The Professor's Notes

The connectedness of… a newly selected nominee to the US Supreme Court, the abortion issue… Arizona immigration law… and a Pennsylvania tax amnesty commercial?

Privacy.  PRIVACY.  The RIGHT to PRIVACY.  Do you believe we should have a right to privacy?  Should we expect that our government will allow us to live our lives without surveillance, free from the need to check, to constantly look over our shoulders to see who from the government is watching?

As always the world is full of events occupying our time and driving the news.  And, as is usually the case, each story is presented in isolation.  Rarely does anyone discuss the connectedness of the stories or their implications.  Often, that means little, but occasionally the disconnectedness points to the dissonance in government when agencies pursue their agendas.  Once in a while the opportunity arises from this to view the conflict in “generalizable principles” that drive our government’s behavior. Read the rest of this entry »

In the last post I wrote about the perversions of incentives that cause the problems in the health care system.  Let me point out that it’s not that we are behaving irrationally.  We are behaving completely rationally–given the situation we face.  It’s that the situation (the “help” we are getting) encourages bad decisions that drive up costs.

So now we face  the BIG PROBLEM.

By shifting to a policy where everyone is now to be insured, we open the floodgates of demand (okay, a bit much. But we certainly will allow millions more in.) Demand for services will increase. So it would make sense that prices would increase to balance out the demand (remember Econ 101, all else equal, in the near term an increase in demand will result in an increase in price. In the long term it should result in an increase in supply, as the market responds to the increased demand for the product).

Will we see prices increase? Not for the consumer–they are capped at the Co-pay. And now we are seeing pressures to not raise prices from the supply side (and the insurance companies will be SHOT if they raise rates significantly).

So what happens now? If prices cannot go up, then demand will remain (unrealisticly) high. Unrealistic in that demand is acting free of the market place.

With demand high, and the inability to increase prices we will see no real “benefit” to more providers entering the marketplace.

More to the point, even if we could see more providers enter the market there are significant barriers to entry. Consider the medical field:

1. Doctors must go through extensive training, and then licensing (not to mention the fact that they never really get it right–so must keep “practicing”)

2. medicines must be approved after rigorous testing, and their labs must be approved, and so forth.

3. Various other licensing and authorizing are in place for therapists, assistants, nurses, and the like.

Supply cannot respond quickly, and with a rising demand and supply unable to keep up, and with no pricing mechanism to regulate the demand we will face:

Shortages of service resulting in long waiting lines/delays.

And how do you deal with shortages? Since the market forces are not allowed to work, we are left with the government stepping in, once again, to fix the mess of it’s own making. They will have to “ration” care.

Sorry–it’s a fact. In every nation that has shifted to “socialized” they have faced shortages, lines and rationing.

It’s not something we can “do better.”

It’s economics.

Okay, here’s another problem, since spend way too much time talking about the mandate… let’s talk basic economics.

The whole initiative is predicated on a few arguments:

1. Costs (prices) are too high.
2. Insurance companies are “making too much money”
3. Millions of people don’t have access to care
4. The Health Care people are receiving is poor (oh, wait, it’s not about the actual care…)

So let’s tackle this. The basic problem now comes down to a discussion of supply and demand/economics.

As the system currently works we have two sets of perverse incentives fighting against the consumer (and one of these incentives takes place with the willing, yet unknowing, assistance of the patient)

First, the perverse incentives of the patient:

Currently, the “cost of entry” into the health care system is high (monthly “Insurance” rates) but thanks to low, or no, co-pays, the marginal costs of most health care transactions are quite low.

Given the low costs incurred per visit, and the high “sunk” costs incurred to enter the system, the insureds (patients) who HAVE insurance are incented to go to the doctors more frequently, and to go ahead and get the prescriptions (Hey, it’s only $3 copay at Wal*Mart!)

Of course, this is a mirage. The actual costs of each visit and each prescription are borne by the insurance companies, which then have to recover their costs through increased premiums, which of course has everyone screaming that the insurance companies are “gouging” the customers.

On the other hand, we have a set of pricing incentives that also conspire against the consumer. The ‘care providers” are aware that the patient/customer doesn’t see the actual costs–they only pay the co-pay. So given this we have a series of perversions that are at play:

1. Doctors are more able to prescribe tests/medicines, and the like, since they will receive little if any push-back from the patients because of costs. More services with a low marginal cost to the consumer/patient, but a higher total cost, paid by the insurance companies.
2. Insurance companies work to lower their costs by negotiating to pay health care providers a fraction (some value less than 1) of the billable rate. Thus the providers are incented to increase their prices the maintain their revenue stream. This increases the costs once again.

So these two twists to the problem work once again to force the insurance companies to have to raise the rates (really on everyone) to cover the payments they are having to make.

Now–as consumers, we see that we are paying a high “sunk cost” as a monthly fee and, rather than view this as traditional insurance (where I am betting against myself) the consumer wants to try to get at least that benefit back out of the “system” (and is encouraged to do so, by “low co-pays”)

Sadly, the whole mess was brought on by our desire to protect everyone and provide some level planning to health care. The “free market” actually would provide better incentives here, placing limits/governors not only on how much people are willing to spend on services, but the prices that people would have to pay. If service providers want to stay in business then they would be forced to price competitively based on the market, and the market would be making the decisions based on the consumers. As it stands now, with the “same co-pay regardless” the consumer has no indication of value, and the market cannot respond. Viagra is as valued as Interferon and as Motrin.

