Emergence: how entropy and incentives create scams

This afternoon I went through an aneurysm-stressing experience related to Aetna's management of my employer's flexible spending account.

The details of this particular screw-up don't matter, I'll just pick on Aetna because, well, they have the voice menu system from Hell. Really though, it's the incentives, not the company.

The trick is understanding how Flexible Spending Accounts work in the US. Participating employees predict their spend in qualified programs (dependent care, health care) and set aside a portion of regular earnings to cover the costs. The amount spent is not subject to payroll tax.

The catch is the what happens to any unspent funds.. Employers get to keep 'em. I am willing to bet that, somehow, someway, the FSA administrator also benefits from unspent money.

Now here's where it gets interesting. The plan administrator and employer are clearly incented to make the claims process as problematic as possible -- but they don't have to actually do anything bad to get their money. In fact, they don't have to do anything at all.

They can let "nature" take its course. It's like gardening. Weeds are the easiest things to grow; you just have to let entropy work its magic.

Benefit systems, particularly those involving low bid outsourced companies,have a lot of complex moving parts. It's natural for things to go wrong, for communications to be forgotten, for software bugs to flourish. In fact, it takes a lot of money and effort to make the system work.

Companies with perverse incentives don't have to create scams, they simply have to let entropy build a dysfunctional system. They even don't have to know how it's built or how it works or even that it's in operation, they can still reap the rewards of an emergent scam.

It's a lesson worth remembering. Don't participate in complex systems with perverse incentives; you can't beat Mother Nature.