Skin in the Game

A couple of recent articles on taxes and health care reminded me how important it is to create "skin in the game" for stakeholders.  The tax article builds on an op-ed from a few months ago on the "tax tipping point"… the point where a minority of people actually pay taxes and tax policy is by definition driven by the majority.  In effect, representation without taxation.

In 2006, the latest year for which we have Census data, 220 million
Americans were eligible to vote and 89 million — 40% — paid no income
taxes. According to the Tax Policy Center (a joint venture of the
Brookings Institution and the Urban Institute), this will jump to 49%
when Mr. Obama's cash credits remove 18 million more voters from the
tax rolls. In all, three out of every five voters will pay little or nothing in
income taxes under Mr. Obama's plans and gain when taxes rise on the
40% that already pays 95% of income tax revenues.

The recent article takes it a step further.

Picture an upside-down pyramid with its narrow tip at the bottom and
its base on top. The only way the pyramid can stand is by spinning fast
enough or by having a wide enough tip so it won't fall down. The
federal version of this spinning top is the tax code; the government
collects its money almost entirely from the people at the narrow tip
and then gives it to the people at the wider side. So long as the
pyramid spins, the system can work. If it slows down enough, it falls.

He goes on to discuss income redistribution and such, but I won't touch that third rail this time.  That's not my point.

His solution is to create skin in the game… everyone pays.  Not equally; very few people dispute that taxes should be progressive with the more successful paying more… to a point. 

One letter responding to the article pretty much nailed it.

Revising and clarifying the tax code, closing loopholes, decreasing
or eliminating politicized deductions is long overdue. A simplified tax
code so straightforward that it could enable senators, congressmen,
even U.S. Treasury secretaries to comply would be a welcome change.

Indeed.  Perhaps a few cabinet nominees could even figure it out.

Now on to health care, which has a very similar problem.  Costs are going up, and some portion of that is due to inefficiency.  Once again I won't touch the third rail discussion of whether that's due to insurance companies and such.  But a portion, a very significant portion, is due to the increased marginal cost of improved care technology.  Tiny improvements can cost much, much more… but who's to say they shouldn't be paid for?

There's nothing I've seen so far, however, that will fundamentally
address the core issue, and that is that medical care costs are simply
going up. Increasing access is great for various social reasons, but
it's not going to have a big impact on increasing costs unless we
actually start making some hard choices. Some of those hard choices are
going to be very unpopular, especially when you start to ration care.

But the second approach is more of a long term approach, where you have
to make people sensitive to how much… they spend on health care.
That's the core problem: People always want the very best, even if the
marginal benefit is much less than the marginal costs, because they
don't bear the cost. In Medicare, the government bears the cost. And so
people don't have any type of trade off between spending and benefits.
They always want the very best. And… the innovators always come up
with the better pill even though its efficacy may be just marginally
better than the generic drug; or the better operation, even though its
efficacy will be just marginally better than the cheaper operation.

How do you do that?  We like insurance that basically pays for everything, perhaps aside from a $20 co-pay.  Universal or single-payer would just make it easier.  What a great deal!  Or is it?

There are only really two things you can do. The first is you say,
"Well, people still aren't sensitized to cost and benefits. We'll keep
on paying for it." And in that case the government then has to say,
"You know what, we'll keep on paying but for only some stuff." And now
the government is the one in charge of deciding who gets what. The
second approach is to actually make people directly sensitized to it.
And you do that with things like health savings accounts in which
people have to pre-fund some of their future medical care. They have to
pay out the first several dollars of that care, and the government's
only a back stop on a catastrophic case.

That second option is the only one that would really work.  Everyone has to have skin, at least some skin, in the game.  With some modification for income and ability to pay.

Ultimately, the best package is some type of hybrid where you have
people being sensitized to health care costs for routine care. For
catastrophic care you probably have a government back stop, but more of
minimal back stop than we now have. It's not always wise to pay for the
best device that's out there. It's really about taking into account
cost benefits.

Medicare, by the way, will claim that it take costs and benefits
into account. But in effect they do not. They will approve almost
anything that has some type of marginal benefit and not really think
very hard about the costs.

I learned the lesson about having skin in the game when I owned my own manufacturing company.  I had to pay all the various fees and taxes, including the employer side of employee taxes.  These days I still pay my taxes quarterly, but cutting a real live check.  It hurts, and I really feel what I am paying for roads and schools and bridges to nowhere.  Many are good things, many aren't, and I have become very sensitive to the difference.

It would be a bureaucratic nightmare, but what if income taxes weren't deducted from payroll checks?  What if everyone (well, those few that still have to pay!) had to actually sit down a write a check to the government every few weeks?  What if gas taxes weren't simply included in the price of gas but were added on afterwards, like other sales taxes?  Ouch!  I bet people would be looking at those roads and bridges a bit differently.

And perhaps even volunteering to pay more.  Yes, really.

Think about the tip you give when going out to dinner.  Remember when it was typically 15%?  Most of us as we move into higher income brackets get a new appreciation for the amount of work it takes to provide good service at a dining establishment, and we slowly increase the standard tip to 20% or more.  Or perhaps it's just easier to calculate.  Compare that to some other countries where a standard tip is just included.

And finally, yes finally, think about your business or organization.  Do employees have skin in the game?  Profit-sharing or gain-sharing tied to real goals?  Goals that improve the value delivered to customers and thereby creating more return to the stakeholders?

Everyone needs skin in the game to feel a part of, and accountable to, the value creation process.