Books

I recently finished reading Management Lessons from Mayo Clinic by Leonard Berry and Kent Seltman. The book provides a glimpse inside one of the most successful health care organizations. While the book illuminates how Mayo Clinic has solved many of its operational issues and how it has built its reputation, the book is overwhelmingly positive. This should not be surprising since Kent Seltman was the director of marketing at Mayo Clinic from 1992 to 2006.

Thus, I would recommend this book for healthcare management professionals as long as it is read with the knowledge that the book is not an unbiased analysis of the Mayo Clinic but more of a chronicle of the Mayo Clinic’s successes.

Some of the highlights from the book are:

• The Mayo Clinic now employs over 20,000 individuals on its Rochester, MN; Scottsdale, AZ; and Jacksonville, FL campuses.
• “More than 62% of Mayo Clinic physicians have received some or all of their training at Mayo.” This helps to build a strong collaborative culture at Mayo, it does risk making Mayo insular.
• While many policy wonks advocate a “team approach” to health care, Mayo Clinics is truly one of the few health care organizations to accomplish this. This is due to the fact that all physicians are employed directly by Mayo, they are paid on a salary basis, and the culture of Mayo is very collaborative.
• The Mayo Clinic faces the debate of how fast to expand. Expanding its brand (through associated clinics, hospitals, and online contact) and increases revenues but may dilute its brand equity or reputation.
• The Mayo Clinic was one of the first organizations to organize medical records by patient rather than physician, thus allowing any physician to easily access patient information. In the digital age, Mayo is a leader in EMR.
• The Mayo Clinic has impressive systems engineering. There is centralized scheduling, and the testing facilities each day are allowed spare capacity to meet the need of current days patients (”downstream demand”), and Six Sigma management practices are in place.
• Departments are co-headed by physicians and administrators. Physicians make sure that administrators know understand how management choices affect patient care; administrators communicate with physicians so that they understand how medical practices affect patient flow and the bottom line.
• “The reality of labor intensive service organizations is that their people are their product.”

Berry, Leonard L; Seltman, Kent D. (2008) “Management Lessons from Mayo Clinic: Inside one of the world’s most admired service organizations,” McGraw-Hill, 256 pages.

In 2006, Columbia/HCA was forced to return $1.7 billion to the federal government for defrauding Medicare. How was the federal government able to amass such strong evidence against HCA in order to win such a large settlement?

The answer to the question is revealed in a book called Undercover by John W. Schilling. The book details how Mr. Schilling, a former accountant of HCA, found significant irregularities in HCA’s Medicare reimbursement charges. When his concerns were voiced about this illicit behavior, his bosses told him to ignore the issue. But Mr. Schilling did not ignore the issue. Instead he filed a qui tam whistleblower lawsuit an in the process became a multi-millionaire.

The book is interesting in that it goes into such vivid detail with respect to how deciding to reveal Medicare fraud alters one’s life. It is interesting to see how the Schilling uncovers lies on top of lies. By filing the suit, Schilling knew he would be excommunicated from the health care finance industry; this led to significant strain on his personal, family, and financial life.

Most of the blame for the fraud is of course heaped upon HCA, the worthy culprit. But some of the blame is also place on Medicare, whose complex reimbursement schemes often make hospital reimbursement decisions fall into a gray area.

While the book stimulates readers by revealing the truth behind what happens in whistleblower cases, the book isn’t necessarily a page turner. The writing style is: this happens, then that happens, then this happens. Schilling always portrays himself positively; he is always the best witness or the most honest person. While this may or may not be true, I would say that Schilling has an unbiased point of view.

Nevertheless, if you really want to know what it takes to expose fraud in the health care industry on a grand scale, this book reveals a the dirty underbelly of the health care industry rarely visited.

• Schilling, John W. (2008) “Undercover: How I Went from Company Man to FBI Spy — and Exposed the Worst Healthcare Fraud in US History,” AMACOM, 304 pages.

What is life really like working in a hospital? The Economist reviews a recent book by Julie Salmon titled Hospital: Man, Woman, Birth, Death, Infinity, Plus Red Tape, Bad Behavior, Money, God and Diversity on Steroids.  Here is an excerpt from The Economist:

“…the fine grain of Ms Salamon’s observations allows her to paint a compelling—and damning—portrait of a dysfunctional health-care system. She describes the chaotic emergency room, with patients waiting in holding patterns like aircraft at a busy airport, and the “frequent flyers”, as the staff call those they send away with prescriptions for medicines these patients cannot afford, knowing they will soon be back in a bad way once more.

