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Saturday, July 25, 2009

Of course the cows were struck by lightning

President Obama was uncharacteristically on the defensive this past week. One particularly awkward episode was when he made a passing reference to money seeking behavior of physicians. He suggested that money considerations induced physicians to do procedures which were of little benefit to patients. The example he used, tonsillectomies on children done by pediatricians, was more than a bit off base.

He was hammered from multiple quarters. In particular Senator Tom Coburn of Oklahoma, a practicing physician, was indignant that the President could suggest that physicians were motivated by financial concerns. I find this discussion nothing short of bizarre. Of course physicians are influenced by financial concerns. How could you assume otherwise? If the expectation that whatever system we operate under will work only if physicians were immune to financial concerns you are frankly delusional.

However, the reality is a bit more nuanced than physicians are either saints immune to motivations like greed or they are money grubbing whores. I am reminded of a story which was relayed to me by my friend Doug who has a mountain home in Virginia. His home is surrounded by working farms with cattle. One day wandering his property Doug noted a putrid odor and determined it came from a decaying carcass of a cow in his neighbor's field. He contacted his neighbor to inform him of his find upon which time the neighbor queried him as to whether he knew how this animal met his demise. The neighbor went on to inform Doug that this animal was struck by lightning and when met by skepticism, he adamantly insisted to Doug this was unquestionably the case.

Only later did the Doug come to understand how this perspective came to be. Years ago selected farmers found that if they claimed lightning strike on an insurance claim, they could recover damages from their livestock loss. While the initial claims may have been placed because of actual lightning strikes, evidence of actual lightning strikes on subsequent claims may have been somewhat less solid. Over time, it came to be widely accepted that this series of events leading to livestock loss was actually true! No deception was intended.

Physicians are imperfect human beings. Despite the desire of various professional organizations to make this otherwise through education and indoctrination with the values of professionalism, we are and will always be "sinners" to some degree. A recent movement sweeping Academic Medical Centers, almost like a religious awakening, has targeted the relationship of physicians with pharmaceutical companies. The intellectual underpinnings of this attack rest to a great degree on scientific work looking at how gifts, no matter how small, influence decision making. Where the logic breaks down where this inquiry stops. If pens and lunches create an unacceptable skewing of medical decision making which impacts patient care, what about the influence of arbitrary payment schemes which enrich only certain elements of medicine and leave other elements grovelling for crumbs?

Heavy use of high margin medical services may share characteristics of the mindset which led farmers to believe their cows were struck by lightning. Some if not many patients may appear to benefit from such activities and physicians who provide those services likely believe in their heart of hearts that they are doing God's. work. However, a repetitive theme of medical practice over the past 40 years has been the the preferential aggressive adoption of specific high margin interventions at high cost (both financial and patient risk) only to discover they are essentially clinically useless except as financial engines.

The behavior does not stop with individual physicians. Listen to advertisements for health systems and the products they hawk. Do we hear advertisements for vaccinations, high blood pressure management, diabetes management, or the diagnosis and management of complex chronic disease? The answer is no because these are money losers. No rational business entity would invest large sums of money to recruit patients whose care will result in financial loss. No entity can serve human needs by going out of business.

Perhaps we should incorporate an oath of poverty into all elements of medical training. I do not think that would be particularly functional. It would serve as a disincentive for many to go into medicine except those who have no trouble being blatant hypocrites. Those are who we really want to attract. We need to understand that the health care industry runs to a great degree on the same motivations used by other industries which fulfill human needs. It should not come as any great shock that doctors are motivated by financial concerns. Those who deny this should be viewed in the same light as countless previous Utopians who have repeatedly tried to create more perfect human beings. Such desires are driven because perfect societies just cannot just do not work when they depend on flawed people. Unfortunately, Utopian movements at best simply fade away and at worst result in terrible human tragedy.

"It is not enough to declare an idea noble and ones hands clean: one needs to ask what will happen to that uplifting idea when people behave not like angels but like fallible human beings." Benjamin Barber, An Epitaph for Marxism. Society 1995 .

