The “rabbit” in a marathon (and healthcare)


I was talking yesterday to Eron Ferreira, a former marathon runner. Eron is Brazilian, grew up poor and could not afford shoes, so he ran barefoot, as many Kenyans do. Later, when he was able to afford shoes he realized that they were soft, mushy and pointless, so he kept running barefoot. But he still had to make a living, and in the 1990s he did that by being a “rabbit“.

Now bear with me: As Eron was telling me about his time as a rabbit, I suddenly understood why Obama’s health care plan, which includes a controversial public-sector insurance option alongside private plans, is correct.

In the context of marathons, Eron explained to me, a rabbit is somebody whom the event organizer pays to run quite fast for the first half of the race. It is understood that the rabbit wears himself out this way, and he can stop running in the second half.

Now, why would the event organizer do such a silly thing–ie, pay somebody … to run fast in a running race? (!)

Apparently, because without such a pace setter, the other runners would hang back tactically and not run fast. It would be boring for the spectators. It would be bad sport. In any other industry, including health care, we would call this a market failure. In theory, it should not happen, but in practice, it does.

1) Success for Eron

In Eron’s case, this once led to his big break in life. One day, during a marathon in France, he was being a rabbit and running quite fast for the first half. He felt great that day, and it occurred to him that he did not technically need to stop, or even to slow down, at all. All the other runners knew he was “just the rabbit”, so they had allowed him to get ahead a bit. Eron looked back, saw that they were far behind him, and just kept going till … he won!

2) Success for health care

And what does this have to do with Obama’s health care proposals? Well, you may have heard that the health care industry and Republicans are preparing to gun down his plan because it will have a new, public insurance option alongside private health insurers. How un-American! How unfair for the private insurers! How socialist!

(For my general thoughts about health care, look here.)

Need I say more? In theory, all the private health insurers should be running fast to win the marathon and make spectators happy. In practice, they are all hanging back tactically. What this sport needs …. is a rabbit!
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Sick and unfree in America


In ancient Taoist China, a well-off family would hire a doctor, pay him as long as everybody in the family was healthy, and stop paying him as soon as somebody got sick until that person was healthy again. This, as far as I know, was the last time that a society aligned the incentives in the healthcare industry properly.

By contrast, healthcare today is upside down: You don’t pay for the thing you want (health); you pay for service when the thing that you don’t want (sickness) comes around. Hypothetically, if you had two doctors, one Taoist and one modern, and if the Taoist were good enough at his job to keep you healthy, the modern doctor would not get paid at all!

I bring this up only as a little thought exercise to illustrate something important: Healthcare is not like other industries. If the product is muesli or ball bearings, it makes sense to talk about competitive markets and such. But if you’re dealing with an industry that is fundamentally upside down, you have to be careful about using trite concepts of economics.

Another way that healthcare is different: If there were large numbers of, for example, children in society that could not get muesli or ball bearings, we could live with it. After all, they can get corn flakes instead, and walk instead of using wheels. The “market failure” would not equate to a shameful indignity. By contrast, if children (and adults, for that matter) cannot get access to healthcare, it is a shameful indignity.

(Disclaimer: As with everything on The Hannibal Blog, the opinions in this post are mine and mine alone, and may or may not overlap with the views of my magazine, The Economist.)

Healthcare and freedom

I bring up healthcare only reluctantly in my ongoing ‘Freedom Lover’s Critique of America’. I’m not qualified to talk about it and it’s not my beat at The Economist. But I decided that it belongs into this series because America’s healthcare system is so different from those in all comparable countries, and because it has such a direct bearing on freedom.

That the system is dysfunctional is well known. I won’t rehearse the familiar list of failings (many uninsured; many underinsured, et cetera). Let me just point to a few features for the subsequent discussion:

  1. American healthcare is typically American in that is it bureaucratic and adversarial. The effect on patients is alienating and dehumanizing. At the precise moment when they are most vulnerable and dejected, they are expected to go to war against their insurance company on the 1-800 numbers and phone trees to contest pieces of paper they don’t understand. But they have to, because their insurance company will contest almost every single claim–for this is built into the system!
  2. American healthcare is also typically American in being uneccessarily complex, as America’s tax system is. I’m not talking about the medical side–that is complex everywhere, because our bodies are–but about the administrative side.

Does this limit the freedom of individual Americans? Yes, and let me just give one concrete example. A free society is one in which people feel free to move and to change jobs, among other things. But a great many Americans are afraid to change or quit jobs, because their healthcare coverage is tied to an employer. So healthcare can become yet another of the shackles that makes serfs out of many Americans.

More generally, the system’s dysfunction limits freedom because it robs so many Americans of dignity. And dignity is a prerequisite for freedom. Thomas Jefferson could write “life, liberty and the pursuit of happiness” only because he lived in a relatively innocent age, the Enlightenment. A more mature constitution of liberty, such as West Germany’s after the Holocaust, begins with

Die Würde des Menschen ist unantastbar–The dignity of each human being is untouchable.

So yes, healthcare belongs into any debate about whether a country can claim to be free or not. Now let’s figure out what sort of problem healthcare poses, in general and in America.

What kind of problem is healthcare?

When the ancient Chinese paid Taoist doctors to keep them healthy, healthcare was a cost of living, comparable to food and shelter. When we turned it around and paid doctors for managing our sickness, healthcare became an insurance problem.

