It seems that a last minute change in the financial reform bill just past has created what might be considered a small hiccup in the bond market. I am no fan of the bond rating agencies. Their behaviors in thew recent past played a central role in the real estate bubble which triggered the worst financial calamity in seventy years. Their ratings of mortgage backed securities, particularly the repackaged triple B rated bonds magically transformed into triple A rated CDOs , created an absolute mess.
Congress, in its desire to right the wrongs, added a measure to the reform bill at the eleventh hour which converted the bond ratings generated by Moody's, S&P, and Fitch, from an opinion (and not legally liable) to expert advice. Voila! Literally overnight the bond rating agencies go from having essentially no legal exposure to just being totally out there. Their response has been to put everything on hold.
I will not shed any tears for this incompetent triumvirate. They failed to serve any useful purpose and may have worsened the blowup in the mortgage bond market. However, there is a not so little problem. The functioning of the bond market requires the distribution of prospectuses and these documents are required to include ratings from these same bond rating agencies. No ratings, no complete prospectus. No complete prospectus, no new bond sales. Furthermore, the bond ratings are required for many investment entities to include specific paper in their portfolios.
So there we have it. In the midst of a fragile recovery (at best), the new financial reform legislation has frozen the bond market. I would have no problem if the rating agencies simply disappeared. Markets are pretty good and factoring in risk, unless they are lead astray by data derived from non-trustworthy sources such as... rating agencies. However the same entity which has overnight thrown the switch changing a product from one having no liability to infinite liability, has also previously mandated that the markets cannot function without this same product.
Let recap:
1. New bonds require ratings
2. Ratings are fundamentally flawed
3. Rating agencies are now legally liable for their flawed products
4. Rating agencies are not willing to issue ratings if they are held to the new standard
5. No ratings, no new bonds
This can be easily fixed. Simply change nothing except lose the requirement for ratings. If the ratings agencies can actually create a useful product, they will survive.
Wednesday, July 21, 2010
Tuesday, July 20, 2010
Homeopathy and the right to health care
A recent piece in Der Spiegel highlights a problem with attempting to mix a state sponsored right to health care and consumer driven health care.
http://www.spiegel.de/international/germany/0,1518,706971,00.html
It seems that, despite a general European love affair with homeopathy, the scientific basis for this approach to treatment of disease is essentially non-existent. Over and over again, the results of studies is the same. There is no benefit that can be identified and the theoretical basis for effect is simply laughable. However, homeopathy is very popular. In a world of positive health care rights mandated by law, how should demand for such treatments be handled? Should they be paid for with public monies?
In a free society, humans have the right to make decisions regarding investment of their own resources. They can make what you or I might view as good decisions or bad decisions. It is their business based upon two basic assumptions. First, they have their own resources (time, money, talent) to invest and second, their decision is not a coerced one. I for one have been humbled more than once after judging someone else's decision unwise. It is not for me to be all knowing as to what someone else might be after when they invest their own resources.
In the Alice in Wonderland world of positive rights, this simple paradigm becomes hopelessly complex. The decision to invest resources moves from a personal decision made by individuals directing their own resources to a group (read political) decision allocating resources taken from individuals and thrown into a common pool. When trying to even develop a model for how best to allocate such resources, whose goals do we have in mind? What is off the table in terms of possibilities and why? Who makes these calls and by what mechanism? Majority rules, super-majority rules, Philosopher kings?
What you end up with is passionate debates about the legal right to homeopathy and much more like this. Homeopathy has basically no scientific basis but should that mean that it should not be available to those who desire to purchase some element of it? Individuals should have the broadest realm where they can enter into agreements with others to further their own goals, whatever they might be. I strongly suspect they are making a poor investment if they invest time and money in homeopathic approaches to their ailments but I cannot really know what their goals might be. I don't have to and my judgment of their decisions means little in a world where they are free to exercise their rights to make their own decisions, good or bad.
In a world where the decision was made to make health care a right, we will be forced to make blanket decisions which cannot be made without the state becoming the ultimate busybody. If homeopathy, with essentially not evidence to support its effectiveness, can become something paid for using resources extracted from skeptical taxpayers using the coercive force of the law, what is not within the bounds of possibility? What could taxpayer dollars end up supporting? If popular support or at least a highly vocal group demanding some specific good or service is all that is required, there are no limits.
