The future of health care, continued. Where will economics come in?

So, within a decade, IT-driven health care is gonna be "essentially free?"

Pardon my dubiety, comrades. That breathless proffer (from my prior post) raises a host of vexing questions.

First: interesting post yesterday on THCB.

The C Word
Apr 11, 2016
by Jeff Goldsmith

That we are experiencing a “consumer revolution” in healthcare is a durable meme in the media and in policy circles just now.  When you hear the word “consumer”, it conjures images of someone with a cart and a credit card happily weaving their way through Best Buy. It is, however, a less than useful way of thinking about the patient’s experience in the health system.

A persistent critique of our country’s high cost health system is that because patients are insulated from the cost of care by health insurance, they freely “consume” it without regard to its value, and are absolved of the need to manage their own health.  In effect, this view ascribes our very high health costs to moral failure on the part of patients.

Market-oriented policy advocates believe that if we “empower”patients as consumers by asking them to pay more of the bill, market forces will help us tame the ever rising cost of care. If patients have “skin in the game” when they use the health system and also “transparency” of health providers’ prices and performance, patients can deploy their own dollars more sensibly...

A good post. Read all of it. Having been a cancer patient for much of 2015 (with about 10 grand of OOP "skin in the game" notwithstanding my BCBS "coverage"), I pondered it with interest.

apropos, I got off on a bit of a tangent across the past few days. My favorite mid/late 90's grad school professor, Dr. Alan Zundel, alerted me to a book he'd read and reviewed, and asked for my opinion.

The UK's Paul Mason: "Postcapitalism: A Guide to Our Future." I immediately bought and downloaded the Kindle edition. A compelling diversion.

Triangulate with "Four Futures."

Paul's nominal chronological baseline is that of the 2008 financial meltdown, regarding which I've written at some length from my personal/professional perspective in my posts "Tranche Warfare" and "The Dukes of Moral Hazard."

The relevant "postcapitalism" crux according to Paul Mason? "IT changes everything." No, really. The Zero Marginal Cost of InfoTech.

THE INFO-TECH REVOLUTION 
The one positive factor to set against all the negatives outlined so far is the tech revolution, which was produced by neoliberalism and has stormed ahead in defiance of the economic crisis. ‘The information society,’ writes the philosopher Luciano Floridi, ‘has been brought about by the fastest growing technology in history. No previous generation has ever been exposed to such an extraordinary acceleration of technical power over reality, with corresponding social changes and ethical responsibilities.’

It was the increase in computing power that enabled a complex global finance system. It underpinned the growth of the money supply as digital systems replaced the need for cash. It enabled the physical redistribution of production and supply to the emerging markets, where labour was cheap. It de-skilled the engineering worker, made the labour of semi-skilled workers redundant and accelerated the growth of low-skilled service work. 

But though info-tech has become, as Floridi writes, ‘the characteristic technology of our time’, its emergence takes the form of a disappearing act. Mainframes are born then disappear to be replaced by servers, which also disappear from corporate HQs and now sit in vast air-conditioned sheds elsewhere. The silicon chip gets smaller; the add-on devices that once cluttered our workspaces – modems, hard drives, floppy disks – become smaller, scarcer, and then disappear. Proprietary software gets built by corporate IT departments and is then replaced by off-the-peg versions at one-tenth of the price. And soon, too, the IT departments disappear, to be replaced by call centres in Mumbai. The PC becomes the laptop. The laptop shrinks and gets more powerful but is superseded by the smartphone and the tablet. 

At first, this new technology was mapped on to the old structures of capitalism. In the 1990s, the folklore in IT was that the most expensive software – the enterprise resource package – ‘moulds like putty, sets like concrete’. By the time you had computerized your production line, innovation elsewhere meant you had to rip it out and start again. 

But after around 2004, with the rise of the internet and mobile data, technology began to enable new business models: we called it Web 2.0. It also started to produce tangible new behaviours among large numbers of people. It became normal to pay with plastic; normal to put your whole private life online for ever; normal to go online to get a payday loan at 1,000 per cent interest. 

At first, the exhilarating rush of new technology was taken as justifying all the pain we’d gone through to get free markets. The British miners had to be smashed so that we could have Facebook; telecoms had to be privatized so that we could all have 3G mobile phones. That was the implicit rationale. 

Above all, however, it was the change in human terms that was critical. The most vital component of neoliberalism – the individualized worker and consumer, creating themselves anew as ‘human capital’ every morning and competing ferociously with each other – would have been impossible without network technology. Sociologist Michel Foucault’s prediction of what it would make us – ‘entrepreneurs of the self’ – looks all the more visionary because it was made when the only thing resembling the internet was a green-screen network, owned by the French state, called Minitel.

