October 2007 – Page 2 – artdiamondblog.com

Incentives, and Unintended Consequences, in Medicine

A clever image, but is it apt, since the article claims doctors are extracting money, rather than injecting it? Source of image: online version of the NYT article quoted and cited below.

If patients paid for their own care, doctors would have a greater incentive to improve overall care that is valued by patients. The perverse incentives of the current government Medicare reimbursement rules would be gone.

One main lesson from the article below is to show how fundamentally hard it is for the government to get the incentives right: they tried to re-jigger the reimbursement rules, but the law of unintended consequences once again bit them in their collective ass (or more accurately, alas, it bit us).

(p. C1) When Medicare cracked down two years ago on profits that doctors made on drugs they administered to patients in their offices, it ended a windfall worth hundreds of thousands of dollars a year for each physician.

The change, which mainly affected drugs to treat cancer and its side effects, had an immediate effect. In all, cancer doctors billed about $4.4 billion for chemotherapy and anemia medications in 2005, down from $5.6 billion in 2004, with Medicare covering 80 percent of the bills in each year. The difference mostly represented profit that doctors had made on the drugs.

But the change did not reduce overall federal spending on cancer care, which increased slightly. And cancer doctors say the change did nothing to reduce a larger problem in cancer treatment.

Some physicians say that cancer doctors responded to Medicare’s change by performing additional treatments that got them the best reimbursements, whether or not the treatments benefited patients. Those doctors also say that Medicare’s reimbursement policies are responsible.

“The system doesn’t value the time we spend with patients,” said Dr. Peter Eisenberg, a cancer doctor in Greenbrae, Calif., and a former director of the American Society of Clinical Oncology. “The system values procedures.”

The ballooning cost of cancer treatment, one of Medicare’s most expensive categories, offers a vivid example of how difficult it may be to rein in the nation’s runaway health care spending without fundamentally changing the way doctors are paid.

. . .

(p. C6) Now, oncologists are lobbying Medicare officials and members of Congress to reverse some of the changes and again raise the prices the government pays for drugs.

But Dr. Robert Geller, who worked as an oncologist in private practice from 1996 to 2005 before leaving to become senior medical director at Alexion, a biotechnology company, said that increasing drug reimbursement might raise oncologists’ profits but would not relieve the system’s deeper flaws.

As long as oncologists continue to be paid by the procedure instead of for spending time with patients, they will find ways to game the system, however much money they make or lose on prescribing drugs, he said.

“People go where the money is, and you’d like to believe it’s different in medicine, but it’s really no different in medicine,” Dr. Geller said. “When you start thinking of oncology as a business, then all these decisions make sense.”

For the full story, see:

ALEX BERENSON. "A Stubborn Case Of Spending On Cancer Care." The New York Times (Tues., June 12, 2007): C1 & C6.

(Note: ellipsis added.)

Source of graph: online version of the NYT article quoted and cited above.

Business Should Stop Apologizing for Creating Wealth

Source of book image: http://hoeiboei.web-log.nl/photos/uncategorized/atlasshrugged.jpg

David Kelley’s op-ed piece, excerpted below, was published in the WSJ on October 10, 2007, the 50th anniversary of the publication of Ayn Rand’s greatest novel.

Fifty years ago today Ayn Rand published her magnum opus, "Atlas Shrugged." It’s an enduringly popular novel — all 1,168 pages of it — with some 150,000 new copies still sold each year in bookstores alone. And it’s always had a special appeal for people in business. The reasons, at least on the surface, are obvious enough.

Businessmen are favorite villains in popular media, routinely featured as polluters, crooks and murderers in network TV dramas and first-run movies, not to mention novels. Oil company CEOs are hauled before congressional committees whenever fuel prices rise, to be harangued and publicly shamed for the sin of high profits. Genuine cases of wrongdoing like Enron set off witch hunts that drag in prominent achievers like Frank Quattrone and Martha Stewart.

By contrast, the heroes in "Atlas Shrugged" are businessmen — and women. Rand imbues them with heroic, larger-than-life stature in the Romantic mold, for their courage, integrity and ability to create wealth. They are not the exploiters but the exploited: victims of parasites and predators who want to wrap the producers in regulatory chains and expropriate their wealth.