What to do when everything costs the same?

Let the experiment begin.

I am not alone in my expectation that the Health Care (insurance) reform will not improve Health Care (it won’t make bad doctors good ones, for instance) and it won’t improve access since lower prices have that pesky effect of increasing demand–in a field where the barriers to entry for suppliers are significant.

I will say this:  Welcome to the new “Grand Experiment.”  If it succeeds, then by all means celebrate (but could we get a good solid definition of success on which we can all agree?)  But (and this is significant) if it fails, how many will have died as part of the experiment, and will we ever be able to recover?

One final note:  As researchers we have to seek, and get, informed consent from human subjects before we can experiment on them.  Did you get the forms?

Writing as an academic, I desperately want to get my hands on (the demand data for) the iPad.  Specifically,  I wonder about the “pre-order” demands that have been placed.

I am not writing this as a “hater” or critic of the iPad.  I just would love to see if the demand spiked on the first day and dropped precipitously, or whether the demand over the 21 days prior to shipping stayed relatively constant, or even ramped up as we approached the 3rd of April.

Here’s what I wonder:  people who are early adopters, and the first to get in line and wait for days for a new product, are by all anecdotal evidence I have heard the ones who pre-order, and pre-ordered on the first day they could.  And in the case of my brother, ordered it as soon as the Apple Store made it available.

If my supposition is true, then the demand for pre-ordered items would have been heavily front-loaded.  Conversely,  I would find it quite interesting if demand for the iPad through pre-ordering had any sort of ramping to the demand pattern.  If the demand was increasing, then the big question of the day would be:  Why?

The next question is are the people who would normally stand in line to get the next “really cool product” the same who would want to pre-order right away (and thus reduce or eliminate lines at the stores) or is the psychology of waiting in line for a “cool new product” palpably different from the psychology of “getting” it?

Anyone have any thoughts or insights into this?

I was struck yesterday by the word choice that was presented when AT&T’s executive announced that they are “considering incentives to get consumers to reduce their data usage.” (See the story “AT&T Considers incentives to curb heavy data usage“)

What sort of incentives could they be talking about? And why choose that word?

Well, the last point is obvious.  The definition of incentive (by most dictionaries) is to encourage or motivate to action.  These are all “positive” words.  Things that make us shake our head in the affirmative. “Ahhh… incentives. Nice.”

We usually see these as pay bonuses, time off, gifts.  Additional “things” that would encourage us to do a bit more.

Of course, that isn’t what AT&T is thinking.  In this case AT&T is going to try to come up with some way to get people (their customers) to stop using a service they provide–most likely the service offering that led them to AT&T and the iPhone in the first place! AT&T is looking to “consider new pricing models to curb users’ data usage as it tries to keep up with growing demand.”

What pricing model would “encourage” you to use less of something you currently consume and enjoy?  I think this is obvious–AT&T is going to charge you more.  So the incentive here is a negative one.  ¹

What is perhaps even more interesting is this (and I will leave you with this thought):  AT&T isn’t saying “We realize you like using our product and our product is in high demand and thus we will increase the price and generate greater profits for our shareholders.”  They are saying “We realize you like using our product, but we don’t want you to, so we are going to raise the price so that you stop using it.”

Tell ya what AT&T, when my contract runs out, how about I reduce my data consumption to zero.  The Droid sure is looking better every day!

The New York Times has the story, Broadband Now! So Why Don’t Some Use It? where they ask the question “Why not?”

So for those that have been listening to our podcast Real Tech for Real People, we have talked quite a bit about the numbers of people that don’t have high speed (broadband) internet access.  We have been reporting the numbers we had previously read that had anywhere from 40-45% of the population does not have access.

Okay, I am confused. FCC says 96% of households have, or have access to, broadband.

“No less than 96 percent of households either subscribe to or have access to broadband service, according to an F.C.C. task force, which presented a status report to the commission last month.” (see commission report here)

The article reports that the task force goes on to report that:

• median speed is 3 megabit/second ¹
• 1/3 of households “choose” to not subscribe Read the rest of this entry »

In my last post, I put forward my argument for how digital textbooks can result in a win-win for publishers, students and authors. (Okay, so I didn’t mention the authors. I hope it doesn’t take much to realize that more copies sold by the publisher will result in more royalties paid to the authors. )

Part of my argument hinged on the elimination of the resale market in large part due to the robust DRM (copy protection) afforded by the digital books.  Unfortunately, when I presented this argument a few weeks ago, someone pointed me to a site that shared the (convoluted) steps necessary to break the DRM on the Kindle.  So much for secure. ¹

This forced me to think a bit further.

In this post, I hope to make a case for reasonably priced digital textbooks in an era of “cracked DRM” that can still result in a win-win. Read the rest of this entry »

Those who know me personally know I have a strong desire to see digital textbooks succeed.  I think it has the potential to deliver a Win-Win for most of the major stakeholders, including the authors, the publishers, the environment (potentially) and the students.¹ Perhaps the biggest challenge facing everyone in this is how to achieve that “win-win”and this involves a mix of pricing, availability, and convenience.  I hope to address that in this post. Read the rest of this entry »