The promise was that new technology would produce an information economy and a knowledge society. These have emerged but not in the form envisaged...

Mason, Paul (2016-02-09). Postcapitalism: A Guide to Our Future (pp. 23-24). Farrar, Straus and Giroux. Kindle Edition.

Awesome book. Replete with an enjoyable crash course re-review -- comrades -- of the salient elements of your Undergrad Econ survey courses' Marx, Engels, Trotski, et al, in addition to the Usual Suspects of classical, neo-classical, and neoliberal private market theorists (including the principal cadre of Austrian Scolds).

More Mason:

The thing that is corroding capitalism, barely rationalized by mainstream economics, is information. The equivalent of the printing press and the scientific method is information technology and its spillover into all other forms of technology, from genetics to healthcare to agriculture to the movies. 

The modern equivalent of the long stagnation of late feudalism is the stalled fifth Kondratieff cycle, where instead of rapidly automating work out of existence, we are reduced to creating bullshit jobs on low pay, and many economies are stagnating. 

The equivalent of the new source of free wealth? It’s not exactly wealth: it’s the externalities – the free stuff and wellbeing generated by networked interaction. It is the rise of non-market production, of un-ownable information, of peer networks and unmanaged enterprises. The internet, says French economist Yann Moulier-Boutang, is ‘both the ship and the ocean’ for the modern-day conquest of a new world. In fact, it is the ship, the compass, the ocean and the gold... [ibid, pp. 242-243].

But wait there's more...

...in an information economy, the externalities become the major issue. In the old world, economists categorized information as a ‘public good’: the costs of science, for example, were borne by society – so everybody benefited. But in the 1960s economists began to understand information as a commodity. In 1962, Kenneth Arrow, the guru of mainstream economics, said that in a free-market economy, the purpose of inventing things is to create intellectual property rights. ‘Precisely to the extent that it is successful there is an under-utilisation of information.’ [ibid, pp 131-132]

So, "transparency" is inimical to the "free market"? Well -- hello -- yeah. You need not even be a Nobel Laureate to get that. Opacity = Margin. How could it be otherwise? Ruminate on the fashionable Health IT cliche "Business Intelligence." 

You know stuff that others don't. Therein lies your (ever transitory) market advantage, your margin.

"Kenneth Arrow, guru of mainstream economics"

I dug around a bit. I'd made this comment on THCB that "we act like this stuff is news." Finally found an old PDF that I could screen-scrap.

It's a long read, full of catatonia-inducing economist jargon. 1963. I was a senior in high school when this was published. Medicare was still in the legislative oven. A Nobel-pedigree'd neoliberal no less, making the case that life may not in fact be reducible to "markets uber alles."

Introduction: Scope and Method
This paper is an exploratory and tentative study of the specific differentia of medical care as the object of normative economics. It is contended here, on the basis of comparison of obvious characteristics of the medical-care industry with the norms of welfare economics, that the special economic problems of medical care can be explained as adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment…

The interest in the competitive model stems partly from its presumed descriptive power and partly from its implications for economic efficiency. In particular, we can state the following well-known proposition (First Optimality Theorem). If a competitive equilibrium exists at all, and if all commodities relevant to costs or utilities are in fact priced in the market, then the equilibrium is necessarily optimal in the following precise sense (due to V. Pareto): There is no other allocation of resources to services which will make all participants in the market better off.

Both the conditions of this optimality theorem and the definition of optimality call for comment. A definition is just a definition, but when the definiendum is a word already in common use with highly favorable connotations, it is clear that we are really trying to be persuasive; we are implicitly recommending the achievement of optimal states.' It is reasonable enough to assert that a change in allocation which makes all participants better off is one that certainly should be made; this is a value judgment, not a descriptive proposition, but it is a very weak one…

The first step then in the analysis of the medical-care market is the comparison between the actual market and the competitive model. The methodology of this comparison has been a recurrent subject of controversy in economics for over a century. Recently, M. Friedman [15] has vigorously argued that the competitive or any other model should be tested solely by its ability to predict. In the context of competition, he comes close to arguing that prices and quantities are the only relevant data. This point of view is valuable in stressing that a certain amount of lack of realism in the assumptions of a model is no argument against its value. But the price-quantity implications of the competitive model for pricing are not easy to derive without major--and, in many cases, impossible-econometric efforts.