And there are two traditions of modern insurance:

1) Lloyd’s of London

In 1688, rich toffs started hanging out in Edward Lloyd’s coffee house in London, near where the ships came in and maritime gossip spread. They began betting on which ships would make it to port with their cargo and which might sink. They called it ‘insurance’. It was really a higher form of gambling, with huge profits when the bets went well and huge losses when they went bad. This is the origin of the Anglo-Saxon view of insurance: as a profit-business.

2) Swiss mountain valleys

In Switzerland, going back to I-don’t-know-when, villagers got together to share risk. You might say they “collectivized” it, but don’t think that they were socialists. They were freely volunteering to pool their individual risks because they noticed something that we now call

the Law of Large Numbers

Say that a Swiss village had 1,000 houses. The villagers knew from historical record that, on average, one house would burn down every year. That house’s family would be devastated. Let’s put their loss at SF1,000 to make the math simple. The other families would suffer no loss at all, but they could not tolerate the indignity of letting one family suffer and lived in fear that they might themselves be next.

So they agreed, in free assembly, to pony up SF1 each for a SF1,000 fund. The SF1,000 then went to the one family whose house burnt down to make it whole.

What had they done? They had exchanged a

large but uncertain loss

for a

small but certain one.

They were able to do this thanks to the Law of Large Numbers, which says that an unpredictable risk becomes highly predictable when it is pooled with large numbers of similar, but unrelated, risks.


The Law does not work if the individual risks are correlated. The Great Fire of London in 1666 (below) happened because all of London’s thatched houses stood so close together that they were in fact one big house from the point of view of a flame.


The Law also does not work if adverse selection spoils the risk pool. For instance, say that some of the Swiss villagers had opted out of the pool because they had stone houses. Only those families with highly flammable houses would have entered the pool, but that would mean that the 1-in-a-1,000 ratio no longer applied (it would be much higher).

The Law also does not work if moral hazard changes the way people behave once they get insurance. If some villagers get the idea that, since they are now “covered”, they might as well set their houses afire, the system breaks down.

Finally, the Law works best for risks that are high in frequency, low in devastation. Fire is a good example. It does not work well for risks that are low in frequency, high in devastation. An extinction-causing meteor is a good example. (Who would charge whom what premium for what risk?)

Back to healthcare

And where does healthcare fit in?

  • First, it is very high in frequency (everybody gets injured or sick sooner or later) and low in devastation (usually only that one life is at risk). For most illnesses–diabetes, heart disease, etc–actuaries know exactly what percentage of the population as a whole will get sick in a given year.
  • Moral hazard is not a problem, because–loonies and rock stars excepted–people do not intentionally ruin their health just because they are insured.
  • Adverse selection is a problem, because risk, and the perception of it, changes over a lifetime. The young feel immortal and would opt out to save the buck (Swiss Franc) for a beer, leaving only the geezers to pay up.


Healthcare seems to be altogether unsuitable for a Lloyd’s of London (Anglo-Saxon, profit-driven) insurance culture, and perfectly suited for a Swiss-mountain-valley (risk sharing) insurance culture.

The prerequisite is that everybody in the pool must participate to avoid adverse selection.This, however, would require a mandate for the majority to coerce a few unwilling individuals, and that is something that (real) liberals do not like. But many liberals (and the Swiss are freedom lovers!) make this sacrifice because they understand that it is necessary: Dignity mandates that we look after the sick even if they have opted out of participating, so some people would become free riders.

There are two simple ways to get everybody into one risk pool subject to the Law of Large Numbers:

  1. Tax everybody a little bit (the equivalent of the SF1 per village family) to cover the proportion of people being sick every year, or
  2. make people buy their own insurance, rather as we require car insurance for drivers.

The first leads to a British or Canadian-style single-payer system. (Important: Notice that the government need only manage the funding of the care, not the care itself.) Since everybody is covered, there need be no paperwork for patients. I still remember when I was visiting Britain as a teenager with a soccer team and woke up unable to move my neck one day. I dragged myself to the street, got a taxi to a hospital, and, although I was not British, got fantastic care without signing a single piece of paper.

The second leads to a system of competing insurance carriers. This is fine, although there is one problem: What if you pay premiums to one insurer while you’re young, but then you switch to another insurer when you’re old? That would be adverse selection again (for the second insurer). But in a competitive system, patients would move in both directions, and might cancel one another out. Even so, there is slightly more paperwork for patients, since the care provider needs to reclaim the money from any of several insurers.

Notice that, either way, the economic burden is the same: Every citizen pays, whether through taxes or premiums, the same amount to participate in the risk pool.


And now, the American way: A bit of everything, mixed together and stirred. If you’re a veteran, you participate in huge risk pool. If you’re old (Medicaid) or poor (Medicaid), you participate in other risk pools. If you buy your own insurance, you can carry your coverage around, but you are paying much higher premiums because the insurer assumes adverse selection. If you’re employed, your company arranges coverage, but only as long as you work for it. If you are none of the above, you have no coverage and go to the emergency room when you’re sick, thus leaving the provider to hike everybody else’s costs to compensate for you.

Paper, paper, paper. No law of large numbers for society as a whole. Fragmentation. Confrontation between patient and insurer. Nightmare.

And if Obama goes on to do just the “politically feasible” thing–which, in America, is to add more “options” and complexity–it will get worse.

The way to bring freedom and dignity to America is to get rid of employer-sponsored insurance and to have either  one single government-run insurance pool or mandatory individual insurance for one privately-run insurance pool. Nothing else works.

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