Healthcare is not a free market

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!

Ex-Pat Entrepreneurs

This morning on KUT I heard about a plan here in Austin to encourage Mexican Nationals to start companies based in Austin. This initiative is being pushed by the Hispanic Chamber of Commerce and Austin’s IC2, an incubator. I think this is a great idea. This will allow a great cross pollination of ideas between Mexico and the United States. Bringing together people with great ideas leads to more interesting ideas. This is something I really loved about my Master’s program. I was continually surrounded by people with big ideas, vision and energy.

I think that this idea also can help Americans see that people in other countries can have and do have, fantastic exciting ideas that can drive technology, the economy and employment. With our US-centric view of entrepreneurship and venture capital we tend to overlook this. It’s not fair and it short changes potential collaborators, because we assume that Americans have the best ideas.

This collaboration also shows that resources in America can be used to help develop entrepreneurship within a community of immigrants. We have seen some of this with Silicon Valley and the Indian and Chinese populations there, but we have not see it with another community in the US or with a Latin American culture. I think that this experiment will be useful in spreading knowledge and developing future entrepreneurs in Mexico to the south.  It will also likely lead to an increase in entrepreneurship within Mexico over time. It will not happen immediately, but a group of these entrepreneurs will eventually move back to Mexico and will start companies there or at least subsidiaries in their home country. This will produce more legitimate work for Mexicans in Mexico that could offer wages that can compete with the drug cartels and develop a larger business community.

This type of growth is important for Mexico, as it will increase the amount of resources for Mexicans to develop their own businesses. It will increase legitimate pressures on the government to fight corruption and make efforts to reduce the impact on organized crime on the government. It will provide employment for highly capable graduates from Mexican universities which will continue to drive improvement for the country.

Most of this is a decade or two in the future, but there will be a great deal of benefits for both Austin, the Hispanic community in the city and for Mexico. Austin will benefit, because it will continue to grow as entrepreneurs will bring more money in, more jobs and new ideas.

The Mexican nationals will fuel increase knowledge sharing between the US and Mexico and will act as de facto ambassadors for their home country. They will educate people on the real Mexico and show Austines that Mexico has a great deal to offer besides amazing food.

Unintended consequences of knowledge management regimes

There are several consequences of the differences between the US (and the west) and China (and other autocracies). First, with one of the major assumptions of neoclassical economics out the window, it calls into question basing economic policy on neoclassical economics. Second, with a monopoly structure for intellectual property several different economic incentives have been created. Finally, the differences in IP management between the countries creates tensions at several different levels. I’ll discuss each of these points in more detail.

First, if one of the major assumptions for economic policy includes non-rival, non-exclusive knowledge, it’s difficult to understand why there isn’t more competition in many markets. However, as we know it’s not really possible for any firm to pick up any sort of technology and start to produce a given product. Because of this difficulty regions and areas tend to become experts at specific types of technologies. However, even in the case of China the freedom of access to IP makes it easier for firms to produce specific products. The problem still lies in the fact that you still need tacit knowledge to actually make the product. A patent is supposed to give you the information you need to produce the technology. However, the actual patents are difficult to read and not likely to be possible

Second, with a monopoly structure in place for intellectual property it gives very different incentives for owners of intellectual property. First, for people who actually produce a product, attacking products that are similar for infringement can be a very lucrative proposition. It prevents other companies from becoming competition. Apple is currently using this tactic to go after Android through Samsung and HTC. With a full monopoly technological progress can actually come to a standstill. An example of this is with Xerox copiers. With the monopoly in place Xerox did not innovate and kept prices extremely high. As soon as their patent ran out the competition came in and almost took all of the market share from Xerox. They introduced lower priced products and a wider more personal product range. Without the monopoly in place other companies could try to move into the market space earlier and drive innovation from the beginning of the market.  Finally, with reduced ownership of IP there will be less patent trolls like Intellectual Ventures.

