US Healthcare is an Embarrassment

We often hear that America spends an exorbitant amount of money on healthcare, but people rarely stop to think how much it is or what that means. In 2011, the United States spent 17.9% of its GDP (over $2.6 trillion) on healthcare.

That number is insane.

To give it some context, our peers in the 18% range are Liberia and Sierra Leone. In the 10-11% range are countries like France, Canada, Denmark, Germany, Switzerland, Austria, Portugal and New Zealand. Down closer to 7-8% are Uruguay, Croatia, Hungary, Chile, Cyprus, Bulgaria, Vietnam, Poland, and Turkey. Between 3-5% are countries including Singapore, Sri Lanka, United Arab Emirates, Algeria, India, and Thailand.

We spend about $8,800 per citizen, which is surpassed only by Switzerland, Norway, Luxembourg (which all have higher per capital incomes), and is more than double what most of the developed world spends.

If we could cut spending by just 1% of GDP, that would save us over $150 billion per year. Cutting 7%, getting us in line with our peers in the developed world, would save over a $1 trillion per year.

This is a graph I constructed with data I pulled from worldbank.org, plotting life expectancy at birth against a country's healthcare expenditure as a percentage of GDP. Why is the United States sitting at the intersection of the developed world and Liberia and Sierra Leone?
What this graph doesn't show is that these costs are running away. We spent 17.9% in 2011 compared to 16.6% in 2008, and all experts predict this number will continue growing.

Obviously, life expectancy is a rough indicator of the effectiveness of a healthcare system and there are a lot of conflating factors. But you'd expect this most basic goal of healthcare - keeping people alive - to improve with higher expenditure.

An endless list of problems

Moral hazard is a huge part of the problem; the third-party payer system is crippling our economy. When medical bills are footed by insurance companies the pricing system gets completely out of whack.

Drug companies charge $50,000 for a single chemotherapy treatment, an IV drip whose cost is defended by years of research and development.  An MRI in the US can cost anywhere between two and eight thousand (good luck finding out exactly how much) - in France, by comparison, it costs a few hundred.

A single-party payer system, or more pejoratively, "nationalized healthcare", has drawbacks. For example, wait times for elective treatment go up (just ask a disgruntled Canadian), and the government has to become integrally involved, which Americans tend to react negatively to (despite the fact that the data says it's better in almost all dimensions).

But the truth is that there's good reason for healthcare to be nationalized. I'm no great liberal; I am all for taxing cigarette smoking, motorcycle driving, and maybe even obesity. But why do people not see that healthcare is one of the few areas that makes sense - theoretical, academic, and practical sense - to have a highly involved government?

Healthcare is an inherently irrational market, where patients routinely act based on emotions rather than logic, and where the costs of decisions made by one person fall on someone else's shoulders. Externalities run high, payoffs and outcomes are unclear at best, and the philosophical backdrop for the whole system is closer to liberty than to capitalism. Everything about my economics degree tells me this is the textbook entry point for government.

Aside from the system itself, the worst offenders are probably insurance and pharmaceutical companies. But doctors are not without blame either. Hospitalized patients feel incredibly price inelastic (since the money doesn't come out of their pocket) and will pay for basically whatever their doctor recommends. Even the best-intentioned doctors may tend to recommend treatments that are more expensive and will give them a bigger payout, especially if they think that treatment is marginally more effective (and not all doctors have the best intentions).

Despite our obscene healthcare expenditure, almost 50 million Americans still don't have health insurance. Why do we have the general understanding that free speech, gay marriage, and social equality are part of a civilized and compassionate society, but somehow universal healthcare is not? We all agree that everyone has the right to food, water, and air; why do we draw the line before basic medicine and healthcare? As a worldview, I think it's barbaric.

And why are we still on a system where healthcare is tied to employment? This is a 70 year old mechanism that was installed during World War II to avoid regulations on wages and prices. This worked well back then, when employees stayed at one company for decades or life. Today's average American changes jobs a dozen times over a career, and so tethering healthcare to employment makes little sense. When Americans lose their jobs, they and their families are taken out of the healthcare system, which becomes a complete mess when they have preexisting conditions (although Obamacare is slated to fix this).

What can be done?

