Wednesday, April 9, 2008

Healthcare's Fatal Decoupling

Most innovative markets employ the following system of invention and devlopment. A would-be entrepreneur derives an idea by which existing resources might be newly combined to create an innovative product or service. Alternatively, they may innovate to discover errors in how resources are currently utilized for existing production. Kirzner writes in Discovery of Error, "entrepreneurship is evoked by the presence of as yet unexploited opportunities for pure profit".

This would-be entrepreneur takes this discovery to market. They set out to argue that their new combination of society's resources is better than existing combinations, i.e. existing products and services. Society then casts its ballot through a voluntary transfer of wealth if they believe that this entrepreneur did better than existing candidates.

Thus, there is a coupling of entrepreneur to the beneficiary of their efforts. Those whom derive their benefit of the entrepreneur's efforts anonymously and voluntarily cast their vote through the ballot of cash communicated through prices. Prices thus serve as that measurable entity by which society communicates to the entrepreneur that they agree with their stewardship of society's resources. This entrepreneur and other would-be entrepreneurs thus continue to bear the incentive to continue in their innovation efforts.

Most important in this coupling is that the prices of society's basket of products and services reflect the benefit society derives through this coupling. As Hayek writes in Use of Knowledge, "prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan". Without this coupling, prices can only reflect the costs of production inputs and not the value of the final product.

Health care lacks this coupling. A would-be entrepreneur in health care discovers a new procedure, service or product that might have a benefit to society. However, those whom may benefit do not make that coupled transfer of cash for benefit. Albeit the cost of health care prohibits such, as is pedantically argued. This cost of care is not due to the nature of health care itself, but the original decoupling of benefit to cash transfer that continued its exasperation to higher and higher costs.

To understand this, we have to consider how prices in such a decoupled economy operate. Without this voluntary transfer of wealth, prices must reflect the costs of production. In the absence of coupling, a separate entity must decide on behalf of another the benefit of that resource to the beneficiary. They then decide through some cost-effectiveness analysis those combination of resources that provide the greatest benefit at the lowest cost.

Without this coupling, this separate decision maker is not punished nor rewarded for this process. They neither receive a benefit, aside from some merit, nor are they punished for this process. It is not their funds of which they allocate to acquire those resources. Nor is it their benefit they are estimating. Therefore, the prices they attribute to those resources only reflect their costs, and the benefit is simply a metric subject to bias, confounding, and error in measurement.

This is health care's fatal decoupling. Health care's resources of input reflect their cost, not their value. The entrepreneur is not rewarded for their actions. Thus, we have a never ending cycle of rising costs and slowing innovation.

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