Keeping score, sedentism, and Ponzi schemes

Early in human history, we did not need to keep score. In a world where it was every person for themselves, what mattered most was whether any particular individual garnered enough resources to survive in the short term. People lived day to day...really. The ability to accumulate resources and to trade created a whole new world, but it created both opportunity and peril.

Exchange is central to the accumulation of wealth. Free exchange in the engine which allows for resources created by one party to end up in the hands of another party where they are used to create greater value. Win-win exchanges are how wealth is created. When trade was simple, it was easy to track. When exchanges became more complicated, it became more difficult to track who owed what to who. Fast and furious exchange may create the appearance of wealth creation where no additional value is actually created.

A perfect example of this is the Ponzi scheme where no actual exchange occurs, no value is created, and yet the illusion of wealth prompts all types of economic exchange which ultimately must be undone. At one level, the creation of huge entitlement programs can be viewed as Ponzi-like schemes. Some of the investors do not have the option to  not be investors but in the same sense as the voluntary marks, their monies are not invested but instead are paid out immediately to satisfy the demands of those who have previously invested in the system through their votes. Some of the investors (e.g. investors in T bonds) are betting on the ability of the US government to continue to compel the tax payers to continue to fund the increasingly precarious enterprise. At some point, even the US government will not be able to dance fast enough to keep the game afloat.

Oddly enough, the driver of this is as old as civilization. When the Natufians created permanent settlements, they no longer left their old and infirmed to die. Those who produced also took on the obligation for those who were no longer able to do so. Plenty served to be a trap by creating an explosion of population and quickly resources were outstripped by numbers. The was the curse of sedentism. There were no retirement accounts, just hard assets such as food and shelter  When there was not enough, people died of starvation or exposure. There was no way to game this system. They had to create more resources or people died.

Human ingenuity has driven the expansion of resources to where famine is seen only where it is used as a brutal weapon of political repression.  However, the impact of sedentism remains with us, albeit in a markedly different form. In the simplest sense, sedentism is the product of societies where social norms allow for segments of the population incapable of creating resources which they ultimately "need" and can lay clam on.

Do not take this observation as a criticism of any societal obligation to care for the weak and the sick. Our compassion and desire to help others is what makes us human and is crucial for the creation and maintenance of complex social structures.  Where it gets complicated is when invariably appropriate claims changs over time and become harder to track and account for and when the claims outstrip the resources, problems arise.

When we declare that people have a right to health care, we must consider the lessons of sedentism. When our ancestors bought into value systems which compelled those who produced with obligations to feed those who could no longer produce, there were limits on the nature of the obligations which were rooted in the world of the possible. In the world of health care, the obligation we have created is open ended and not anchored in the world of the reality of scarcity. We are on the road to financial ruin driven by health care expenditures, consuming substantially more than we are creating. We have created incredibly complex and expensive interventions which are deployed without regard to actual value they bring or how we will pay for them. Declaration that they fall under the rubric of human rights serves to short circuit any real discussion of whether they are really the right thing to do and whether we can afford them.

Our present approach to addressing this resource mismatch is to use a state driven Ponzi scheme. It may work for a while if the mismatch is small enough, or if increases in subsequent productivity offset the mismatch, or if inflation devalues the mismatch, or if you can find new "investors" who will fund this for a while.  However, we are still ultimately limited by what is deliverable within the world of the possible, but it may be more difficult to see when the resources will be depleted and when the "investors" will stop funding the Ponzi scheme. Using a Ponzi like scheme may work for a while and create the illusion of real wealth but it cannot work forever.

Caution...Children at Play

http://washingtonexaminer.com/blogs/beltway-confidential/2011/07/reid-durbin-and-obama-very-partisan-record-debt-ceiling

Who are the adults in the room?

As the Tuesday deadline approaches, the finger pointing and exchange of accusations will reach a crescendo as the game of financial and political chicken escalates beyond what any of us imagined when this process began. There are so many angles and perceptions that it is possible to read various perspectives on the history and possible solutions and discover that although each contains an element of truth and yet they have essentially no common ground.