At this point you can probably guess that I support nationalized healthcare, but I recognize that that won't happen. There are too many people in positions of authority that are incentivized to block this change. Even more difficult to overcome is the national sentiment of "this is America where we work to buy our own healthcare, leave socialism to those lazy Canadians." These self-described capitalists apparently refuse to look at healthcare data in the rest of the world.


We can still make meaningful changes within the system. We can figure out how to align incentives so doctors and drug companies aren't incentivized to over-treat patients (or, more sinister, prevent the cure of profitable diseases). We can address the tricky problems with end of life care, which drain hundred of billions of dollars per year to keep many patients miserable and bed-ridden. We can change regulations for pharmaceutical companies, create clearer pricing schemes at hospitals, and reduce friction throughout payment systems. America's obesity is clearly a huge part of the problem, but regulating calorie consumption doesn't go over well (thanks for trying Mayor Bloomberg).

I also think there are new innovations on the way that could dramatically change healthcare costs. Real-time blood monitoring, where an implant in your bloodstream could send a notification to your iPhone when something was wrong, promises to reinvent preventative medicine (which admittedly has its own set of problems). Software technology companies are in the process of streamlining and automating healthcare systems, which will save billions.

Right now, I think the most important thing we can do is begin a cultural shift to make people care about the problem of healthcare expenditure, which begins by articulating the issues. It's lucky that we live in a country where popular consensus dictates policy, but it's a shame that Americans don't know enough to fight for substantive changes. 

Know thyself and compete accordingly

Startups can always identify their competition. If they're in a worthwhile market, they have competitors, and they know who they are. Surprisingly, I have found that many startups can't pinpoint the way in which they compete, and many more haven't thought deeply about why they should compete in that particular way.

Startups can compete in three main dimensions; quality, convenience, and price. As startups grow, they gain resources, leverage and market share, which allows them to compete in more ways than one (Airbnb is an example of startup that often beats hotels at all three). However, early stage startups usually only have the ability to compete in one dimension well.

It's usually not that difficult to figure out how best to compete, and it's critically important. Knowing the company's key dimension of competition is on the short list of things everyone at a startup should know at any given point (other items on the list include short-term goals and critical metrics).

Intuition and empirical examples typically lead to the same conclusions and should allow founders to extrapolate the best way for their startup to compete.

Quality

From what I've seen, startups often prefer to compete on quality; it's everyone dream to offer a truly better solution than anything else that exists. Marc Andreessen said that to be successful, startups have to offer a solution that is 10X better than existing solutions.

Startups should compete on quality only when they actually have something is that is 10X better than existing solutions. This requires a very honest look at your product and market. Can you really provide users with a product that is so much better than everything else on the market that nothing else matters? If you are, great. If you aren't, that's okay - you can still be successful, you just have to compete differently.

Convenience

Competing on convenience makes sense when two conditions are sufficiently satisfied: 1) demand for a solution is price-inelastic and 2) existing solutions are inconvenient.

Uber is a great example of a startup that competes with other car services on convenience. Uber has been successful because it is so much more convenient than any other transportation solution, not because of cheap prices or unbeatable high quality. People need to get around and they will pay to do it, so competing on convenience makes sense in this market.

Price

Startups can successfully compete on price when one of two conditions is satisfied: either 1) existing market prices are artificially high for some reason, or 2) when offering a solution at a cheaper price will gain sufficient market share to ultimately drive the company's success.

Warby Parker's value proposition and success has come from competing on price, and they have been able to do so because of artificially high market prices. The international conglomerate Luxottica had a stranglehold on the high-end eyewear industry, and was selling glasses for $300-500 that it produced for less than $20. By entering the same supply chains and cutting out middle men and licensers, Warby Parker successfully entered the market based on $95 glasses.

Competing on price is tricky and should be done thoughtfully. Amazon is famous for this strategy; they slashed their margins to almost nothing in order to successfully gain a stranglehold on the online retail and book markets.

Know yourself, know your market

Picking your dimension of competition is critical, and I think a lot of startups would do well to give it more consideration. Knowing exactly why you belong in the market gives your team focus and a sense of purpose that will allow you to increase your value-add to users and ultimately the size of your business. 

