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Controlling Health Care Costs November 18, 2011

Posted by The Armchair Economist in Economics, Fix Health Care, Health, Health Care, Medicine, Technology.
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I cam across an Op Ed on controlling health care costs through bundling.  I’ve read about novel health systems that focus on high risk/frequent fliers that take daily vital signs via telemedicine and other ways to prevent costly admissions (ie: daily weights for CHF patients, daily in person clinic visits to monitor healing wounds in diabetics).    With the enormous cost of admissions, and inefficient management of patients as inpatients (ie: often working up problems that can be worked up/treated as outpatients)  I see this as a potential way to reduce the cost on our health system.

One particularly interesting statement:

Half the population — mostly young people and healthy adults — consumes just 3 percent of costs, while the sickest 10 percent consumes 64 percent

It would be interesting to see where this information comes from – and to compare insurance company statistics to see what percentage of health care costs are consumed by the sickest 10%.   Although I am a proponent of capitalism and the free market, there are areas (health insurance being one of them) where I feel that the free market cannot work.  Too many inefficiencies – administration/marketing/overhead amounting to as much as 25% of costs being directed to non healthcare related costs, too much incentive to game the system (your legal obligation is to minimize payouts to the insurees and to maximize profits).    I’ll elaborate on all of this in a future post (hopefully)

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The costs of the “Free Shipping” option at Amazon November 29, 2007

Posted by The Armchair Economist in Business, Economics, shopping, Technology.
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This morning, I caved and bought the Nikon D40 D-SLR that I’ve been fantasizing about on and off for 6 months. In any case, I ordered the camera with an extra 55-200mm VR zoom lens in addition to several other accessories (which came to almost free taking advantage of various promotions). Being the cheapass that I am, of course I opted for the ‘Free Shipping’ option.

I wouldn’t call myself a frequent buyer from Amazon, for one, I feel that their prices aren’t all that much better than elsewhere (especially on textbooks and review books, where there is often a 0% discount, go figure.. they have less overhead but charge full price?). But on occasion, a deal crops up where I’ll bite the bullet and buy from them, always using the free shipping option. I noticed that up until maybe 2 or 3 years ago, anytime I used the free shipping option, it would ship within a few hours. However, within the past 3 years, my “free shipping” items would often be delayed a few days before it shipped. This coincided with the “Amazon Prime” offering, where you could get free 2nd day air if you pay them 79$/year. I figured the delayed shipping on the “Free” option was just their strategy to artificially inflate the ‘value’ of Amazon Prime. This time is probably a record, the ship date is 5 days AFTER i placed the order.. and all of my items are in stock and are available for 1 day shipping. This got me curious enough to do a quick google search and I info (posted below)… apparently its from an insider and provides some details into the free shipping/ estimated date of shipment algorithms.. [source: techdirt.com]

I used to work at Amazon, in fact I was responsible for a lot of the algorithms used in Amazon’s logistics network in use today. I’ve read a lot of FUD about Amazon order fulfillment so I have to try to add some facts to these discussions.

Amazon’s order fulfillment process is insanely complex and involves hundreds of different variables which impact customer satisfaction and costs. Since keeping costs (and thus prices) as low as possible is also a major factor of customer satisfaction, it’s important to understand that the underlying principle for all of the algorithms used is to maximize the customer experience. But that’s very complicated. Without disclosing any trade secrets, here are a few of the types of parameters which go into the order fulfillment decisions:

* What has the customer paid for? If they’ve paid for next-day delivery, Amazon assumes they want their order as quickly as possible. Likewise, if they’ve chosen super-saver free shipping, they assume it’s not needed that quickly.

* Where is the inventory? Amazon has many distribution centers scattered across the U.S.A. and not all items are available at each center. It obviously costs less to quickly get an item to a customer from a nearby warehouse. But it might be necessary to ship from further away.

