Sunday, August 26, 2012

Profit Incentives, Disruptive Technology, and Reducing Health Care Costs


Medical care is famously immune to the usual market incentives; the patient has little reason to make a cost-benefit tradeoff. Doctors and hospitals hardly do either; indeed the opposite seems to be the case. Matters are made all the worse, ironically, by the continual improvements in medicine – improvements which often treat what was previously untreatable, and which improve on existing treatments but at a higher cost.

This is particularly true in the case of life threatening illnesses. The use of co-payments for self-rationing is considered unethical if it allows only those with adequate means to survive. Yet if we are to get control of medical costs, we need to find ways to deal with these, for they make up a significant portion of our medical costs. This is even more the case for terminal illnesses and end-of-life treatment, which are a significant component of the exploding health care costs and the related strain on medical entitlements. The cost of medical care in the last year of life due to terminal illness or decline makes up a third of medical costs. Given the increase in medical costs over time, expenditure for end-of-life care is poised to become as high on average as the total cost of medical care for the preceding portion of life.   

Cost Containment through Economic Incentives
In cases of life and death, only the patient can make the decision of when to terminate aggressive care. And right now those decisions are not made on the basis of economics. Here is a proposal to put economic incentives in place; to keep the decision for care firmly in the hands of those receiving it while adding an awareness of the economics of health care into their personal decision process:

  1. Lay out for the patient the possible modes of treatment along with the estimated cost until death if each of those courses of treatment is taken. The cost includes not only the specifics of the treatment, but the associated costs of care. Obviously a treatment that has the patient hanging on for a year in and out of intensive care will cost more in total than one where the patient has nothing more than palliative care and dies in a month or two.
  2. The patient receives a lump sum payment equal to some fraction of what is saved if he or she pursues a course of treatment with a cost lower than the highest cost allowable treatment. The payment can be assigned to their spouse, children or any other designee; this makes sense for the terminally ill, given that they are not going to have much opportunity to enjoy this windfall.
  3. The recipient pays taxes on the payment, so in an indirect way a portion of it is returned to the system. (In this proposal I am primarily thinking of Medicare).

The total savings will be based on the difference between the cost of the alternatives, the fraction of the difference the patient receives adjusted by the tax rate, and the decisions of the patients based on these incentives.

This incentive structure may be easier to understand in the context of terminal illness and end-of-life care because the costs are high, the quality of life is often low, the benefit of various courses of treatment can be more tightly defined than for curable illnesses. And it is here that outside interference in denying quality medical care is most charged. But the same approach conceptually can apply more broadly as well.

Cost Containment through Disruptive Technologies
There is a benefit to the health care system that comes from this sort of incentive structure that over time may be even more important for containing health care costs. As things stand right now, there is a limited prospect for a new, less expensive treatment to be developed if it provides a notably lower probability of success than the standard and more expensive treatment. That is, suppose researchers come up with a new treatment that has a 20% probability of adding six months to the patient's life and that costs 10% as much as the standard treatment, where that standard treatment has a 40% probability of adding six months to the patient's life. (All else equal in terms of side effects, etc.). The new technique may never see the light of day. With no price incentive on the part of the patient, who will pick a 20% success rate when another gives 40%?

But suppose that with this incentive in place the patient or his children might receive half a million dollars from choosing the cheaper approach. There will no doubt be some patients who are willing to take the tradeoff for the benefit of their spouse, children or other designee. Thus this new treatment will be put into the system – assuming the FDA goes along.

This is important because it is a way new, disruptive technology will enter into the medical system. The classic example of disruptive technology entering the system is in the steel industry. As Clayton Christensen has pointed out, mini-mills came to dominate the steel industry by starting in the lowest margin, lowest quality steel product, rebar, and then over time the mini-mill technology advanced, and the mini-mills rode up the quality curve until they absorbed the steel industry at overall savings to the consumers.