Let me float some likely candidates:
1. Chelation therapy
2. Colonic irrigation
3. Biofield therapies
4. Expensive detoxification schemes
5. Sweat lodge therapy
6. Exorcism
7. Animal sacrifice
8. Here's one from "seven days in Tibet" by Brendon O'Neill http://www.spiked-online.com/index.php/site/article/9187/
http://www.spiegel.de/international/germany/0,1518,706971,00.html
It seems that, despite a general European love affair with homeopathy, the scientific basis for this approach to treatment of disease is essentially non-existent. Over and over again, the results of studies is the same. There is no benefit that can be identified and the theoretical basis for effect is simply laughable. However, homeopathy is very popular. In a world of positive health care rights mandated by law, how should demand for such treatments be handled? Should they be paid for with public monies?
In a free society, humans have the right to make decisions regarding investment of their own resources. They can make what you or I might view as good decisions or bad decisions. It is their business based upon two basic assumptions. First, they have their own resources (time, money, talent) to invest and second, their decision is not a coerced one. I for one have been humbled more than once after judging someone else's decision unwise. It is not for me to be all knowing as to what someone else might be after when they invest their own resources.
In the Alice in Wonderland world of positive rights, this simple paradigm becomes hopelessly complex. The decision to invest resources moves from a personal decision made by individuals directing their own resources to a group (read political) decision allocating resources taken from individuals and thrown into a common pool. When trying to even develop a model for how best to allocate such resources, whose goals do we have in mind? What is off the table in terms of possibilities and why? Who makes these calls and by what mechanism? Majority rules, super-majority rules, Philosopher kings?
What you end up with is passionate debates about the legal right to homeopathy and much more like this. Homeopathy has basically no scientific basis but should that mean that it should not be available to those who desire to purchase some element of it? Individuals should have the broadest realm where they can enter into agreements with others to further their own goals, whatever they might be. I strongly suspect they are making a poor investment if they invest time and money in homeopathic approaches to their ailments but I cannot really know what their goals might be. I don't have to and my judgment of their decisions means little in a world where they are free to exercise their rights to make their own decisions, good or bad.
In a world where the decision was made to make health care a right, we will be forced to make blanket decisions which cannot be made without the state becoming the ultimate busybody. If homeopathy, with essentially not evidence to support its effectiveness, can become something paid for using resources extracted from skeptical taxpayers using the coercive force of the law, what is not within the bounds of possibility? What could taxpayer dollars end up supporting? If popular support or at least a highly vocal group demanding some specific good or service is all that is required, there are no limits.
Let me float some likely candidates:
1. Chelation therapy
2. Colonic irrigation
3. Biofield therapies
4. Expensive detoxification schemes
5. Sweat lodge therapy
6. Exorcism
7. Animal sacrifice
8. Here's one from "seven days in Tibet" by Brendon O'Neill http://www.spiked-online.com/index.php/site/article/9187/
On one stall a young British man in a white coat (seriously - a white coat) was trying to convince an elderly gent, who could barely walk and who looked jaundiced to boot, that if he put his name on a mailing list he would ‘experience healing’ the next time the young man in the white coat climbed a mountain in Tibet and ‘projected positive energy’ to the world.We would have to come up with a CPT code for this. I am sure you can come up with more. Send in your suggestions of what could become a covered service!
Sunday, July 18, 2010
Innovation and changing behaviors in healthcare
This week I am on vacation and I have more time to think and reflect. I spent some time this morning perusing blogs and came upon two pieces from the current issue of Health Affairs which are sequential and remarkably enlightening, but not intentionally so. The first was:
http://content.healthaffairs.org/cgi/content/abstract/29/7/1293?rss=1
Yes, such a simple task of creating a whole new system of practice as well as the feedback mechanisms which ultimately will be required to change human behavior.
The second article was:
How The Center For Medicare And Medicaid Innovation Should Test Accountable Care Organizations [Payment & Delivery]
The Patient Protection and Affordable Care Act establishes a national voluntary program for accountable care organizations (ACOs) by January 2012 under the auspices of the Centers for Medicare and Medicaid Services (CMS). The act also creates a Center for Medicare and Medicaid Innovation in the CMS. We propose that the CMS allow flexibility and tiers in ACOs based on their specific circumstances, such as the degree to which they are or are not fully integrated systems. Further, we propose that the CMS assume responsibility for ACO provisions and develop an ordered system for learning how to create and sustain ACOs. Key steps would include setting specific performance goals, developing skills and tools that facilitate change, establishing measurement and accountability mechanisms, and supporting leadership development.
http://content.healthaffairs.org/cgi/content/abstract/29/7/1293?rss=1
Yes, such a simple task of creating a whole new system of practice as well as the feedback mechanisms which ultimately will be required to change human behavior.
