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Saturday, January 26, 2013

Extracting value versus creating value in health care

One of the pitfalls we fall into when we discuss health care and health care financing is the implicit assumption that health care activities can be distinguished from non-health care activities. This is simply wrong. However, this assumption is almost universally accepted (passively but not actively) and allows for further acceptance of such nonsensical statements as "Health care is different" or "Markets don't work in health care". These statements are nonsense because the critical term health care remains undefined.

Labor specialization and exchange are essential elements of human societies. As societies become wealthier, they become more complex and ever more dependent upon specialization and exchange. Unless we desire to move back to eking out a subsistence existence (along with hunger, disease, and a vastly shortened life expectancy), there is no turning back the clock. Within the web of exchange, there are goods and services which are all linked to some degree to human health. Everything is part of the health care industry. To state that free markets don't work in health care is a non sequitur; it implies that free markets do not work to fulfill human needs.

Markets work for the simple reason they are the best vehicle to create value. Free, non-coerced exchange of goods and services results in goods and services ending up in the hands of those who value them the most. Free exchange creates value and wealth.

In my 30 years as a physician, I have witnessed an increasing divergence between what brings value to patients and what brings value to the health care system that purportedly cares for patients. The increasingly command and control health care system combined with a payment system that divorces the cost of care from recipients has served to drive practitioners and health systems toward simply extracting value from patients and payers, often without actually delivering value to patients. Payments for many services were determined before value to patients was known and questionable interventions were deployed on large scales. We saw this in the past with cardiac bypass surgery, hysterectomies, carotid endarterectomies, and bone marrrow transplants for breast cancer. One not need to look for dramatic and expensive interventions to find resources wasted on activities which create little or no patient value. Find a well person going to the doctor and you are likely to find someone who is receiving little value unless they are getting their vaccinations.

A price coordinated economy rapidly sends signals to producers or goods and services, letting them know whether their products are valued by those who exchange their personal resources for what is being marketed. In domains embedded in free markets, falling out of touch with what is valued by consumers is a quick ticket to extinction.

However, segments of the economy serviced by entities locked into price controls lose the most valuable feedback tool which allows producers to know whether they are bringing value to customers.

That is where much of medicine resides now. We do lots of things to patients, some of which may fulfill patient needs and are worth whatever investment is made for them. I suspect that many simply create very little value for their recipients and much more value for the people and systems that deliver them. We within the field are terribly fearful to allow patients to absorb anywhere near the entire cost to deploy these services as now delivered because we know that patients would not value them sufficiently to pay for them using their own resources. Hello! There is a message there.

Perhaps the contrast between extracting value and creating value is not so black and white. In free markets, for an entity to be enduring and successful it must create value before it can extract value required to maintain itself. The problem with the portion of our economy designated as health care is that creation of value is random and to a great degree irrelevant to the ability of those particular portions of the delivery system to extract value from patients and payers.

As the realm of health care expands capturing ever larger portions of the overall economy in the command and control, administrative pricing trap, the waste and extraction without clear value creation will only aggravate our current economic situation. Economics is all about the allocation of scarce resources and no method has proved superior to free markets in directing resources into the hands of those who value them most and can create the most value.

This is not a trivial intellectual spat. We either fix the problem associated with health care payments or we go broke. We will not fix this problem until we understand the difference between creating value and extracting value, and come to realize that markets are the best tool we have at our disposal to work best to foster free exchange, allocate scarce resources, and create value in all realms of human activity.

Sunday, January 13, 2013

Why we should be optimistic

I am a great fan of Matt Ridley. His recent book "Declaration of Independents" is well worth reading. I particularly like his chapter on deregulation in the beer brewing industry. This video from the Zeitgeist is simply stunning!

Saturday, January 12, 2013

Gun control and other distractions

Now that we have avoided the immediate impact of the fiscal cliff, our political class has taken refuge in heated debates regarding gun control. I wish I could say there was some degree of wisdom and reflection associated with these discussions. No such luck.