In this paper, the institutional organization and the observable mores of the medical profession are included among the data to be used in assessing the competitiveness of the medical-care market. I shall also examine the presence or absence of the preconditions for the equivalence of competitive equilibria and optimal states. The major competitive preconditions, in the sense used here, are three: the existence of competitive equilibrium, the marketability of all goods and services relevant to costs and utilities, and nonincreasing returns. The first two, as we have seen, insure that competitive equilibrium is necessarily optimal; the third insures that every optimal state is the competitive equilibrium corresponding to some distribution of income. The first and third conditions are interrelated; indeed, nonincreasing returns plus some additional conditions not restrictive in a modern economy imply the existence of a competitive equilibrium, i.e., imply that there will be some set of prices which will clear all markets…

The instance of nonmarketability with which we shall be most concerned is that of risk-bearing. The relevance of risk-bearing to medical care seems obvious; illness is to a considerable extent an unpredictable phenomenon. The ability to shift the risks of illness to others is worth a price which many are willing to pay. Because of pooling and of superior willingness and ability, others are willing to bear the risks. Nevertheless, as we shall see in greater detail, a great many risks are not covered, and indeed the markets for the services of risk-coverage are poorly developed or nonexistent…

The nonexistence of markets for the bearing of some risks in the first instance reduces welfare for those who wish to transfer those risks to others for a certain price, as well as for those who would find it profitable to take on the risk at such prices. But it also reduces the desire to render or consume services which have risky consequences; in technical language, these commodities are complementary to risk-bearing. Conversely, the production and consumption of commodities and services with little risk attached act as substitutes for risk-bearing and are encouraged by market failure there with respect to risk-bearing. Thus the observed commodity pattern will be affected by the nonexistence of other markets…

The failure of one or more of the competitive preconditions has as its most immediate and obvious consequence a reduction in welfare below that obtainable from existing resources and technology, in the sense of a failure to reach an optimal state in the sense of Pareto. But more can be said. I propose here the view that, when the market fails to achieve an optimal state, society will, to some extent at least, recognize the gap, and nonmarket social institutions will arise attempting to bridge it…

But it is contended here that the special structural characteristics of the medical-care market are largely attempts to overcome the lack of optimality due to the nonmarketability of the bearing of suitable risks and the imperfect marketability of information. These compensatory institutional changes, with some reinforcement from usual profit motives, largely explain the observed noncompetitive behavior of the medical-care market, behavior which, in itself, interferes with optimality. The social adjustment towards optimality thus puts obstacles in its own path.

The doctrine that society will seek to achieve optimality by non-market means if it cannot achieve them in the market is not novel. Certainly, the government, at least in its economic activities, is usually implicitly or explicitly held to function as the agency which substitutes for the market's failure…

A. The Nature of Demand
The most obvious distinguishing characteristics of an individual's demand for medical services is that it is not steady in origin as, for example, for food or clothing, but irregular and unpredictable. Medical services, apart from preventive services, afford satisfaction only in the event of illness, a departure from the normal state of affairs. It is hard, indeed, to think of another commodity of significance in the average budget of which this is true…

In addition, the demand for medical services is associated, with a considerable probability, with an assault on personal integrity. There is some risk of death and a more considerable risk of impairment of full functioning. In particular, there is a major potential for loss or reduction of earning ability. The risks are not by themselves unique; food is also a necessity, but avoidance of deprivation of food can be guaranteed with sufficient income, where the same cannot be said of avoidance of illness. Illness is, thus, not only risky but a costly risk in itself, apart from the cost of medical care.

B. Expected Behavior of the Physician
It is clear from everyday observation that the behavior expected of sellers of medical care is different from that of business men in general. These expectations are relevant because medical care belongs to the category of commodities for which the product and the activity of production are identical. In all such cases, the customer cannot test the product before consuming it, and there is an element of trust in the relation.' But the ethically understood restrictions on the activities of a physician are much more severe than on those of, say, a barber. His behavior is supposed to be governed by a concern for the customer's welfare which would not be expected of a salesman. In Talcott Parsons's terms, there is a "collectivity-orientation," which distinguishes medicine and other professions from business, where self-interest on the part of participants is the accepted norm…

…It is at least claimed that treatment is dictated by the objective needs of the case and not limited by financial considerations." While the ethical compulsion is surely not as absolute in fact as it is in theory, we can hardly suppose that it has no influence over resource allocation in this area. Charity treatment in one form or another does exist because of this tradition about human rights to adequate medical care.' (4) The physician is relied on as an expert in certifying to the existence of illnesses and injuries for various legal and other purposes. It is socially expected that his concern for the correct conveying of information will, when appropriate, outweigh his desire to please his customers…