Creating technological revolutions

Would you rather be Thomas Newcomen and help invent the steam engine or Andrew Carnegie and use that technology to build a railroad empire? Would you rather be Tim Berners-Lee and be credited with inventing the world wide web (and receive a $1.65 million prize 15 years later) or Mark Zuckerberg and deploy that technology to create a $75 billion social media company?

Phrased for the general case, would you rather be an inventor or a deployer of a revolutionary new technology? If you had to pick, you’d probably choose deployer.

The nature of technological revolutions

Chris Dixon wrote a great post about how technological revolutions come in two phases; installation and deployment. Typically, the installation phases happens during a financial bubble when excess resources are poured into a promising new technology. An inevitable financial collapse ensues, followed by a sustained period of growth fueled by the deployment of the new technology.

America’s unusual success has largely been fueled by major technological revolutions that have lead to large increases in productivity that unfolded over time. Innovations in manufacturing, transportation, engineering, and energy are examples of giant leaps in technology that resulted in real growth of productivity and quality of life.

Technological revolutions increase our national output and well-being in a way incremental improvements in labor and organization efficiency simply cannot. If you are America and want to maximize your success, it is essential to figure out how to create as many of these revolutions as possible. So how do you do that?

If America were an individual, it would probably invest time and resources into "installation" technologies – some promising places to start might be artificial intelligence, robotics, nuclear power, or materials science. America would know that many of these investments would never reach the deployment phase, but it would be worth it in the long run because those few successful revolutions would be so incredibly valuable.

America, unfortunately, is not an individual, and the inventors who dedicate their lives to making progress in installation types of technologies often don’t enjoy the benefits they seem to deserve. Most installation technologies never reach deployment phase, and even when they do, the inventors rarely reap the same benefits as the deployers.

Dynamic inconsistency

In Homer's The Odyssey, Circe warns Odysseus that when he sails past the sirens, their beautiful singing will draw him in and result in his death. The singing will be so beautiful, in fact, that once he hears it he will still decide to go towards the music even know though he knows it will lead to his certain demise. Knowing that his preferences will change, he orders his men to put wax in their ears and tie him down so that he will be able to hear the music but unable to steer the boat towards it.

This is one of the earliest written examples of dynamic inconsistency, the phenomenon in which an individual's preferences are inconsistent over time. We are all too familiar with this in our everyday lives – we wake up in the morning determined to work out and eat healthy food, and cave in late at night to a delicious piece of chocolate cake. What you want right now is often different from what you want most.

When you are an individual, if you know that your preference will change over time, you can make decisions that force yourself to do the things you most want. Throw the cake out of your apartment so you can’t eat it late at night. Get ahead on your work on Sunday evening so Monday is better. Pay for a full online course to encourage yourself to see it through.

When you are a community, however, it is much harder to do this because individuals are driven by their own well-being, rather than by the well-being of the community.

Inventors and deployers

There are two main reasons it’s bad to be an inventor. First, much of the work done never results in a tangible product or service; instead, it’s akin to incremental advances in academic knowledge, which are important in the aggregate but typically yield little benefit for the individual researchers. Second, the period between the installment and deployment phases can take a *really* long time. As John Maynard Keynes said, in the long run we are all dead. Most people don’t want to wait around for decades to watch their inventions be gainfully deployed.

Individuals are much better off participating in the deployment phase than the installation phase because of the rapid and sustainable growth, and because many installation phases will hit a dead-end and never make it to deployment. The deployment phase is much less risky and, frankly, easier. This causes people to flock to deployment phases (think about the current deployment rush in tech) rather than installation phases (consider the nascent industry of computer chips and microprocessors).

America the individual gets long-term benefits when one person invents a brilliant new technology that another person gainfully deploys many years later. Unfortunately, humans' incentives are typically limited to themselves and those closest to them, so the inventor isn't always be so eager to pour his life into a risky research endeavor that may never pay off.

Incentivizing technological revolutions

Because the time periods are so long and third party externalities are so relevant, I believe we need to actively encourage work on promising installation technologies. Quantum leaps in robotics, cheap energy, transportation or AI will result in the long-term sustainable growth that has lead to America’s greatness, but how do we get the smartest people to leave their jobs at SnapChat or Goldman Sachs to work on those problems?