She meets uninsured patients with seven-figure bills, destined never to be paid, who know that only if they stay do they retain the right to be treated. (The hospital can force them to leave only if they can do so on their own two feet.) And she meets some whose stay will be tragically brief, because lack of insurance has kept them away from doctors until it is too late. One such is a young mother from the Dominican Republic without papers but with cancer that is already terminal before she seeks medical help. She dies so quickly that there is little the hospital’s staff can do other than help her relatives arrange care for her three small children.”

• Julie Salamon “Hospital: Man, Woman, Birth, Death, Infinity, Plus Red Tape, Bad Behavior, Money, God, and Diversity on Steroids,” Penguin; 363 pages.

Paul Polak’s book Out of Poverty could have just as easily been titled “How to get rich: a guide for small-time farmers in developing countries” or “Marketing to dollar-a-day earners.” Polak’s book states that donations –especially those run through the developing country government–will not end poverty. They have not so far. One reason is that most donations are used to give away goods for free. But this destroys the incentive of any small businessperson to try to sell affordable priced goods to the poorest of the poor.

Polak’s NGO, IDE, develops products for those in extreme poverty in developing nations. Polak stresses that any good targeted to poor rural farmers must be 1) cheap, 2) small scale and 3) expandable. Drip irrigation is one great way for poor farmers to conserve water and efficiently irrigate their crops. Further, drip irrigation will allow farmers to grow crops during their more lucrative off-seasons, when the price from the crops is higher. Unfortunately, most drip irrigation companies make large, capital intensive products targeting large farms. IDE has taught farmers to use less expensive versions of these drip irrigation technologies to increase their income. IDE has also helped to spread the treadle pump technology to many farmers.

Another NGO with a similar philosophy as IDE is the Scojo Foundation. Scojo gives small entrepreneurs the materials and training to start their own firm selling reading glasses to the poor. Not only do these small-time entreprenuers profit, but customers who’s vision improved also appreciate the market transaction.

Another seemingly obvious point Polak makes is that the cure for poverty is to find a way for the poor to make more money. Increasing the education or medical care the poor receive is not in and of itself a means out of poverty. Poor children get little education because their parents need them to work on their farms to survive, not because they do not understand the value of eduation. Polak claims that once farmers in developing countries increase their income, they do increase their spending on education for their children, and medical care for their entire families.

• Polak, Paul. (2008) Out of Poverty: What works when traditional approaches fail. Berrett-Koehler Publishers, Inc. San Francisco, 232 pages.

Darkness at Noon by Arthur Koestler is a unique novel which describes the imprisonment of Communist revolutionary Nicholas Rubashov. Rubashov was a loyal supporter of the Communist cause in Russia, but his subsequent imprisonment on bogus charges causes him to reflect on whether his fight to bring Communism to Russia was truly beneficial to Russian society. The book demonstrates how Communist idealist notions became perversions as Stalin took power and instituted a cruel dictatorship.

One of the main themes of the book is that philosophical generalizations and abstract ideals often lead to disastrous results when they are applied without regard to individual circumstance. As Ferdinand Lassalle once said:

‘Show us not the aim without the way./ For ends and means on earth are so entangled/ That changing one, you change the other too;/ Each different path brings other ends in view.’

One passage from the book may be particular applicable to economists whose solutions to mathematical problems may not prove to be fruitful in the ‘real-world’.

‘A mathematician once said that algebra was the science for lazy people–one does not work out x, but operates with it as if one knew it. In our case, x stands for the anonymous mases, the people. Politics mean operating with the x without worrying about its actual natures. Making history is to recognize x for what it stands for in the equation.’

Are you a bibiophile? Are you always on the lookout for a good book recommendation?

If this is the case you should try GoodReads. The website is a social networking site like Facebook or MySpace. Instead of using a social network to keep up with friends or the latest gossip, GoodReads allows users to list the books they have read and give them one to five stars. You can write a book review as well.

If you invite your friends to the site, you can see which books they rated highly. Perusing your friend’s 4 and 5 starred reviews, you will have long list of great books to read in the future.