Perhaps the best place to start is the cold hard facts of the financial reality. If the debt ceiling is not raised, the federal government estimates it will have about $180 billion in receipts to cover about $315 billion in promises for the month of August. Just think about this. If this were my or your budget, the claims on your monthly earnings would be close to double your receipts. This is not sustainable nor defensible.

I do not know sufficient specifics of the various plans to write an intelligent critique at this point. However, there are some obvious general conclusions and implications which can be drawn from the irrefutable numbers above. First, something has got to give, if not now, then sometime in the not too distant future. I find it intriguing that one of the major criticisms of the Boehner plan from Democratic leadership is that it will place us of having to discuss this again in the not too distant future since it only creates a brief fix of the debt ceiling.

Well duh! That should not be a criticism. We can view this as a safety mechanism in that the proposed bill will automatically bring it to our attention again. This is such a critical problem it should be front and center of our political leaders until it is addressed sufficiently. In my estimation such an approach which does not kick the can down the road for someone else to deal with is a plus, not a minus.

In addition, the stark numbers demonstrating  the huge delta between what is required to fulfill promises made by the Feds and the actual tax receipts should prompt us to think about which populations and what entities have become unhealthily dependent upon federal largess to fulfill their missions. Given the stark math and the likelihood that anyone or anything which receives federal dollars will take a haircut in the near future, whose business plan is so dependent on this support that is makes survival unlikely if needed cutback occur. This list is mind boggling. In addition to the Defense Department (which we would probably not want to have an option other than public funding) we now have additional federally dependent entities...every state and major municipality; most institutions of higher learning; almost every health care entity; all medical residency training programs; the aerospace and defense industries; and I am sure I am missing something.

The world I know best is healthcare and healthcare without or at least with substantially fewer federal dollars is an industry that will undergo cataclysmic change. Start with residency training. There is basically no other mechanism which will pay for residency positions. While there may be scattered positions funded via other mechanisms (such as the Mayo model)  there is no other financial model which is widely deployed and validated. Furthermore, the rules dictated by Medicare have pushed one to be all in or completely opt out. Most have elected to be all in and are woefully unprepared to adapt to loss of federal monies. The same holds true for the research enterprise, and although less so, clinical care. The impact of the haircuts will be huge but likely unavoidable.

Similarly, when the federal social safety net becomes the norm rather exception, it creates a similar unhealthy dependence on a single source for essential resources. It prompts larges segments of the public to place a huge bet on one source. What happens when promises made are simply not supportable? The fallback of those who promote such approaches is to increase taxes on the rich and corporate sources. While one can come up with various justifications based upon social justice, the problem is that the math does not work. Steeply escalating progressive tax rates on personal income even under the best of circumstances will harvest only a fraction of the revenue needed to pay for future obligations and those targeted will respond in ways which will decrease their taxable incomes. Increased corporate taxes may raise monies in the short term but their long term effects are generally to decrease capital available for investment, economic growth, and job formation. You end up with Greece.

Any person or business which becomes overly dependent upon any single source of essential resource sets themselves up for loss of viability. The largess of the Federal government is in historical terms a very recent and likely transient phenomena. That entire industries or segments of industry have built their business model on such a narrow resource stream is clearly unwise and almost certainly unsustainable. To suggest that the "children" in the room are those who are now saying that we need to address this is amazingly short sighted. They are not the ones who have created the problem and their efforts insisting that we begin to address this problem now are courageous, not childish. These efforts may turn out to be politically unwise in the short term but that reality should be viewed with embarrassment by us, not with smug self-righteousness.

The real adults are those who have the courage to raise the hard questions and have the difficult conversations. The conversations will not get any easier right up until the point where the conversations will become irrelevant. Let us hope we do not get there.

