Perhaps you’ve read “Freakonomics,” or seen the Academy Award-winning movie “A Beautiful Mind”, or heard a broadcast on National Public Radio detailing human motivations explained by math or economics? Or, maybe you’ve heard jargon tossed around such as: B=PxL, zero-sum games, Nash equilibriums and Coase’s theorem. Even if you’re familiar with the vernacular of these theories and you have an inkling of what they mean, you’re probably still wondering what all this has to do with practicing dermatology.
Surprisingly, a lot.
Explaining Everyday Life with Game Theory and More
The concepts of law and economics and game theory explain the diverse activities that animate everyday life — such as why we act the way we do and why others act the way they do.
American courts also consider law and economics and game theory when they make their legal rulings. If you want to understand the current state of social theory or even the state of dermatology, an understanding of these principles is helpful.
Here, I’ll outline these theories and then give examples of how they might play out in your everyday professional life.
B=PxL
Judge Learned Hand gave form to the American legal movement called law and economics in United States v. Carroll Towing Co. (1947) by writing an assessment about whether a barge owner was liable for not minding his barge:
Since there are occasions when every vessel will break from her moorings, and since, if she does, she becomes a menace to those about her; the owner’s duty, as in other similar situations, to provide against resulting injuries is a function of three variables:
1. The probability that she will break away
2. the gravity of the resulting injury, if she does
3. the burden of adequate precautions.
Possibly it serves to bring this notion into relief to state it in algebraic terms: if the probability be called P; the injury, L; and the burden, B; liability depends upon whether B is less than L multiplied by P. In other words, whether B
So, if B
Game Theory
Similarly, theoretical constructs can be used to understand human affairs. In 1944, John von Neumann and Oskar Morgenstern formulated what was to be known as game theory, or the ‘the zero-sum game.” A zero-sum game denotes a situation in which a participant’s gain or loss is exactly balanced by the losses or gains of the other participant(s). These ideas were used by John Nash, the mathematical genius and Nobel Laureate whose life was portrayed in the movie “A Beautiful Mind”, who conceived the following: In a game with any number of players, if each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs is termed a Nash equilibrium.
Coase’s Theorem
In the puzzle of formulas and theories, the final piece is Thomas Coase’s theorem, which explicates the problem of market externalities (spillover effects) — or situations in which one person’s actions impose costs (or benefits) on another.
An externality occurs when someone other than the buyer must share the benefits or costs of a product. A good example of this is the paradigm involving factories and pollution. In a situation in which a factory can either treat pollution — which costs money — or dump for free, the company will choose to dump.
In a broader sense, when something is not accounted for (such as pollution when manufacturing certain products) — when it is externalized — the internal participants (the manufacturing company, for example) will act in a way that benefits itself without taking into account any external factors.
Real-World Examples in Dermatology
The real world is messy and doesn’t easily fit into boxes, but I will try and show how the theories mentioned affect dermatologists in two situations. The examples are not perfect but are meant to be illustrative and not definitive.
Decrease in Isotretinoin Prescriptions
Since the iPLEDGE risk management prescribing program has been instituted, I’ve been told by an representative of Ranbaxy (manufacturer of isotretinoin [Sotret]) that isotretinoin use is down 30%.
Using B<PxL. The story of isotretinoin and iPLEDGE can be explicated using BPxL. We can plug values into the equation in the following fashion. The burden (B) a dermatologist gets for prescribing isotretinoin increased under iPLEDGE, the loss (L) to the patient is the same and the P has gone down (because it is usually a challenge to use iPLEDGE), so the behavior of the dermatologists has changed. The number and medical state of acne patients is the same and the effectiveness of isotretinoin has not decreased; however, if B>PxL, then we can understand why less isotretinoin is being prescribed because the burden on dermatologists has increased.
Using Coase’s theorem. The story of isotretinoin and iPledge can also be explicated using Coase’s theorem. iPLEDGE can be viewed as an externality that is an additional cost being passed on to the dermatologists for someone’s else’s sole benefit. The identity of this “someone” is complex to assess and might include:
• society and the mothers who potentially might have taken isotretinoin (because there will be fewer children with birth defects)
• the March of Dimes whose mission is furthered
• those who oppose abortion because now they can rest easier knowing fewer abortions are being performed
• Congressman Bart Stupak (D-MI) (who has crusaded to have isotretinoin studied for possible links to depression and suicide) who feels that he has done the constituents some good by getting what he thinks is a dangerous medication to be used less
• pharmaceutical companies who sell isotretinoin that will have fewer competitors because iPLEDGE makes it so difficult to market an otherwise easy molecule to manufacture.