Third, the IP management is causing issues between firms and the Chinese government. The firms do not want to give up their IP because it’s how they are able to make their money. Some of these technologies are so easy to copy it’s impossible to make a profit without protection. In theory pharmaceuticals should be perfectly copyable based on the chemical properties of the drug. If the pharmaceutical companies didn’t have a chance to recoup the investment on a drug (500 million – 1 billion per drug) there would be no innovation. The differences present problems for trade and agreements between countries. The US and China have had serious disagreements over how IP should be managed.

Basically, the differences in how IP is understood impacts a countries policies economically and in trade. It is important to understand exactly what’s going on with these issues. Our governments are pushing for different levels of control over IP both in patents and other forms of copyright. As some one interested in policy, it’s important to understand what types of policies we should be pushing for. I don’t think there’s any true right answer for the IP problem. In different situations policies should be adjusted. We cannot have a stagnant IP regime when technologies are evolving as fast as they are.

Are democracies or autocracies better with technology Management?

According to neoclassical economics knowledge is a non-rival (I can use it without preventing you from using it) and non-exclusive (available to everyone) resource. This has two impacts on their economic theory. First, the actual impact of research and development is excluded from economic growth and is ignored. Second, that any company should be able to pick up and produce any technology. Both of these points are relatively ridiculous. For two reasons. First, we know that research leads to the formation of new companies. Second we know that most companies cannot produce any product and many companies that produce products outside their expertise fail at it.

From a neoclassical perspective democracies are terrible at sharing knowledge and technologies. Democracies have a slew of laws that regulate access to technology form monopolies for specific technologies if they have something called a patent. Additionally, there are other contracts that can get in the way of sharing of knowledge in a way that is neoclassical. Non-disclosure agreements and non-compete clauses. If you aren’t allowed to discuss a specific technology with other people, it prevents knowledge from spreading and being shared to other companies. If you aren’t allowed to compete within the same industry after you leave a company, it prevents you from using that knowledge in a positive way at another firm.

These laws have been put into place in our democracies to ensure proper protection of technologies for firms. It’s designed to prevent the spreading of tacit knowledge from company A to company B. As a company this is incredibly desirable. Without these protections some research would be worthless to conduct. Knowledge spill-overs would cause prices to fall to cost or lower as firms compete for market share. It’s great for consumers, but bad for firms.

So what happens in China? Well according to Make it in America, China requires many firms to hand over their Intellectual Property to the Chinese state. What ends up happening after this is that the Chinese government sells the information or gives the information to one or more Chinese company. These companies tend to be made up of former employees at the company that made the product before. This allows tacit knowledge transfer to the firm and a fast ramp to compete directly with the inventor of the technology. The knowledge is freer in China than it is in the US because of this. This increases competition and may be impacting the cost of goods like solar panels.

In a way this type of behavior forces companies to compete based on the actual costs of the technology. This is what is expected in the neoclassical theory. All prices will eventually drop to the marginal cost of a product with near zero profits for the producing company. In a perverse way, this is a “freer” market than ours because it comes closer to the non-rival non-exclusive knowledge base.

In my next blog, I’ll discuss this topic more.

China, Technology and creativity

Sorry I’ve been away for so long. I’ve been hanging out with my Awesome wife! She gave a talk in Ireland, which I went to for most of a week. It was a good time. She then came here to Eindhoven for a week and had an interview. So that’s why I haven’t been updating. Sorry faithful readers.

At a party on Saturday, I got into a fairly active discussion with 4 PhDs and myself. They are all engineering PhDs, so they understand research and how technology works rather well. We got into a discussion on if China was going to actually really over take the US in scientific research. I said I think it’s likely, but there were many arguments against that likelihood. I didn’t really get to finish my argument on why it’s possible. So, I’m going to do that now.

Basically, some of the core arguments against China being able to overtake is us lack of creativity. China is a country of followers, not a country of creative leaders. Another argument was the lack of high quality education and research centers in China. I’ll address the second argument first and then discuss the first argument.

