The Healthcare Game Theory

A few weeks ago I watched a Veritasium video called "This Game Theory Problem Will Change the Way You See the World." Big claim for a YouTube title. But it mostly delivered.

The video is about the Prisoner's Dilemma, the classic game theory setup where two rational, self-interested players both walk away worse off because cooperating feels risky and defecting feels safe. It's been picked apart for decades and applied to everything from nuclear standoffs to why impalas groom the ticks off each other. Worth your time if you've got thirty minutes. But here's the part that stuck with me.

In most of life, you don't have to win at someone else's expense. You can both come out ahead, because your reward isn't actually coming from the other player. It's coming from the world. The video uses the image of a banker handing out the winnings, so it's not one of you losing for the other to gain. There's a bigger pot, and cooperation is how you get to it.

I've spent more than 25 years working in and around American healthcare, mostly on the payor and brand side, and these days as a consultant seeing the system from several angles at once. And that one line sharpened an idea I'd been circling for years.

Everyone's playing not to get burned

A huge amount of what's broken in American healthcare isn't because anyone's acting in bad faith. It's because the system is built like a series of one-shot games between players who actually need each other for the long haul. And everyone's playing to not get burned.

And there are so many players. The patient receiving care. The provider delivering it. The entity paying for it, which might be a commercial payor, or might ultimately be the state or Federal government subsidizing the bill. But that's just the start. Specialists. Pharmacies and pharmacy benefit managers. The labs running the blood work. Device makers and OEMs. Imaging centers. Care navigators. The whole apparatus of premiums, co-pays, cost-sharing, and prior authorizations layered across all of it. Each one a separate player, with separate incentives, often with almost no visibility into what the others are actually optimizing for. Each one, reasonably, trying to protect itself.

The self-protection tax

And here's the interesting part that should get everyone's attention: all that self-protection has a price, and everyone pays it. Researchers estimate that wasteful spending runs somewhere between $760 billion and $935 billion a year, close to a quarter of what the US spends on healthcare. The single largest category isn't overtreatment or fraud. It's administrative complexity, roughly $266 billion a year — the cost of a system so tangled it can't easily talk to itself. Layer in the duplicated tests and repeated paperwork that come from providers who can't see each other's records, and you start to see where the money goes. It evaporates in the friction. Call it a self-protection tax: the premium everyone pays when trust, alignment, and transparency go missing.

None of that is any one player's fault. It's the toll the system collects for being fragmented.

Clarity and opportunity

The research has one more finding I keep coming back to. In repeated games between self-interested players, the strategies that win tend to share a few traits. The players don't allow themselves to get pushed around, but they're not the first to defect either. And they're clear. Unreliable, murky behavior that was too hard for the other players to anticipate tended to provoke defection just by being confusing. If you can't tell what the other side is doing or why, you start assuming the worst and act accordingly.

That's a pretty good description of how a lot of healthcare players experience each other. Providers can't always read what payors are optimizing for. Patients can't read either of them. And when nobody can see clearly, everybody plays defense.

So where does that leave a healthcare organization trying to grow or just operate more sustainably?

The players who make their value legible to the other side aren't just marketing solutions — they're doing the work of alignment. That's where I spend most of my time: helping an organization get clear on what it's offering, to whom, and why it's good for the other side too.

That self-protection tax isn't a line item anyone chose. Rather, it's what the system charges when players treat a long, repeated relationship like a one-shot game. And let's remember, for the millions of Americans struggling with healthcare costs every day, this isn't a game at all.