. . .

. . . At a crucial point in the novel, the industrialist Hank Rearden is on trial for violating an arbitrary economic regulation. Instead of apologizing for his pursuit of profit or seeking mercy on the basis of philanthropy, he says, "I work for nothing but my own profit — which I make by selling a product they need to men who are willing and able to buy it. I do not produce it for their benefit at the expense of mine, and they do not buy it for my benefit at the expense of theirs; I do not sacrifice my interests to them nor do they sacrifice theirs to me; we deal as equals by mutual consent to mutual advantage — and I am proud of every penny that I have earned in this manner…"

We will know the lesson of "Atlas Shrugged" has been learned when business people, facing accusers in Congress or the media, stand up like Rearden for their right to produce and trade freely, when they take pride in their profits and stop apologizing for creating wealth.

For the full commentary/review, see:

DAVID KELLEY. "Capitalist Heroes." The Wall Street Journal (Weds., October 10, 2007): A21.

(Note: ellipsis in Rearden quote was in original; the other two ellipses were added.)

Good Democracies and Bad Democracies

A street demonstration in Ukraine’s December 2004 democratic revolution. Source of photo: online version of the NYT article cited below.

Democracy is neither a necessary, nor a sufficient, condition for having free markets. At best, we can argue that in the long run, liberal democracies may be more likely to sustain free market economies.

. . . , as the free market and autocrats gained power in the Caucasus, Central Asia, Latin America and Russia, the initial optimism about democracy’s sure-footed march faltered. Some scholars pointed out that the American experience, where democracy and capitalism arose at the same time, was not so much a model for the rest of the world as an anomaly. “Capitalism came before democracy essentially everywhere, except in this country, where they started at the same time,” said Bruce R. Scott, an economist at Harvard Business School who is finishing a book titled “Capitalism, Democracy and Development.”

“In the rest of the world, it took 100, 200, 300 years before they got to where they could manage a democracy,” Mr. Scott said. A big mistake, he said, was assuming that “all you had to have was a constitution and an election and you had a democracy; that was really stupid.”

Joseph E. Stiglitz, a Nobel laureate now at Columbia University, agrees that one of the biggest changes since the early 1990s is an appreciation of the complexity and limits of democracy.

As more fledgling democracies fail, various theories have surfaced to explain the appearance of democracy and elections without real freedom.

For the full commentary, see:

PATRICIA COHEN. "POLITICAL MEMO; An Unexpected Odd Couple: Free Markets and Freedom." The New York Times (Thurs., June 14, 2007): A4.

(Note: ellipsis added.)

UNO Protects Students from Cupcakes (Whether They Want to Be Protected, or Not)

Many years ago, I went along with a group of Exec MBA students to Germany. Among them was Bill Swanson. Bill had a sense of humor.

At some point in the trip, I spilled ketchup on my tie. Bill’s response was that normally a ruined tie would be sad, but given my tie, the ketchup was an improvement.

Yes, Bill has a sense of humor; so I’m hoping the story below is a joke.

That’s what I hope, but what I fear is that the story below is one more example of the inefficient, sometimes painful (like when an 8th grader can’t take aspirin to middle school), and sometimes funny, things that we are driven to do to protect ourselves from being sued, in an economy where congress has empowered personal injury lawyers to frequently sue for huge and unpredictable compensatory and punitive damages. (When Joe Ricketts, Ameritrade founder, spoke to my Exec MBA class a few years ago, he said that the biggest threat facing the U.S. economy was the proliferation of tort law suits.)

So it’s either a bad joke; or (most likely) it’s UNO protecting itself against every potential law suit; or it’s a third, and worse, alternative—which would be if the story below is to be taken at face value.

In that case we would have to conclude that some UNO staff have nothing better to do with their time than to paternalistically ‘protect’ young adults from a minuscule risk of illness from freely choosing to purchase and eat cupcakes being sold by fellow students to raise money for good causes.