The second article was:
How Medicare's Payment Cuts For Cancer Chemotherapy Drugs Changed Patterns Of Treatment [Web First]
The Medicare Prescription Drug, Improvement, and Modernization Act, enacted in 2003, substantially reduced payment rates for chemotherapy drugs administered on an outpatient basis starting in January 2005. We assessed how these reductions affected the likelihood and setting of chemotherapy treatment for Medicare beneficiaries with newly diagnosed lung cancer, as well as the types of agents they received. Contrary to concerns about access, we found that the changes actually increased the likelihood that lung cancer patients received chemotherapy. The type of chemotherapy agents administered also changed. Physicians switched from dispensing the drugs that experienced the largest cuts in profitability, carboplatin and paclitaxel, to other high-margin drugs, like docetaxel. We do not know what the effect was on cancer patients, but these changes may have offset some of the savings projected from passage of the legislation. The ultimate message is that payment reforms have real consequences and should be undertaken with caution.
http://content.healthaffairs.org/cgi/content/abstract/29/7/1391?rss=1
In this case the government had no particular desire to change human behavior. They just wanted to save money. However, they changed the behavior of oncologists by altering the financial rewards for specific activities. Offer to pay less for something and you are sending the signal that it is less valuable.Duh? Thus, we have further evidence that markets are remarkably effective tools at changing human behavior, yet we still insist upon trying to create some new mechanism using untested tools.
Why are markets so good at this? It is because they are remarkably good at taking all types of information and distilling it down to a common language which virtually everyone understands. While the cost of any given good or service may not be affordable to everyone, the mechanism by which it is priced adds little to the cost of the item. I view the market pricing system as the original information superhighway. To replace this validated system the idea to create some command and control alternative, the inner workings of which are simply yet to be built and are likely to resemble some Soviet commissar's dream. This is not innovation despite any name assigned to it.
http://content.healthaffairs.org/cgi/content/abstract/29/7/1391?rss=1
In this case the government had no particular desire to change human behavior. They just wanted to save money. However, they changed the behavior of oncologists by altering the financial rewards for specific activities. Offer to pay less for something and you are sending the signal that it is less valuable.Duh? Thus, we have further evidence that markets are remarkably effective tools at changing human behavior, yet we still insist upon trying to create some new mechanism using untested tools.
Why are markets so good at this? It is because they are remarkably good at taking all types of information and distilling it down to a common language which virtually everyone understands. While the cost of any given good or service may not be affordable to everyone, the mechanism by which it is priced adds little to the cost of the item. I view the market pricing system as the original information superhighway. To replace this validated system the idea to create some command and control alternative, the inner workings of which are simply yet to be built and are likely to resemble some Soviet commissar's dream. This is not innovation despite any name assigned to it.
The Big Short and health care
I just finished reading Michael Lewis' "The Big Short". It is well worth reading and of all the books I have read on the financial breakdown of 2008, it is the one that gets the best mix of forest and trees. My favorite books tell stories of specific people and circumstances which reveal principles which are generalizable to many other circumstances, particularly medicine and health care. This is one of those books.
One of my pet peeves is to hear colleagues within medicine who somehow believe that somehow the delivery of health care is fundamentally different from the delivery of other goods and services to humankind. The problem of this perspective is at least two-fold. First, it is imply wrong. Second, it serves as the premise to discard thousands of years of human experience to justify unwise policy decisions.
How does this all relate to a book on bad bets on sub-prime mortgages? The two are linked because the respective industries are the products of many of the same flaws, specifically:
1. Inability of leadership within the industry to effect real change and the lack of a global view
2. The inherent drive to game the system
3. Short term timelines
4. Wrong incentives
My first response to The Big Short was disbelief. How could anyone involved at any level view institutions and processes involved as durable? For any given person operating within this industry who had half a brain, it should have been obvious that this was utter madness. While maybe it is not surprising that a lowly loan originator might not be one to pull the switch to sound the alarm, someone at some level of leadership should have seen what was coming. How could anyone believe that making money by loaning money to those who could never pay it back was a viable business? Ultimately it was not anyone on the inside who recognized the madness. It was outsiders who figured out how to bet against this business model and brought it down, becoming very wealthy in the process.
