The Zorn Effect

Economist Arnold Kling invents a new economic term: the Zorn Effect:

Management…can degrade externally and internally. Externally, your competitors copy your strengths and exploit your weaknesses.

Internally, your motivational tactics, including compensation systems, lose their effectiveness. Your goal is to get maximum impact on worker behavior for minimum pay, and your employees want the reverse. Over time, they learn to game your compensation system, and your management effectiveness degrades.

So what does this mean for health care?

In health care, there is a lot of talk about reforming the compensation system. One thought is to move away from paying for procedures and moving toward paying for outcomes. Given that doctors have had fifty years to adapt to a system of pay for procedures, a sudden change might lead to a more cost-effective health care system in the short run. Pretty soon, however, doctors would figure out how to game an outcomes-based system.

That analysis actually sounds pretty consistent with the criticism I’ve heard about pay for performance really being “pay for documentation”.


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