I recently finished reading a very satisfying book titled The Ghost Map by Steven Johnson. The book looks at how London was able to solve the cholera epidemic which struck the city in the mid-nineteenth century. The book chronicles how John Snow and Henry Whitehead were able to discover that cholera is transmitted from drinking water contaminated with feces.

One of the most interesting motifs of the book is that of scale. The book looks at the cholera outbreak from a microscopic level (the Vibrio cholerae bacteria) moves to the scale of the individual lives of John Snow, Henry Whitehead, William Farr and Edwin Chadwick, and finally to the statistically analysis conducted at the bird’s-eye, metropolitan level.

The book documents the work of John Snow and how he was able to stop the spread of cholera by convincing public officials to remove the pump handle of the cholera-inflected water well on Broad Street.

The book also chronicles the life of Edwin Chadwick.

“Chadwick helped solidify, if not outright invent, an ensemble of categories that we now take for granted: that the state should directly engage in protecting the health and well-being of its citizens, particularly the poorest among them; that a centralized bureaucracy of experts can solve societal problems that free markets either exacerbate or ignore; that public health issues often require massive state investment in infrastructure or prevention. For better or worse, Chadwick’s career can be seen as the very point of origin for the whole concept of ‘big government’ as we know it today.”

Chadwick erroneously believed that “the air of London was killing Londoners…and thus the route to public health had to begin with removing noxious smells.” This was done by dumping all of London’s sewage into the Thames river.

“Within a period of about six years, thirty thousand cesspools were abolished, and all home and street refuse was turned into the river…Herein lies the dominant irony of the state of British public health in the late 1840s. Just as Snow was concocting his theory of cholera as a waterborne agent that had to be ingested to do harm, Chadwick was building an elaborate scheme that would deliver the cholera bacteria directly to the mouths of Londoners. (A modern bioterrorist couldn’t have come up with a more ingenious and far-reaching scheme.)”

When public health officials are right, they can save thousand of lives. When they are wrong, they can just as easily kill those very same individuals.

I recently finished reading a very through, level-headed book analyzing the Economics of Alcohol Policy. The book is titled Paying the Tab: The costs and benefits of Alcohol Control by Philip Cook. The book focuses mostly on the costs of alcohol consumption. This is due to the fact that it is much easier to estimate the costs of alcohol consumption (e.g.: drunk driving, spousal abuse, health affects, homicide) than the benefits (e.g.: the enjoyment from drinking, possible health benefits from moderate drinking).

Cook wisely notes that alcohol research must be conducted “with boldness tempered with humility.” Data on alcohol consumption is notoriously unreliable. Individuals tend to underestimate their alcohol consumption on surveys. Wholesale alcohol tax records are more accurate but “takes no account of wastage, illicit production for sale (moonshining), or production at home.”

There is little doubt that alcohol is one of the biggest public health issues in the U.S. Alcohol costs include motor vehicle fatalities, increased homicide rates, and health issues such as cirrhosis. The CDC estimated that “63% of all potential lives lost due to drinking were due to acute effects of drinking, namely injuries resulting from assault, suicide, traffic accidents, poisoning, and so forth.”

So why do people drink? Some people enjoy the taste of a fine wine; others enjoy the intoxication of alcohol. According to journalist Pete Hamill, alcohol offers “confidence for the shy, clarity for the uncertain, solace to the wounded and lonely, and above all, the elusive promise of friendship and love.”

According to Cook, the best manner in which to balance these costs and benefits is to impose a higher alcohol tax. This policy has been shown in many studies that when the cost of alcohol increases, alcohol consumption decreases. Taxing is attractive because 1) it still allows individuals the choice to consume if they please, 2) it reduces overall alcohol consumptions and the adverse consequences that come with increased alcohol consumption and 3) it raises money for the government. One problem with all taxes, however, is that a black market may emerge to avoid the tax.

Further, one can think of the tax as a “user fee” that alcohol drinkers must pay in order to pay for the externalities alcohol consumption creates (e.g.: drunk driving, costs to public health care entities). Other regulations, such as zero tolerance drinking and driving laws for minors, have been shown to be effective. On the other hand, increase jail time for DUIs and more punishments for establishments which serve minors do not serve to decrease alcohol consumption.

Cook does a wonderful job of showing allowing anyone to drink any time they wish is not ideal. Some restrictions are welfare improving. Yet complete Prohibition is not the answer either. Neither libertarians nor tee-totalers are completely in the right.