We know that we will be best off in the long run if we invest time and resources into installation technologies, but because America is not an individual we have to create structures to incentivize the behavior we want.

Some of these incentives are already in place. There are academic prizes and government grants, and even in the private sector, Zuckerberg, Milner and Brin teamed up to offer a $3 million reward for breakthroughs in medical research. The 20 under 20 Thiel Fellowship is at least tangentially related.

Still, it’s not enough; we could and should be doing much more. Private initiatives are good but there will probably need to be significant government involvement to correct the natural disparity in incentives for being an inventor over a deployer.

Until we make it more appealing to focus on inventing for emerging installation phases, people will continue the (relatively) easy and rewarding work of deploying the current revolutions. There are undoubtedly some private forces at work, and inventors can get great joy and satisfaction from their work, and often money too. But until we figure out how to make it as appealing to work on invention as deployment, we are leaving an indeterminate amount of innovation and growth on the table.

Pay attention to power law distributions

My mom is a dermatologist and her favorite drug is Accutane. If you haven't heard of it, Accutane is the amazing pill that cures even the most extreme cases of acne. Despite being a wonder drug, Accutane requires a fair amount of explanation for new patients. After 25 years of perfecting her talk, it still takes 10 minutes to touch all the bases.

One morning a few weeks ago, right before her first patient of the day, she decided to film this 10 minute explanation on an iPad. Now when she has a new Accutane patient, she hands them the iPad, goes to see another patient, and then comes back to answer any questions that remain.

The results have been incredible. Not only do her patients rave about the new video, but she now has more of her most valuable resource: time. Relative to the investment of a few hundred dollars for an iPad and 10 minutes of her time, the payoff has been astronomical.

Power law distributions

A couple of days after discussing the iPad video with my mom, I reread a discussion about the importance of power law distributions between Peter Thiel, Paul Graham and Roelof Botha. These are the notes from Peter Thiel's class called "Startup" at Stanford business school as recorded by Blake Masters. It's a great read.

Power law distributions are really important to understand. The class at Stanford discusses this concept with respect to startup investments: you plot all your investments from best to worst on the x-axis, and your investment returns on the y-axis. Most people expect that this curve would be fairly flat (a linear distribution), implying that the difference between the return of each investment would be about the same. In practice, most venture capital funds live in a world of power laws, where the best investment returns more money than the rest of fund combined, the second best returns more than the rest combined, and so on.  Venture capital is one obvious manifestation of power law distributions, but we see this phenomenon all over. In industries susceptible to the "superstar effect", such as sports, movies, or politics, the outcomes of top performers tend to follow a power law curve. The best baseball player makes a lot more than than the 100th best player, who makes much more than the 1,000th best player. "A-list" actors do dramatically better than "C-list" actors, who do dramatically better than struggling artists in Manhattan. The president has much more power than senators, who have much more power than local officials, who have much more power than me.

There are more power law distributions in our lives than we think

In my mom's case, if you lined up everything she has done to try and improve her practice's efficiency from best to worst, the payoff from the iPad video would be on the far left of her power law curve. It was probably worth shockingly more to her efficiency than her average improvement.

We are all constantly exposed to these kind of curves in our own lives with our investments of money and time.

We spend money on a lot of things that don't provide us with that much happiness, but a small number of purchases produce amazing returns for our happiness (think your favorite shirt, an incredible pillow, a perfect gift for a friend, or maybe even the dopamine-releasing iPhone, despite the offsetting high cost). The curve for our time investments is probably even more pronounced. Sometimes we spend hours making little progress on problems that won't even be that helpful if solved, and other times we spend 30 seconds writing an email that turns out to be hugely valuable in our personal or business lives.

The important thing to remember is that there are outsized returns for a small number of our "investments", and it's worth a great deal of our time and energy figuring out how we can be more likely to make these investments. For my mom this may mean asking other dermatologist what high impact changes they have recently made in their practices.

Almost always, these outliers have an element of unpredictability; you can never know for sure which early stage startup will be worth a billion dollars, which email will be worth a huge multiple of the time it took to write, or what new improvement will make a medical practice drastically more efficient.