Patients, HMOs and the FDA are not paying doctors more to comply with iPLEDGE. The FDA is mandating that dermatologists comply with this new regulation. iPLEDGE can be seen as an externality imposed on dermatologists that burdens dermatologists without compensating them for their increased burden.
The Rise of Biologics
I know of two dermatologists on the Upper East Side of Manhattan who once had six light boxes apiece and now each only have one. At the same time, biotechnology companies are making millions of dollars selling biological therapy for psoriasis. How can this be understood?
This change has taken place because of the flat reimbursement for phototherapy (with a recent Medicare increase but still not enough to keep its reimbursement constant or growing in real terms). Moreover, biologics are available and many companies still pay for them without a hassle. Biologics are low risk compared to a lifetime of methotrexate or cyclosporine. More importantly, biologics do not require the intensive monitoring needed for methotrexate and cyclosporine. In addition, biologics are not as inconvenient as phototherapy.
Using B>PxL. When discussing methotrexate and cyclosporine, for many dermatologists B equals the peace of mind and lack of excess cost to the doctor while also equating to the convenience and fewer side effects for patients. P is the possibility that methotrexate or cyclosporine would be used, and L equals the downside of not using cyclosporine or methotrexate.
With this formula, dermatologists frequently prescribed phototherapy, but this type of therapy became a burden to them over time because it became less profitable (and other procedures became available and were more profitable). The procedure also became a burden to patients because the patient had to go to the dermatologist’s office several times a week. With biologics, the burden (B) has gone down (it seems for doctors and patients) so that B
The story is not over. As insurance companies notice that more expensive medications are being used, thereby increasing their costs and decreasing profits, game theory tells us that their behavior will change.
Using game theory. Insurance companies could try to decrease use of biologics by requiring proof of previous cheaper treatment failure and letters of necessity. The increased burden on doctors might discourage some of them from writing for biologics; others who want to use biologics will become more adroit at writing letters and assembling data to satisfy the strictures of the insurance company and will keep their level of writing for biologics constant.
For these doctors, the insurance company will likely find ways to make their policies tighter still. This has not yet happened in most cases but as insurance companies are motivated to cut costs, they might eventually take one or more biologics off their formulary altogether or perhaps cap the amount of money that can be spent over a lifetime of the insurance policy for psoriasis medications (as insurance companies have done for HIV therapies).
Game theory explains that players tend to respond tit for tat in ongoing games until an equilibrium is established.
A Lot to Learn
When I began to write this column one of the residents with whom I work asked me “Are you going to write about malpractice every month?”.
He informed me that if this was the case that my column was going to get boring fast.
The few principles I’ve reviewed and the examples of how they can apply to real-life situations in dermatology show that there is a lot to learn and explore in the areas of law and economics.
Perhaps you’ve read “Freakonomics,” or seen the Academy Award-winning movie “A Beautiful Mind”, or heard a broadcast on National Public Radio detailing human motivations explained by math or economics? Or, maybe you’ve heard jargon tossed around such as: B=PxL, zero-sum games, Nash equilibriums and Coase’s theorem. Even if you’re familiar with the vernacular of these theories and you have an inkling of what they mean, you’re probably still wondering what all this has to do with practicing dermatology.
Surprisingly, a lot.
Explaining Everyday Life with Game Theory and More
The concepts of law and economics and game theory explain the diverse activities that animate everyday life — such as why we act the way we do and why others act the way they do.
American courts also consider law and economics and game theory when they make their legal rulings. If you want to understand the current state of social theory or even the state of dermatology, an understanding of these principles is helpful.
Here, I’ll outline these theories and then give examples of how they might play out in your everyday professional life.
B=PxL
Judge Learned Hand gave form to the American legal movement called law and economics in United States v. Carroll Towing Co. (1947) by writing an assessment about whether a barge owner was liable for not minding his barge:
Since there are occasions when every vessel will break from her moorings, and since, if she does, she becomes a menace to those about her; the owner’s duty, as in other similar situations, to provide against resulting injuries is a function of three variables:
1. The probability that she will break away
2. the gravity of the resulting injury, if she does
3. the burden of adequate precautions.
