The Invisible Hand Has Arthritis: Why Free Market Capitalism is not a Panacea for U.S. Health Care

Running a health care service business is hard. Very hard. It is real-world and messy. It is a man with no insurance and a heart attack on your doorstep. It is an elderly woman who arrives senile with a broken hip and no caretaker. All of the clean simplifying assumptions written on the chalkboard at the start of my economics classes (perfect information, infinite buyers and sellers, rational players, elastic curves, a lack of externalities, homogeneity of goods or services) simply don’t apply to medicine.

Below are some useful considerations:

·         Externalities & the Common Good: Libertarians argue that if a person can’t afford health care, they shouldn’t receive it. However, U.S. society does not seem prepared to turn away the desperately ill. The Emergency Medical Treatment and Active Labor Act (EMTALA) requires most US hospitals to provide care to anyone needing emergency treatment regardless of citizenship, legal status or ability to pay.^1,2 Similarly, community hospitals can be considered a “public good”, which should fall outside of traditional market forces.

·         Perfect inelasticity of demand: Health Care is often life and death and demand curves become perfectly inelastic (straight up and down). How can you put a dollar amount on someone’s life? When you or a loved one is in the hospital, rationality is thrown out the window as fear takes hold. This reality, combined with a limited amount of suppliers, puts dramatic upwards pressure on prices.

·         Risk-pooling and third-party payers: The third-party payment system arose to pool catastrophic health care risk amongst many consumers. Now, the consumer (i.e., the patient) is not the payer (i.e., the insurance company) and the employer usually sits between the two. The relationship hinders price transparency, i.e. the relationship between subsidized premiums paid by patients and cost of services provided by hospitals & physicians.³

·         Physician/Hospital fiduciary duty: In most industries, the payer for and provider of a service agree to price ahead of time. Not in health care. Physicians and hospitals have a fiduciary duty to *rapidly* decide what and how many services to provide while ultimately receiving a financial reward for those services and potentially incurring legal liabilities if they miss something.⁴

·         Medicine is not a commodity: Medicine is complicated. It is not like drycleaning or babysitting or getting your car fixed. It is constantly advancing and certainly not a commodity. All patients have unique issues and, while there are standard treatment protocols, doctors have to quickly use their discretion and judgment at all times.

·         Lack of perfect competition: On the one hand, the government is a quasi-monopolistic buyer. Private payers often follow its lead. On the other hand, due to high infrastructure and licensing requirements, many US towns only have one or two hospital networks to supply services. There simply aren’t thousands of payers and providers driving marginal cost to equal marginal revenue, nor is there the time or inclination to shop around.

These are a few of the ways in which the simplifying assumptions of free market capitalism do not apply to health care. There are many others and they all interact with each other. The business of medicine is complicated. The better the BioPharma, Med Device, and Health Care IT industries understand this, the more likely they can all work towards driving efficiencies into and waste out of the health care system.  

Notes:

¹ http://en.wikipedia.org/wiki/Emergency_Medical_Treatment_and_Active_Labor_Act

² However, often no one reimburses hospitals for many of the related costs – it is essentially an unfunded government mandate. Many hospitals write off such care as charity or bad debt for tax purposes. Besides causing some hospitals to go bankrupt, this law has led to cost-shifting and higher rates for insured hospital patients. There are, in some cases, funds form the city or county to remunerate hospitals for indigent care. Many times these funds do not come close to completely covering the deficit. Also, not for profit hospitals have to do a certain amount of charity care to qualify for their tax exempt status. 

³ Consumer-directed health plans aim to ameliorate this situation.

⁴ This is why insurance companies often pay hospitals fixed DRG payments for a given diagnosis regardless of the actual cost of treatment to the hospital. This results in a large administrative effort to prove after the fact that the services they provided were appropriate and necessary.