Stick it to the bond holders

I, like much of the public, have been watching this slow motion debt debacle unwind over the past few months. It is remarkable how no one, not even the routinely self-confident pundits, have any idea how this will play out. Will we default or will Tuesday pass without any immediate consequences absent a debt ceiling deal? I have heard more than one explanation which points out that technical default is extremely unlikely since the Federal tax receipts are more than enough to pay interest on Treasury securities. However, it occurred to me that payment depends on being both being able to pay and the desire to do so.

During the financial meltdown in 2009, GM went bankrupt. At that time, I had the misfortune to hold GM bonds. I knew the company was in financial troubles but we held the bonds and not the stock. Financial precedence held that bond holders would be first in line if GM went belly up. So much for this historical precedence. The bond holders were left holding the bag in a political deal which leapfrogged the UAW ahead their claims. 

Fast forward to 2011 and we have the US government in financial straits. There are multiple parties who have a claims on US government cash, including holders of treasury bonds. There is no question that markets have assumed up until the present that the holders of US government debt will be first in line to be paid if the debt ceiling is not raised. Rates on Treasuries are at historical lows and have remained so all during this crisis. However, let us say for argument's sake that the Treasury elects to place payment of interest on the debt as a lower priority than anything else.

Basically, default on our debt, even with failure to raise the debt ceiling is a choice which the Treasury can make. Everyone assumes that no one in their right mind would make such a choice if the money is available. Alternatives such as furloughs of federal workers, closing of non-essential federal agencies, delay of payments to doctors and hospitals could be done. However, might there not be a political game to play to the advantage of the President by intentionally inducing default? Default would reek havoc with the financial world,  but havoc creates opportunities, the most important being one to blame the Republicans for the chaos.

It is a high stakes game but the payoff is potentially huge. The nuances of understanding the real financial choices is beyond the understanding of most of the American public, likely independent of educational status. The public is likely to believe him if he claims he had to choice but stiff the bondholders. He has done this before and  suffered no consequences. That such an outcome may trigger a terrible financial calamity is most likely to result in pillorying of his opponents, despite the fact that the choice not to pay the bondholders lies with the Executive branch.

Yes...stick it to the bondholders again, create chaos, blame the Republicans, get re-elected with control of Congress.

Cheating and Fraud vs. Gaming

The cheating scandal in the Atlanta Public Schools (APS) is a major embarrassment for a school system that was only recently basking in the glory of garnering national awards for elevating scores on standardized exams. As it turns out they were spectacularly successful because of blatant cheating. While the behaviors of the APS were clearly off the scale, as one moves away from this extreme, it becomes more and more difficult to separate cheating and fraud from gaming behavior.

Any high stakes activity will prompt agents to push the envelope in trying to maximize their chances for gain. In that sense, the APS scandal is not surprising. So much was riding on test score improvement that score improvement became the final goal. Whether it was actually associated with improved learning was irrelevant. In the same sense, the finances associated with health care are a high stakes game. While there are many examples of outright fraud perpetrated in health care such as billing for serves not rendered, there is also a huge segment of health care transactions which may not meet the bar for fraud but clear fail the smell test; those involved are clearly gaming the system for their own narrow interests .

The parties involved cover the entire spectrum of who health care touches, patients, providers, and payers (both private and state). The spectrum of behaviors ranges from cheating and outright fraud to behaviors which may not strictly break the rules but clearly violate the spirit and purpose of the rules.  What might be viewed as wrong by one party may simply viewed as getting one's fair share by another party. The nature of the behaviors is diverse but it includes any and all activities which may give someone of something an edge. While performance enhancing drugs may be illegal in sports, they are widely deployed on college campuses. http://www.nytimes.com/2005/07/31/education/edlife/jacobs31.html  The number of students who have been diagnosed with ADHD is substantial and the number of students using drugs such as ritalin or Adderral  at exam time is startling. Is it illegal? Not likely but it gives some people an edge not available to others and creates an uneven playing field. This is what gaming does.

