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To generalize: competitors in a market usually behave rationally, and what looks like "stupid" behavior from afar may actually be unseen incentives.

Which suggests a test for your understanding of a market: can you map out the incentives and explain why what looks like apparently-irrational behavior is happening?

For example, in healthcare, we waste 30%+ of the $3T we spend each year. Much of that waste is due to hospital readmissions for an ongoing condition like heart failure. Startups sometimes try to fix this by developing a special machine learning algorithm to predict readmissions and apply an intervention. But even when the technology succeeds, the business fails: hospitals charge for readmissions, so there's an active disincentive for the hospital to buy the product. (That is now changing with ACOs, and a change in incentives is an opportunity for new companies.)

The hospital admission/re-admission policy (or lack thereof) is exactly the type of thinking that this article is addressing. ER/Urgent Care doctors have a list of criteria for hospital admissions that are not always present at the time but may comeback later. If they are use more caution then required a hundred dollar medical bill may turn into a several thousand dollar hospital stay over a minor issue. Doctors are dealing with imperfect information when making a diagnosis so to say that they need an "algorithm" is trivializing a complex problem. There is room for a lot of improvement in terms of helping medical staff make better decisions with more complete information. I am uneasy that some of the new regulations in this area will end up handcuffing doctors in ways that will not always be in the best interests of the patients Note: not medical staff. Many years ago I processed claims for an insurance company and had some long and heated discussions about this topic with hospital staff. If some of these new regs are like what my oversized insurance company had, it will not end well.

It's not just ACOs. CMS is also changing the reimbursement structure to penalize hospitals that have unnecessary readmissions.


I don't understand your comment. You say "we waste 30%", but then say "hospitals charge". Who's the "we" who's wasting 30%, and why are startups trying to sell something to prevent X to the people who make money from X, rather than to the people who lose money from X?

"We" referred to US healthcare spending [1], and the party with the right incentive for this problem is the payers: Medicare, Medicaid, and private insurance like Aetna, Blue Shield, United Healthcare, etc.

While the payers have the incentive to reduce readmissions (saves them money, leading to lower insurance premiums for you), they don't usually have the access to do so -- they're not the one seeing the patient or prescribing medicine.

The payers could, of course, try to change the way that THEY reimburse the hospital to align the incentives. For Medicare and Medicaid, that requires a law--which is why the Affordable Care Act is creating opportunities for new startups as it rolls out. For private insurance, I think they'd like to change reimbursement, but they have relatively little market power compared to healthcare providers: http://rockhealth.com/wp-content/uploads/2012/12/Kocher-et-a...

[1] Completely different set of incentives (and thus problems) in other healthcare systems.

That clarifies things, thank you.

A readmission is basically sending someone home early or failing to care properly for them on an out patient basis after they leave the hospital. Sending someone to the hospital twice when you could send them once is wasteful.

Ah, thanks. Wasteful unless you are the hospital, indeed.

There's no actual stupidity there - just conflicting unstated goals.

There's an inevitable conflict between "Make as much money out of patients and the entire health system as possible" and "Care for patients as efficiently and effectively as possible."

Agree. Same can be said about countries. Laws/incentives vary drastically and change what the "correct" strategy is from country to country.

An excellent keynote presentation showing this in the public-home-maintenance business in the UK is was presented by John Seddon at https://www.youtube.com/watch?v=hbNsQFd8DQw

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