Here is an excerpt from the page one, lead story, of the Sat., Oct. 6, 2007, Omaha World-Herald:

(p. 1A) Guns. Drugs. Bake sales.

What do these things have in common?

All have been banned at the University of Nebraska at Omaha campus.

Citing safety and health concerns, UNO last week prohibited selling homemade food items at campus fundraisers.

Officials said the prevalence of serious food allergies and the potential for contaminated food — either by accident or deliberately — led UNO to adopt the policy, which then drew complaints from student groups.

"The primary issue is the health of the students and the safety of the students," said Bill Swanson, assistant to the vice chancellor in the Career Exploration and Outreach Office.

No one on the UNO campus has reported problems with contaminated food purchased at a bake sale, Swanson said.

But there have been incidents around the country, he said, and those were enough to prompt a discussion among officials.

The decision has come under fire from students who say the restriction cuts off small student (p. 2A) groups from their primary fundraising source.

The Public Relations Student Society of America traditionally held bake sales once a month to raise money for national conferences, local business luncheons and volunteer work, said the group’s president, Katie Dowd.

The group raised about $1,500 a year hawking homemade baked goods donated by members.

"It’s a big blow to us," said Dowd, who called the potential for food contamination from her group’s offerings "very unlikely."

For the full story, see:

ELIZABETH AHLIN. "Goodies ban half-baked, UNO students say." Omaha World-Herald (Saturday, October 6, 2007): 1A & 2A.

How the Congo Government ‘Inspires’ Technology Entrepreneurs: More on Why Africa is Poor

"Micheline Kapinga of Kamponde, Congo, uses a cellphone on the only site in the village that is sometimes able to capture a signal." Source of caption and photo: online version of the NYT article cited below.

I AM just back from Tanzania in East Africa.

In the mornings, disregarding the protests of the armed guards at my lodge near Arusha, I jogged along muddy footpaths. After the heavy rains, and under a low, misty sky, the fields looked as ruined as a battlefield. Very poor farmers and their children stared curiously at me as I passed.

In the afternoons, I attended the TEDGlobal 2007 conference, held by the Technology, Entertainment and Design organization in the modern Ngurdoto Mountain Lodge. The contrast between the two experiences troubled me.

TED conferences, mostly held in Monterey, Calif., are invitation-only affairs, are attended by the aristocracy of Silicon Valley and are known for their adventurousness in drawing together wildly disparate trends in technology, business and the arts.

On this occasion, Bono, the Irish rock star and champion of African causes, had persuaded the conference’s organizer, Chris Anderson, to invite the usual crowd, as well as African entrepreneurs, activists, health care professionals and artists to this tropical, leafy region midway between the Serengeti Plain and Mount Kilimanjaro.

. . .

At least one of the African attendees of the conference was representative of the kind of technological entrepreneurialism that the show advocated.

Alieu Conteh, the chairman of Vodacom Congo, was born in Gambia, in West Africa, 55 years ago and moved to Congo in 1981. For years, he was a successful coffee buyer and exporter.

Congo is about the size of Western Europe and has an estimated population of 65 million people. It is one of the least-developed nations in the world, with less than 300 miles of roads, most of them in poor condition.

In 1997, Mr. Conteh recalled in an interview, he heard Laurent D. Kabila, then the country’s president, deliver a speech in which he called upon his countrymen to rebuild Congo’s infrastructure after the 30-year dictatorship of Mobutu Sese Seko. Mr. Conteh, who had no experience in telecommunications, said he was inspired. He decided to build the nation’s first GSM (Global System for Mobile communications) digital network.

At the time, according to Mr. Conteh, fewer than 10,000 people living in Congo — mainly business people, foreigners and government employees — had mobile handsets. They paid $7 to $10 a minute to make a call, using an older technology. Less than 15,000 homes had a telephone landline.

Mr. Conteh said he went, cap in hand, to the minister of communications to ask for the country’s first GSM license. In January 1998 he got it — but he first had to pay the government a license fee of $100,000. Over the years, and with little explanation, he said, the government, which is often terribly short of money, increased the license fee, first to $400,000, then $2 million.

