Price variations in US healthcare market and the power of data visualization

Competitive markets deliver cost-effective health care? No, if evidence presented in the graphic from New Jersey on treatment of chronic obstructive pulmonary disease is to be believed.

In the same New York city area, a joint replacement surgery costs anywhere between $15000 and $155000! The variation in prices, over such a small area, is truly stunning. This variation is equally stark when procedure rates in the US are compared with those in other countries. A few weeks back Time carried a well researched story on the high health care costs in the US, which had this graphic.

The data on the variations in prices for the 100 commonest diagnosis related groups (DRGs), spanning 163,065 patients, charged by 3337 hospitals in 306 metropolitan areas in 2011 was recently released by the US Government's Centers for Medicare and Medicaid. The data is available here. Is there any more compelling evidence of a market failure? Health care is clearly not broccoli.

The Times has rendered the database in a superbly informative interactive infographic. Its cognitive appeal and user-friendliness is striking. It is also an excellent example of how appropriate rendition of "big data" can be transformational in bridging the "last mile gap" in awareness creation efforts. Such graphics present critical decision-support information (here, a very good representative metric, fee charged by the hospital for each DRG for both Medicare and non-Medicare patients, both compared with respective national averages) in a manner that resonates cognitively (it is mentally easier to compare hospitals when information is so presented, on a geographical plane) with its audience.

In this context, considerable academic research has been done in recent years on the impact of information dissemination on increasing the responsiveness of elected representatives, quality of learning outcomes in primary schools, girl child literacy, prices of farm products, and so on. In many respects, all these studies are merely regurgitating conventional wisdom. At a conceptual level, even before any such research, people at the cutting edge in each of these areas already knew that bridging information asymmetry can be transformative. But the challenge, and they also knew it all along, is in presenting it in a manner that would facilitate easy use by its targeted audience. The academic research, beyond validating conventional wisdom, does nothing to address that challenge.

Imagine having similar visualization in developing countries to help people shop for school admissions or buy insurance policies and savings instruments, parents know the learning trajectory of their child, farmers know the optimal farm-gate price for their produce, and so on. And also if this information can be made available on a mobile phone interface.

I strongly believe that the search for such solutions require a smart intersection of statistical analysis, data visualization techniques, communication technologies, and behavioral psychology. Given the inherently complex nature of these issues and co-ordination problems, the market is not likely to resolve this challenge. It requires a partnership between governments, large private foundations, non-government organizations, and private service providers. But governments have to take the lead in facilitating this partnership.

PS: In the US, even with the available information, in the absence of some form of regulation, the local market power of hospitals, the presence of an insurance intermediary, and the very nature of demand for health care services, will conspire to maintain the diverse price distribution. 

Designing effective development program implementation

A collaborative approach to development program implementation that marries the consultant's problem solving skills with the academician's experimental research skills is the subject of my latest Governance Agenda column.

The "inflation dog" is locked up in bank vaults!

The IMF recently described inflation as the "dog that did not bark". It pointed to structural unemployment  (which lowers competition in labor market and thereby attenuates deflation) and anchored inflation expectations (due to the high perceived inflation fighting credibility of central banks) as being responsible for muting both deflation and inflation.

There will obviously be disputes about how accurately this reflects the underlying reality - Alok Sheel has a good analysis of other equally compelling factors. Amidst all this speculation we forget that the extraordinary quantitative easing has left no signatures of inflation. This FRED graphic shows that in the US an exploding monetary base has been accompanied by relatively stagnant stock and velocity of M2 money.

And if we add consumer lending, commercial and industrial loans, and commercial paper to the M2 stock and monetary base, the underlying lack of demand becomes painfully obvious.

Atleast for the time being, the "inflation dog" appears safely locked up in the vaults of banks! But do I see the M2 stock inching up or is it just a squiggle?

Germany fact of the day

From a very good article by Edward Luce in FT which explores the attractions of German economic model as America grapples with stagnant or declining manufacturing and a crisis in its human skill development channels, 

Germany channels roughly half of all high-school students into the vocational education stream from the age of 16. In the US that would be seen as too divisive, even un-American. More than 40 per cent of Germans become apprentices.

As America suffers a big unemployment crisis, with no end in sight, structural issues like skills mismatches have been blamed as being responsible,

Almost half of Americans with a degree are in jobs that do not require one... Fifteen per cent of taxi drivers in the US have a degree, up from 1 per cent in 1970. Likewise, 25 per cent of sales clerks are graduates, against 5 per cent in 1970. An astonishing 5 per cent of janitors now have a bachelor’s degree. They must offer endless nocturnal moments to repent those student loans. 

 

Another PPP in renegotiations - Mysore Water Project

The Mysore Municipal Corporation's Rs 164 Cr PPP project to provide 24X7 water supply is the latest to fall victim to the curse of contract renegotiations. The Tata owned Jusco won the tender in November 2008 for a three-stage project, financed under the JNNURM, to rehabilitate the existing supply network, reduce non-revenue water, manage operation and maintenance, and deliver 24X7 water to the entire Mysore city over a six year period.