In 1948, Mississippi Judge Noah Sweat summed up the arguments for and against alcohol:

If when you say ‘whisky’ you mean the devil’s brew, the poison scourge, the bloody monster that defiles innocence, dethrones reason, destroys the home, creates misery and poverty…–then certainly I am against it.

But, if when you say ‘whisky’ you mean the oil of conversation, the philosophic wine, the ale that is consumed when good fellows get together, that puts a song in their hearts and laughter on their lips, and the warm glow of contentment in their eyes…if you mean the drink that enables a man to magnify his joy, and his happiness, and to forget, if only for a little while, life’s great tragedies and heartaches and sorrow…–then certainly I am for it.

•  Cook P (2007). “Paying the Tab: The costs and benefits of Alcohol Control ” Princeton University Press, 278 pages.

The New York Times came out with its list of the Ten Best Books of 2007 on Sunday.  Here’s the list.

For those of you in the operations research side of the medical care world, you may recognize an interesting textbook by Peter Mears title Quality Improvement Tools and Techniques. The book is a good reference tool, but is a little difficult to slug through. It has so many graphs, outlines, quotations, that there is little room for text. The book gives classic B-school tools such as: a fishbone diagram, deployment charts, focus groups, benchmarking and customer needs mapping. For those with little statistical background, the book also explains in a simple, concise fashion how to construct pie and bar charts, histograms, radar charts, pareto diagrams and control charts. The book is somewhat out of date in that it does not give detailed explanations of how to perform these actions in a statistical program such as Excel.

Quality

Quality is a key component of customer (or patient) satisfaction with any service or product. In medical care, measuring quality is even more difficult than in other fields. There are three types of quality:

• Perceived Quality: This is the customer’s (patient’s) personal belief as to the quality they receive.
• Actual Quality: This is often measured by some quantitative metric (e.g.: defects per 100, number of breakdowns, ease of use). In the medical world, finding relevant metrics to measure performance is difficult. Often we can measure the amount of medical errors per 100 patients a physician makes, but this will not measure superior physician quality. Peer review is one way to measure actual quality, but since this is often done in a non-quantitative way, even most medical professionals are uncertain of quality of care they give.
• Expected Quality: This is the quality level a customer expects. This is often influenced by marketing and word-of-mouth information. An example of differences in expected quality would be that someone with top notch health insurance coverage would likely expect a professional, sleek, expensive office setting in the San Diego area. If the same person had no health insurance and decided to go to Tijuana for medical care, their expected quality of care would likely be lower.

Taguchi Methods

Dr. Genichi Taguchi is a Japanese statistician and Deming Prize winner who has introduced a novel quality control system. Below I point out some of the highlights.

1. Quality is measure by the total loss to society. What is the total loss to society? It contains 2 parts. First there is the cost to manufacture or provide the good to the consumer. Second, there is the cost of inferior quality. In the healthcare setting, simply reducing financial costs will be unsatisfying under the Taguchi methodology if quality of care is not at the same time maintained or improved.
2. Continuous Quality Improvement and Cost Reduction are necessary. Did you hear that economists? Most economists analyze a problem in a fairly static setting. Technology parameters are taken as given and economists are able to derive an optimal solution for a given problem. This answer is less satisfying if you know that your parameter assumptions are relevant only in the very short run. Economists such as Schumpter and his notion of creative destruction are able to incorporate a ‘continuous improvement’ framework in their economic analysis.
3. Quality improvement involves reducing variation. It is important to have a quality product all the time. This is done by reducing variation (e.g.: 6σ methodologies). This precept is very difficult to apply to medical care because of patient heterogeneity.
4. Product and Process Design have a strong impact on quality. In service sectors, often product and process design are one and the same.

• Mears, Peter (1995) “Quality Improvement Tools and Techniques” McGraw-Hill Trade, 326 pages.

