Parallels Between the Health Care and the Credit Market Messes

Readers invited to contribute:

Once simple commercial relationship (doctor-patient, lender-borrower) made complex in the pursuit of efficiency

System increasingly looks to be broken, yet degree of specialization and integration makes it difficult to launch reform/improvement programs

Incumbents argue that change will stifle innovation

Many middlemen add costs that critics argue are out of proportion to the value added

Many middlemen also behave badly

Buyers (investors and patients) often lack ability to judge the quality (or need) for products/services being sold and are often dependent on not-always-reliable and sometimes self-interested guides (for investors, rating agencies and salesmen; for health consumers, drug advertising, doctor referrals, insurance company participating doctor list). As a result, buyers lack usual power to influence product/service quality

High premiums paid for good looking salesmen

Attorneys general go where regulators fear to tread

The beginning of the end occurred in the 1970s (invention of the HMO in 1972; Ginnie Mae did first MBS in 1970)

Incumbents spend a great deal on lobbying and political contributions, assuring that even if there were an obvious solution, it will never be implemented

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  1. Anonymous

    Excellent analogy. Just one suggestion: add homeowner/borrowers to ‘patients’. It’s not just investors who get scammed by all this ballyhooed innovation that is actually no more than camoflage for middle-player profits, fees and wealth building.

  2. William Mitchell

    Ontogeny recapitulates phylogeny department:

    The same parallel applies to national politics. Voters are the customers. Congressmen are the incumbents. Lobbyists are the middlemen. Traditional media are the self-interested guides.

  3. newsman

    What major national issue is NOT afflicted by this same malaise? How about transportation policy? Energy policy? Education policy? Immigration policy? Am I forgetting any?

    In each case, we need major reform, rethinking, reinvestment, and we aren’t even to the point of having a serious discussion about it beyond the confines of academia.

    There’s a word for it: decadence.

  4. newsman

    One final thought:

    We all enjoy sitting back to blame our president, our congress, our media, our bankers, while we wait for them to change their essential natures and do what needs to be done.

    We need to get past that and ask what WE can do as individuals. There is no silver bullet answer to the question, but we must mobilize, challenge the unsustainable status quo at every opportunity.

    This points back toward the discussion on this blog a few weeks ago about Jared Diamond’s “Collapse.” The good news in that book is that some societies (admittedly, societies much simpler than our own) had the ability to recognize they were in danger, and change their behavior to avoid collapse. Others went merrily on until they exhausted their resources and collapsed.

  5. Anonymous

    “buyers lack usual power to influence product/service quality”

    The comparison is generally interesting, but there’s one big difference:

    Patients often have no choice but to consume healthcare, investors can easily avoid opaque products.

    Any bank peddling CDOs that imagined that there wouldn’t be a liquidity crisis given what was being sold was just plain stupid. (As Deutsche Bank and Goldman might point out.) The current situation is more akin to insurance companies going bankrupt because they don’t understand the industry they’re insuring.

  6. Steven

    I’d say its due to the fact of similar underlying problems. The major factor is simply this:

    No long term planning.

    America’s amazingly short-term memory seems to loose track of causation very, very quickly. We forget that booms bust, that things sounding too good to be true can be, and that long-term planning and investment can pay off. But we don’t do it.

  7. Anonymous

    Being a member of the health care process improvement industry, your analogy is vastly incorrect because it is far too simplistic.

    Money is money is money. Credit markets will function with regulation.

    Health care, although in several respects is analogous to a factory producing widgets, is fundamentally different. The HMO model is busted because the results of preventative care are not seen for years.. the patients of HMO A which implements preventative long-term (appropriate, correct) care will lose their patients to HMO B which is willing to charge a lower fee and merely provide the symptom-removal services.

    Health care at present only removes symptoms of disease because that’s how reimbursement incentives are aligned. It does not address the issues of long-term care (which, incidentally, is what America needs) because insurers are DISincentivized to do so.

    Improving health care is a LONG-TERM goal. Outcomes are not generated immediately – they can’t be, and that’s why there is no political will to implement the process changes that will create systemic, long-term, sustainable healthcare at a lower price.

    The US possesses health-care leaders with experience at reforming health-care systems. Yves, if you want a name, check out IHI’s Don Berwick.

    I have zero faith in the political leadership of the US to implement a legitimately useful and implementable solution. Neither party wants to work with the existing healthcare leadership which is capable and experienced at change management, and that’s pathetic.

    Politicians will choose a jawbone patch over healthcare instead of a long-term plan tied to measurable outcomes.

  8. Anonymous

    And Iraq contracting.

    Why pay a contractor 1 million to then pass thru several (republican) subcontractors to eventually pay someone 100k to
    Drive a truck
    Provide security for a military base (huh ?)
    Provide food services on a military base

    There used to be people who did this … I think they were called “Private”. And for about 50k each we could have an unlimited supply.

  9. CrocodileChuck

    Steven’s point above is a good one. I have been struck by the similarity of the ‘CDO/credit crisis’ and the first chapter of “The Learning Organisation’, Peter Senge’s 1991 management best seller (still a classic): The ‘Beer Game’. Rather than recount it here, go back and read it-complete lack of ‘systems thinking’ on the part of the Wall Street (and London) “Masters of the Universe’, who overproduced and oversold these opaque securities. Last, the complete lack of recognition of any kind of breakdown in ETHICS; corruption of the centuries old credit system (based upon trust) and the blatant conflicts of interest (a ‘lift’ from the dot-com bust). Its the end of the line for our modern ‘speculative capitalism’.


  10. Yves Smith

    I’ve made one change in the list which limits the analogy a bit (as to what else might fit the same pattern), please see new first item.

    Anon of 3:14 PM,

    Actually, I don’t agree that investment managers had the choice not to buy complex products. It would have jeopardized their professional survival (John Dizard, apropos quants, but it applies here, has said that everyone follows the same playbook for 9 years, gets great bonuses, then has a “career put”).

    First, there aren’t enough simple products out there. No kidding. Investors now use credit default swaps to create synthetic corporate bond exposures because there aren’t enough cash bonds of the type they want to buy. Similarly, the lack of enough AAA credits relative to demand led to the creation of pseudo AAAs via structured credits. Of course, we have now learned that the imitation isn’t anywhere near as good as the real thing.

    Second, institutional investors are measured on performance. If you don’t perform reasonably in line with your peer group, you will lose investors and eventually lose your job. If your peers buy new sexy products that offer higher returns with more complexity and you don’t, you will fall behind (and look like a dinosaur too). The performance pressure is intense and real.

    It has become a bad system, and one the product producers have known how to exploit to their advantage.

    And I don’t agree that the credit market problems can be fixed by regulation. They can be ameliorated considerably, but the securitization process seems to have become integral, yet there is no ready way to deal the information loss and incentive problems. Assignee liability would be one solution, but that has zero odds of becoming law.

    The best proposal I have seen, to drive more activity onto exchanges, has limits. There are only so many credit market products that trade (or can be made to trade via greater standardization) on exchanges. Similarly, tell me what to do about rating agencies? Their role is hopelessly enshrined in all sorts of state and federal investment regulation. There is no way to do without them, yet I have not seen a viable, effective proposal as to how to reform them.

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