As it stands now, there is no equivalent for rebar in the medical field; there is no equivalent for the low quality steel where the disruptive technologies can cut their teeth. No substantially lower cost/lower quality treatment will be taken, or for that matter, permitted. In having the profit motive added to the process, these disruptive technologies can take root. The low quality process that starts off in rebar-land, with half the success rate but half the cost, might over time move up the quality chain to being of an equal success rate at a tenth the cost. Right now some of these technologies might stay funded in the lab until they get to that point, but many will not.

Thursday, August 23, 2012

Will the Unemployed Really Find Jobs Making Robots?


There is a recent story in the New York Times on the growing use of labor-saving robots to increase production efficiency and, by replacing low-cost overseas labor, to return production to our shores. But the operative term here is “labor saving.” They return production to our shores, but given that they do so by replacing the low-cost foreign labor with machines, it opens up the question of the implications for employment once the production returns. If the robotic revolution is successful, will all the unskilled laborers that are being replaced move up the chain into more skilled and higher paying jobs? Or will they simply be replaced?

This is a critical question right now, because it is at the center of whether the high level of unemployment is structural rather than cyclical. By the time the dust settles on the cyclical component, we may discover we are looking into a growing chasm of labor-lite production.

In some cases, replacing human labor with robots may be a good thing all around. Take the development of robotic warehouses. Warehouse packing is the sweatshop job of our time. The article “I Was a Warehouse Slave” gives a day-in-the-life view of these workers, effectively paid for piece-work, without benefits, with one-day notice job security, in physically grueling conditions. (The warehouse workers are usually employed by temp agencies that act as what I would call “labor launderers”, a buffer between the sub-par conditions of the workers and the image of the company that uses them).

There are a number of companies now that provide robotic solutions for many of these jobs. One of them, recently acquired by Amazon, is Kiva Systems. I first saw what their robots can do at a Wired Conference a few years ago. Check out this video from that conference, or any number of other ones on their robots. It is amazing and entertaining. Another company in the same space is the start-up Symbotic, but they don't seem to have any cool videos out yet.

The problem, of course, is that a sweatshop job might be better than no job at all. So what do these workers do next. This is where the “Well, someone will have to make all those robots” sort of refrains begin. From the New York Times article: “Robotics executives argue that even though blue-collar jobs will be lost, more efficient manufacturing will create skilled jobs in designing, operating and servicing the assembly lines, as well as significant numbers of other kinds of jobs in the communities where factories are. And robot makers point out that their industry itself creates jobs. A report commissioned by the International Federation of Robotics last year found that 150,000 people are already employed by robotics manufacturers worldwide in engineering and assembly jobs.”

Well, common sense tells you that you don't replace five $30K-a-year workers with a $250K robot only to reemploy those five workers in other, higher-paying jobs to build and maintain the robots that just replaced them. There will be skilled jobs in designing, operating and servicing the assembly lines. But obviously not as many jobs as the robots replace, and, taking nothing away from the potential for retraining, most likely not to be filled by the unskilled workers who just lost their jobs.

We have a ingrained view that when one door for labor demand closes, another one opens, that the march of economic progress pushes the workers along with it. It has happened in the past, and in a spectacular way. For example, the industrial revolution came about by the efficiencies that reduced the need for labor in agriculture, freeing up labor for industry. The push of the unemployed and disenfranchised from the farms into the factories was critical for the industrial revolution because at the outset the industrial jobs were not attractive enough for those in agriculture to leave their land and move into the factory system voluntarily. The same has continued over the course of the industrial age. As industry after industry developed efficiencies of production that reduced the need for unskilled labor, new jobs opened up either because of new skills being required to deal with new manufacturing methods, because the raw demand for consumption expanded the labor demand, or because new products, even new industries arose.

But it doesn't always have to happen that way. Where do the displaced workers go this time around? To say that they will move up the chain and go into more skilled jobs building the robots is glib. The entire point is that the robots are labor saving. It certainly is not a good business proposition if they save on the cheap labor but pay out more for more skilled labor.

