Tag Archives: Free Market

Healthcare is not a free market

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From the obvious department, amIright? Yes, but not for the reasons you think. Healthcare cannot and never will be a free market. There are several reasons for this that I will elaborate on here.

Healthcare consists of micro-regulation in the form of the reimbursement structure. This is an artifact of two different systems combining to make things worse. First, because the Federal Government is big and has two different programs one for Federal Employees and one of those in need Medicare/Medicaid (I’m combining them here for simplicity), there’s also the VA, but that has much less influence on healthcare. These two programs set the terms on how the government will reimburse or even pay providers for care provided. These are based on Current Procedure Terminology (CPT Codes) and not based upon your diagnosis. Essentially the government sets a price they are willing to pay for a procedure. As one of the largest market players, this influences all of the other payers (IE insurance companies). Many insurance companies use Medicare payment rates to set their own, which drives down the cost of a procedure to the point, in many cases, where it’s below the cost of the actual care. This drive providers to select more expensive and more procedures in many cases to make up the short fall. This payment model also makes it hard for new procedure methodologies to be adopted as they may not be paid for.

Healthcare is a network economy – nearly all care happens close to home. This is why groups like the ACLU argue that driving more than an hour for an abortion is an unnecessary burden on women. Because of the proximity of the majority of care (10.2 miles) this creates a local network of care based on the original provider a patient sees. When you receive a referral, there are a few different routes this can go, best doctor the the referrer knows, another doctor in the same clinic, or in the same care network (such as UPMC in Pittsburgh or Kaiser Permanente in CA). This drives an incentive to send patients within the network leading to mutual referrals or money staying within that care network even if there are better doctors for that specific patient outside of that care network. In addition to the Doctor’s network there is, of course, your insurer’s network which may be in direct conflict with the professional network that your provider has.

Imbalances of knowledge – in typical free markets there’s an assumption that everyone has the same amount of knowledge. In Healthcare, it is abundantly clear that this isn’t true. Most patients have little to no understanding of their diseases when they are first diagnosed. On the other hand, both their insurer and provider has an extensive knowledge of the disease. This limits how well the patient is able to correctly make decisions about their healthcare. It also pushes reliance to the provider whenever there is a disagreement between insurer and provider. The member can’t effectively participate in those conversations about care. Furthermore, there maybe little penalty to the patient if they fail to follow the prescribed course of care until much later where neither the insurer or provider can enforce a change of behavior to reduce costs for the entire system now through treatment rather than later when there are more complications.

These are but three cases that highlight the lack of free market mechanisms in healthcare. Even in cases where a patient wants to seek the best care it’s typically the patient’s responsibility to pay for it if it’s not with in the insurer’s network. In many cases these clinics can reduce systemic costs through lower point of care and lower likelihood of readmission after care.

Over the course of the next few weeks I will discuss Exchanges and their potential, how healthcare can be made more affordable using process improvement tools and other mechanisms. I plan on writing weekly on healthcare. If you have any topics that interest you please comment and let me know!

Free-market, Small Government and Regulations

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The free-market has been used to argue against regulations and for small government for years. However, I believe that the major supporters of using the free-market argument are disingenuous in their application of the argument. In addition, the free-market is a flawed theory which needs to be revisited by neoclassical scholars and adjusted.

The free-market theory comes from the idea that there is an invisible hand that guides the market towards equilibrium between supply and demand. This assumes that once the equilibrium is hit it will stay at that point until there is some shock to the system which would find a new equilibrium. Each time that there is a shock, the invisible hand would push the market into a new equilibrium. This idea came as a side comment in the Wealth of Nations. This idea has become enshrined in the minds of neoclassical economics in a manner that Newtonian Physics was presumed to be accurate. In both cases the theory is incorrect. Relativistic Physics has replaced Newtonian, but in Economics the free-market is still the prevailing mechanism for policy creation. There has been no evidence for an invisible hand at all. In fact Metcalf created the theory of a networked economy which argues that the value of a good becomes more valuable as more people use it. I’ve mentioned this in the past. Essentially, this will prevent any equilibrium from every being found as the price can increase and people will still adopt the networked item because it’s becoming more valuable to the user. Or the price can remain constant even when it should drop for other factors such as a reduction in cost of production. A perfect example is the iPhone. According to research Apple has a whopping 72% margins on the iPhone, even if production was moved to the US Apple would still make 42% margin on the iPhone. There also is an over production of the iPhone and strong competition, which would indicate that the iPhone should drop prices as they are capable with that large of a margin. This market has a great deal of competition and has a large number of companies producing, which indicates that it Apple should be under pressure to drop prices. However this isn’t happening because of the networked value of the iPhone. There are a huge number of apps for the phone, the apps are high quality and the product works well with other iPhones. The market has had no impact on the cost of the iPhone.