Possibly it serves to bring this notion into relief to state it in algebraic terms: if the probability be called P; the injury, L; and the burden, B; liability depends upon whether B is less than L multiplied by P. In other words, whether B
So, if B
Game Theory
Similarly, theoretical constructs can be used to understand human affairs. In 1944, John von Neumann and Oskar Morgenstern formulated what was to be known as game theory, or the ‘the zero-sum game.” A zero-sum game denotes a situation in which a participant’s gain or loss is exactly balanced by the losses or gains of the other participant(s). These ideas were used by John Nash, the mathematical genius and Nobel Laureate whose life was portrayed in the movie “A Beautiful Mind”, who conceived the following: In a game with any number of players, if each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs is termed a Nash equilibrium.
Coase’s Theorem
In the puzzle of formulas and theories, the final piece is Thomas Coase’s theorem, which explicates the problem of market externalities (spillover effects) — or situations in which one person’s actions impose costs (or benefits) on another.
An externality occurs when someone other than the buyer must share the benefits or costs of a product. A good example of this is the paradigm involving factories and pollution. In a situation in which a factory can either treat pollution — which costs money — or dump for free, the company will choose to dump.
In a broader sense, when something is not accounted for (such as pollution when manufacturing certain products) — when it is externalized — the internal participants (the manufacturing company, for example) will act in a way that benefits itself without taking into account any external factors.
Real-World Examples in Dermatology
The real world is messy and doesn’t easily fit into boxes, but I will try and show how the theories mentioned affect dermatologists in two situations. The examples are not perfect but are meant to be illustrative and not definitive.
Decrease in Isotretinoin Prescriptions
Since the iPLEDGE risk management prescribing program has been instituted, I’ve been told by an representative of Ranbaxy (manufacturer of isotretinoin [Sotret]) that isotretinoin use is down 30%.
Using B<PxL. The story of isotretinoin and iPLEDGE can be explicated using BPxL. We can plug values into the equation in the following fashion. The burden (B) a dermatologist gets for prescribing isotretinoin increased under iPLEDGE, the loss (L) to the patient is the same and the P has gone down (because it is usually a challenge to use iPLEDGE), so the behavior of the dermatologists has changed. The number and medical state of acne patients is the same and the effectiveness of isotretinoin has not decreased; however, if B>PxL, then we can understand why less isotretinoin is being prescribed because the burden on dermatologists has increased.
Using Coase’s theorem. The story of isotretinoin and iPledge can also be explicated using Coase’s theorem. iPLEDGE can be viewed as an externality that is an additional cost being passed on to the dermatologists for someone’s else’s sole benefit. The identity of this “someone” is complex to assess and might include:
• society and the mothers who potentially might have taken isotretinoin (because there will be fewer children with birth defects)
• the March of Dimes whose mission is furthered
• those who oppose abortion because now they can rest easier knowing fewer abortions are being performed
• Congressman Bart Stupak (D-MI) (who has crusaded to have isotretinoin studied for possible links to depression and suicide) who feels that he has done the constituents some good by getting what he thinks is a dangerous medication to be used less
• pharmaceutical companies who sell isotretinoin that will have fewer competitors because iPLEDGE makes it so difficult to market an otherwise easy molecule to manufacture.
Patients, HMOs and the FDA are not paying doctors more to comply with iPLEDGE. The FDA is mandating that dermatologists comply with this new regulation. iPLEDGE can be seen as an externality imposed on dermatologists that burdens dermatologists without compensating them for their increased burden.
The Rise of Biologics
I know of two dermatologists on the Upper East Side of Manhattan who once had six light boxes apiece and now each only have one. At the same time, biotechnology companies are making millions of dollars selling biological therapy for psoriasis. How can this be understood?
This change has taken place because of the flat reimbursement for phototherapy (with a recent Medicare increase but still not enough to keep its reimbursement constant or growing in real terms). Moreover, biologics are available and many companies still pay for them without a hassle. Biologics are low risk compared to a lifetime of methotrexate or cyclosporine. More importantly, biologics do not require the intensive monitoring needed for methotrexate and cyclosporine. In addition, biologics are not as inconvenient as phototherapy.
Using B>PxL. When discussing methotrexate and cyclosporine, for many dermatologists B equals the peace of mind and lack of excess cost to the doctor while also equating to the convenience and fewer side effects for patients. P is the possibility that methotrexate or cyclosporine would be used, and L equals the downside of not using cyclosporine or methotrexate.