C. Product Uncertainty
Uncertainty as to the quality of the product is perhaps more intense here than in any other important commodity. Recovery from disease is as unpredictable as is its incidence. In most commodities, the possibility of learning from one's own experience or that of others is strong because there is an adequate number of trials. In the case of severe illness, that is, in general, not true; the uncertainty due to inexperience is added to the intrinsic difficulty of prediction. Further, the amount of uncertainty, measured in terms of utility variability, is certainly much greater for medical care in severe cases than for, say, houses or auto- mobiles, even though these are also expenditures sufficiently infrequent so that there may be considerable residual uncertainty.

Further, there is a special quality to the uncertainty; it is very different on the two sides of the transaction. Because medical knowledge is so complicated, the information possessed by the physician as to the consequences and possibilities of treatment is necessarily very much greater than that of the patient, or at least so it is believed by both parties. Further, both parties are aware of this informational inequality, and their relation is colored by this knowledge…

E. Pricing Practices
The unusual pricing practices and attitudes of the medical profession are well known: extensive price discrimination by income (with an extreme of zero prices for sufficiently indigent patients) and, formerly, a strong insistence on fee for services as against such alternatives as prepayment.

The opposition to prepayment is closely related to an even stronger opposition to closed-panel practice (contractual arrangements which bind the patient to a particular group of physicians). Again these attitudes seem to differentiate professions from business. Prepayment and closed-panel plans are virtually nonexistent in the legal profession. In ordinary business, on the other hand, there exists a wide variety of exclusive service contracts involving sharing of risks; it is assumed that competition will select those which satisfy needs best…

D. Pricing
The pricing practices of the medical industry (see II.E above) depart sharply from the competitive norm. As Kessel [17] has pointed out with great vigor, not only is price discrimination incompatible with the competitive model, but its preservation in the face of the large number of physicians is equivalent to a collective monopoly. In the past, the opposition to prepayment plans has taken distinctly coercive forms, certainly transcending market pressures, to say the least.

Kessel has argued that price discrimination is designed to maximize profits along the classic lines of discriminating monopoly and that organized medical opposition to prepayment was motivated by the desire to protect these profits…

To recall what has already been said in Section I, there are two kinds of risks involved in medical care: the risk of becoming ill, and the risk of total or incomplete or delayed recovery. The loss due to illness is only partially the cost of medical care. It also consists of dis- comfort and loss of productive time during illness, and, in mole serious cases, death or prolonged deprivation of normal function. From the point of view of the welfare economics of uncertainty, both losses are risks against which individuals would like to insure. The nonexistence of suitable insurance policies for either risk implies a loss of welfare…

As a basis for the analysis, the assumption is made that each individual acts so as to maximize the expected value of a utility function. If we think of utility as attached to income, then the costs of medical care act as a random deduction from this income, and it is the expected value of the utility of income after medical costs that we are concerned with…

C. Problems of Insurance
1. The moral hazard. The welfare case for insurance policies of all sorts is overwhelming. It follows that the government should undertake insurance in those cases where this market, for whatever reason, has failed to emerge. Nevertheless, there are a number of significant practical limitations on the use of insurance. It is important to understand them, though I do not believe that they alter the case for the creation of a much wider class of insurance policies than now exists.

One of the limits which has been much stressed in insurance literature is the effect of insurance on incentives. What is desired in the case of insurance is that the event against which insurance is taken be out of the control of the individual. Unfortunately, in real life this separation can never be made perfectly. The outbreak of fire in one's house or business may be largely uncontrollable by the individual, but the probability of fire is somewhat influenced by carelessness, and of course arson is a possibility, if an extreme one. Similarly, in medical policies the cost of medical care is not completely determined by the illness suffered by the individual but depends on the choice of a doctor and his willingness to use medical services. It is frequently observed that widespread medical insurance increases the demand for medical care. Coinsurance provisions have been introduced into many major medical policies to meet this contingency as well as the risk aversion of the insurance companies.