Money is the energy that drives complex human societies. It is the general impetus that serves as the motivation for people to get out of bed in the morning to do the things which are required to make this complex entity work. Many of us would serve without financial considerations for those to whom we have close personal ties . However, for the most part complex divisions of labor require we do things for and receive things from total strangers. Let us accept the fact that financial considerations are the primary considerations that allow this complex world to work. Individually we may aspire to a higher calling and set examples by our own behavior. Let us not delude ourselves into believing that we can create a more perfect world here on earth by changing people into something they are not.

Wednesday, July 22, 2009

Healthcare Reform: What happens when the price is not right?

The big news is sticker shock. We are talking about trillions of dollars. I am sorry. I do not think there is a human being on the planet that can fully comprehend the magnitude of trillions of dollars. The real tragedy is we have no concept of what these inconceivable sums of money will actually buy for us!

We are told that we have a right to health care so we are going to expand the federal entitlement to health insurance. One might think that giving us the former will automatically give us unbridled access to the latter. That is not the case. There are a number of arguments to support this position but I believe the most compelling argument is one that focuses on pricing of actual services.

As I stated above, the bills going through Congress create a huge entitlement for health insurance. Ultimately, we do not receive services from insurers. We receive services from a host of other people and entities which deliver some discrete service or bundle of services which in some way shape or form attend to some want or need. Why those specific individuals are available at a given time and place and have the particular set of skills required to attend to our needs is the product of a cascade of events extending well into the past. Their activities are not planned as part of some grand scheme and their individual decisions to be available with a particular expertise or service is more likely driven by the fact they are paid to do so rather than a more noble motivation.

If specific services are priced too cheaply, there will be demand but little supply. This applies to widgets and medical services alike. If widgets are too cheap, producers stop making them creating a shortage and prices will increase. In medical services, prices are administratively set and if set too low, they remain too low and shortages develop and persist. If prices are set too high on widgets, buyers withdraw or suppliers expand. In the medical world, prices for services which are arbitrarily set too high, remain high. While high prices in the rest of the world defer buyers, the presence of medical insurance insulates sufficient numbers of people from inflated prices. Prices do not correct and lucrative services tend to be over utilized.

Self correcting mechanisms in the world of administrative prices in medicine work slowly if at all. In the vast sea of non-market based prices, health care providers tend to find and exploit high margin services well before any administrative entity can respond. Because there are so many prices to set and the variables which define value of those services are in constant flux, there will always be countless prices set wrong. Many prices will be set to low and shortages will ensue as providers avoid those money losers. Many prices will be set too high and you can be assured that these opportunities will be discovered promptly and exploited fully with the assurance that the bureaucracy charged with correcting this will be paralyzed for years if not decades.

How such luminaries in medicine, health policy, and economics can miss this point baffles me. When faced with this problem it is generally dismissed with a simple statement such as "The market can not be trusted with something as important as health care." If market pricing cannot be trusted in health care, why not impose administrative pricing upon the rest of the economy. History tells us why this is a very bad idea.

Sunday, July 19, 2009

When is the price right and why does it matter?

Prices annoy us. If we want it, whoever is selling it wants too much. If we are desiring to sell something, we are generally disappointed if we can't get our asking price, or we kick ourselves that we did not ask for enough if we too easily find a buyer.

At a deeper level, what do prices mean? Prices relate to money which is another story, both simple and complex. Money is simply a common placeholder which allows us to quickly show what we value. We are willing to devote much of our lives to work in order to receive money which allows us to obtain things we need as well as things we desire. If we are selling something which required many hours of our work to produce, we desire to get a reasonable return on our efforts, otherwise we will direct our efforts somewhere else with a better return.

In short, prices are an information system. I like to view the price mechanism as man's first rapid information system. In some sense the price mechanism was the first internet. Traders figured out exchange systems which allowed for people, living at great distances from one another, to transmit what their time and efforts were worth.

How would human exchange work without prices? It would not! Without a price mechanism how could you hire a plumber to snake out your toilets or go to a fast food restaurant to get a quick bite to eat. There would be no signals to direct people to engage in activities that other valued. We could serve ourselves and our immediate family and friends but this constituency would be insufficient to support any sort of real specialization. We would end up raising our own food and living in a subsistence economy.

One mystery is where do prices come from? Another way to view this is that prices are a measure of value. They are a measure of the value of what the producer puts into what is priced, but perhaps more importantly the striking price is what the consumer is willing to pay. No matter what what the inputs are a good or service is essentially worthless is there are no buyers.
It is all about supply and demand but this concept is actually meaningless. It is all about supply and demand at a given price. In other words, supply and demand has no meaning outside the context of price.