With this formula, dermatologists frequently prescribed phototherapy, but this type of therapy became a burden to them over time because it became less profitable (and other procedures became available and were more profitable). The procedure also became a burden to patients because the patient had to go to the dermatologist’s office several times a week. With biologics, the burden (B) has gone down (it seems for doctors and patients) so that B
The story is not over. As insurance companies notice that more expensive medications are being used, thereby increasing their costs and decreasing profits, game theory tells us that their behavior will change.
Using game theory. Insurance companies could try to decrease use of biologics by requiring proof of previous cheaper treatment failure and letters of necessity. The increased burden on doctors might discourage some of them from writing for biologics; others who want to use biologics will become more adroit at writing letters and assembling data to satisfy the strictures of the insurance company and will keep their level of writing for biologics constant.
For these doctors, the insurance company will likely find ways to make their policies tighter still. This has not yet happened in most cases but as insurance companies are motivated to cut costs, they might eventually take one or more biologics off their formulary altogether or perhaps cap the amount of money that can be spent over a lifetime of the insurance policy for psoriasis medications (as insurance companies have done for HIV therapies).
Game theory explains that players tend to respond tit for tat in ongoing games until an equilibrium is established.
A Lot to Learn
When I began to write this column one of the residents with whom I work asked me “Are you going to write about malpractice every month?”.
He informed me that if this was the case that my column was going to get boring fast.
The few principles I’ve reviewed and the examples of how they can apply to real-life situations in dermatology show that there is a lot to learn and explore in the areas of law and economics.
Perhaps you’ve read “Freakonomics,” or seen the Academy Award-winning movie “A Beautiful Mind”, or heard a broadcast on National Public Radio detailing human motivations explained by math or economics? Or, maybe you’ve heard jargon tossed around such as: B=PxL, zero-sum games, Nash equilibriums and Coase’s theorem. Even if you’re familiar with the vernacular of these theories and you have an inkling of what they mean, you’re probably still wondering what all this has to do with practicing dermatology.
Surprisingly, a lot.
Explaining Everyday Life with Game Theory and More
The concepts of law and economics and game theory explain the diverse activities that animate everyday life — such as why we act the way we do and why others act the way they do.
American courts also consider law and economics and game theory when they make their legal rulings. If you want to understand the current state of social theory or even the state of dermatology, an understanding of these principles is helpful.
Here, I’ll outline these theories and then give examples of how they might play out in your everyday professional life.
B=PxL
Judge Learned Hand gave form to the American legal movement called law and economics in United States v. Carroll Towing Co. (1947) by writing an assessment about whether a barge owner was liable for not minding his barge:
Since there are occasions when every vessel will break from her moorings, and since, if she does, she becomes a menace to those about her; the owner’s duty, as in other similar situations, to provide against resulting injuries is a function of three variables:
1. The probability that she will break away
2. the gravity of the resulting injury, if she does
3. the burden of adequate precautions.
Possibly it serves to bring this notion into relief to state it in algebraic terms: if the probability be called P; the injury, L; and the burden, B; liability depends upon whether B is less than L multiplied by P. In other words, whether B
So, if B
Game Theory
Similarly, theoretical constructs can be used to understand human affairs. In 1944, John von Neumann and Oskar Morgenstern formulated what was to be known as game theory, or the ‘the zero-sum game.” A zero-sum game denotes a situation in which a participant’s gain or loss is exactly balanced by the losses or gains of the other participant(s). These ideas were used by John Nash, the mathematical genius and Nobel Laureate whose life was portrayed in the movie “A Beautiful Mind”, who conceived the following: In a game with any number of players, if each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs is termed a Nash equilibrium.
Coase’s Theorem
In the puzzle of formulas and theories, the final piece is Thomas Coase’s theorem, which explicates the problem of market externalities (spillover effects) — or situations in which one person’s actions impose costs (or benefits) on another.
An externality occurs when someone other than the buyer must share the benefits or costs of a product. A good example of this is the paradigm involving factories and pollution. In a situation in which a factory can either treat pollution — which costs money — or dump for free, the company will choose to dump.
In a broader sense, when something is not accounted for (such as pollution when manufacturing certain products) — when it is externalized — the internal participants (the manufacturing company, for example) will act in a way that benefits itself without taking into account any external factors.
Real-World Examples in Dermatology
The real world is messy and doesn’t easily fit into boxes, but I will try and show how the theories mentioned affect dermatologists in two situations. The examples are not perfect but are meant to be illustrative and not definitive.
