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Saturday, December 12, 2009

How could they have been so blind? Hindsight and Foresight

A recurring theme of human history could be termed "How could they be so blind!" This refers to the many events which led up to some sort of major human tragedy which in retrospect displays two common characteristics. First, there is virtually complete consensus that the events should and could have been avoided. Second there is disbelief that no one apparently stood up and intervened in some way to prevent the obviously undesirable events from happening.

The most recent event which could fall into this category is the housing bubble which collapsed in 2008 bringing upon us the worst financial calamity of almost 100 years. I think the lead up to the collapse and the forces which drove us to this state have broad implications outside of the housing market and actually have tremendous implications in health care markets as well.

Even in hindsight, it is very difficult to sort out what EXACTLY happened. That is not possible. The temptation is to identify who is at fault but the reality is virtually everyone is at fault by the nature of what we are and how we are individually motivated. In my estimation the financial collapse had its origins in the misalignment of incentives and an iterative process which, over time, consistently punished those who tried to act as voices of reason.

Specifically the mixture of undesirable tax advantages, unwise subsidies, ill-conceived legislation, and short sighted interest rate policies created an environment where individuals and companies made huge amounts of money doing really stupid activities. Those individuals who resisted jumping on board made what happened to be a bad financial decision in the short term, even though their decisions appear to be prudent in the longer term. Over time, those people who were more prudent either changed their minds or left the business, leaving only those with an outlook and perspective which fed the bubble and had disastrous consequences in the end. In the short to intermediate term, the feedback loops which operated basically punished only those who ultimately were vindicated. In the mean time they were dismissed and marginalized while the true believers were laughing all the way to the bank.

At any given moment of time looking back in time after a calamity happens, it is always easy to see the folly of certain activities. When events are unfolding, it is more difficult to to have the insight required, particularly when we find ourselves awash in a sea of rewards for doing what ultimately turns out is absolute folly.

You might ask how this relates to health care? In many respects health care now operates under a similar perverse mix of peculiar tax incentives, unwise subsidies, ill-conceived legislation which result in individuals and companies making ridiculous sums of money. Those in health care who raised concerns about thoroughly bizarre billing schemes and business practices find themselves in a position where they are in some sense acting irrationally. If you can legally bill and collect large sums for particular activities, why not preferentially engage and bill for these activities. Why would ANYONE leave money on the table? The environment which fosters such thinking has gone on long enough the effectively cull out anyone who resists buying into this culture.

The present business model is predicated on full exploitation of difficult to defend pricing and billing activities. No one wants to make the prices transparent since this activity will make the indefensible price structure obvious. However, the pricing and payments are transparent to those who provide the services. This results in aggressive promotion of high margin activities whether they are of particular value to patients or not.

All this may be obvious to those in the know, generally insiders in the health care industry. However, there is little incentive to speak or act since this would likely result in punishing only yourself. Thus the bubble will continue to grow and like the mortgage industry, the voices of reason will be culled out over time, leaving behind only those who will be blindsided. When the day of reckoning comes, we will all ask why don't anyone see this coming?

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