I am no gun enthusiast. I have not fired a weapon in probably over 30 years. I can honestly say I do not harbor strong feelings regarding this debate. I do believe that the second amendment was originally written to protect the rights of individuals to bear arms. Note that the term gun is not included in the second amendment.
A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed.

Few would argue that this amendment should guarantee an individual right to arm oneself with Sarin gas or thermonuclear weapons. It is a given that the Second Amendment to the Constitution is not a carte blanche for individuals to acquire tools of mass destruction. However, the debate is not couched in these terms. One has to draw a line somewhere. Where do you draw such a line and which criteria can should we use to determine where it might be?

For all the bluster regarding gun control legislation, it is essentially impossible to determine what the specific likely accomplishable goals of legislation might be.
It is implied that implementation of additional restrictions of some sort will result in fewer gun related deaths and injuries. This is predicated on two basic assumptions. The first assumption is that such regulations are enforceable in any meaningful way. The second assumption is that even if the laws are enacted and enforced, they will have a meaningful effect. Ironically, places like Washington DC with some of the most restrictive gun control laws have the highest gun related homicide rates .Granted it is difficult to impossible to prevent diffusion of weapons from neighboring localities but this issue is not likely to go away.

The recent series of mass murders has also highlighted a facilitation role for violent media, particularly first person shooter video games. I find the discussions very odd, saddled with huge blind spots. There is no question that it is only the very rare individual who plays these games who then acts out by recapitulating their actions in real life. It is perhaps analogous to the rare complication of drug treatment where one is million of individuals given a particular has a catastrophic and idiosyncratic event. If this happens frequently we do take the drug off the market but if it happens only rarely and the agent provides value, we tolerate the rare undesirable outcome.

What I find odd what we define as acceptable to pay out in a virtual video world. I have not actually played any of these games so my knowledge of what specific characteristics these games have may be flawed. From what I can discern, we deem it commercially acceptable to create video games where players can live out a crime, even the crime of murder and even the crime of mass murder to boot. I understand that no one is really dying and it is just a game.

Let's take this one step farther and ask whether in the virtual and victim-less world we would find other scenarios acceptable:

1. Virtual pedophilia
2. Virtual ethnic cleaning
3. Virtual mass murder of children
4. Virtual animal cruelty

I am presently reading Jonathan Haidt's book on "The Righteous Mind" which touches upon some of these issues. He makes the point that we define certain private behaviors as unacceptable even if there appears to be no immediately victim. What I find so odd about the first person shooter videos is not that we have not legally banned them. It is the fact that they have received so little social push back. They allow people to live out gruesome and horrible fantasies, doing deeds in a virtual world which are so reprehensible that anyone who actually pulls this off in the real world initiates national outrage.

Whether playing such games facilitate mass murders will be debated forever. The sample size required to "prove" such a causal linkage is beyond what we can collect, or at least I hope that this is the case. Thankfully these events are rare events. That said, it does appear that the profile of these young shooters tends to include heavy use of first person shooter video games. That may mean nothing since the use of these games is fairly widespread among young men. However, I cannot imagine such virtual renditions of reprehensible actions would be accepted if it touched upon violence against women, rape, child sex acts, or killing infants. Remember, what is acceptable in the video game world vs not acceptable is not defined by what is legal in the real world. Many of the actions done in these video games are crimes and crimes of the worst sort.

Which brings me back to earth. The discussion is useful but the likelihood that anything useful results in the legal realm is almost zero. Humans have a tendency to violence and this tendency needs to be tempered by social and legal controls. The political class will jump all over this because they want to create the impression they are doing something. Legislation will pass and it will accomplish nothing. This is not a problem which has its roots in legal failure. Making more things criminal is not likely to solve the underlying problems.

Fundamentally, the gun control debate pulls attention from pressuring the political class from having to actually deal with more important and pressing matters where their actions can actually make a real difference. I suspect that the distractions will continue while Rome burns.