5.6.17

WHY MARKET TESTS MATTER.

Charles "Strong Towns" Marohn illustrates what goes wrong when there is no price discovery, as is the case on Health Care Island, and the neighboring Infrastructure Island.
For example, on the island, nobody ever talks about prices, they only talk about costs. This is not a subtle nuance. Prices, of course, are related to costs but, in a true competitive marketplace -- one where people, not a third party, actually pay directly for the goods and services they consume -- we never talk in terms of costs. Only prices.

Does it really matter to you how much it costs the grocery store to provide that twelve pack of your favorite beverage? Of course not. It's only matters to you -- someone living on the mainland -- what the price is to you. Price is how you determine your preferences among competing items. Profit is how the market receives feedback on those preferences. High prices invite substitution. High profits invite competitors. This is all basic and obvious to us on the mainland.

Which is why, on the healthcare island, the conversation is about costs. Your preferences don't matter, except where they are aligned with the objectives of those on the island. Substitution doesn't matter; there are no competing services. Obscene profit margins don't invite competitors; they invite consolidation. Justifying costs to third party payers, instead of prices to patrons, is the name of the game. It's a bizarre world that doesn't make any sense.
Worse, because there is no price discovery, nobody has any idea whether the profit margins are obscene, as there is no basis for comparison, and there are lots of ways for the rent-seekers to conceal the obscenity in the dissipation.  Here's how it works in Minnesota.
In Minnesota where I live, public contracts are required to always take the lowest bid price. This creates incentives for all kinds of shenanigans. I worked on one state paving project where the low bidder bid most every item far below cost except for bituminous, where they were the highest price by many multiples. The strategy for executing the contract was then clear: Do the least amount necessary to fulfill the contract agreement and overrun the bituminous as much as possible. An extra 1/8 of one inch of pavement over a 40 mile project -- an amount hardly perceptible -- caused a massive cost overrun.

I could go on, but here's the crazy thing: On Infrastructure Island, this all makes sense. Nobody there is really unethical, it's just that the incentives have perverted what, in other realms, would be seen as normal and acceptable. Make the project big. Make it take a long time. Create a lot of overruns. Don't maintain it until it falls apart catastrophically. Few on Infrastructure Island set out to do these things, but they happen and nobody loses a lot of sleep over it. That's because, for the players involved, there is little negative feedback and lots of positive feedback associated with these perverse outcomes.
Although Mr Marohn doubts that going to a fully-private reform for the highway commission (and, per corollary, Big Medicine) would work, note the implicit market test in that "Don't maintain it until it falls apart."  People migrate away from such places, and the death spiral continues.

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