For more of the commentary, see:

JASON PONTIN. "SLIPSTREAM; What Does Africa Need Most: Technology or Aid?" The New York Times, Section 3 (Sun., June 17, 2007): 3.

(Note: ellipsis added.)

Online Job Sites Grow and Evolve

Source of graphic: online version of the WSJ article excerpted and cited below.

Among the hottest Web sites of the past few years were job-search sites such as CareerBuilder.com and Monster.com. Helped by lavish advertising, they became household names. Newspapers, eager to tap the fast-growing online-ad market, teamed up with them.

Now, the hottest names in online recruitment are increasingly specialized job sites. That poses a threat to the growth prospects of the broad-based online job boards and their newspaper partners, analysts said.

In August, the number of unique visitors to CareerBuilder — which is jointly owned by Gannett, Tribune, McClatchy and Microsoft — dropped 2% to 20.2 million, while Monster.com’s traffic rose 4% to 16.3 million visitors.

By contrast, technology-focused Dice.com saw its traffic jump 34% to 998,000. At Healthcaresource.com, which posts health-care jobs, traffic rose 36%.

For the full story, see:

EMILY STEEL. "ADVERTISING; Job-Search Sites Face a Nimble Threat Online Boards Become Specialized, Threatening Web-Print Partnerships." The Wall Street Journal (Tues., October 9, 2007): B10.

A Toast to the Feisty Old Lady Entrepreneur Who Fought the Government, and Won

(p. B10) When Virginia-based vintner Juanita Swedenburg discovered Prohibition-vintage laws prevented her from mailing cases of wine to customers in New York, she decided to make a federal case of it.

"I was furious, never so cross, as cross as I can get," Ms. Swedenburg told the Washington Post in April 2005. A month later, the Supreme Court ruled 5-4 in Swedenburg v. Kelly that a New York law preventing wine sales across state lines was unconstitutional.

. . .

To Ms. Swedenburg, it was a matter of principle, not peddling more vino, says her son, Marc Swedenburg. She shut down her mail-order business when she filed suit in 2000, to ensure she wasn’t violating the law. The family winery still does very little mail-order sales.

Ms. Swedenburg’s day before the nation’s high court was set in motion in the early 1990s, when lawyer Clint Bolick of the Institute for Justice, a Washington D.C.-based libertarian law firm, stopped by her Middleburg, Va., tasting room. There, he discovered "a chardonnay with the toastiest nose I can remember," Mr. Bolick wrote in his book "David’s Hammer" (2007), which includes Ms. Swedenburg’s story in an anthology of David vs. Goliath tales. Mr. Bolick and Ms. Swedenburg got to talking, he writes, "When I told her that, among other things, I challenged regulatory barriers to entrepreneurship, she exclaimed, ‘Have I got a regulation for you!’ "

. . .

Ms. Swedenburg expressed regret that her husband didn’t see her constitutional arguments prevail. "He never made fun of me for doing something as foolish as this. Some men would say, ‘What are you getting into all this foolishness for?’ Not him," she told the Washington Post. "He would always be very quiet when I’d go off on my rampage about the situation." The decision in her favor was rendered on May 16, 2005, the first anniversary of his death. Ms. Swedenburg was still bouncing around on her tractor days before her death at age 82 on June 9 in Middleburg.

For the full story, see:

STEPHEN MILLER. "REMEMBRANCES; Juanita Swedenburg (1925 – 2007); Passionate Winemaker Won Fight To Sell Product Across State Lines." The Wall Street Journal (Sat., June 16, 2007): A6.

(Note: ellipses added.)

The reference for the Bolick book, is:

Bolick, Clint. David’s Hammer: The Case for an Activist Judiciary. Washington D.C.: Cato Institute, 2007.

Source of book image: http://images.barnesandnoble.com/images/12270000/12274961.jpg

Water Problems from Ethanol Reported by National Academy of Sciences

Greater cultivation of crops to produce ethanol could harm water quality and leave some regions of the country with water shortages, a panel of experts is reporting. . . .

. . .

But increased production could greatly increase pressure on water supplies for drinking, industry, hydropower, fish habitat and recreation, the report said. . . .