Two relatively recent schools have thought have dominated the perspective on price, the objective school derived in Germany in the mid-19th century and the subjective school in 19th century Austria. The objective school held that value (price) can be determined by measuring all the inputs that go into generating a good or service. The subjective school maintained that value was purely subjective and was determined solely on the basis of what someone was willing to pay. The objective school served as a philosophical basis for socialist and Marxist economic thought while the subjective concept served as the basis for free market capitalism.

What relevance do these concepts have now in the 21st century? They are as relevant now as they were over 100 years ago. Much of the controversy centering on health care reform comes back to these fundamental economic views.

More to come...

What is health care reform?

The health reform train has left the station. Yes, there is tremendous resistance to change from many quarters but the truth is the status quo is not sustainable. Perhaps the best thing about what is being proposed is it is so flawed it will hasten the collapse of our present system. Unfortunately I am afraid this will be accompanied by no additional insight into why things went so wrong.

In my opinion the major problem with health reform is the assumption that somehow health care activities are fundamentally different from other human activities. If I am engaged in health care how do I know this? Obviously there are specific activities associated with direct patient contact which are clearly recognized as health care activities such as nurses changing dressings or phlebotomists drawing blood. What about those who answer the phones at a clinic, those who track the money at a hospital, those who park the cars, and those who change the light bulbs? What about the contract workers who clean the rooms at night, or deliver the food to be cooked in the clinic lunchroom, or those who administer the retirement programs for any of the above workers. The health care industry cannot run without these people and the services they render any more than they can operate without doctors, nurses, technicians, or administrators. One can make the case that fulfillment of all human needs can fall under the classification of health care.

If we cannot separate health care activities from non-health care activities, what does that mean in terms of our efforts to reform the delivery of such? There are multiple implications. Perhaps the most important is the present activities to bring health care under increasing control of the federal government without defining boundaries of where it stops and something else begins will inexorably result in the overall economy coming under greater federal control. Furthermore, the increasing cost of health care will result in initiatives to control behaviors of people justified on the basis of saving money by improving health. These are all reasonable on face value, but history is replete with examples of good intentions serving as the basis of state driven coercion resulting in tyranny.

As complicated as things appear to be, there is a simplicity which we can fall back upon. As the world has become more complex and our roles as individuals become more specialized, we need to rely on many other people to fulfill our many needs and wants. How the activities of all these people, many of whom we don't know and never will know, are coordinated is almost impossible to fathom. The coordination of human activities within the health care realm cannot be distinguished from coordination of human activities outside of health care for the simple reason that no one can distinguish between these.

Our anxiety centering around the feelings of loss of control in our complex world drive us to look for institutions that create at least the appearance of control. Despite the unmitigated failures of the state in the 20th Century to serve the purpose of creating order out the apparent chaos of a market driven world, we still listen to the siren song of politicians who promise us a perfectible world ordered by more rules. Less than optimal outcomes in health care is not likely going to be made better by increasing state control, particularly when that control will likely spread to involve much of the economy.

There is never enough "stuff" out there to meet human wants and needs and our only hope to help alleviate this situation marked by scarcity is to harness the productive activities of human beings and provide environments which stimulate the production of more things that humans need and want. This applies to everything, including activities directly or indirectly related to health care (which is everything). The state driven command and control model has never worked...ever. In the same sense that many were burned by the arrogance which marked the most recent financial bubble collapse, viewing their immediate gains from the perspective that it is a new economy and the old rules don't apply, we will be scorched by health care reform based upon a management and financial model history has shown to have a perfect batting average; perfectly awful at 0 for whatever.

Sunday, July 12, 2009

Killing the goose making the golden eggs.

As this ongoing economic meltdown continues to unfold in slow motion, economic "weak links" have become apparent. As the economy contracts along with the tax base which has supported various levels of governmental programs, one glaring problems has become apparent with the soak the rich approach of specific states, most notably New York and California.

The primary purpose a tax system is to provide revenue for supporting vital state functions. In and so far that other secondary functions can be accomplished, these should be pursued only if they do not compromise the primary purpose of revenue generation, either in the immediate or the long term. While it seemed "fair and just" to claim that those who have more resources should pay their "fair share" of taxes, two major challenges have arisen when this state of mind is taken to more than its logical conclusions.

