Econ 201

Hi all,
I promised a lesson in Econ 201 which will hopefully enlighten and educate you like never before. This comes from one of my favorite books, "Unleashing the Killer App", by Downes and Mui.

Most people have heard of what we call a "transaction cost" - now we think of it as an ATM fee or similar. However, it is not a one shot deal, there are many parts to a transaction cost and they are all important. Leaving any one part out would be like a genetics expert saying, "Oh heck, we don't need that stinking chromosome!".

There are six parts to a transaction cost - (there will be a quiz later)

1. search costs - trying to sort and filter the right product or service.
2. information costs - learning the particular product and company info as the results of your search
3. bargaining costs - pretty obvious, this can be simple like eBay or very complicated like a federal contract
4. decision costs - weighing the risks , features and benefits of your choice.
5. policing costs - making sure you got what you paid for according to your earlier agreement and,
6. enforcement costs - what happens when you get a short ship or a deviation from the original agreement, not uncommon.

Ronald Coase studied economics in 1931 and published his findings (above) in 1937!!!
The article "The Nature of the Firm" earned him the Nobel prize, but over 50 years later!

His conclusion - firms are created because the additional cost of organizing and maintaining them is cheaper then the transaction costs involved for individuals to conduct business directly. (think eBay, Amazon). I can buy life and car insurance over the web, why not health insurance? How hard can this be?

Conversely, when was the last time you explored for and refined your own gasoline? Would you be comfortable buying your own surgery equipment on the Net? "Hey doc, don't use that expensive hospital stuff, I got a deal on eBay! I'll bring my own scalpel and anesthesia."

When I was a Bid/RFP manager at Unisys, later DG, it was not uncommon for our government and health care bid responses to be over 500 pages long, we often had to use two binders to fit it all.

By now if you are savvy, you know where this is going.
Question - Who is going to police the government if they also operate the system? D'oh! Let's create another layer of bureaucracy - yeah, that will make things better.

If the government gets involved in operating the health care system, they will DOUBLE their (our) transaction costs. They are set up to do oversight, we already have contract laws regarding commerce, police, courts, FBI and Secret Service to manage the oversight of our economy. These fixed costs are built in over decades (amortized, for you accountants). What accountant ever got promoted by saying - "let's double our fixed costs immediately and then hopefully we'll save money over time!" I think that firm was Abbott and Costello CPA, LLC.

Based on my 20 plus years of experience I can add a BONUS education moment - that there is an extreme cost in health care based on #4 and #6. In order for a health care professional to change their habits, the decision cost (using a web based EMR,CPOE recent studies indicate only 15% of all docs use them! even now.) The "switching cost ROI" (my term) must be multiples (5x to 10x!) in order to justify the retraining of everyone in the delivery chain. Also, no one will stick their neck out with a new system because they are afraid of getting sued. They need legal cover.

I am not a smart guy, Mr. Coase won the Nobel prize, maybe we should listen to him. It would be foolish to ignore this reality. This Nobel prize winning economist just proved to me that our transaction costs would double with a government run plan.

There is another, better way; credit goes to my good friend and mentor, Dr. Bob T. He said the best choice for all is to head in the direction of "consumerism", or an individual-based health care system. Again, I can buy an IRA, 401k, life and car insurance over the web, why not health insurance? Create a duplicate system.

The web will enable the best of our collective intelligence to refine and improve the current system, without any transaction cost increases. I like simple.

copyright M. Ryan 2009