I recently finished reading the fascinating book The Places in Between by Rory Stewart (see also NY Times review). The book describes the authors journey 2002 journal between Herat and Kabul in the middle of winter just after 9-11. Mr. Stewart gives a rarely seen glimpse of life for rural Afghanis and how they view the Taliban, the U.S., and local warlords. One footnote describing contemporary UN and OECD policy makers particularly caught my attention:

“Critics have accused this new breed of administrators of neo-colonialism. But in fact their approach is not that of a nineteenth-century colonial officer. Colonial administrators may have been racist and exploitative but they did at least work seriously at the business of understanding the people they were governing. They recruited people prepared to spend their entire careers in dangerous provinces of a single alien nation. They invested in teaching administrator sand military officers the local language. They established effective departments of state, trained a local elite and continued the countless academic studies of their subjects through institutes and museums, royal geographical societies and royal botanical gardens. They balanced the local budget and generated fiscal revenue because if they didn’t their home government would rarely bail them out. If they failed to govern fairly, the population would mutiny.

Post-conflict experts have got the prestige without the effort or stigma of imperialism. Their implicit denial of the difference between cultures is the new mass brand of international intervention. Their policy fails but no one notices. There are not credible monitoring bodies and there is no one to take formal responsibility. Individual officers are never in any one place and rarely in any one organization long enough to be adequately assessed. The colonial enterprise could be judged by the security or revenue it delivered, but neo-colonialists have no such performance criteria. In fact their very uselessness benefits them. By avoiding any serious action or judgement they, unlike their colonial predecessors, are able to escape accusations of racism, exploitation and oppression. Perhaps it is because no one requires more than a charming illusion of action in the dev4eloping world. If the policy makers know little about the Afghans, the public knows even less, and few care about policy failure when the effects are felt only in Afghanistan.”

I recently finished reading an interesting book titled A Mathematician Reads the Newspaper by John Allen Paulos. Published in 1995, the book employs simplified mathematical and statistical techniques in order to ascertain the validity of many statements published in the press. There are also numerous examples from the arena of health care reporting. For instance:

“A related equivocation arises when one is discussing diseases, accidents, or other misfortunes and their consequences. If one wishes to emphasize the severity of a problem, one will usually talk about the number of people afflicted nationally. If one wants to downplay the problem, one will probably speak about the incidence rate. Hence, if 1 out of 100,000 people suffers from some malady, there will be 2,500 cases nationwide. The latter figure seems more alarming and will be stressed by maximizers. Dramatizing the situations of a few of these 2,500 people by publishing or televising interviews of their families and friends will further underscore the problem. Minimizers, on the other hand, might invoke the image of a crowded baseball stadium during a World Series game and then point out that only one person in two such stadiums suffers from the misfortune in question.” [p. 79-80].

In another chapter, the Mr. Paulos advises one to be skeptical of medical claims made in both the news and advertising sections of the paper.

“A survey shows that this medication works more quickly. Than what does it work more quickly? Why is quick action important? Is it quick, but relatively ineffective? This nutrient is essential to good health. Are we suffering from a lack of it? Are there other sources of it? Can we have too much of it?”

The book is structured as a series of newspaper article length chapters. While most professional economists, mathematicians, or statisticians will not find this book a revelation, it still is an interesting read–making a case for the importance of the newspaper despite its many flaws. For those without a serious mathematical background, this book will hone your analytical senses and hopefully demonstrate how mathematicians is interesting and relevant to current events.

• New York Times review
• Reason magazine review
• American Mathematical Society review
• Paulos, John Allen (1997).  A Mathematician Reads the Newspaper.  Anchor Publishing, 224 pages.

“In its 1999 report To Err is Human, the Institute of Medicine report estimated that as many as ninety-eight thousand Americans are killed each year by medical error. Another ninety thousand to four hundred thousand patients are harmed or killed by the incorrect use of a drug–they received the wrong drug, or the wrong dose of the right drug, or two drug that interacted in the wrong way.”

“…preventable hospital error [is] the eight leading cause of death annually, ahead of motor vehicle accidents (43,458), breast cancer (42,297) and AIDS (16,516).”

Most health policy articles and books look at how to get more medical care to those who need it. How can we lower the cost of medical care? How can patients receive higher quality treatment? How can we decrease the number of uninsured? Shannon Brownlee’s book Overtreated looks at the medical care from a different perspective. She claims that Americans are too anxious to receive medical care and that the excessive amounts of medical treatment are actually hurting the average health levels of the American population.

Her well-written book uses a mix of anecdotes and statistics to document how unnecessary medical care is not only increasing health care costs, but also harming patient health. Examples where physicians do not take into account a drug or medical procedure’s side effects abound. Orabilex causes potentially fatal kidney damage. Spinal fusion surgery is frequently preformed but likely benefits only a small percentage of back-pain sufferers. Drugs such as Prozac and Ritalin are certainly over-prescribed. Diabetes patients receive recommended care only 24% of the time (McGlynn et al. NEJM 2003).