Whatever analogue there is to the Industrial Revolution, workers do not play much of a role in it. It is interesting that u to this point much of the displacement from computers has been in the mid-level jobs, like bookkeepers. These medium skill jobs that focus on rote but quantitive tasks are the easiest for a computer to do. Replacing workers doing relatively unskilled, manual tasks is actually more difficult. But the rubicon is being crossed. For example, Meyakawa Manufacturing is shipping robots that can debone chickens at the rate of 1,500 per hour, replacing ten human workers. As one commentator put it, “if you can do that, you can do most anything.”

Sunday, August 12, 2012

Return Pankration (a.k.a. Mixed Martial Arts) to the Olympics


Of the sports in the ancient Olympics, there is one that remains absent from the modern Olympics: Pankration. Pankration, which means “all strength”, is a combat sport which is a combination of boxing and wrestling; indeed, it permits all fighting techniques. What is essentially pankration does exist as a sport today outside of the Olympics. It began in Brazil as vale tudo, Portuguese for “anything goes”, and now is called mixed martial arts (MMA). It dwarfs boxing in popularity. Its most active promoter, the UFC, has filled arenas throughout the US (except, surprisingly, New York), and has extended to events in Japan, Ireland, Canada, Australia, Brazil, Germany, Abu Dhabi, and Sweden.

MMA had a poor start in the U.S., decried by John McCain as “human cock fighting.” But whatever its past, it is now a carefully refereed sport with rules to protect the athletes, who wear gloves and are barred from dangerous techniques. Despite its reputation, MMA does not have the brutality of boxing. In boxing a fighter might sustain hundreds of blows to the head; even if he is knocked senseless, even if he sustains a concussion in the process, he will continue to absorb rounds of punishment after the respite of an eight-count. With MMA, if a blow stuns the opponent, rendering him even momentarily defenseless, the contest is over. And more often than not, if it fails to go the distance it ends not though strikes but through a submission, where an arm lock or a choke hold leads the opponent to “tap out” before damage is done.

I bring up the idea of returning Pankration to the Olympics for three reasons.

First, the roots of modern Pankration lead back to Brazil, as do the roots of one of the two key disciplines behind MMA, Brazilian jiu jitsu. (The other is Thai kick boxing). So the Brazil Olympics is a natural time to return the sport to the games.

Second, having an “anything goes” sport is a natural given that we have most of the raw ingredients peppered throughout the Olympics today. Among the combat sports in the Olympics is one where you can strike only with your hands, and another where you can strike only with your feet. With both, if you end up in a clinch you are separated. Then there are other combat sports where the contest begins once in a clinch, but where no strikes are permitted (Greco-Roman and freestyle wrestling, and Judo).

And, third, do I dare mention that the state of combat sports in the Olympics is pathetic? All of these sports are highly stylized, in some cases to the point where their combat origins are obscured. The scoring system for boxing and tae kwon do has turned them into little more than games of tag, with the athletes wrapped in padding, with the power of a strike almost incidental to the outcome. (Which gets to another question: how did tae kwon do end up elevated from being a demonstration sport? Or did it? If you compare what goes on in the competition versus in an academy, you would never guess there was a connection).

There are two problems with bringing MMA into the Olympics. The first is that having multiple matches in a few days is difficult in a sport that is so physically grueling. The rules should be modified to reduce the risk of injuries that might keep the victor from being able to continue with future matches by, for example, not allowing elbows to the head, and by having a small field admitted to the Olympics, so perhaps there would only be two or three preliminary matches. The second is that the very top fighters might not want to bypass a big payday in order to compete for an Olympic gold, any more than you would likely see Manny Pacquiao or Mayweather entering the Olympic ring if boxing eliminated its amateur-only restriction. (An amateur-only restriction would not fare well for MMA, because most all of the high level athletes have fought professionally).