The parallels to health care are many. In the financial world, the industry used the ratings agencies to game the system. In doing so, they implied value where none actually existed and thus altered investing decisions and capital allocations.Money was invested in housing stock that was not needed and scarce capital was mis- allocated. In health care, the gaming opportunities are derived from the CPT and RBRVS. They are our own rating agencies. Based upon how these entities decide what does and does not have value, physicians and health care entities allocate scarce resources to expand particular product lines. Unfortunately, this approach creates a disconnect between what brings value to physicians and health systems and what actually brings value to patients. Like the bond ratings, we game the value assignment process, both the political process used to assign values and the investment process which follows as a consequence of the artificial values assigned. One would think that the foolishness of using such an approach to define value would be obvious to anyone with any appreciation of universal failure of such approaches through history. Alas, remember that health care is different and based upon this we are instructed to ignore the entirety of human experience relating to allocation of scarce resources.
Many participants within the mortgage bond and CDO world realized that the premises underlying their industry were bogus and not sustainable. Similarly, there are many within the health care industry who realize that we are riding a train headed off the cliff. Where within the hierarchy are those most likely to sound the alarm. Too low in the hierarchy and no one will listen. Too high up and they will have too much to lose in the short term. Leadership within health care, like leadership within the mortgage bond business, will not be capable of inducing change.
Part of the problem with leadership is based upon who rises to such positions and what they are charged to do. Business leaders (and those who run health care are business leaders) are basically very practical people. However, practical people are not necessarily reflective people. To see the big picture, one needs to step away from the practical at times and reflect upon the bigger picture. Some leaders in health care are capable of such reflection but that is not what they are paid to do. It is a secondary concern and only rarely will such thinking be rewarded. In the booming mortgage bond and derivative industry of the mid 2000s, no CEO who questioned the basic premises of their industry was rewarded. Similarly, leadership within health care must focus on how best to game the system as it now stands. No CEO with a huge fixed investment will want to put the model which that investment is based in jeopardy.
This leads me to the obvious question? How can one short health care? Should someone short health care? ObamaCare will attempt to decrease how much money will go to continue inflating the health care bubble, but the methods are all wrong. Over the short term, more money will pile in. The bubble will continue to grow. Gaming opportunities will abound. Where in health care are the equivalent of the overbuilt tracks of homes and condos in Las Vegas and south Florida? Much like the empty strip shopping centers in central Florida, who is borrowing money to overbuild health care facilities which no one will use? Short sellers have a bad rap but they are the canaries in the mine. They provide the early warning system that things are going where they should not go.
Those players in the Big Short who saw this coming may have seen it early on and made a financial killing, but they were ultimately devastated. It is always better to be the optimist but sometimes that is simply not possible. Too many optimists and you end up with bubbles that need to break, the earlier the better. I am now convinced that someone needs to short health care and break the bubble before it gets even larger.
One of my pet peeves is to hear colleagues within medicine who somehow believe that somehow the delivery of health care is fundamentally different from the delivery of other goods and services to humankind. The problem of this perspective is at least two-fold. First, it is imply wrong. Second, it serves as the premise to discard thousands of years of human experience to justify unwise policy decisions.
How does this all relate to a book on bad bets on sub-prime mortgages? The two are linked because the respective industries are the products of many of the same flaws, specifically:
1. Inability of leadership within the industry to effect real change and the lack of a global view
2. The inherent drive to game the system
3. Short term timelines
4. Wrong incentives
My first response to The Big Short was disbelief. How could anyone involved at any level view institutions and processes involved as durable? For any given person operating within this industry who had half a brain, it should have been obvious that this was utter madness. While maybe it is not surprising that a lowly loan originator might not be one to pull the switch to sound the alarm, someone at some level of leadership should have seen what was coming. How could anyone believe that making money by loaning money to those who could never pay it back was a viable business? Ultimately it was not anyone on the inside who recognized the madness. It was outsiders who figured out how to bet against this business model and brought it down, becoming very wealthy in the process.
The parallels to health care are many. In the financial world, the industry used the ratings agencies to game the system. In doing so, they implied value where none actually existed and thus altered investing decisions and capital allocations.Money was invested in housing stock that was not needed and scarce capital was mis- allocated. In health care, the gaming opportunities are derived from the CPT and RBRVS. They are our own rating agencies. Based upon how these entities decide what does and does not have value, physicians and health care entities allocate scarce resources to expand particular product lines. Unfortunately, this approach creates a disconnect between what brings value to physicians and health systems and what actually brings value to patients. Like the bond ratings, we game the value assignment process, both the political process used to assign values and the investment process which follows as a consequence of the artificial values assigned. One would think that the foolishness of using such an approach to define value would be obvious to anyone with any appreciation of universal failure of such approaches through history. Alas, remember that health care is different and based upon this we are instructed to ignore the entirety of human experience relating to allocation of scarce resources.