Why does this overtreatment occur? Brownlee, gives 5 main reasons.

1. Defensive Medicine. Doctors fear malpractice suits and would prefer to preform more tests and give more treatment in order to avoid being sued.
2. “Do something” mentality. Patients want the doctor to ‘do something’ even if the best medicine would be non-treatment and rest. Patients often believe that every disease can be cured with enough treatment.
3. Lack of evidence. Doctors are pressed for time and can not read through the copious amounts of journal articles available (although people working for the Cochrane Collaboration, InfoPOEMs, and UpToDate are trying to change this). Thus, doctors may be misinformed. Further, different studies often provide contradictory suggestions as to what the physician should do.
4. Lack of training to interpret evidence. Even when doctors are diligent about reading journal articles, they often misinterpret the results and do not critically review the paper to be sure the researchers methodology is sound.
5. Money. When physicians are paid on a fee-for-service basis, they have a financial incentive to provide more medical care.

The book is non-technical and the first 9 chapters document the way in which and the reasons why Americans get so much medical care. Chapter 10 offers some solutions to these health care problems. These solutions are similar to the ones expounded in Ms. Brownlee’s article in the October 2007 edition of the Washington Monthly (see my comments here).

• Brownlee S, (2007) Overtreated. Bloomsbury, New York, 1st ed.

I just finished reading Burton Malkiel’s influential book A Random Walk Down Wall Street. Originally published in 1973, the book was one of the first to advocate for the creation of a “no-load, minimum-management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners.” In other words, the book called for the creation of the index funds, which have become extremely popular.

The book talks about how difficult it is to pick winners, since by definition half of investors will do worse than the market and half will do better. As John Maynard Keynes stated:

Playing the stock market is analogous to entering a newspaper beauty-judging contest in which one must select the six prettiest faces out of a hundred photographs, with the prize going to the person whose selections most nearly conform to those of the group as a whole.

The book recommends a buy-and-hold strategy using dollar cost averaging. Some critics of this passive investment style claim that some individuals (e.g.: Peter Lynch and Warren Buffet) have been able to beat the market consistently. A reply would be that Mr. Lynch and Mr. Buffet have access to information which is not possessed by the typical investor. Also, mathematical probability states that when many people are betting on the market, their are bound to be a few people who have a string of winning years.

The book also talks about some historical investment crazes; or as Dr. Malkiel calls them, creating “castles in the air.” For instance:

• Tulip Bulb craze: Tulips imported into Holland from Turkey during the 17th century gained instant popularity. According to Investopedia: “The true bulb buyers (the garden centers of the past) began to fill up inventories for the growing season, depleting the supply further and increasing scarcity and demand. Soon, prices were rising so fast and high that people were trading their land, life savings, and anything else they could liquidate to get more tulip bulbs. Many Dutch persisted in believing they would sell their hoard to hapless and unenlightened foreigners, thereby reaping enormous profits. Somehow, the originally overpriced tulips enjoyed a twenty-fold increase in value - in one month!” Eventually the market crashed and individuals who had traded the value of their home for a single tulip realized the error of their ways.
• South Seas bubble: This financial institution was granted a monopoly over trade in the South Seas by the British government. The company was supposed to grow due to trade in slaves, as well as mineral wealth (i.e.: gold and jewels). The company even agreed to finance a large debt Britain incurred after a war. “Investors quickly saw what they perceived as value in the monopoly of the South Seas. Shares were quickly snatched up from the start… The management team of this company started hyping the stock, spouting illusions of grandeur to the investors.” After the stock price reached astronomical levels, the crash began. “Eventually word broke out that the management team had sold out completely. Investors were left holding the bag. Panic selling of the worthless shares immediately ensued. Fortunes were lost in a heartbeat.”

This book is a great read for any investor and I highly recommend it.

“We want the protection the government provides, and we want freedom. Put those together, and what we really want is for our government, and the whole public sector, from firefighters to voluntary organizations, to be both responsible and responsive.”

I recently finished reading the book The Fox in the Henhouse: How Privatization Threatens Democracy by Si Kahn and Elizabeth Minnich. The book rails against the evils of privatization. As an economist, my default response is to believe that privatization is generally good. While the book does make some compelling arguments against privatization in certain industries, I am not compelled to call for a dismantling of the capitalist system.