 Activities which qualify are found at all levels of government. The Federal Government created a cost sharing mechanism for Medicaid (to try to control costs?) which required states to provide matching funds. According to the National Conference of State Legislators as many as 44 states finance a portion of their Medicaid spending by imposing taxes on health care providers who are paid by the Medicaid program, increasing payments to those providers by the same amount, and then using that additional “spending” to increase their federal match. It was a clever response to ill conceived legislation but it clearly a gaming maneuver which in the long run was dysfunctional.

Less egregious examples play out every day in the over-regulated world of healthcare. The more byzantine the rules become, the more opportunity is created for adroit and connected people to game them for profit. Whether it’s Medicare, Medicaid, or the hundreds of agencies and commissions that write the rules, the outcome is invariably the same: people respond to incentives, once they have learned to get around the rules. The universe of people who can be deployed to probe the system for weaknesses is infinite and dwarfs any cadre of enforces who can be mustered to respond, who will always be in reactive mode, three steps behind and always in the dark.

Many of the gaming responses are in response to ill conceived but perhaps well meaning rules.  Take the example of forever available drugs such as colchicine or 17 hydroxy progesterone, or 17P. Both drugs had been around forever and available for very limited costs.  In the case of 17-HP, it was prescribed by doctors, largely to a poor and vulnerable patient population, to significantly reduce the risk of premature births that can cause severe birth defects.Physicians have been treating patients with a weekly injection over 4-5 months with 17P made by local compounding pharmacies. KVA Pharmaceuticals managed to get the compound assigned Orphan Drug status by the FDA, renaming it Makena and giving them a seven year monopoly on its manufacture. Because it has obtained Orphan Drug status, compounding will no longer be allowed. KVA’s price for Makena?: $1500 per injection, or $30,000 for a full course treatment, a 7400% increase. All perfectly legal. Similarly, Colcrys Pharmaceutical invested in clinical testing of colchicine  to demonstrate what decades of experience already showed, that colchicine was effective in treated acute gout. For this they received market exclusivity and an increase from $0.09 per pill to $4.85. Again all legal but there is no evidence to support they provided any actual value to patients.

Administrative pricing schemes create all sorts of opportunities and it tends to be a rolling set of new gaming options. For example, Medicare pays a flat fee of $2,200 for up to nine home health visits. When a patient receives a tenth session, the home health company gets another check of approximately $2,200. It was just amazing how many patients require just enough therapy to qualify the home health company for the additional $2,200, according to the Wall Street Journal in their story on Amedisys in April 2010. http://online.wsj.com/article/SB10001424052748703625304575116040870004462.html?KEYWORDS=therapy#articleTabs%3Darticle.  From 2005 to 2007, few patients received only nine visits. In 2007, less than three percent received nine in-home therapy sessions, while nearly 10 percent had 10 visits.

Patients are avid gamers, with behaviors which span the scope between pushing the limits to outright fraud. Patients will push me to code something in their favor, even if it is incorrect. They are all too happy for someone to waive their co-pay. As we create more and more complex system, the opportunities for patient to game the system also becomes vast. For example, in Massachusetts in 2009, almost 1000 people signed up for coverage with  Blue Cross and Blue Shield of Massachusetts for three months or less and ran up claims of more than $1,000 per month while in the plan. Their medical spending while covered by insurance was more than four times the average for consumers who buy coverage on their own and retain it in a normal fashion, according to data the state’s largest private insurer. http://www.boston.com/news/local/massachusetts/articles/2010/06/30/short_term_insurance_buyers_drive_up_cost_in_mass/

We are left with a high stakes game where each set of rules creates perverse incentives which prompts gaming behavior followed by more arcane rules and more gaming. I am reminded of Richard Epstein's book "Simple Rules for a Complex World". The basic tenant of this work is that more rules is not always the best response to less desirable outcomes. As the complexity of rules increases and the tools to assess compliance with new rules are not sufficient to provide appropriate feedback, gaming gets out of hand and it creates an environment where gaming transforms to fraud and cheating. This analysis should not be used to justify the behavior. We live in a world where complex systems are made possible through the combined efforts of ordinary and deeply flawed people. Approaches using increasingly complex regulatory structures employing difficult to enforce rules to mitigate the flaws of those involved simply do not work.  