Many participants within the mortgage bond and CDO world realized that the premises underlying their industry were bogus and not sustainable. Similarly, there are many within the health care industry who realize that we are riding a train headed off the cliff. Where within the hierarchy are those most likely to sound the alarm. Too low in the hierarchy and no one will listen. Too high up and they will have too much to lose in the short term. Leadership within health care, like leadership within the mortgage bond business, will not be capable of inducing change.
Part of the problem with leadership is based upon who rises to such positions and what they are charged to do. Business leaders (and those who run health care are business leaders) are basically very practical people. However, practical people are not necessarily reflective people. To see the big picture, one needs to step away from the practical at times and reflect upon the bigger picture. Some leaders in health care are capable of such reflection but that is not what they are paid to do. It is a secondary concern and only rarely will such thinking be rewarded. In the booming mortgage bond and derivative industry of the mid 2000s, no CEO who questioned the basic premises of their industry was rewarded. Similarly, leadership within health care must focus on how best to game the system as it now stands. No CEO with a huge fixed investment will want to put the model which that investment is based in jeopardy.
This leads me to the obvious question? How can one short health care? Should someone short health care? ObamaCare will attempt to decrease how much money will go to continue inflating the health care bubble, but the methods are all wrong. Over the short term, more money will pile in. The bubble will continue to grow. Gaming opportunities will abound. Where in health care are the equivalent of the overbuilt tracks of homes and condos in Las Vegas and south Florida? Much like the empty strip shopping centers in central Florida, who is borrowing money to overbuild health care facilities which no one will use? Short sellers have a bad rap but they are the canaries in the mine. They provide the early warning system that things are going where they should not go.
Those players in the Big Short who saw this coming may have seen it early on and made a financial killing, but they were ultimately devastated. It is always better to be the optimist but sometimes that is simply not possible. Too many optimists and you end up with bubbles that need to break, the earlier the better. I am now convinced that someone needs to short health care and break the bubble before it gets even larger.
Wednesday, July 7, 2010
Ivy League and Economically challenged
Donald Berwick's recess appointment allowed us to avoid some additional pointless Senate drama. From all accounts he is a smart, respected, and well intentioned person. The problem is he is suffers from what Hayek referred to as the "fatal conceit". From CNSnews:
The solution to such pricing problems... The independent Payment Advisory Board! What a great idea. Create a board of experts selected via a political process to set prices on what may be an infinite number of items through a political process. What a great idea. Why did I not think of this myself? Perhaps because I have some actual working knowledge of economics and an appreciation of the catastrophic mistakes of history. This idea is simply even more of the fatal conceit. It is so fundamentally flawed that it is difficult to critique. Do those who propose this idea realize that basically every single price set by the board will be wrong and they will have no idea in any real time which prices are so out of whack that they acutely disrupt service delivery?
The saving grace is that the prices are said to be restricted to Medicare. It is highly likely that they will be used as the framework for private payers. The NEJM of weighs in on this with a piece by Timothy Stoltzfus Jost, J.D.. In this he concludes:
Berwick argued that purposely provided an inadequate supply of health-care—as Britain’s health-care system does—is superior to allowing the market to provide an excess. “In America, the best predictor of cost is supply; the more we make, the more we use—hospital beds, consultancy services, procedures, diagnostic tests,” Dr. Berwick wrote. “… Here, you choose a harder path. You plan the supply; you aim a bit low; you prefer slightly too lit tle of a technology or a service to too much; then you search for care bottlenecks and try to relieve them.”
Yes, you can try to plan the supply but if there is anything we should have learned in the 20th century it is that planned economies simply do not work. The conceit here is the belief that the problems which universally afflicted planned economies in the past (and I do mean universally - no exceptions) can be avoided by those of us in the present who are just that much smarter and insightful.
The present system is indefensible. It is supply driven and wasteful and will bankrupt us. However, Dr. Berwick is delusional (and he is not alone) if he thinks he plan and can use a command and control system to execute a centrally driven system which will defeat an army of gamers who will exploit the many unanticipated weaknesses which will bedevil his plans.
It is all about coordination of human efforts and allocation of scarce resources. Berwick's take on this?