First, there is no clear point where a fair share can be defined. This has resulted in a remarkable reliance on the far end of the income curve to support state activities. In the both New York and California, more than half of the respective state budgets are balanced on the backs of less than 150,000 people. This worked reasonably well when a robust economy created enough of the wealthy to support such a scheme. Unfortunately two problems undermined this approach. First, reliance on high income earners was accompanied by virtually eliminating tax paying responsibility on the middle and lower class of income earners. As California and New York have lost their gooses that produced golden eggs, they also have lost the political will to reimpose tax paying responsibility upon much of their populace. Soaking the rich may be a good way to garner tax income under a limited set of circumstances but it is not a good way to garner a steady and predictable source of tax income.

The federal government is following the lead of states like New York and California in pushing a soak the rich approach. As it stands, a smaller and smaller cadre of individuals is supporting a larger and larger share of the federal budget. It will become increasingly difficult for those in control of the Federal Government to play a political game hostile to those who generate income and create wealth while simultaneously beocmes more reliant upon them to fund the operation.

Monday, July 6, 2009

The legacy of Robert McNamara

Robert McNamara died today at the age of 93. His accomplishments were many and on the whole his legacy should be viewed in a positive light. However, his focus on quantitative methods as tools to gauge success in the Vietnam war was quickly recognized as a perverse application of quantitative tools with limited relevance to critical decision making. When we think of McNamara, we think of the body counts.

McNamara's quantitative bent and use of numerical tools subsequently permeated science, finance, and policy making, not always with optimal outcomes. While data and measurements are essential elements of understanding our world and decision making, we need to be sure that we do not become blind to the point that we find ourselves focusing on the equivalent of body counts in various endeavors. Just because we can measure and model does not mean we can understand and control.

New and powerful quantitative tools were unleased in the financial markets over the past two decades, tapping into unrealized sources of wealth and capital. These tools ultimately created the impression of control and prediction beyond actual reality and drove the development and subsequent collapse of a financial bubble. (see Demons of our own Design - We thought as long as we could count what we thought what counted, we were in control. It was not the case.

In one realm of medicine, one of the original quants, Alain Einthoven, has become a luminary within the realm of health care economics and policy. A little known fact is Dr. Einthoven was Deputy Assistant Undersecretaries secretaries of defense under Robert McNamara. He has been instrumental in using quantitative tools to look at health outcomes. I will not disagree that outcomes are important in health care, much as they are in military campaigns. The problem is that what gets measured is what is measurable and what is measurable may or may not be important.

We are entering into tricky waters when it comes to measuring outcomes in healthcare, a world which consumes an ever increasing amount of resources and is coming under greater and greater stgate control. When payment becomes linked to outcomes and relevant outcomes are difficult to impossible to measure, it will be easy for us to begin to count the bodies to see if we are winning.

Saturday, July 4, 2009

Constraints, Collaboration, Control, Conflicts, and Commitments

If there is any theme which cuts across multiple disciplines and endeavors it is the theme of teamwork and the role of teams in the 21st century. Since Adam Smith made the observations that specialization of labor roles could increase productivity of pin makers, there has been a relentless movement towards specialization of tasks and remarkably expanded productivity to address human needs and wants. The upside to this cataclysmic change (and it has been cataclysmic) has been a staggering change in our physical world resulting in changes in day to day life that are basically inconceivable to those of us living presently. The downside is each of us in individually more dependent upon others for items essential to our day to day lives.

There is a theme which recurs at multiple points in time during this ongoing transition towards an increasingly complex world. As we become more dependent upon others to provide what is essential , we become more concerned about how we can control their activities. While history shows us that robust complex interdepedencies in human systems developed without intentional design, our fears of system failure drive us to push us to move toward command and control approaches despite their consistent failures. Like Lenin who believed that the "complex" world of the early 20th century required the state to seize the "Commanding Heights" of the economy because the complexities and coordination required something more than markets could offer, our fears of a world where we cannot visualize how things work compel us to try to construct one from the top down.

There is only one problem with this... it does not work.

