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.

The Dangers of Advocating Pharmacy Reimbursement

Pharmacists' advocation of prescription filling reimbursement may cause what Kirzner writes as, "[ a failure] to understand that the market has not yet discovered all that it will surely soon tend to discover”. When government protects inefficiencies by creating price flooring, it blocks future innovations yet to be discovered by the entrepreneurial market process.

Many pharmacies through America advocate for government intervention to promote higher dispensing fees. The California Pharmacists Association reacted recently to the June 1st, 2007 California State Legislature Budget Conference Committee. They claim that independent pharmacies face the danger of closing their business. This advocacy is not new of America's pharmacies nor of America's businesses in general. The formula typically adopts the following format. "X price is not fair, so Y business will fail, leaving Z, the American Consumer, without a certain commodity." It follows a "we advocate for the best interest of the consumer" type of terminology that really is a mask for protecting the interest of their businesses.

Do patient's really suffer from these independent pharmacies going out of business? Possibly patients will then lack the special pharmacy services that independents allegedly provide. Realistically, pharmacists at chains or independents rarely spend the time performing the clinical services that raise patient outcomes. There is no randomized clinical trial in America illustrating the enhanced patient outcomes delivered by community pharmacists.

Why should we reward inefficiency in the market? When pharmacies such as CVS or Walmart can deliver patients economies of scale and lower costs prescriptions, why should we protect those pharmacies that fail to do so?

The Dangers of Mandatory Comprehensive Health Insurance

State-wide mandatory comprehensive health coverage is set to be in form July 2007 in Massachusetts. Every resident will be forced to buy coverage or face a $1000 fine. In January, California's governor announced similar intentions. Talks are underway in Maryland as well.


Kirzner writes in The Perils of Regulation, "the urge to regulate, to control, to alter these outcomes must presume not only that these undesirable conditions are attributable to the absence of regulation, but also that the speedy removal of such conditions cannot be expected from the future course of unregulated market events." The urge to implement comprehensive health coverage stems from a belief that the market failures of health care are due to a lack of government regulation.

By fixing a quantity, Q, presumably above equilibrium, regulation forces a premium price of insurance above equilibrium. While this is common sense to assume price increases with comprehensive coverage as the above figure illustrates, other perils of regulation consequentially develop.

When government intervenes, as Kirzner writes, it fails to understand that the market has not yet discovered all that it will surely soon tend to discover”. By setting quantity fixing, through imposing mandatory coverage, this blocks the discovery process that may have taken place in due time.

According to Porter and Teisburg (Redefining Health Care, 2006), health care is driven by competition to increase bargaining power, cost shifting, and defensive medicine. No economy of scale is produced with increased beneficiaries. Mandatory health coverage will only serve to feed into this defective system.

Guan Xi 关系- Kirzner and the Chinese

Kirzner's writes in Uncertainty, Discovery, and Human Action, "it appears equally plausible to associate entrepreneurship with that aspect of human action in which the alert individual realizes the existence of opportunities that he has up until now somehow failed to notice".

GuanXi (关系, pronounced goo wan shee) is a word in Chinese literally translated as "relationship". What it really means is your social network. Hayek teaches us in Use of Knowledge that the totality of information in a market is limited. No one individual, according to Hayek, can attain comprehensive knowledge about a market condition. Chinese have known this principle for ages. That is why GuanXi is vital. You know in your limited frame, inputs of production that are vital for someone else's pure profit potential. Your neighbor likewise has knowledge that may benefit you. It is through the network or GuanXi, that the awareness of entrepreneurial opportunities of pure profit arise.

So, if you want to do business in China, make sure you bring a strong stomach to eat strange things, and a patience to sit for long hours doing business in a restaurant or tea house.