However, free-market champions would look at any effort to change the labor practices of Apple as wrong headed and regulation that isn’t required. The Market isn’t demanding any change to labor practices because the market can bear the current prices and the demand indicates that people don’t care about labor practices. However, it’s well known that there are no alternatives to Apple’s iPhone that are produced in an ethical manner. So voting with your money wouldn’t actually work here. The problem arises because there is something of a monopoly in the manufacturing of the smart phones in FoxConn. In this case there is a market failure. Which is something that neoclassical theorists argue cannot occur. The market cannot send a signal to firms because there is no mechanism in which the market could send a signal. This is can be understood if you view this industry as a networked economy. Where you see the ties between manufacturers and handset companies, which would show a massive connection to FoxConn.

Efforts to regulate the manufacturing of devices have been argued as the reason for moving the manufacturing to other countries. However, this is not the case in the case of Apple, as they would still have huge margins. It’s because the company is attempting to maximize profits, not reduce costs to be profitable. The same arguments have been used to argue for smaller government. Saying that since there are no market failures the government should not intervene in the industry.

The unfortunate thing is that these arguments immediately disappear when it comes to protecting the profits of record industries. The same free-market advocates then move to argue that intellectual property must be protected. Essentially, creating protection for a specific product through IP causes a market failure and prevents the market from operating at its most efficient because there are not other competitors in the market. Creating IP requires a huge regulatory framework from the mechanisms of registering, logging complaints and prosecuting actors that infringe on the IP.

This type of industrial policy is typically derided by the small government fans, as it is a type of regulation that selects a “winner” (IP owners) over “losers” (non IP owners). Which may be fine. However, whenever this selection pushes our government to select a winner (Music) over the fastest growing, possibly only growing, part of our economy (internet based companies) there is a serious risk to the future. As I’ve mentioned before these laws represent huge risks for innovation.

These laws are SOPA and PIPA, which I’ve discussed extensively. However, the next round of internet regulations come in the form of CISPA. This bill, which requires allows companies to share extensively with government agencies. This type of sharing of user data and information about the activities going on at the company would not go over very well from the the free-market advocates if this was a request for data about customer data for car dealerships or steel mills. Essentially, this is going to increase the cost of doing business in the US. This may prevent companies from working in the US and prevent innovation. If I was to create a company that dealt with social data I would not want to do so after the passing of this bill. It would be likely that I would be blackmailed into giving the government data about my users that I had no desire to give them.

The internet is the perfect example of a networked economy. Facebook’s value comes from the fact that it has a huge user base. This is true for Google, Amazon and Instagram (List of companies that support CISPA). Without the users the services is literally worthless. With the users a company without any revenues can be worth $1 Billion (Instagram). The difference between this bill and other bills like SOPA and PIPA is that the agreement is bidirectional. The government will likely help Facebook and Google fight Chinese attacks and give information to each other about the activities of online hacktivist groups like Anonymous. It is likely that 4chan will end up giving over IP data and other information related to anonymous and Anonymous users.

This is regulation that the internet doesn’t need and will stifle innovation. The government already has these powers, which maybe why the Obama administration is opposed to CISPA. It is also ironic that Obama plans on sanctioning countries that use Tech to abuse human rights specifically committing genocide. A whistle blower has recently announced that the NSA has intercepted 20 TRILLION emails and likely has copies of all of these stored somewhere. The passing of CISPA and any other law of similar persuasion  would likely protect companies like AT&T from future lawsuits for being complicit with these activities.