Related links:

http://krugman.blogs.nytimes.com/2009/07/25/why-markets-cant-cure-healthcare/

http://e.viaminvest.com/B12Methodology/PosEcon/Table_3ExamAssumptions.asp

http://www.cdc.gov/ncidod/eid/vol7no2/scott.htm

http://www.sph.umich.edu/vbidcenter/publications/pdfs/jama1207.pdf

http://econlog.econlib.org/archives/2009/07/what_makes_heal.html

http://insureblog.blogspot.com/2009/06/economics-of-health-care.html

http://healthblog.ncpa.org/is-health-care-different/

http://www.davidhilfiker.com/docs/Economics/Constitutive%20Rules.htm

A Fish Out Of Water?: A Biotech Investor At A Mobile App Hackathon

At first (and second) glance, the worlds of biotech and mobile app development seem to mix like oil and vinegar. What do kinases, IFNs, GPCRs, RT-PCR, SNPs, DRGs, NDA, and 510K have to do with HTML5, JAVA, API, UI, WYSIWYG, Freemiums, 3G, and the Cloud? The two worlds seem polar opposites and seemingly attract people with distinctly different personalities, backgrounds, and ambitions.

·         Biotech is a steady, capital-intensive, IP-reliant industry with a fixed business model (increasingly high price/low volume), high regulation, and risk primarily dependent on technical not commercial success. Participants are used to ten or more years from product conception to commercialization.

·         Mobile App development, by contrast, is a relatively brand-new, rapid-fire, low cost industry with endless novel business models (trending towards low price/high volume), currently low regulation, and risk primarily dependent on consumer adoption. Time from product concept to commercialization could be days.

As someone who has spent the last seven years immersed in the business of biotech, I view the world of Mobile App Development with some trepidation. It seems too good to be true. In contrast to biotech, which appears to be on the flattening phase of its growth curve, Mobile Apps are the Wild West with ample room for exponential growth. Can it be real?

I decided to attend a local Mobile App Hack-a-thon sponsored by AT&T to learn more (http://mobileappsd.eventbrite.com/). The event was described as follows:

Mobile App Hackathon is an event for mobile developers to come together, network, learn about new technologies and build mobile apps. A full day of coding, drinks, food and snacks and fun contents with prizes across categories. Meet new people and teammates, start projects and work on existing ones, and learn from short talks on technologies and trends that can help you build better apps. 

Sounds great, except I know nothing about coding or developing. I built my website with a WYSIWYG (What You See Is What You Get) software program and only recently started to use Twitter and Blogger (for which I was very proud of myself). When I showed up at the event on a Saturday morning, I felt like a fish out of water.

My worries were quickly overcome, however, by the casual, open, and positive energy of the event. It turns out, by a show of hands, that many people there didn’t know how to code. Red Foundry, which has a web-based WYSIWYG App Developer Program, even gave a presentation for the non-coding App Developer (http://redfoundry.com/). In addition, plenty of expert App Developers at the event wanted to work with non-developers with good ideas for Apps. There was room, need, and even hunger for brains – not only those with HTML5 knowledge.

The next Friday, I visited ansir innovation (AI) center, a local tech accelerator with co-working space (http://aicenterca.com/), for their “Hackaway Friday” event – advertised as a casual, all-day coworking event especially for entrepreneurs and startups. Again, I felt like a biotech infiltrator who would illicit an immediate immune response from the nest of techies. Again, I was wrong. The group was casual, welcoming, and smart with a lot of positive energy and intellectual curiosity.

The moral of the story, and the point of this blog, is to encourage the biotech and other communities to get involved with the mobile one. One year ago, when a senior biotech executive encouraged me to consider software applications, I answered, “but I know nothing about that”. In reality, there are plenty of smart, casual, intellectually curious people who do know coding/developing and are eager to partner with people with good business ideas. It is yet to be seen whether mobile will live up to the hype, but I see no reason why it will not. With the biotech and other industries in a temporary (and potentially permanent) slump, it seems like a good time for biotech brains to pivot into the mobile world.  