“Please don’t put your faith in market forces,” he said (italics in original). “It’s a popular idea: that Adam Smith’s invisible hand would do a better job of designing care than leaders with plans can. I find little evidence that market forces relying on consumers choosing among an array of products, with competitors fighting it out, leads to the healthcare system you want and need. In the US, competition is a major reason for our duplicative, supply driven, fragmented care system.”His alternative... central planning by experts. To blame the dysfunctional system in place on market forces is laughable. The prices are all administratively fixed. You can't have free markets when the prices are fixed. It is duplicative and wasteful because the price signals, which are administratively fixed, are sending the signals to be wasteful and duplicative.
The solution to such pricing problems... The independent Payment Advisory Board! What a great idea. Create a board of experts selected via a political process to set prices on what may be an infinite number of items through a political process. What a great idea. Why did I not think of this myself? Perhaps because I have some actual working knowledge of economics and an appreciation of the catastrophic mistakes of history. This idea is simply even more of the fatal conceit. It is so fundamentally flawed that it is difficult to critique. Do those who propose this idea realize that basically every single price set by the board will be wrong and they will have no idea in any real time which prices are so out of whack that they acutely disrupt service delivery?
The saving grace is that the prices are said to be restricted to Medicare. It is highly likely that they will be used as the framework for private payers. The NEJM of weighs in on this with a piece by Timothy Stoltzfus Jost, J.D.. In this he concludes:
In the long run, Congress may not be able to cap Medicare expenditures without addressing private expenditures as well. If the IPAB opens the door to rate setting for all payers, it may well be the most revolutionary innovation of the ACA.Disruptive, yes. Innovative, hardly. Administrative prices and state driven price controls are ancient and resurface whenever mankind displays historical amnesia. It is sad this happens all to often. This time is different. Here we go again.
Tuesday, July 6, 2010
Creative destruction and the end of Blockbuster
Last week, the NYSE announced that Blockbuster Video shares were to be suspended and delisted from the NYSE, as reported in the WSJ on July 1, 2020.
http://online.wsj.com/article/BT-CO-20100701-712209.html
For those of us who grew up in the mid to late 20th century, we have an internal clock relating to technology change. We were the first television generation and witnessed steady improvements including increased screen size and color picture. Television may have disrupted radio to some degree but there always appeared to be plenty of room for both technologies. Cassette tapes and eight tracks helped up take music to where vinyl could not go, but they did not appear to threaten the existence of records. They were extending but not disruptive technologies.
However, something else is happening and the meteoritic rise and fall of Blockbuster is indicative of this new (or perhaps not so new) process. Using videotapes to distribute content to viewers was revolutionary. Using a rental network to facilitate this was also revolutionary and Blockbuster video was remarkably successful in deploying such a business model, swallowing up its competitors. Remarkably, the time frame for being able to exploit their model was incredibly short, peaking in the late 1990's and then losing money after 2002. The revolutionary technology at the center of the Blockbuster business plan became obsolete, being supplanted by online streaming, Redbox, and Netflix. Blockbuster's business model, as blockbuster as it might have appeared in the early 1990's, came and went.
This is actually an old story. Kodak film technology lasted for a century. Alfred Sloan's GM and Henry Ford's Ford had incredible runs before being displaced by competitors who could provide better and cheaper products. What is striking about Blockbuster is it appears that someone has sped up the clock. What used to take centuries now takes decades or less. We see this in the time lines for technology obsolescence. Yesterdays super computers and now today's commodity loss leaders. Yesterday's remarkable 20 MB thumb-drive for which people paid good money for has been replaced by the 1 GB thumb drive party favor.
I have to wonder about the timeline for obsolescence in medicine. We train physicians using basically the same model deployed basically a century ago after issuance of the Flexner Report. What part of what we do is timeless? What skills and knowledge which we acquire will be rendered obsolete before the end of our respective careers? Before the next decade? Before the end of the year?
The medical community has great fears as to the effect of government driven health care reform. I would venture to guess that heavy handed state bureaucracy will serve more as a brake for change as opposed to a driver of revolutionary and disruptive change. State price controls and global budgets may cause a slow erosion of the power and wealth generating ability of current health entities but I suspect it will protect them from a Blockbuster flash in the pan phenomena. It will not matter whether what we know and do is obsolete, so long as what we do is still reimbursable. That will be driven by politics. What we view as the bane of our existence is in reality the savior of the current system.
http://online.wsj.com/article/BT-CO-20100701-712209.html
For those of us who grew up in the mid to late 20th century, we have an internal clock relating to technology change. We were the first television generation and witnessed steady improvements including increased screen size and color picture. Television may have disrupted radio to some degree but there always appeared to be plenty of room for both technologies. Cassette tapes and eight tracks helped up take music to where vinyl could not go, but they did not appear to threaten the existence of records. They were extending but not disruptive technologies.