The research council, an arm of the National Academy of Sciences, issued the report yesterday. It is available at the academy’s Web site, nas.edu. It was financed by the National Science Foundation, the Environmental Protection Agency and other agencies and foundations.

The report noted that additional use of fertilizers and pesticides could pollute water supplies and contribute to the overgrowth of aquatic plant life that produces “dead zones” like those in the Chesapeake Bay, the Gulf of Mexico and elsewhere.

For the full story, see:

CORNELIA DEAN. "Panel Sees Problems in Ethanol Production." The New York Times (Thurs., October 11, 2007): A18.

(Note: ellipses added.)

Government Subsidies Support Wealthy Golfers

Wealthy greeting card executive Mike Keiser created and owns the Bandon Dunes Golf Resort, which caters to wealthy corporate executives who fly to the course in small private corporate jets. Source of the photo: online version of the NYT article cited below.

(p. C1) BANDON, Ore. — Mike Keiser, who made a fortune selling greeting cards on recycled paper, turned this remote spot on the southern Oregon coast into a golfing mecca that attracts wealthy people in private jets from around the world.

To many in this hard-luck town of 3,000, Mr. Keiser is an economic hero. Work became scarce after the timber and fishing industries collapsed a quarter-century ago, and his Bandon Dunes Golf Resort, a few miles north of town, has created 325 full-time jobs, plus hundreds more part-time jobs. Mr. Keiser earns millions of dollars in profits each year.

But beneath this model of enterprise, largely hidden subsidies from airline passengers, state-lottery players, taxpayers and company shareholders support the benefits that the owner, workers and visitors at Bandon Dunes enjoy.

Airline passengers and lottery players are paying for a $31 million airport expansion to serve the 5,000 business jets that arrive each year, filled almost entirely with golfers. Many of them are executives of publicly traded companies flying at a small fraction of the real cost of their trips; taxpayers and shareholders bear nearly all of these costs.

Much controversy swirls around the subsidies and tax exemptions state and local governments offer expressly to attract businesses to a community. But far less attention has been focused on the many kinds of indirect favors that are showered on places like Bandon Dunes through government policies (p. C6) that influence the flow of money from the public to private interests and often serve to reinforce benefits for those who are already successful.

. . .

No official tally of business subsidies exists, but in separate studies Peter S. Fisher of the University of Iowa and Kenneth F. Thomas of the University of Missouri estimated that state and local subsidies aimed at creating jobs total about $50 billion annually. More subtle subsidies like those that benefit Bandon Dunes are not counted in those figures and may be even larger.

Such government subsidies have been challenged as inefficient by a broad spectrum of critics, from the libertarian Cato Institute and the conservative Heritage Foundation to liberal groups like Good Jobs First.

To be sure, said Martin S. Feldstein, a Harvard University economics professor and a former chief economic adviser to President Ronald Reagan, some government subsidies can be beneficial for society.

“A subsidy for flu vaccines is good,” he said, “because if you are vaccinated I am less likely to get flu by contagion.” But job subsidies are a drag on the economy, he added, “unless the local gain exceeds the loss in the rest of the nation.”

For the full story, see:

DAVID CAY JOHNSTON. "Assisting the Good Life." The New York Times (Fri., June 15, 2007): C1 & C6.

(Note: ellipses added.)

A few of the roughly 5,000 business jets that carry executive golfers to the public airport, built and expanded partly with fees from middle-class airline travelers. Source of the photo: online version of the NYT article cited above.

Ehrlich Won Genius Award; Simon Won No Award, But Simon Was Right

Source of image: online version of the WSJ article cited below.

A new United Nations report called "State of the Future" concludes: "People around the world are becoming healthier, wealthier, better educated, more peaceful, more connected, and they are living longer."

. . .

To what do we owe this improvement? Capitalism, according to the U.N. Free trade is rightly recognized as the engine of global prosperity in recent years. In 1981, 40% of the world’s population lived on less than $1 a day. Now that percentage is only 25%, adjusted for inflation. And at current rates of growth, "world poverty will be cut in half between 2000 and 2015" — which is arguably one of the greatest triumphs in human history. Trade and technology are closing the global "digital divide," and the report notes hopefully that soon laptop computers will cost $100 and almost every schoolchild will be a mouse click away from the Internet (and, regrettably, those interminable computer games).