* Are inventory levels as low as possible? To maximize cash flow and utilization of its warehouse space, Amazon is very aggressive about managing its inventory levels. This may mean that rarely ordered items are not kept in inventory and may require time to source from a supplier. It also means that Amazon tries to move inventory out to customers as quickly as possible. Usually, delaying shipments has inventory costs. Believe me, Amazon has no desire to own inventory one minute more than it has to.

* Where is there space for inventory? Related to the above point, space can get very very tight in the Amazon warehouses, especially before the holidays. They just may not have room for dozens of 60″ plasma TVs in every distribution center.

* Does the item need to be ordered from a distributor or manufacturer? If an item is not in Amazon’s inventory it may already be on order and due on a future date supplied by the source or it may need to be ordered. Obviously it’s cheaper to buy large volumes directly from a manufacturer, but those items may not be available quickly. If a customer has paid for next-day delivery though, Amazon will pay to get that item to them.

* Which distribution center has enough people working today? To help keep employees happy, Amazon tries to smooth work loads. Employees prefer to know when and how many hours they will be working next week. When there are high volumes of orders, this may mean delaying some low-priority orders.

* Which distribution center has capacity in their automated systems? It’s much cheaper to fulfill an order using Amazon’s automated facilities than to do it using manual labor. But only so many orders can go through these automated systems a day. Orders may be routed to a different fulfillment center, or delayed to minimize the handling costs.

* Are there any automated fulfillment lines? For big ticket items (think new Harry Potter book) Amazon will often dedicate mechanized packaging and shipping hardware to just that product. It may be much cheaper to wait a couple days until one of these mechanized production lines is in place before fulfilling an order.

* Which shipping company is cheapest? Amazon utilizes just about every common carrier in the U.S. and can even use them together to minimize shipping costs and reduce delivery times. These rates change regularly and service levels can vary from day to day. It may cost 50% less to get a non-next day order to a customer by waiting a day or two before shipping it.

* Do the shipping companies have capacity? Many of Amazon’s distribution centers are in low-cost rural areas. It’s not uncommon for Amazon to max-out the capacity of UPS, DHL, USPS, FedEx, or other shipping companies from one of these centers. If that happens, an order for New York City may end up coming from Nevada rather than near-by Pennsylvania.

* How quickly can Amazon be paid for an order? Legally, Amazon can’t charge you for an order until that order has shipped. To maximize cash flow, Amazon normally tries to get orders out as quickly as possible so they can be paid as quickly as possible.

* How good of a customer is this? And yes, if you’re a good customer, Amazon will spend more to keep you happy. In extreme cases, I’ve seen Amazon send employees to local Walmarts or other retailers to buy an item which is then couriered to a great customer. Believe me, this isn’t cheap. This cost and effort doesn’t go into a first-time buyer’s Super Saver order.

These are just a handful of the types of decisions which have to be made for every order. During peak periods Amazon handles over a million orders a day; trying to balance and optimize all of these constantly changing variables is a difficult job but I believe the company does a pretty good job of it. And yes, I believe there is intellectual property in the software created by Amazon to make this happen.

In general, I think Amazon’s customer service is great. But when I hear that some individual customer service rep, who is probably sitting in West Virginia or India and has never seen the algorithms used for fulfillment or even been to one of Amazon’s fulfillment centers explains how free shipping works, I just have to giggle. They really have no idea.

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One problem (of many) with our system of health care August 21, 2007

Posted by The Armchair Economist in Commentary, Health, Health Care, Politics, Technology.
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Its 1am. I have to be at the hospital in 5 hrs. These mid afternoon naps are killin me I tell ya.

