Healthcare is Not a Market

The Republican party seems to be pushing the perennial myth that the “Free Market” will make the healthcare system more efficient. This ignores a wealth of evidence by respected neoclassical economists (such as Kenneth Arrow), but also ignores plain Micro 101.

To clarify, a few things are needed for a efficient market:

1. Consumers have an indifference curve for consumption.
2. Suppliers are price-takers; they do not discriminate on price.
3. Consumers have full information about all products on the market.
4. There are no transaction costs and no barriers to entry/exit.
5. Homogenous products.
6. Constant returns to scale.

It’s possible to quibble with one or two (you can argue that one is redundant, and others add more requirements, etc) but that’s the general necessary assumptions.

Now, the free market only exerts its magic is all requirements are fulfilled. Obviously, it’s not a binary result, so if you violate an assumption to a greater or lesser degree, the market becomes less efficient – and thus less “magical.”

This is not controversial. I just want to repeat: this is taught in every Micro 101 post, and freely acknowledged by every neoclassical economist.

Let’s consider the healthcare market.

First of all, consumers do not have set indifference curves for healthcare consumption. Certainly, there are exceptions; and there are some healthcare providers where people do have such indifference curves (non-essential providers).

However, the important stuff is the unpredictable stuff. It’s worth nothing that medical expenses are involved in about half of bankruptcies.

But from a logical standpoint, suddenly discovering cancer changes your desire to consume healthcare. This is not by choice. It’s in response to changing events.

As a consequence, forcing everyone to pay out of pocket for medical expenses (taking it to the extreme) would do nothing but forced people who have unfortunate medical problems to suffer and die – through no fault of their own, and outside of their ability to control.

This is the “moral issue” that Kenneth Arrow pointed out: do we, as a society, want to let citizens of our democracy sicken and die simply because they have the bad luck to fall ill?

Not to mention the related issues – healthcare is not homogenous (every person requires different treatment), suppliers are not price-takers, consumers never have full information on treatment options and costs, and there are tremendous transaction costs to undergo a procedure.

Any of those would be enough to kill the possibility of an efficient healthcare market.

But the deeper problem is assuming that people can ration their healthcare consumption, according to how healthy they want to be, and that costs for each person will be roughly equivalent (varying only in the amount they choose to consume).

That’s a fantasy, and a piss poor one at that.

Of course, healthcare has a number of problems currently – one of the major ones it the lack of decent incentives. How many people die in hospitals for lack of basic hygiene? For medical mistakes, like hooking up a feeding tube to a blood vein? And how is it that a hospital that tries to reduce medical accidents actually ends up losing money – because the real profit is in treating more serious disorders, so it pays to make someone sicker before you make them better?

Those problems can be solved either through incentive alteration (changing the entire pay system of health insurance) or through regulation; for obvious reasons, changing and enforcing regulation is the easier (politically feasible, economically feasible, and successful) way to fix or at least alleviate those problems.

Making healthcare more of a free market will not.

However much people talk of “moral hazard” and “tort reform.”

Jobs of the future!

Computerworld has an article about what (IT) jobs will be like in 2020. Ignoring the parent difficulty of forecasting a decade in the future, allow me to poke a few holes in their account.

There are two broad themes: first, that technology is changing the business landscape, driving more towards cloud-based and mobile solutions.

Second, that people in all categories lack the skills to react appropriately. I’m not going to dwell too long on the stereotyping – it’s pretty basic, such as claiming that there’s “gap between college and real-world experience” (surprise), that Gen-Xers have too much entitlement, that mid-career workers lack experience with technology, etc.

There are two issues with this pretty picture. First, it’s so damn broad that it could apply to anyone at any time; second, it over-emphasizes the impact of technology on business.

I know, I know: it’s a terrible surprise from a rag called “Computerworld.”

Business is about two things: money and relationships. While such a simplification is broadly inaccurate, it’s sufficient when talking about technology. The goals for technology are to lower cost, speed up existing processes, move into new areas, and make it easier to connect.

For all that people claim that Facebook, Twitter, LinkedIn, Salesforce, whateverothercompany is changing the way business works – well, they’re full of shit. Facebook makes maintaining existing social relations easier (no more writing letters/emails to update people), LinkedIn does the same for business networking, Twitter (and its cousin, blogs) make publishing your thoughts easier, and Salesforce (along with other automation technology) makes existing tasks easier.

You could say that the purpose of technology is to eliminate drudgery.

Now, it’s very true that people who make a living off of performing drudgery are challenged by this tendency. And it’s true that people who put up with drudgery to accomplish their real goal (like a salesperson who fills out paperwork so that they can sell) don’t like having processes changed on them.

But it isn’t true that the “skills” are changing so much. People who sell still need to sell; people who manage need to manage, etc. The communication channels change somewhat, but neither the goal nor the method undergo distinct changes.

Tools are just tools: they exist to make you more effective. If new technology makes you less productive – well, it’s not a very good tool then, is it? So why the hell are you adopting it?

Review: Practical Thinking

In 1971 Edward de Bono published Practical Thinking, and has revised it multiple times; the last time in 1992.

It’s a charming little book, largely because – despite making some false statements – his advice is excellent, practical, and should improve thinking for almost anyone who reads (and applies) it.

The most interesting parts of the book, to me – given I have just completed a major in epistemology, or the study of knowledge (sort-of “how to think”) – was the advice about certainty. It’s well-known (now) that the feeling of certainty people sometimes have is bonkers. de Bono breaks down why it’s bonkers; but also provides ways of avoiding the issue.

I’m not going to re-hash his book, in part because he provides an excellent summary at the back of the book you can reference (and, really, it’s $4).

But the most important takeaway for managers and other “practical thinkers” is the de Bono’s discussion on the tyranny of the YES/NO system. It’s a simple insight: If you keep saying “No” to new ideas, the idea you end up with will be the first idea whose answer isn’t “No.” That is, it will not be the best idea; it will be the first mediocre idea. Abandoning the “YES/NO” system of brainstorming is really rather important.

If you’ve studied, oh, logic, Quine, cognitive psychology, and the philosophy of science, all this stuff will be old hat (and some of it wrong). If not,  I highly recommend it.