Decrease in Isotretinoin Prescriptions
Since the iPLEDGE risk management prescribing program has been instituted, I’ve been told by an representative of Ranbaxy (manufacturer of isotretinoin [Sotret]) that isotretinoin use is down 30%.
Using B<PxL. The story of isotretinoin and iPLEDGE can be explicated using BPxL. We can plug values into the equation in the following fashion. The burden (B) a dermatologist gets for prescribing isotretinoin increased under iPLEDGE, the loss (L) to the patient is the same and the P has gone down (because it is usually a challenge to use iPLEDGE), so the behavior of the dermatologists has changed. The number and medical state of acne patients is the same and the effectiveness of isotretinoin has not decreased; however, if B>PxL, then we can understand why less isotretinoin is being prescribed because the burden on dermatologists has increased.
Using Coase’s theorem. The story of isotretinoin and iPledge can also be explicated using Coase’s theorem. iPLEDGE can be viewed as an externality that is an additional cost being passed on to the dermatologists for someone’s else’s sole benefit. The identity of this “someone” is complex to assess and might include:
• society and the mothers who potentially might have taken isotretinoin (because there will be fewer children with birth defects)
• the March of Dimes whose mission is furthered
• those who oppose abortion because now they can rest easier knowing fewer abortions are being performed
• Congressman Bart Stupak (D-MI) (who has crusaded to have isotretinoin studied for possible links to depression and suicide) who feels that he has done the constituents some good by getting what he thinks is a dangerous medication to be used less
• pharmaceutical companies who sell isotretinoin that will have fewer competitors because iPLEDGE makes it so difficult to market an otherwise easy molecule to manufacture.
Patients, HMOs and the FDA are not paying doctors more to comply with iPLEDGE. The FDA is mandating that dermatologists comply with this new regulation. iPLEDGE can be seen as an externality imposed on dermatologists that burdens dermatologists without compensating them for their increased burden.
The Rise of Biologics
I know of two dermatologists on the Upper East Side of Manhattan who once had six light boxes apiece and now each only have one. At the same time, biotechnology companies are making millions of dollars selling biological therapy for psoriasis. How can this be understood?
This change has taken place because of the flat reimbursement for phototherapy (with a recent Medicare increase but still not enough to keep its reimbursement constant or growing in real terms). Moreover, biologics are available and many companies still pay for them without a hassle. Biologics are low risk compared to a lifetime of methotrexate or cyclosporine. More importantly, biologics do not require the intensive monitoring needed for methotrexate and cyclosporine. In addition, biologics are not as inconvenient as phototherapy.
Using B>PxL. When discussing methotrexate and cyclosporine, for many dermatologists B equals the peace of mind and lack of excess cost to the doctor while also equating to the convenience and fewer side effects for patients. P is the possibility that methotrexate or cyclosporine would be used, and L equals the downside of not using cyclosporine or methotrexate.
With this formula, dermatologists frequently prescribed phototherapy, but this type of therapy became a burden to them over time because it became less profitable (and other procedures became available and were more profitable). The procedure also became a burden to patients because the patient had to go to the dermatologist’s office several times a week. With biologics, the burden (B) has gone down (it seems for doctors and patients) so that B
The story is not over. As insurance companies notice that more expensive medications are being used, thereby increasing their costs and decreasing profits, game theory tells us that their behavior will change.
Using game theory. Insurance companies could try to decrease use of biologics by requiring proof of previous cheaper treatment failure and letters of necessity. The increased burden on doctors might discourage some of them from writing for biologics; others who want to use biologics will become more adroit at writing letters and assembling data to satisfy the strictures of the insurance company and will keep their level of writing for biologics constant.
For these doctors, the insurance company will likely find ways to make their policies tighter still. This has not yet happened in most cases but as insurance companies are motivated to cut costs, they might eventually take one or more biologics off their formulary altogether or perhaps cap the amount of money that can be spent over a lifetime of the insurance policy for psoriasis medications (as insurance companies have done for HIV therapies).
Game theory explains that players tend to respond tit for tat in ongoing games until an equilibrium is established.
A Lot to Learn
When I began to write this column one of the residents with whom I work asked me “Are you going to write about malpractice every month?”.
He informed me that if this was the case that my column was going to get boring fast.
The few principles I’ve reviewed and the examples of how they can apply to real-life situations in dermatology show that there is a lot to learn and explore in the areas of law and economics.
