Belmont Club

Doctor Who?

Britain’s Dr George Hibbert was working as a public health care provider.  You might think he was working for his patients, but that would not be strictly correct. He was more precisely working for the government, and that is not quite the same thing.

A leading psychiatrist faces extraordinary claims he deliberately misdiagnosed parents with mental disorders – decisions which meant their children were taken away from them …

He was paid hundreds of thousands of pounds by social services for the reports which tore children from their parents – many of them young mothers. He is now being investigated over shocking suggestions he distorted the assessments to fit the view of social services.

If true, it is a textbook example of what economists call the principal-agent problem, which is a fancy way of describing a situation when someone (the agent) who is supposed to be working for you (the principal) is really working for someone else.

The principal–agent problem arises when a principal compensates an agent for performing certain acts that are useful to the principal and costly to the agent, and where there are elements of the performance that are costly to observe.

Dr. Hibbert was by all accounts doing very well in his chosen specialty. “Dr Hibbert charged local authorities £6,000 a week for every family in his care and £210 an hour just to read documents such as medical records.”

By 2007 his company, Assessment in Care, was making a profit of around £460,000 a year from his lucrative arrangement with social services.

He is now worth more than £2.7million. Last night a black Porsche Turbo, thought to be worth around £120,000, and a grey Porsche 911 Carrera, worth around £80,000, were parked on the gravel driveway outside his £500,000 country cottage.

The question is who Dr. Hibbert was really working for. It is an issue of more than academic interest since it turns out there was a demand by government agencies to supply children for adoptions. One way to meet that need was to take away children from unworthy parents. But first they had to be unworthy. And this is where assessments come in.

The allegation is that the doctor could make more money satisfying the agenda of the authorities than serving the needs of his patients. In the language of economists, the agent’s duty to his patients would be “costly to observe” since it would mean a lost “sale” to the government.  Lawyers for the patients say, “we believe this distressing case may be the tip of a very big iceberg.”

Maybe not as big as the iceberg sailing down the California coast. “There are icebergs in Californa?” Yes, in the sense that the Golden State’s public sector unions are sending billions of dollars in unfunded medical costs to the taxpayer. That’s one hell of an iceberg. Bloomberg reports the California Supreme court held that government can use taxpayer money to make up shortfalls caused by low returns on the health fund investments.

The Orange County Register editorial board opined that “much in the way that federal courts have found penumbras in the Constitution — i.e., meanings between the lines, or in the shading or the shadows — the state Supreme Court found that certain benefits are the result of ’implied’ contracts.” Localities now face a high hurdle to change these benefits.

Treasurer Lockyer warned about a health-care “time bomb,” but threw the problem back to the taxpayer.

“Nothing is more important in providing for retirement security than preserving the defined-benefit pension for those who have it,” he said in the October speech. Any changes would need to be “on our terms,” he added, to preserve “the power of workers and their unions to be a balancing force to business and the unregulated marketplace in American life.”

The question in this instance is who is the government working for? Is it the taxpayer? Is it the voter? Or is it the public sector union? Once again it’s our old friend the principal-agent problem in operation. Walter Russell Mead summarizes the problem in his lucid prose, which basically says that politicians bought off the unions with taxpayer money — and they didn’t tell the taxpayers — until now.

The problem bedeviling California is the gap between the money it has promised to pay retirees and the money it has—or expects to have—to pay the claims, estimated at about $500 billion late last year. For years, California politicians and union leaders rallied around a lie: They promised big benefits to employees while telling taxpayers that it wouldn’t cost a lot of money. They took less money out of current tax receipts than required to honor the pensions, and they assumed unrealistically high rates of return on the assets they did sock away. The wood fairies and the forest elves were going to make up any shortfalls.

Well surprise, surprise. Now that the wood fairies and forest elves have failed to deliver enough funds to pay for California public sector health care, the government says the unions can send the bill to the taxpayer to make up the difference, otherwise “the power of workers and their unions to be a balancing force to business and the unregulated marketplace in American life” would be threatened. And one can’t have that, of course.

Mead concludes, “wars on arithmetic never end well.” But that is where Walter Russell Mead is wrong. In the right hands arithmetic is as pliable as piece of softened plastic. It can make perfectly sane parents legally incompetent. It can raise legions of voters from the dead. It can make anyone liable, not only for Sandra Fluke’s contraceptives but for the public sector union health costs. Heck, it’s like having the pin number and bank-card to every account of every taxpayer who ever put on a pair of shoes. You can beat arithmetic any time. All you have to do is have the right answer to this question: “who sent you?”

When you take control of the agent what recourse is the principal left with?

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