The project had three phases - preparation (1 year), rehabilitation (3 years), and O&M (2 years) - with clearly defined performance clauses. But now with rehabilitation period deadline having passed in January, just 61000 out of the 117000 services have been connected to the rehabilitated network and of them only 13000 have 24X7 supply. Now Jusco is seeking renegotiations. Livemint writes about the reasons,

First, Jusco found problems with the scope of the work defined in the project agreement. When the tripartite agreement was signed, the work was for laying a network of pipelines over 910km with 117,000 connections. During the initial survey done by Jusco, the length of the pipeline network that needs to be rehabilitated was found to be 1,910km with 1.74 lakh connections... With changes in the scope of the work, the estimated cost of the project shot up, and renegotiating became messy. The government does not have money to increase the cost of the project, and even if they did, it would lead to litigation... Jusco is in talks with the government to resolve the discrepancies in the initial surveys... The Planning Commission working group conceded in its report that the risk of data gaps is high and that guaranteeing performance is difficult if a project design is flawed. 

I haven't read the Jusco contract document. But it is clear that Jusco is following the same script as the numerous failed or failing utility PPPs across the world. In all such PPPs, conventional wisdom would have it that the public agency should design the tender in a manner as to align incentives. The most favored design in such water supply rehabilitation and O&M contracts is Engineering Procurement Contracts (EPCs) where the bidders study the network and offer their quotes. These quotes are invariably based on an estimate of how much it would take to rehabilitate, operate and maintain the network for a period of time (Jusco may not be an exact form of this). It is reasoned that this project design will align incentives and encourage bidders to adopt the most optimal rehabilitation and O&M plans and leverage the latest technology, thereby lowering costs and raising efficiency.

However in the real world, this approach rarely ever works, especially for utilities where massive legacy systems dominate. Even with the most comprehensive upfront surveys, baseline information collection, and O&M plans, it is impossible to reliably estimate the cost of any such project. In all such projects, the rehabilitation costs generally emerge in unpredictable manner, as the project work starts. Tailoring an incentive compatible contract becomes an imposing challenge.

In the circumstances, and especially when faced with competition, a market failure ensues. The bidders, eager to be the first-mover in an emerging market with great long-term potential, invariably under-estimate the costs and bid aggressively. Renegotiations are a fait-accompli. In fact, the window of renegotiations serve to generate the moral hazard that drives aggressive bidding. I am not aware of even a single such project which has been successful.

There are no easy solutions. The legacy risks inherent in rehabilitation of existing networks cannot be borne by private operators. It has to be dealt separate from O&M. Its entrustment to private operators poses the aforementioned difficulties. However, once the rehabilitation is done, the performance contracts to monitor O&M is a much more tractable and realistic window to bring in private capital, management, and technology.

Is India's power crisis, also a case of foreign policy failure?

In 2010 the Indonesian government decided to annually benchmark all coal exports to international market price and also announced the levy of higher royalty and income tax on these exports. It has adversely affected the operationalization of 20000 MW of power capacity addition projects in India, including two of the Ultra Mega Power Plants (UMPPs). In 2012, Indonesia accounted for 79% of all thermal coal imports, of which 93% were made by private generators.

One could take the view that these projects were awarded to private generators through global open competitive bidding and it was their responsibility to have hedged for such risks. But, given the strategic nature of these economic transactions, there is a compelling case for the government's close involvement in such transactions. In other words, shouldn't all such transactions, private and public, which impinge on India's energy security be facilitate and underpinned by the umbrella of India's strategic diplomacy?

If one were to step back and analyze this, certain important questions arise. When the private generators were aggressively pursuing coal mines acquisitions in Indonesia in mid-2000 and developing large country-risk exposure, how actively was the government engaged with the process? Did this form an important part of India's diplomatic engagement with Indonesia? Couldn't we have got early warning signals about the impending policy change and advised power regulators and private generators accordingly? Once the Indonesian government announced its policy, what could have been done to mitigate its adverse impact on India's power generation program?

In the years ahead, given India's ambitious infrastructure upgradation targets, our country-risk exposure in strategic minerals, oil, and gas will increase dramatically. The increasingly widespread trend of resource nationalizations means that expropriation risks are very high in these sectors. We cannot afford to leave such risks in the hands of the private sector, who are in no position to hedge against them. It requires active, often aggressive, support from India's foreign policy establishment.

Corporate India's Woes

I was struck by this graphic of the changes in the distribution of ratings of India's business firms done by CRISIL. In many ways, it is a nice reflection of the fortunes of corporate India during the period. Clearly ratings downgrades continue to outnumber upgrades.

Construction and infrastructure sector firms are the worst affected, with the highest ratings downgrades and corporate debt restructurings. The graphic shows that a very high proportion of firms from these sector have suffered ratings downgrades and their credit ratio (ratio of upgrades to downgrades) is extremely low.

Thanks to declining economic growth, project delays, cost over-runs, high interest rates, and slow revenues growth, total restructured loans crossed Rs. 2.27 trillion, or 4.4% of the total loans given by Indian banks, and is rising. This may be an underestimate given the bilateral restructurings and the true estimate may be around Rs 4 trillion. Iron and Steel (23%), infrastructure (9.65%) and power (8.13%) were top of the pile in the Rs 77,101 Cr worth loans restructured in 2012-13.