I believe that the production of most goods and services should be done by the private sector. Competition between firms ensures that companies will not cheat or injure their customers; if they do, they will not be in business for long. Customer choice between firms acts as a disciplining mechanism to ensure that quality goods are produced at a reasonable price. In some sectors, monopolies form and consumers who wish to purchase a good or service have no choice other than to buy for the monopolist. While this of course is a sub-optimal scenario, it does not necessarily mean that a government takeover would improve the situation. When the government takes over an industry, it itself becomes a monopolists, and production decisions may be made for political rather than economic reasons.

Below, I look at a few different sectors, recounting some of the book’s arguments and adding my own comments.

Prisons

When prisons are privatized, the government outsources care of the prisoners to a private company. Between 1984 and 2005, private companies such as the GEO Group built 120,000 new private prisons. The book argues that private prison companies have lobbied politicians for stricter laws in order to increase the prison population and thus increase their profit. While it is true that private prison companies have an incentive to increase the number of people incarcerated, it seems that this fact could also be used to argue for smaller government which would be less influenced by lobbyists tactics.

I do agree with Kahn and Minnich that prisons should not be privatized. The government is the ones sending individuals to jail and is the ones who should care for them. Prisoners, of course, have no choice of the facility to which they are sent. Thus, if prisoners are abused, they can not switch prisons to one with better conditions. Prisons also have to enforce the prisoners constitutional rights, which is likely done more effectively by a public entity. Despite my agreement with the authors on this issue, I should point out the government run prisons do not have a stellar track record (e.g.: Abu Gharib, Guantánamo Bay, prisons in North Korea, the Gulag of Stalinist Russia).

Schools

The authors argue that education is a public good and thus should be provided by the government. They claim that charter schools preform worse than public schools (there is much debate about this subject).

I believe that everyone should be entitled to a good education. However, people should be able to choose which school they go to and that school can be either public or private. I am a big fan of voucher programs (e.g.: in Milwaukee). If the school you are attending is poor, you can switch schools and attend a better one. The competition for students should raise the quality of schools in the long run.

At the university level, private colleges have been a big success. Many of the most reputable universities are private (Harvard, Yale, Princeton, Penn). The University of Phoenix’s innovative distance learning program has been a rousing success as well. Thus, I conclude that there is a significant need for public financing of K-12 education, but having the government provide education services itself is highly inefficient.

[Disclaimer: I myself attended a public school through high school, but attended a private university (Penn). I am now a grad student at a public university (UC-San Diego)]
Natural Resources

Kahn and Minnich favor nationalizing natural resources, the approach Evo Morales of Bolivia is taking. They argue that these resources could fund many social services for the country. However, any profitable sector could provide significant funds for social services if its profits were expropriated. Why target only national resources? This is one reason why we have taxes, to help decrease income inequality. Taxation creates inefficiencies, but not as much as expropriation.

Using oil or gas for social services profits may be well-intentioned idea, but many leaders who are choking off democracy (see: Saudi Kings, Vladimir Putin, Hugo Chavez) have been using natural resource revenue as a political slush fund.

Healthcare

Healthcare is one area where some government oversight is needed. Governments need to help fund the treatment of diseases with significant externalities. For instance, the book cites a statement from Paul Farmer who claims that after public funding for TB specialist was cut, “TB incidence in Moscow was 27 per 100,000 population; by 1993 it had almost doubled to 50 per 100,000.”

The book also notes that fee-for-service physicians have an incentive to preform unnecessary medical procedures to maximize profits. The book does not mention that salaried government physicians may not have the same incentive to work hard that the FFS system provides.

Kahn and Minnich want health care to be free for everyone, but as anyone with common sense will tell you, “There’s no such thing as a free lunch.” Citizens pay for medical care, whether through insurance premiums, taxes or direct payment. Having free health care will induce individuals to over-use medical services which will then increase the cost to society.

Nevertheless, if redistribution from healthy to sick is as necessary a moral obligation as transferring resources from rich to poor, than some type of government intervention should be necessary. Exactly what form this government intervention should take, I do not know at this time.

Conclusion

Thus, whenever there is competition in a market, I believe private sector production of good and services is optimal. When the private sector has a monopoly in a sector, the evaluation is more opaque and should be treated on a case-by-case basis.