For devotes of the Free-Market these laws create market distortions and will cause serious harm to innovation on the internet. For people that understand networked economies, this will greatly undermine the value of these networks as users will likely change their behavior to mitigate the amount of information the Government can compile on them. CISPA and its sister laws SOPA and PIPA represent big government actions attempting to control and regulate industries that do not need to be regulated. In this case there is no market failure that needs to be addressed. Privacy is something that the users have been pushing for and Facebook and Google have steadily improved on those accounts. Surprisingly industry is doing a decent job at regulating itself. Finally, regulations being pushed by advocates of small government and free-market smack of hypocrisy and a lack of understanding. These laws require a deep understanding of the internet and how the market of the internet works. Without this understanding terrible laws will be passed that will damage our privacy and freedoms. For the issues that this law would protect from there are other methods that could be employed to gain the desired results without passing laws.

Contact your congressional members to fight against this bill.

Ubiquitous free high speed wireless: Computing

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In my last two blogs, Government and Business, I’ve discussed some of the impacts on our society of ubiquitous high speed wireless internet. In this post I’ll look at the future of the computing industry. I think that this industry will go one of two ways, or perhaps both at the same time. The first route is obvious and is already happening, the second route will probably begin as a backlash to the first route.

The obvious route is cloud computing. As I’ve said we’re already going down this route. The best example of the speed of this transformation is the Amazon Kindle Fire (all three different links). Basically, we will be using less powerful, but still growing in abilities, equipment and pushing the more processor intensive applications out onto a server in the cloud. This will most likely be owned by some private organization. Amazon’s Fire is a great example of this because it provides the ability to browse websites at a much faster rate than what’s allowed under current network speeds. Even with high speed internet this may continue because it’ll fit the website to your screen and make it even faster than over the high speed network.

However, many people are skeptical of cloud computing. There is a sense of a loss of ownership. You become locked in to a specific firm to provide the required services. End User license agreements change frequently and your true ownership of the data and information you place on their servers can change unexpectedly and in ways that aren’t in the favor of the users. Additionally, it’s been acknowledged by both Google and Microsoft that all data in their cloud servers are subject to the US Patriot Act. This raises privacy concerns for the EU and firms using cloud services.

I think that these concerns will drive another type of cloud computing. I think it’ll be something like a personal cloud. It will be similar to working with both a desktop and a laptop at the same time and remoting into the desktop from the laptop, but it will be done seamlessly and transparently. The ownership of the data will be clearly yours and the power will effectively take a phone or low power table and turn it into a fully powered desktop computer. This way the cloud won’t be out there and will be easily controlled by the end user. You don’t have to worry about the Patriot Act or a company going under, changing rates and other issues like that.

Both of these changes will create disruptive changes within the computing industry. The Kindle Fire is on the cutting edge of this. I fully expect Amazon to create additional applications that will run on the Amazon cloud system. There’s no reason not to expect this. It will shift how apps are developed. It will also change who is in the game of creating computers. Dell, for example, will continue to have a major hold over both servers and personal computers, however as we move away from laptops to tablets and phones over time Dell is going to fail in this market. They have been unsuccessful at every attempt to enter these markets. There will be a shift in the players in the market.

These systems will only work with ubiquitous internet connection. They will become more effective as the network speed and capacity increases. Users will become more willing to use the systems as the reliability of the systems increase.

In my opinion these changes will fundamentally change the way that we look at computers. The way we interact with computers and how we feel about the usage of computers. Today they are everywhere, but in the next few years I expect them to become more prevalent as we are able to offload high power demanding applications off of our phones and onto powerful servers.

In my next blog I’ll discuss some overall societal changes.

Ubiquitous free high speed wireless: Business

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In my previous blog I discussed some governmental issues with ubiquitous free high speed wireless internet. In this piece I’m going to discuss the impact on businesses. I’ll start with some really obvious impacts and then move into some that may be more interesting.

First, this would effectively kill the current business model for telecoms. Not just internet providers but it would also have a massive impact on telephony and television providers. Internet providers would basically go out of business unless the governments that implemented the network hired them to manage the networks and perform the upgrades required to ensure expected performance. It should also be expected that net neutrality should be the norm as the internet is free as in free beer and as in free speech in a situation like this. This would impact telephony in a similar manner. With free internet phones could be designed to work on wifi (or whatever the network type is) and use services like Google Voice (which is popular in the US and free). These services provide a telephone number as well. Further more skype communication or similar type programs could become the norm as they are free and easy to use. The impact on television would be a continuation of the current system. With Netflix and Hulu driving usage to the web. Without easy access pirating will be the norm and extremely easy.