It also turns out that the Malthusians (who worried that we would overpopulate the planet) got the story wrong. Human beings aren’t reproducing like Norwegian field mice. Demographers now say that in the second half of this century, the human population will stabilize and then fall. If we use the same absurd extrapolation techniques demographers used in the 1970s, Japan, with its current low birth rate, will have only a few thousand citizens left in 300 years.

I take special pleasure in reciting all of this global betterment because my first professional job was working with the "doom-slaying" economist Julian Simon. Starting 30 years ago, Simon (who died in 1998) told anyone who would listen — which wasn’t many people — that the faddish declinism of that era was bunk. He called the "Global 2000" report "globaloney." Armed with an arsenal of factual missiles, he showed that life on Earth was getting better, and that the combination of free markets and human ingenuity was the recipe for solving environmental and economic problems. Mr. Ehrlich, in response, said Simon proved that the one thing the world isn’t running out of "is lunatics."

Mr. Ehrlich, whose every prediction turned out wrong, won a MacArthur Foundation "genius award"; Simon, who got the story right, never won so much as a McDonald’s hamburger. But now who looks like the lunatic? This latest survey of the planet is certainly sweet vindication of Simon and others, like Herman Kahn, who in the 1970s dared challenge the "settled science." (Are you listening, global-warming alarmists?)

The media’s collective yawn over "State of the Future" is typical of the reaction to just about any good news. When 2006 was declared the hottest year on record, there were thousands of news stories. But last month’s revised data, indicating that 1934 was actually warmer, barely warranted a paragraph-long correction in most papers.

For the full commentary, see:

STEPHEN MOORE. "DE GUSTIBUS; Clear-Eyed Optimists." The Wall Street Journal (Fri., October 5, 2007): W11.

(Note: ellipsis added.)

Strong, But Slower, Growth in Online Sales

Source of graph: online version of the NYT article cited below.

(p. 1) SAN FRANCISCO, June 16 — Has online retailing entered the Dot Calm era?

Since the inception of the Web, online commerce has enjoyed hypergrowth, with annual sales increasing more than 25 percent over all, and far more rapidly in many categories. But in the last year, growth has slowed sharply in major sectors like books, tickets and office supplies.

Growth in online sales has also dropped dramatically in diverse categories like health and beauty products, computer peripherals and pet supplies. Analysts say it is a turning point and growth will continue to slow through the decade.

. . .

Forrester Research, a market research company, projects that online book sales will rise 11 percent this (p. 16) year, compared with nearly 40 percent last year. Apparel sales, which increased 61 percent last year, are expected to slow to 21 percent. And sales of pet supplies are on pace to rise 30 percent this year after climbing 81 percent last year.

Growth rates for online sales are slowing down in numerous other segments as well, including appliances, sporting goods, auto parts, computer peripherals, and even music and videos. Forrester says that sales growth is pulling back in 18 of the 24 categories it measures.

. . .

The turning point comes as most adult Americans, and many of their children, are already shopping online. That means Internet stores are not getting a flurry of new shoppers to spur the kind of growth tht the industry is accustomed to. There is a boom in the number of foreigners coming online, but shipping items overseas can limit that market as a source of growth.

. . .

John Morgan, an economics professor from the Haas School of Business at the University of California, Berkeley, said he expected online commerce to continue to increase, partly because it remains less than 1 percent of the overall economy. “There’s still a lot of head room for people to grow,” he said.

For the full story, see:

MATT RICHTEL and BOB TEDESCHI. "As Some Grow Weary of Web, Online Sales Lose Momentum." The New York Times, Section 1 (Sun., June 17, 2007): 1 & 16.

(Note: ellipses were added. The online version of the article had the slightlly different title: "Online Sales Lose Steam as Buyers Grow Web-Weary." The bold has been added to indicate a couple of sentences in the above excerpts, that were in the print version, but had been dropped from the online version.)

Source of graph: online version of the NYT article cited above.