Social Technologies: Organizational Capital in Health Care

Much of what I believe to be the problem in health care is centered around the social technologies (STs) that have arisen in the delivery and payment mechanisms we use in the health care field. There has been a surprising lack of innovation in these STs. This has resulted in the attempts to continually fit rigid models of old STs to the rapid innovation in the physical technologies in medicine. Indeed, my biggest complaint about the health care “reform” legislation that is being considered currently is that it cements the status quo, which has (admittedly) for the last half-century, delivered high quality of care, but at a high (and rapidly increasing) price. Many people decry the existence of profit as being “the problem” in the health care field — we will ignore these people, as the do not have a valid argument.

Social Technologies

A pertinent question to ask when beginning to think about these issues is, “What are social technologies, and how do they evolve?” I define social technologies as the methods and designs used to organize people and institutions in pursuit of a goal or goals. STs are very important to the growth of economies. In fact, McKinsey and Company’s Global Institute did a study on the underlying drivers of the “productivity revolution” that occurred in the 90’s, and found that the main driver was not innovations in products, but innovations in organizational capital that allowed goods and services to be produced and consumed at a much lower cost (these types of innovations in the retail sector alone accounted for nearly a quarter of the growth in overall US productivity during that period).

Health Care Stagnation

So if the retail sector gained from innovation in ST design space, why has the health care sector stagnated? That isn’t really a fair question — there are large parts of the “health care” sector that have leveraged innovation in organizational capital to lower costs and provide cheaper products. Over-the-counter medicines and remedies, sanitation products, and health food are examples of these. But the core of actual medicine seems to have stopped attempting wide-scale experimentation in ST design space in favor of the traditional status-quo. There was an HMO fad that faded quickly in the 90’s, and Health Savings Accounts haven’t taken off to a large degree (even though they have been proven to lower costs). Retail medical clinics get bombarded from every angle (government, lefty consumer groups, etc), and this has led to tough shackles which hamper their effectiveness. However, I don’t think that status-quo bias among consumers tells much of the story.

The problem (as usual?) is the structure of the regulatory apparatus. The government heavily regulates almost every aspect of medicine; from the delivery, to the division of labor. The sheer amount of regulation has created a very narrow evolutionary design space in which people wishing to innovate have to work. Health care is a market that is veritably planned by “Big Men”, and thus, unless the ideas come from “on high”, very few innovations can get widespread adoption. The health care marketplace is dominated by these “Big Men” (insurance companies, pharmaceutical companies, government agencies). The health care “reform” bill further cements this trend. The insurance exchanges are administered by “Big Men”, the comparative effectiveness research proposals are squared around a group of “Big Men” who make the decisions…and there is little room in the design space for other innovators. In other words, there is no room for deductive tinkering.

In Praise of Markets

I view the economy as an evolutionary system, which operates much like natural evolution. Agents deductively tinker in an infinite design space for effective designs of physical and social technologies, and devise “business plans” with the goal of profit in mind. Markets act as a differentiation, selection, and amplification mechanism. In this way, businesses live and die; but it is markets that innovate.

What we need in health care is a larger evolutionary design space, and a much more prescient differentiation, selection, and amplification process. As it stands today, we have agents searching a narrow design space, and then the big actors (insurance, pharma, med, and government — all with status-quo bias) doing the differetiation, selection, and amplification. We need to widen the design space, and provide a more robust selection and amplification mechanism. As Orgel’s Second Rule states, “Evolution is cleverer than you are.”

Viewing markets from an evolutionary perspective, we can partly dismiss the “traditional” economic view that markets are the most efficient method of allocating resources in equilibrium, and reinterpret the view as an evolutionary search mechanism that states:

Markets provide incentives for the deductive-tinkering processes of differentiation. They then critically provide a fitness function and selection process that represents the broad needs of the population (instead of a few “Big Men”). And finally, they provide a means of shifting resources away from unfit designs and toward fit ones, thus amplifying the fit models’ influence.[1]

Markets win over command and control not because of their efficiency (indeed, central planning is much more efficient[2], that’s why companies exist!), but because of their effectiveness at innovation in disequilibrium. Of course, markets are much better than big men at allocation, as well, but they are better because of their computational efficiency.

Bottom Line: When “markets” fail, use markets.

[1]See The Origin of Wealth, by Eric Beinhocker.
[2]In the notional definition of efficiency (getting things done), not the economic definition.


2 thoughts on “Social Technologies: Organizational Capital in Health Care

  1. Hey Mang,

    You should put together a suggested reading list and update it once and awhile..

    Just an idea. Prost!

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