When you find yourself in a hole, the first step is to stop digging

There are two articles in succession in this week's NEJM which are well worth reading. I have liberally lifted quotes. The figures have been taken from other sources. The first article is  "The Economics of Financing Medicare" (NEJM | July 13, 2011 |) by Katherine Baicker, Ph.D., and Michael E. Chernew, Ph.D.http://healthpolicyandreform.nejm.org/?p=14920&query=TOC

The article opens with a simple statement of fact:

"The pressure the Medicare program puts on the federal budget has been much discussed, but financing Medicare also has broader implications for the economy. Medicare expenditures currently account
for 15% of federal spending and 3.6% of the total gross domestic product (GDP). Moreover, Medicare spending grew an average of about 2.5 percentage points faster than the GDP from 1975 through 2008, consuming a rapidly increasing share of the country’s total resources." 

What the authors do not highlight is that this is not just Medicare but also Medicaid. While part of this may be due to changing demographics, there is an underlying growth rate which is demographic independent and unsustainable.  We will need to address this or else health care spending will undermine the economy.

A common diversionary tactic in this debate is to deflect attention to other portions of the budget such as defense spending or waste and fraud. While our forays into various corners of the globe are arguably a waste, the long term trend in defense allocations as a percentage of the federal budget and GDP are trending downward. This is in stark contrast to the growth of non-defense outlays. Medicare and Medicaid spending growth as well as growth in other entitlement  programs are greater than the underlying economic fundamentals. We could close the Pentagon entirely tomorrow and it will buy us a few years, but the growth in Medicare and Medicaid if continued along the presernt  course will bankrupt us still.

Baicker and Chernew go on to state:

"Although the economy can probably bear some tax increases to help finance Medicare, if recent rates of spending growth continue, taxes would have to increase precipitously. An analysis performed by the Congressional Budget Office (CBO) before the ACA was passed suggested that income tax rates would have to increase by more than 70% to finance health care spending that grew just 1 percentage point faster than the GDP — and by more than 160% to finance growth at the historical rate of 2.5 percentage points faster than GDP growth, increasing the income tax rate in the top bracket, for example, to 92% from 35%.² Even with just 1 percentage point excess growth in health care spending, the CBO estimates that the tax increase would reduce the GDP by 3 to 16%.^2"

There was a second article published in the this issue of the NEJM - The Public’s Views about Medicare and the Budget by Robert J. Blendon, Sc.D., and John M. Benson, M.A.

There is good news and bad news. The public realizes we have a big problem with spending more than we have in revenues. The bad news is that in most cases math was not their best subject when in school. In a nutshell, the public perception of the what can fix the problem is at odds of what virtually any actuary would tell  them:

Third, although most Americans (68%) believe that the federal budget deficit is a “very serious” problem (CBS, March 2011), a majority (54%) think it is possible for the federal government to balance the budget without cutting Medicare spending (AP). When people are given a list of options for reducing the deficit and asked whether they favor or oppose each item, cutting Medicare spending is one of the least favored. In two polls with such lists, only 21 to 22% favored cutting Medicare spending to reduce the deficit (WP–ABC, April 2011; CBS, March 2011; see table).


"Whenever either political party has put forth a proposal to improve Medicare’s long-term financial situation that includes raising taxes, major changes in the existing Medicare program, or substantial cuts in Medicare spending, the other party has strongly opposed it in the hope of gaining an advantage in the next election. In fact, within the past year, both parties have used the Medicare-cuts issue for campaign purposes. The current debt-ceiling debate has changed the short-term dynamic, but it has not altered the long-term play of these forces."

There you have it. What might work to actually address the the economic abyss we are facing creates a political abyss. Anyone who advocates for somethign other than kicking the can down the road will lose their next election. Can you say rock and hard place?