The Digitalized U: The U.S. Health Care Consumer of 2026

What will the digitalized U.S. health care consumer of 2026 look like? Fifteen years from now, several currently emerging trends will have had time to mature, converge and disrupt the U.S. health care ecosystem, including mobile connectivity & mHealth, social media & electronic health records (EHRs), genomics/proteomics & diagnostics, consumer-controlled healthcare & insurance reform, and, not unimportantly, the rise of the BRIC countries. The system of levees and dams that currently controls and constricts innovation in the U.S. health care industry, (i.e. HIPAA, FDA Regulation, Medical Malpractice, Third-Party Payment System, Cultural Mores, Medical Paternalism, etc.), will find itself overcome by a surge of digital technology, consumer (a.k.a. voter) demand, a loosening of disease stigmas, Medicare & Medicaid cut-backs, an aging population, and a drastic need for improvement in system efficiency.  A generation of individuals raised on the internet with easy access to information, a culture of openness & sharing, and a consumer-focused economy will become middle-aged and demand more control over their own health and that of their parents. 

·         Mobile Connectivity & mHealth: The mobile health revolution is underway. Consumers are already psychologically connected to their iPhones, so a physical connection seems inevitable. mHealth will allow for continuous capture of clinical data in the home and mobile setting, an innovation which will dramatically change the treatment of chronic conditions and general health.  Sensors of all abilities will flood the market by 2026, and we will use wireless patches and implants along with environmental sensors to monitor our every biodigital datapoint, e.g., heartbeat, net calorie consumption, temperatures, insulin levels, blood pressure, brainwaves (yes, some basic thoughts), mood, stress, cholesterol levels, infections, protein-expression levels, etc. Cyborgs, here we (be)come.

·         Social Media & EHRs: The Web 2.0 revolution will be a distant memory and Web 3.0 will be underway. Compiling and utilizing international databases of consumer health care data will be considered second-nature. Population statistics applied to this data will reveal novel understandings about disease etiology & response to treatments. Clinical study implications will change the face of drug development, clinical use, and reimbursement. Social stigmas for many diseases will be reduced as a clearer picture of epidemiology and open discussion of symptoms emerges.  

·         Genomics/Proteomics & Diagnostics: A large percentage of the U.S. will have their genome sequenced, housed within global population databases, annotated for phenotype, and analyzed for revelation of new promoters, genes, SNPs, etc. Similarly, advances in microfluidics and proteomics will allow for the monitoring of a variety of protein expression signatures over time and an understanding of their association with disease. Diagnostics in general will be more accurate and ubiquitous, with OTC access. The medical profession will be incentivized to put much more emphasis on prevention vs treatment, with major implications for the drug industry.  

·         Consumer-controlled Healthcare & Insurance Reform: “Patients” of today will become the “Consumers” of tomorrow who utilize consumer driven health plans and are culturally open to out-of-pocket payments for health monitoring and preventative therapies. Instead of brick-and-mortar doctor’s offices and hospitals, health care will take place at home, in retail stores (Walmart, Walgreens, Brookstone), and online (Amazon, iTunes App Store, SaaS sites), etc. Health care consumers will take more control over their treatment plans and medical paternalism will give way to doctor-patient partnerships.

·         Rise of the BRIC Markets: India and China will be more dominant forces with innovation economies of their own. Their lower barriers to market will drive initial launches of new health care innovations outside of the U.S., with obvious successes influencing the U.S. market. The interconnectivity of the internet and digital information will allow for international human health & biomedical databases and an arbitrage on conducting research in those geographical markets with lower regulatory hurdles and more fundamental health care needs (with resulting ethical concerns).  

How the process will play out over the next 15 years remains a question, but the end result described above seems clear. Big, successful, profitable, transformative health care companies will exist in 15 years that are only glimmers in someone’s mind today. Stay tuned.