Americans know that we educated a lot of foreigners at our universities, 2008 was an all time high for the number of international students. In fact my roommate at one point explained to me that one of the groups at the University of Texas was comprised entirely of Chinese students. They conduct their meetings and research all in Chinese and, in fact, leave the US speaking worse English than when they arrived. But why are they leaving? The link above notes that there simply aren’t enough H1B Visas or green cards for them all to stay. Effectively we’re throwing out the people we educate. Over time enough good scientists and engineers will be sent back and will start teaching in China. China has big ambitions and has been creating universities as fast as it can. Using an evolutionary perspective, we can see that it’s likely they will continue to create variation and students will be selecting the best universities. One of them is likely to start producing more science and better science than another. This will lead to the best students and best researchers going to that school. One or two could become the Chinese version of MIT, Berkeley or Harvard. I think it’s clear that education won’t hold them back. Eventually, they will have several universities in the top 200 list according to the Times Higher Education ranking.

The second argument is a little tricker to argue against. The Chinese aren’t creative enough to create radical innovations. First, I’m sure that the Chinese I know would object to this blanket statement. However, let’s assume for the moment that’s it’s some what correct. There’s a culture that doesn’t reward creativity and rewards conformity. I can think of two countries that have similar types of culture that have been creative and are excellent centers of research and innovation, Japan and South Korea. Now are they as good as the US at innovation or research, No. However, they have had some great innovations and do great research.

When it comes to patent research there’s something called a Triadic patent. It’s a patent that is filed in the US, Europe and Japan. Europe and Japan have higher standards for patents than the US and are more difficult to acquire. Why does this matter? Well effectively Japan is the only country in Asia that would fit better with the European countries in terms of GDP per capita, protection of IP and research.

Both South Korea and Japan have a few companies that are on the leading edge of their respective fields. Samsung is in a huge number of different areas and is the world leader in many of them. Japan has Nikon, Sony, Toyota and a few other big companies that are on the cutting edge in research, design and innovation. So, I don’t accept the argument that the Chinese couldn’t be creative.

Another point I was trying to make, is that over time as a country becomes the center of manufacturing and incremental innovation on a product, it’s likely that they are going to be able to create the next radical innovation in that field. There are two things that support this. First, in a book by Andrew Liveris, the British CEO of Dow Chemical, there is anecdotal evidence to support bringing manufacturing back to the US along with the R&D that goes with it. The other argument is based on the research of Cesar Hidalgo of MIT that shows through network theory, that to become a leader in technology you have to build your way through a series of other technologies. It helps explain why it’s so hard for countries to pick up creating semiconductors. However, as a country develops the technological capability to work within a type of technology they are likely to create innovation and changes in that technology.

China has effectively been given the ability to manufacture just about everything through outsourcing. They have the technological capabilities to build and design new technologies. China also has the resources devoted to it. They created a five year plan where they are going to invest $1.5 trillion in 7 science sectors. Because of these factors I believe that China is a real threat to US and European leadership in research and technology. For any one to dismiss China because of cultural reasons or technological capabilities is making a mistake and is likely to be surprised in 20 -30 years when China becomes a leader in at least one field, likely more than one.

Where good ideas come from

Last year I bought a book after listening to a segment from NPR that my dad had sent. In it they interviewed to different authors, Kevin Kelly and Steven Johnson, I ended up getting both books. To my dismay the Kevin Kelly book, What technology wants,  was in my opinion painting a technology deterministic world that ultimately was unrealistic and absurd. I stopped reading it and never finished it, which is something I almost never do (I would equate him with Clay Shirky in being overly optimistic about the role of technology).

The second author’s book was significantly better. It’s called Where Good Ideas Come From and it has some really great ways to generate new ideas and how he believes ideas are formed. Below is a short talk of his animated by RSA animation.

The short and simple is that I completely buy his approach to generating new ideas. In his book he discusses using a piece of software (DEVONthink) while doing almost all of his reading . I’ve tired to do this with a similar program in windows called Evernote, but it’s difficult to remember to do it. I feel I need to get better at it. I had a great idea for a blog two days ago, never wrote it down and totally forgot what it was. Helaas pinda kaas (Dutch for “too bad peanut butter”). In some way the book is a big ad for DEVONthink, but that’s not really the important part. The important thing is how these different ideas come together and lead to new and fully formed ideas. A tool like DEVONthink or Evernote (There’s also OneNote as part of MS office) allow you to increase your ability to find things and create new ideas.