In the US Starbucks is extremely popular for two reasons, gigantic flavored coffees and free wireless internet. I think in the Dutch context free wireless internet would spur an increase in the amount of business meetings that happen at cafes. With the slow service which is designed to encourage conversation and being social, it would be a great way to work remotely from outside of home. As it stands there aren’t that many places, at least in Eindhoven, that have wireless internet like that. I think it will spur sales at restaurants.

The broadband movement is already increasing the number of people that can work from home and be educated at home. I think there will be some differences though. Mostly because of the freedom that is allowed with the wireless connections. You are able to connect everywhere and anywhere. I think this will create more flexible schedules. I’d be able to work nearly as easily on a train as I would be able to in the office. I would be able to get on a train at the time I’m supposed to be at work get there for some meetings and finish up around the same time just on the train.

I think that there will be more business models based on highly interactive advertisements and user driven actions out in the “wild.” I’ve seen a lot of the QR codes outside of buildings as it is, but I think there will be an increase in the number of these. Users will be more willing to activate them because they are going to get the data from them significantly faster than previously. This will drive traffic to these sites and potentially new jobs from the different types of videos/ads that could be created with them.

I think this will also be something of a technological discontinuity. Broadband at home encourages one type of behavior, but I think there will be very different interactions with broadband everywhere. In the long term there could be a slew of different devices that will take advantage of the continual connections. Clothing could be that could measure the current weather conditions real time which could be uploaded to get real time weather information. We could collect data at levels we’ve never seen it before. This is just one usage of the informational sphere we’ll be living in. There will be a huge number of new applications that will radically shift the way people think about knowledge, information and computing products. Predicting the next wave of technologies based on the wireless web is difficult. It’s likely to be impossible.

However, I think that in my next blog on Computing, we’ll see the largest changes.

Technological Convergences

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Convergences happen in all different ways. They happen in books or book series, where a good author can plan to have plotlines converge in a specific time and place. In the case of the series I just finished, the Malazan Book of the Fallen, the author was able to get two totally unrelated characters meet in really unexpected ways. It happens in films too, Crash and 21 Grams are two great examples of this. This happens in technology as well. Most of the time, we as consumers never even see it happening. When we look back though we realize it was incredibly obvious that it would happen. Two great examples of this happened with cell phones.

MP3 players have been wildly popular since they came out in the late 90’s. Napster and easy to rip CD’s made them incredibly useful and provided hours of great listening. Around the same time cell phones were becoming smaller and more popular. No unexpectedly, phone manufacturers decided that it would be useful to put a music player onto the phone. These were clunky and really only used when people didn’t have a better MP3 player. Apple had created a great MP3 player and realized, like the phone manufacturers that users only wanted to carry one of these devices. This is one of the reasons that drove them to make the iPhone. Great interface and good music experience. At this point they already had the music infrastructure and the loyal fan base to be sure of a high number of sales.

Around the same time as the MP3 boom businessmen were starting to use Portable Digital Assistants (PDA). This was a replacement to the calendar and phone book. It also provided a few applications that allowed some work on documents. It could also be used to schedule emails when the PDA was synced with the computer. It was obvious that this would be a great device to connect to some sort of network aside from plugging it in. Blackberry used to make two way pagers and figured out a way to send emails and other useful data over the pager network. This was one of the earliest smart phones. Eventually Microsoft and Palm got into the phone manufacturing game for the same reason. People didn’t want to carry two device a PDA and a phone. If you put them both together you’d have a better product and would sell more.

These two technologies converged on a similar product, smart phones. Both types of phones had a very different set of users initially. However, since the iPhone there has been a further convergence of these phones into general purpose phones. Blackberry, while still catering to the business side, is shifting to compete directly with the iPhone because business users want the apps that the iPhone has. Palm has vanished from the market being unable to compete and Android has appeared as the first PC based OS. Android is a distribution of Linux, it doesn’t run well on PCs but MS and Apple are moving in a direction of merging mobile OSes and PC OSes (sure it’s a Mac, but it uses Intel so there’s no different besides the OS).

If we look back at these convergences, aside from new competitors and firm failure, they appear to be pretty obvious. Why wouldn’t these companies move into these market spaces? I’ll discuss some of that in my next blog.