However, something else is happening and the meteoritic rise and fall of Blockbuster is indicative of this new (or perhaps not so new) process. Using videotapes to distribute content to viewers was revolutionary. Using a rental network to facilitate this was also revolutionary and Blockbuster video was remarkably successful in deploying such a business model, swallowing up its competitors. Remarkably, the time frame for being able to exploit their model was incredibly short, peaking in the late 1990's and then losing money after 2002. The revolutionary technology at the center of the Blockbuster business plan became obsolete, being supplanted by online streaming, Redbox, and Netflix. Blockbuster's business model, as blockbuster as it might have appeared in the early 1990's, came and went.
This is actually an old story. Kodak film technology lasted for a century. Alfred Sloan's GM and Henry Ford's Ford had incredible runs before being displaced by competitors who could provide better and cheaper products. What is striking about Blockbuster is it appears that someone has sped up the clock. What used to take centuries now takes decades or less. We see this in the time lines for technology obsolescence. Yesterdays super computers and now today's commodity loss leaders. Yesterday's remarkable 20 MB thumb-drive for which people paid good money for has been replaced by the 1 GB thumb drive party favor.
I have to wonder about the timeline for obsolescence in medicine. We train physicians using basically the same model deployed basically a century ago after issuance of the Flexner Report. What part of what we do is timeless? What skills and knowledge which we acquire will be rendered obsolete before the end of our respective careers? Before the next decade? Before the end of the year?
The medical community has great fears as to the effect of government driven health care reform. I would venture to guess that heavy handed state bureaucracy will serve more as a brake for change as opposed to a driver of revolutionary and disruptive change. State price controls and global budgets may cause a slow erosion of the power and wealth generating ability of current health entities but I suspect it will protect them from a Blockbuster flash in the pan phenomena. It will not matter whether what we know and do is obsolete, so long as what we do is still reimbursable. That will be driven by politics. What we view as the bane of our existence is in reality the savior of the current system.
Monday, July 5, 2010
California chicken
On Friday, California governor Arnold Schwarzenegger threw down the gauntlet, threatening to cut the pay of 200, 000 state workers to minimum wage until the state legislature passed a balanced state budget. This story has actually received remarkably little press. My own local paper picked up an AP piece, which appeared to be identical to what appeared in the Washington Post. I could not find anything in the NYT.
I browsed through some of the comments on the Yahoo news and Huffington Post. They tended to comment on the fact this was unfair, should be blamed on one political party or another (democrats - profligate spending; republicans - hindering adequate tax collection), blamed on public employee unions, blamed on immigrant demands on resources....the list goes on forever. I suspect they are all correct to some degree.
As luck would have it, I just finished reading Burton Folsom's book, "New Deal or Raw Deal". It is a re-examination of FDR's first two terms in office and how his politics changed the political landscape of the country. FDR developed a remarkable political machine based upon patronage on a scale never seen before. Yes, the leaders of major cities used these same tools for a hundred years before FDR deployed them but they did not have access to even a fraction of the financial resources which FDR could muster.
FDR basically ventured into virgin territory when it came to tapping into revenue streams which could be exploited and redirected into political patronage. He and his brain trust were remarkably good at this, as were subsequent politicians such as Lyndon Johnson and Richard Nixon. Folsom points out that in fact, even ideologically contrary George W. Bush took a page out on of FDR's playbook in the passage of the Medicare Prescription Drug benefit. Tax many who may not notice the incremental cost and bestow benefit on the few who you hope are beholden in the next election.
How does all relate to California? There is an endgame. This approach is not sustainable. Economics is the study of allocation of scarce resources. There are many possible approaches to the allocation problem. Ideally the one that should be optimal is one that expands the pool of resources the most over the largest segment of time. As I have written here repeatedly, I am a major proponent of market based allocation approaches. They are decentralized, allow individuals to allocate their resources where they believe they will provide the most return, and history supports this approach provides the biggest pie for distribution.
California state and local governments has absorbed a larger and larger share of dollars generated and has created an environment hostile to business, the very entities which create wealth. This has created a two-fold problem. First, it has not been compatible with growing the pool of resources. Second, it has converted a decentralized process (where resources reside in the hands of many small players) into a centralized process. The centralization of resources is good for those who want to use them to divvy up political patronage, but it runs into a problem. This approach causes the pool of resources to shrink while simultaneously creating an infinite demand for those same resources. Furthermore, as political competition for the shrinking pool of resources intensifies, the flaws of using a political approach to allocation become all too apparent.