To some extent the professional relationship between physician and patient limits the normal hazard in various forms of medical insurance. By certifying to the necessity of given treatment or the lack thereof, the physician acts as a controlling agent on behalf of the insurance companies. Needless to say, it is a far from perfect check; the physicians themselves are not under any control and it may be convenient for them or pleasing to their patients to prescribe more expensive medication, private nurses, more frequent treatments, and other marginal variations of care. It is probably true that hospitalization and surgery are more under the casual inspection of others than is general practice and therefore less subject to moral hazard; this may be one reason why insurance policies in those fields have been more widespread…

3. Third-party control over payments. The moral hazard in physicians' control noted in paragraph 1 above shows itself in those insurance schemes where the physician has the greatest control, namely, major medical insurance. Here there has been a marked rise in expenditures over time. In prepayment plans, where the insurance and medical service are supplied by the same group, the incentive to keep medical costs to a minimum is strongest. In plans of the Blue Cross group, there has developed a conflict of interest between the insurance carrier and the medical-service supplier, in this case particularly the hospital.

The need for third-party control is reinforced by another aspect of the moral hazard. Insurance removes the incentive on the part of individuals, patients, and physicians to shop around for better prices for hospitalization and surgical care. The market forces, therefore, tend to be replaced by direct institutional control…

5. Predictability and insurance. Clearly, from the risk-aversion point of view, insurance is more valuable, the greater the uncertainty in the risk being insured against. This is usually used as an argument for putting greater emphasis on insurance against hospitalization and surgery than other forms of medical care.

6. Pooling of unequal risks. Hypothetically, insurance requires for its full social benefit a maximum possible discrimination of risks. Those in groups of higher incidences of illness should pay higher premiums. In fact, however, there is a tendency to equalize, rather than to differentiate, premiums, especially in the Blue Cross and similar widespread schemes. This constitutes, in effect, a redistribution of income from those with a low propensity to illness to those with a high propensity. The equalization, of course, could not in fact be carried through if the market were genuinely competitive…

3. The concepts of trust and delegation. In the absence of ideal insurance, there arise institutions which offer some sort of substitute guarantees. Under ideal insurance the patient would actually have no concern with the informational inequality between himself and the physician, since he would only be paying by results anyway, and his utility position would in fact be thoroughly guaranteed. In its absence he wants to have some guarantee that at least the physician is using his knowledge to the best advantage. This leads to the setting up of a relationship of trust and confidence, one which the physician has a social obligation to live up to. Since the patient does not, at least in his belief, know as much as the physician, he cannot completely enforce standards of care. In part, he replaces direct observation by generalized belief in the ability of the physician." To put it another way, the social obligation for best practice is part of the commodity the physician sells, even though it is a part that is not subject to thorough inspection by the buyer.

One consequence of such trust relations is that the physician cannot act, or at least appear to act, as if he is maximizing his income at every moment of time. As a signal to the buyer of his intentions to act as thoroughly in the buyer's behalf as possible, the physician avoids the obvious stigmata of profit-maximizing. Purely arms-length bargaining behavior would be incompatible, not logically, but surely psychologically, with the trust relations…

Postscript
I wish to repeat here what has been suggested above in several places: that the failure of the market to insure against uncertainties has created many social institutions in which the usual assumptions of the market are to some extent contradicted. The medical profession is only one example, though in many respects an extreme one. All professions share some of the same properties. The economic importance of personal and especially family relationships, though declining, is by no means trivial in the most advanced economies; it is based on non-market relations that create guarantees of behavior which would otherwise be afflicted with excessive uncertainty. Many other examples can be given. The logic and limitations of ideal competitive behavior under uncertainty force us to recognize the incomplete description of reality supplied by the impersonal price system.

OK, the point? Why does any of this dense tangential crap matter? Because ten years out it's overwhelmingly unlikely that health care will be "essentially free." Health IT and the gushing pronouncements of Singularity University notwithstanding. Health care is likely to continue to comprise a huge and growing segment of GDP, most of it transacted within (and priced by) the fractious capitalist system. Asymmetries of economic power (exacerbated by ongoing information opacity) will likely remain in the driver's seat.

MORE PAUL MASON

It can be a shock to find out capitalism has not always existed. Economists present ‘the market’ as the natural state of humanity. TV documentaries re-create in fantastic detail the Egyptian pyramids or Beijing under the emperors, but gloss over the totally different economic systems that built them...

When you realize that capitalism, once, did not exist – either as an economy or a value system – a more shocking thought arises: it might not last for ever. If so, we have to get our heads around the concept of transitions, asking: what constitutes an economic system and how does one give way to another? 

In the preceding chapters I’ve shown how the rise of information technology disrupted the basic institutions of capitalism: price, ownership and wages. I’ve argued that neoliberalism was a false dawn; that the post-2008 crisis is the product of flaws within the economic model which prevent the exploitation of new technologies, and the takeoff of a fifth long wave. [Mason, op cit, p. 217]

____________

More to come...