Two things have happened since. First, the command and control economies of the early and mid 20th century have all failed to improve the lots of their citizens. Second, the world has become even more complex. Granted, market based economies have suffered their setbacks as well but numbers of people lifted from abject poverty in the past 50 years still dwarfs the numbers suffering temporary setbacks in the past year. There is still great temptation to believe that market failures serve as a justification to try yet again to control what cannot be controlled.

Command and control economies are the road to a predictable world of poverty, stagnation, and loss of freedom. These certainties should be viewed as vastly less desirable than the volatile world of market economics.

United forever?

While we appear to have weathered the initial wave of economic tsunami without the wheels coming off the cart, there are new challenges which may not be amenable to the borrow from the future strategy. The banks and brokerage houses are not folding like lawn chairs and the stock market has stabilized and is less volatile. However, unemployment rates continue to climb, commercial real estate is following the home market, and long standing weaknesses in state finances have become painfully evident.

As politically powerful states such as California and New York face budget issues which appear to defy conventional solutions within their states, there sill be a huge temptation to tap into the largess of the federal government to bail them out. If AIG, GM, and Bear Sterns are too big to fail, why not bail out California? As H.L. Menken once stated "There is always a well-known solution to every human problem--neat, plausible, and wrong."

Such an intervention has the real potential of serving as the catalyst to propel state secession movements to prominence and influence. Five years ago I would not have imagined that I would be writing a blog piece on this Independence day which seriously raised the possibility of dissolution of the US. However, as these events unfold, I see this as a real possibility.

Let there be no doubt, there will be amazing political pressure for the Feds to intervene. However, the implications of such a bail out must include dissolution of the union. Look at any map of the US and identify the states which are fiscal basket cases. They have certain uniform characteristics. Their citizens of these states already carry an onerous tax burden and they have suffered from substantial losses of industry and sources of tax revenues because of their anti-growth tax policies. All this is present without the slightest recognition that their prior actions are responsible for their present state, most notably the growth of entitlement programs crafted to buy the votes of key constituencies.

States which are weathering the present financial crisis also share certain characteristics. They relied on pro-growth tax policies and limited government and were generally supportive of similar policies at the national level. They attempted to create actuarially sound entitlement programs which could be sustained during good times and bad. What will happen if the Federal government intervenes to save states which have maxed out their credit cards, saddling prudent states with additional debt? It may not go over well. The states rights and secessionist movements may become re-energized. It is already happening to some degree (see WSJ link below).

Perhaps re-opening of the states rights debate is not a bad thing. The final word on which powers should reside at the federal level and which ones should reside at the state or local levels is hardly a settled issue. The issues raised in the Federalist papers are just as relevant now as they were over 200 years ago. Throughout my lifetime, the states rights movement has controlled little legitimacy, being heavily controlled by interests who primary driver has been racial segregation. Even in the periods immediately prior Jim Crow, justification for state sovereignty was based to a great degree on the preservation of the institution of slavery, hardly a compelling reason to garner widespread support for a concept that may have still have substantial merits. With the elimination of slavery and the much more arduous and time consuming dismantling of state sponsored segregation, we may begin to look again at the merits of movement of power back to local and state control.

How events will play out in the short term and whether decisions made now will ultimately be seen as thoughtful and insightful is an open question. Whether these questions are settled via open debate or brute force politics may control the fate of the Union.

Wednesday, July 1, 2009

Tylenol and risk perception

There was a point in time where the fear came from the the threat of cyanide salted into the Tylenol. Now the FDA has issued warnings regarding what is perceived as a serious health threat from the acetaminophen itself. Liver failure is serious business but it is not clear just how many people this affects and to what degree patients need to assume responsibility for being aware of what they are consuming.

Published data comes from registries and there is always a problem with under reporting. Even so, given the number of doses taken, the risk of liver failure appears to be rather small. What is the absolute risk to patients who take acetaminophen? How does this risk compare to the risk they take driving to the pharmacy to purchase their drugs or the risk in taking a bath?

The focus should be on education but the message conveyed to the public is that of dangerous drugs. All interventions cary some risk. I am concerned about the pattern of scrutiny regarding the use of agents available for pain relief. Chronic pain is a major problem with significant impact on quality of life in an aging population. Are we moving toward a world where the certainty of pain is accepted because of small risks of treatment?