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Saturday, June 4, 2011

The Big Short and Inappropriate Eye Surgery

In The Big Short: Inside the Doomsday Machine, Michael Lewis insightfully dissected the reasons for our financial meltdown. He pinpointed the role of perverse incentives, illustrating his point with a healthcare story:

"Warren Buffett had an acerbic partner, Charlie Munger....If you wanted to predict how people would behave, Munger said, you only had to look at their incentives....Dr. Mike Burry agreed. [He believed] even in life or death situations, doctors, nurses, and patients all responded to bad incentives. In hospitals in which the reimbursement rates for appendectomies ran higher, for instance, the surgeons removed more appendixes. The evolution of eye surgery was another great example. In the 1990s, the ophthalmologists were building careers on performing cataract procedures. They take half an hour or less, and yet Medicare would reimburse them $1,700 a pop. In the late 1990s, Medicare slashed reimbursement levels to around $450 per procedure, and the incomes of the surgically minded ophthalmologists fell. Across America, ophthalmologists rediscovered an obscure and risky procedure called radial keratotomy, and there was a boom in surgery to correct small impairments of vision. The inadequately studied procedure was marketed as a cure for the suffering of contact lens wearers. 'In reality,' says Burry, 'the incentive was to maintain their high, often one-to-two-million-dollar incomes, and the justification followed. The industry rushed to come up with something less dangerous than radial keratotomy, and Lasik was eventually born.'"

Read a story in Chapter 7 in my book, about my own decision on elective surgery.

1 comment:

Espana said...

Outstanding story teller that he is, Michael Lewis conveys the essence of the subprime mortgage debacle in a unique, captivating manner. While other "tell all" books on the subject focus on Paulson, Bush, Bernancke, Obama, et. al. Lewis instead portrays some of the mid-level traders and analysts who properly identified the approaching meltdown. Although each character arrived at his conclusion differently, each of them share the same queasiness about betting against the masses and are constantly trying "reality checks" as a result of the overwhelming giddiness surrounding the subprime mortgages and their derivatives. The reader can feel their trepidation as they continue as candles in the wind while the frenzy grows. I alternated between wanting to read it in one sitting and not wanting to finish it so that I'd have something to look forward to each night.