What better way to spend my time than to write about the new developments going on at our favorite health care buyer – Medicare. Medicare announced over the weekend that they will stop paying for procedures that stem from medical errors, ranging from instruments left in surgical patients to patient falls to infections acquired while in the hospital (specifically UTIs from cathed patients). Basically they are only going to pay for treatment relating to what the patient originally presented with… (makes sense right?).. however the reality is that being in a hospital brings a whole host of risks that arent always preventable (not really ‘medical errors’) which brings up another issue.. in order to accurately diagnose a patient, lots of tests need to be run (no, it isnt supposed to be this way..).. but medicare only reimburses a flat rate for each case… (btw. i’m not going to talk about the inexcusable cases where the wrong leg is amputated or where a scalpel is left in the body.. these things happen.. but its so rare that the news media actually decide to write about it.. more of the financial impact to health institutions will come through ‘errors’ such as patient falls and nosocomial infections)

Unfortunately, whatever Medicare does, the private insurance industry will adapt and pervert to their will. It will be interesting to see how things shake out.. for example, how exactly do you minimize the number of times that a 75 year old patient needs to go to the bathroom (ie:to prevent falls)? You can give them a bed pan (very dignified eh?).. or maybe make them ring the nurse everytime they need to go (uh.. good luck with that.. might as well keep a bed pan handy)… or maybe you can just put them on a catheter… wait.. that increases the chance of infection.. for which treatment is no longer covered. Also, regarding preventable infections.. unfortunately until we know how to eliminate bacteria there is no such thing as ‘preventable infections’.. no matter where you are, even in the sterile surgical field, there are bound to be bacteria.. the question is whether the antibiotics and your immune system are up to snuff in dealing with it. The main point is that there are always complications (almost ‘expected’ if you will).. and it is alittle rediculous to say that no complications will ever happen. (it kind of provides indirect validation to people who sue due to bad outcomes rather than bad decision making or medical errors).

What we need is to close the liability gap between the payer and the care provider. The problem stands in that the liability for error falls in the health care providers hands.. while the purse strings are being controlled by another party who has no liability whatsoever. For example, if a 10y/o kid presents with recurrent headache with nausea and vomiting, the diagnostician has to consider brain tumor (no matter how remote the idea). The physician will order an MRI, the insurance company will come back with ‘we won’t reimburse for an MRI in this case (basically the chances of an brain tumor is very low, while the number of people who have recurrent headaches with nausea and vomiting are very high.. so it is a business decision not to do reimburse for the MRI.. otherwise they would go bankrupt)… but note: they didnt say don’t get it, they just say they won’t reimburse for it, so now, they’ve thrown te ball back into the doctors court. its up to the doctor to decide what to do.. either make the hospital foot the bill or make the patient foot the bill (btw: its very expensive).. If the doctor thinks that its REALLY low on the differential, perhaps they will tell the patient its most likely nothing (or they could be a real bastard and leave it up to the patient to decide if they want it or not ie: not give them any guidance)… but 5 years down the line, if it really happened to be a brain tumor, guess who gets sued? (by the way, doctors have been sued (and lost) by telling patients time and again to get specific tests.. (ie: writing prescriptions time and again).. but the patients never got it.. and when their disease progressed to an advanced stage, they sued the doctor because the doctor never stressed how important it was for them to get the test!! Its actually progressed to the point in which doctors can call CPS (ie: child protective services.. the same people who come if you are caught abusing your children) if parents don’t get necessary tests for their kids (ie: lead screenings)… now if that isn’t an adversarial/defensive relationship, I’m not sure what is. To be fair, I don’t really know how often this is invoked or how accurate it is.. the anecdote was just passed on to me by another doc)

If the insurance companies want to make decisions on what to reimburse for (ie: they think they know enough to make the decision of what is important and what isnt), they need to share some of the liability.

(btw: regardless of how good you think a hospital is or how good the doctors are, you never want to be in a hospital any longer than you need to be.. consider it a risk benefit decision.. )

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Google: nurturing its downfall May 27, 2007

Posted by The Armchair Economist in Business, Technology.
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Back in the 1990s Bill Gates said the company that would eventually beat Microsoft probably had yet to be founded – some people believe that company is Google. But what about Google itself, who will kill Google? An interesting analysis of who is most likely to form “the next big thing”.

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