I effectively use websites like Reddit, Facebook, Twitter and the books I read in this fashion. Many of my blog posts come about from the different news stories I read to which I put my own spin on them and add additional commentary. Typically by combing ideas from multiple different sources. I love when my friends point me to new sources of information or stories I’d be interested in. One of my blogs, What is the value of a patent, was written because someone sent me the “When Patents attack” story by This American life. I was able to combine the ideas presented in that story with my knowledge of patents that I’ve learned at TU/e to write an interesting blog that’s more than either story.

Yes, my last two blogs have basically be book reviews. However, I figured that as a public service announcement to let people know how I come up with my topics. I think it’s important that other people try to create their own content and share what you know. If you don’t feel comfortable writing, shoot me an idea and let’s see what we can make of it.

Internet and Social Media books: A comparison between Lessig and Shirky

Recently I’ve read two books related to the internet and to some extent social media. The first book I’ve mentioned and quoted repeatedly, Code 2.0 by Lawrence Lessig. The second is a book I just finished called Cognitive Surplus by Clay Shirky which is about how as the internet has evolved and grown we have been able to create our own content instead of simply being passive consumers.

Despite the fact that Code 2.0 was originally written in 1999 and then updated in 2006 and Surplus was written in 2010 I feel that Code is still more relevant. Some of this can be attributed to the approach of the authors. In both cases the authors discuss specific websites and how they impact social interaction between different actors. As side from arguing that the free time and the increased ability to create, Shirky focuses on social connections and ignores other considerations related to content creation. He oversimplifies the skills required to create new content and ignores vested interests ability to prevent content creation.

Lessig on the other hand, creates a framework where it is possible to analyze the interactions between the various actors that interact on the internet. He looks at the market forces, social forces, regulatory forces, and social norms that interact with the internet in different ways. In this way Lessig is able to create recommendations to improve the interaction with the various forces acting on the internet. His goal is to create a safe internet that allows privacy, transparency, great places where economic exchanges can happen and required controls to prevent abuse of the internet.

There are some other differences between these books. Shirky reminds me of Thomas Friedman’s the World is Flat. It’s an incredibly optimistic view of the internet. Effectively the author can’t find anything wrong with the social interactions that occur on the internet. He isn’t concerned with the privacy issues with sites like Facebook, hacking issues both white and black hat and censorship at any level. He ignores these issues and looks at the community aspect. Which is fine, but he should at least mention these factors as they can seriously impact the quality of a community that’s being created. Lessig has a much less optimistic outlook and in fact believes that the internet will allow the government unprecedented access to our personal information and control over the information we control.

I think that these two books represent well the different ways that people look at the internet. I personally have a Lessig outlook. This maybe for a few reasons. I’ve read a few of his books, I can be cynical and I don’t have endless optimism for any technology. I think that the internet is an amazing thing. That people are creating more content, but it’s going to take some time before it gets to the point that Shirky is dreaming of. One of my friends over at KBMOD things that within a few years everyone will have a YouTube account the way that everyone has a Facebook account. I’m skeptical of this. I think there’s more time required to be effective at being a YouTuber than being a Facebooker. Which will decrease the number of people that are willing to take up a hobby. Facebook takes about 10 seconds to update, with YouTube you have to feel comfortable in front of a camera or talking over some sort of content. I think it’ll happen over time, but I think there will be something of a U shape of users. I think older generations that have more free time will pick it up.

I think both books have a positive outlook on the internet and social media. They both think that the more connections that happen the more connections that can occur. Overall, I personally think that if you’re interested in the different forces interacting in the internet Lessig’s book is for you. If you’re interested in a rosy outlook on the positive impact of the internet then read Shirky’s book.