Political allocation does not allocate resources where they can be used most effectively. It rewards those who are willing to be most ruthless in furthering their own ends. It does not allow one to hedge their bets and is prone to huge swings based upon changes in the statehouse or executive branch. What we are seeing in California (as well as other states such as New York), is the endgame. As the beast seeks more and more money, its actions result in shrinking resources. Individual players (teachers, prison guards, administrators, health care workers) who have successfully fed off this passionately defend their stakes. The short term winners in each of these political fights is the group who plays the game of chicken with the most nerve. Short term wins are confused with actual success and durable systems. This is how political allocation schemes work. Over the longer haul, you end up with Greece, California, and similar bankrupt states. They make promises about the future financed by unworkable schemes that will be revealed after those who made the promises can be held accountable. Beyond this, when calamity falls, there is rarely sufficient memory to link the mistakes of the past to the event of the present.
At this point it appears that Arnold has some leverage, He has gotten a hold on those soft and tender parts and he is squeezing. The courts have supported him. My question is, does he know what to ask for?
I browsed through some of the comments on the Yahoo news and Huffington Post. They tended to comment on the fact this was unfair, should be blamed on one political party or another (democrats - profligate spending; republicans - hindering adequate tax collection), blamed on public employee unions, blamed on immigrant demands on resources....the list goes on forever. I suspect they are all correct to some degree.
As luck would have it, I just finished reading Burton Folsom's book, "New Deal or Raw Deal". It is a re-examination of FDR's first two terms in office and how his politics changed the political landscape of the country. FDR developed a remarkable political machine based upon patronage on a scale never seen before. Yes, the leaders of major cities used these same tools for a hundred years before FDR deployed them but they did not have access to even a fraction of the financial resources which FDR could muster.
FDR basically ventured into virgin territory when it came to tapping into revenue streams which could be exploited and redirected into political patronage. He and his brain trust were remarkably good at this, as were subsequent politicians such as Lyndon Johnson and Richard Nixon. Folsom points out that in fact, even ideologically contrary George W. Bush took a page out on of FDR's playbook in the passage of the Medicare Prescription Drug benefit. Tax many who may not notice the incremental cost and bestow benefit on the few who you hope are beholden in the next election.
How does all relate to California? There is an endgame. This approach is not sustainable. Economics is the study of allocation of scarce resources. There are many possible approaches to the allocation problem. Ideally the one that should be optimal is one that expands the pool of resources the most over the largest segment of time. As I have written here repeatedly, I am a major proponent of market based allocation approaches. They are decentralized, allow individuals to allocate their resources where they believe they will provide the most return, and history supports this approach provides the biggest pie for distribution.
California state and local governments has absorbed a larger and larger share of dollars generated and has created an environment hostile to business, the very entities which create wealth. This has created a two-fold problem. First, it has not been compatible with growing the pool of resources. Second, it has converted a decentralized process (where resources reside in the hands of many small players) into a centralized process. The centralization of resources is good for those who want to use them to divvy up political patronage, but it runs into a problem. This approach causes the pool of resources to shrink while simultaneously creating an infinite demand for those same resources. Furthermore, as political competition for the shrinking pool of resources intensifies, the flaws of using a political approach to allocation become all too apparent.
Political allocation does not allocate resources where they can be used most effectively. It rewards those who are willing to be most ruthless in furthering their own ends. It does not allow one to hedge their bets and is prone to huge swings based upon changes in the statehouse or executive branch. What we are seeing in California (as well as other states such as New York), is the endgame. As the beast seeks more and more money, its actions result in shrinking resources. Individual players (teachers, prison guards, administrators, health care workers) who have successfully fed off this passionately defend their stakes. The short term winners in each of these political fights is the group who plays the game of chicken with the most nerve. Short term wins are confused with actual success and durable systems. This is how political allocation schemes work. Over the longer haul, you end up with Greece, California, and similar bankrupt states. They make promises about the future financed by unworkable schemes that will be revealed after those who made the promises can be held accountable. Beyond this, when calamity falls, there is rarely sufficient memory to link the mistakes of the past to the event of the present.
At this point it appears that Arnold has some leverage, He has gotten a hold on those soft and tender parts and he is squeezing. The courts have supported him. My question is, does he know what to ask for?
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