IPL workload, and the near complete batting failure, being inexplicable.

And once, the coincidence of factors align in such comprehensive manner, and one team starts to suffer, it is more likely that its confidence will deplete just as fast as that of the other will rise. A self-fulfilling spiral is triggered off. A statistical outlier will then get mistaken for something else.

2. We live in the present - The stellar performance of the same English bowlers, who not far back were whacked by all and sundry in the cricket World Cup (admittedly there is difference between test and one-dayers, but not so much as to merit such differential - Morkel and Steyn hardly suffered such consistent punishment even in one-dayers), raises the issue of how we should assess modern day cricketers.

The amount of cricket modern cricketers play means that their careers are more likely to be short and spliced with injury or fatigue interruptions. In the circumstances, there is a strong case for assessing players based on their current form. Given the competition and standards, even lesser mortals (say, Time Bresnan or Chris Tremlett) playing cricket today are likely to have a streak of great form for some period of time. Then law of averages catch up and they fall back to their mean career trajectory. Only the great players, and there appear to be only a handful of true greats playing now, can sustain their high-level performance for years.

3. Availability Bias - The 3-1 victory over Australia in 2009-10 was easily the greatest cricketing achievement for England in nearly four decades, if not more. It was preceded and succeeded by consistent performances by the team, albeit, as aforementioned, against the weaker teams. The whitewash of the World No 1 Indian team on top of all this naturally reinforces the positive feeling about the team and therefore the impression of an all-conquering team.

In fact, this is classic availability bias, wherein the immediate recollections of the team's performance gets disproportionate importance in the overall assessment of the team. The immediacy of the string of these successes, amplified manifold by modern media coverage, gave rise to the impression of an all-conquering team.

None of this is to denigrate the English achievement nor condone the pathetic performance of India. It is only to fill in a sense of perspective to the emotion charged reporting that dominated the richly deserved triumph of the British team.

Summary of the conservative argument

(HT: Paul Krugman)