For those who rant about the evils of globalization, let us examine the Sushi Economy. NPR’s Marketplace discusses The Sushi Economy book with its author Sasha Issenberg. Mr. Issenberg talks about how globalization has made the sushi industry a reality in the modern world. Technological improvements in travel and communication have lead to an increased demand for sushi all over the world; advances in communication technology, supply chain flexibility and decreased transportation costs have made eating sushi affordable from residents living in both Tokyo and Tulsa. Mr. Issenberg also discusses some findings from his book in Boston Magazine (”The one that almost got away“). If you are a sushi aficionado or are simply interested in the effects of globalization, the increased consumption of sushi is an interesting topic.

“…in a similar way, the slow growth of the coloring industry in the U.S. before the First World War was largely due to patent protection: most patents were held by the large German companies, such as Bayer, BASF, Hoechst and IG Farben. The chemical industry in the US was so underdeveloped, that during the First World War the U.S. was forced to import dies from Germany via submarines to bypass the British blockade.”

There is a very interesting book titled Against Intellectual Monopoly by Michele Boldrin and David K. Levine which was brought to my attention by the author of the Behavioral Trader blog. In the book, the authors build their argument that patent protection is either wholly unnecessary or at the least too broad. Chapter 9 of the book review the pharmaceutical industry and today I will review of few of the authors main points.

The beginning portion of the chapter shows that there has been large cross-country variation in patent protection over time, and that the evidence shows that countries with patent protection are not more innovative than those without patent protection. For instance, Italy had limited or no patent protection for pharmaceuticals until 1978, and before that time was considered the leading manufacturer of generics. Between 1961-1980, Italy discovered 9.3% of the world’s new active chemical compounds, but between 1980-1983, Italy had only discovered 7.5% of the world’s new chemical compounds, despite the fact that Italian scientist now operated in a patent protection system. In recent years, India has claimed the title of the leading manufacturer of generics. In the “Prizes or patents” post, I mention the Chaudhuri, Goldberger and Jai article which finds that instituting mechanisms to enforce foreign patents in the Indian market would reduce welfare in the anti-bacterials segment by $305 million.

Innovation Chains

Innovation chains is a concept that patents prevent innovation by disallowing other firms from building on the work of others. For instance, a patent can be good for one pharmaceutical company, but not for others. While patents confer monopoly rights to the inventor, they preclude other companies from developing new drugs. For instance, the chief scientific officer at Bristol Myers Squib told the New York Times that:

“there were ‘more than 50 proteins possibly involved in cancer that the company was not working on because the patent holders either would not allow it or were demanding unreasonable royalties.’”

Corruption

Because patents create rent-seeking behavior, corruption , lobbying and bribery are common in the pharmaceutical industry. Many pharmaceutical firms have pleaded guilty to criminal charges of fraud for inducing physicians to bill the government for some drugs that the company gave the doctors for free. For those who do not believe that rent-seeking is rampant in the pharmaceutical industry, just listen to Sharon Levine:

“[Pharmaceutical] Companies today have found that the return on investment for legal tactics is a lot higher than the return on investment for R&D,” says Sharon Levine, the associate executive director of the HMO Kaiser Permanente. “Consumers today are paying an inordinate premium under the guise of the creating the stream of innovation in the future. But it’s actually funding lawyers.”

Where do useful drugs come from?

When the British Medical Journal revealed its list of the top 15 medical innovations, only 2 were obtained during a research project motivated by the desire for a patent. None of the CDC’s list of top 10 medical achievements of the past century had been patented when it was introduced. The authors note that private industry only pays for about 1/3 of biomedical R&D, while government institutions such as the NIH fund much of the rest. Boldrin and Levine propose the following solution so that pharmaceutical companies can recoup their large expense to preform clinical trials:

“Clinical trials are the step in the process of developing a new drug during which information is produced about the effect of a given chemical compound on a large sample of humans. The cost of distributing and absorbing this information being low, and the cost of acquiring it being high, it has a strong public good component. There is also no reason, either of by way of economic efficiency or equity, why this should be paid for by the pharmaceutical firms developing the new drug – indeed, as they will be first to market they have a strong conflict of interest. The cost of clinical trials cost would better paid from the public purse, for example, by competitive and peer-reviewed NIH grants. At which point patents on drugs would no longer have any reason to exist.”