However, we can reduce this unpredictability by removing focus from the types of investments that almost never have outsized payoffs, and by adding focus to the types that often do. By trying to be acutely aware of what activities have a high likelihood of ending up on the far left of our personal power law curves, we can give ourselves a much better chance to see great returns.

Ownership and the Sharing Economy

Sharing can save a ton of money. We share apartments, cars, and office space with family, friends, and coworkers. We share roads, radio waves, and national defense with fellow citizens.

In cases like these, sharing leads to huge economic gain. So why don’t we share more stuff?

The problem, and its solution, has to do with ownership.

Ownership is comprised of a bundle of property rights

Broadly, the various types of property rights include (i) the right to use a good, (ii) the right to earn an income from the good, (iii) the right to transfer the good to others, and (iv) the right to enforce property rights. The term “ownership” applies to the particular bundle of property rights associated with a certain level of ownership. A property right is the fundamental unit in the broader abstraction of ownership.
 
If you buy a coat, you own it outright and have the complete bundle of property rights. You can sell it, give it away, wear it, burn it, or any other activity you see fit, so long as it does not interfere with others’ rights.
 
By contrast, if you rent an apartment, you have a specific bundle of rights that includes living there and earning income through subleasing, but excludes destroying it or selling it. If you buy a subway card, you have the right to ride a subway a certain number of times, and not much else.
 
We’re buying too many rights

Money can be thought of as a way to acquire property rights. But what do we actually want with our money; do we have a fundamental desire to own things? Generally, I would argue no; what we really want is the utility that can be derived from property. Outright ownership is only one way to derive this utility, and usually not the best way.

When you purchase a computer, you don’t really need the right to destroy it at any moment, or the right to make sure no one uses it while you're sleeping.

But people are rational, so why would they enter into suboptimal transactions? According to the Coase Theorem, as long as transaction costs are zero, bargaining will lead to a maximally efficient allocation of resources no matter the initial allocation.

The problem is that transaction costs are rarely zero. Property rights at varying levels below full ownership are often poorly defined (do you know the exact rights your Netflix subscription gives you?) and expensive to enforce. Also, partial ownership rights necessarily imply sharing with others, which comes with a wide range of costs, including moral hazard, transportation costs, psychological unease, and many others.
 
Because proprietary rights (a subset of full ownership rights) can be tricky and expensive, the default is often full ownership rights, even when a smaller bundle of rights would suffice.
 
This leads to massive economic waste. Your TV is off most of the time. Your iPad often goes unused. The majority of your wardrobe is sitting in your closet. Your car sits in the driveway while you travel. There is rampant unnecessary product duplication in all realms of life, simply because people fully own so many things.
 
Sharing is cheap, but comes at a cost

There are some real problems to sharing our property with others. For instance, relationships are impermanent, so we may not want to buy a house to share with four college buddies (this is a good economic reason in support of marriage; permanent relationships allow people to stop duplicating all their stuff). Many objects like TVs are heavy and impractical to move around (a good reason to start streaming all television through the internet). Moral hazard makes it so that people will be less careful with shared property (a good opportunity for new-age insurance companies).

Ownership can be defined in terms of exclusion. Generally, the more rights someone else has to something, the fewer I have. Intuitively, not everything lends itself to sharing equally well. Some goods are rivalrous, which means that one person’s use of a good decreases everyone else’s value.
Obviously, companies with offerings in the lower left quadrant of this diagram will most readily thrive in the sharing economy. But I believe technology will decrease transaction costs and open up opportunities across the board.

Shifting toward curated bundles of property rights

We rarely need the full bundle of property rights.
 
For every good, there is a tension between the cost of full ownership rights and the cost of a subset of proprietary rights plus transaction costs. Because proprietary rights are cheaper than ownership rights, companies that reduce transaction costs and provide the correct subset bundle of rights will be very successful.
 Many companies are already working toward this. Airbnb, Sidecar, Netflix, Rent the Runway, and others have started a shift toward shared ownership and curated property rights.

But still, there is room for much more to be done. I suspect that we will continue to see more companies push the sharing economy forward by figuring out ways to reduce transaction costs and help reshape our understanding and expectation of ownership.