Little Bets vs.Intelligent Design

I finished reading "Little Bets", a book by Peter Sims. It is sort of a conceptual cross between "Fooled by Randomness" by Taleb Nassim, "Why Things Fail" by Paul Omerod, and "Evolution for Everyone" by David Sloan Wilson. The lessons are both simple and profound.

The world is complex, so complex that no one person or entity can consistently predict and successfully plan for the future. Furthermore, complex systems do not develop as a consequence top down master plans but instead they develop as the product of many little bets. Most of these bets are losers but if enough bets are placed, some will pay off in a major way. This is how complex biological systems evolve over time. The information systems in biology are genetic based and the imperfections in DNA replication result is a consistent generation of little bets based upon mutations. Most result in either nothing or at least nothing good. However, some of the mutations result in some new characteristic which provides the organism involved with an enhanced ability to survive and pass on their newly acquired characteristics. The scenario is accepted by virtually the entirety of the scientific community. Intelligent design proponents are intellectually marginalized within the scientific community. However, they are not so marginalized when it comes to non-biological complex systems.

The thinking is not so widely accepted when applied to non-biological complex systems, although it is the focus of David Sloan Wilson's work. I have to recommend his book "Evolution for Everyone" since in my opinion it is so effective at taking this these concepts and showing how intuitive they are when moved to non-biological contexts. Unfortunately, the importance of these principles as they relate to complex social and economic systems has not be widely embraced.

This conceptual blind spot has real and potentially terrible implications as they relate to health care delivery and reform. If one believes that complex systems can and are the product of intelligent design, then it makes sense to take the approach that humans can and should design such entities. This assumption will find little support from the study of virtually any complex system. Perhaps the strongest empirical evidence that these assumptions are flawed comes from the study of economics in the 20th century. At the start of the century, there may be some disagreement regarding the extent of economic planning the state should undertake, there was consensus that states should seize "The Commanding Heights" of the economy. By the end of the century, the consensus had changed.

Sims brings an interesting perspective on why centralized, planned economies failed. He believes it was because they could not take on little bets and because they could not take on little wagers, these economies were unable to innovate.

Everywhere I look in health care I see the same problem. Innovation in the health care system is stymied by the inability to make small bets. Just look at the most recent proposed ACO regulations. While there is lip service payed to the pursuit of innovation, there is nothing in these regulations which can be viewed as fostering little bets.

Medicare is the quintessential innovation stifling entity. At the most basic level a physician is either all in or all out. The DME and IME monies Medicare supplies to institutions for training residents is predicated on the same assumption. Take any money to support any trainee under a given tax ID number and all trainees under that same tax ID number are required to comply with any and all Medicare rules, not matter how onerous or ambiguous.

The payment, regulatory, and liability systems in general obstructs taking little bets. What is defined as financially valuable in medicine is defined by a small cabal via a political process. We are about to substitute one new cabal (IPAB) for a previous one (RUC), but the basic architecture is the same. New or innovative approaches to delivering value to patients are remarkably constrained by this evil triad. For example, I could do follow ups on many of my patients using simple electronic tools (telephone and emails) but HIPPA rules make this legally unwise, payments rules make this financially unrewarding, and the liability climate makes this legally untenable.  I could experiment but only by making a big bet...withdrawing from the mainstream of health care delivery.

The present culture and tools used in the practice of medicine is also inherently hostile to the little bets approach.  Most little bets fail and failure, even low stakes failure is a problem within medicine. To make matters worse, how we practice in the ambulatory world is within a realm of rudimentary information tools. We can place the bets but we may never know if they pay off or not. Thus we fall back on what we can measure...money. We end up doing what the payments system rewards us to do and since no amount of innovative practice appears to change what is profitable, we become locked into doing things because they are what is required to maintain financially viable practices.

Using politics to change this substitutes a few huge bets for millions a little bets. It substitutes regulatory complexity for market simplicity. Based upon the experience of the planned economies of the 20th century, which tried similar approaches, there seems to be no reason to believe that our attempts at intelligent design will be any more successful, unless one takes the tack that now things are different and we are just smarter than our predecessors.  That sounds like arrogance and hubris to me.