Barbarians at a drug firm

After Enron, Valeant Pharmaceuticals is one of the largest corruption scandals of Wall Street. If you want to know the details you just have to connect Netflix. In episode 3 of the documentary series Dirty Money, you'll  find The Drug Short episode. You'll understand what happens when barbarians take unethical decisions, although they were legal. Meanwhile, the regulator was on vacation in the US.
Highly recommended.

PS. If you don't have Netflix and you are interested on how to proceed like a Valeant executive in the energy sector, then you have to watch "Enron: the smartest guys in the room".

Incentives and behavior

THE MORAL ECONOMY
WHY GOOD INCENTIVES ARE NO SUBSTITUTE FOR GOOD CITIZENS

For those interested on pay for performance, the book by Samuel Bowles will open their minds to new perspectives. The rationale behind the Homo economicus needs to be adjusted to ethical and generous motives, professionalism in other words. This explanation of prisoner's dilemma is helpful.

In the Prisoner’s Dilemma game, defecting rather than cooperating with one’s partner maximizes a player’s payoff, irrespective of what the other player does. Defecting in this game is what game theorists call a dominant strategy, and the game is extremely simple; it does not take a game theorist to figure this out. So, assuming that people care only about their own payoffs, we would predict that defection would be universal.

But when the game is played with real people, something like half of players typically cooperate rather than defect. Most subjects say that they prefer the mutual cooperation outcome over the higher material payoff they would get by defecting on a cooperator, and they are willing to take a chance that the other player feels the same way (and is willing to take the same chance.

When players defect, it is often not because they are tempted by the higher payoff that they would get, but because they know that the other player might defect, and they hate the idea that their own cooperation would be exploited by the other. We know this from what happens when the Prisoner’s Dilemma is not played simultaneously, as is standard, meaning that each person decides what to do not knowing what the other will do, but instead is played sequentially (one person chosen randomly moves first). In the sequential game, the second mover usually reciprocates the first player’s move, cooperating if the first has done so, and defecting otherwise. Keep in mind the fact that avoiding being a chump appears to be the motive here, not the prospect of a higher payoff. 

Stanton at Galeria Barnadas

The corporatization of medicine

Private Equity Acquisition of Physician Practices

From Annals of Internal Medicine:

The current environment is accelerating the disappearance of independent practices and the corporatization of medicine. Many of the largest practices have already been acquired by a hospital, insurer, or private equity firm. No peer-reviewed evidence examines the effect of private equity acquisitions on the quality and cost of patient care; physician professionalism; or the experience of patients, physicians, or staff; little evidence examines the effect of hospital or insurer acquisitions

Technology driven disruption in health insurance

Digital is reshaping US health insurance—winners are moving fast

From McKinsey

Digital has begun to reshape health insurance markets. Payers in the United States have been slow to digitize and are still behind other industries in their use of artificial intelligence and automation, as well as in customer satisfaction.1 They’re now starting to catch up. Both incumbents and disruptors are making substantial and growing investments in digital programs

The bill of new drugs

The Contribution Of New Product Entry Versus Existing Product Inflation In The Rising Costs Of Drugs

In US there is a huge concern over drug prices. The question is what is it driving expenditure growth, new product entry or inflation?. In new product entry we have two categories, generic drugs and innovations (in specialty drugs). The answer appears in the latest issue of Health Affairs.

In this retrospective study of pharmaceutical pricing data for 2005–16, we found that increases in the costs of specialty and generic drugs were driven by the entry of new drug products, but rising costs of brand-name drugs were largely due to inflation in existing medication prices.

The costs of oral and injectable brand-name drugs increased annually by 9.2 percent and 15.1 percent, respectively, largely driven by existing drugs. For oral and injectable specialty drugs, costs increased 20.6 percent and 12.5 percent, respectively, with 71.1 percent and 52.4 percent of these increases attributable to new drugs. Costs of oral and injectable generics increased by 4.4 percent and 7.3 percent, respectively, driven by new drug entry. The rising costs of generic and specialty drugs were mostly driven by new
product entry.

We would need similar data for our country. Nobody knows anything, prices are confidential.

PS. On drug pricing scams.

Count Basie and the beginning of swing

Multisided platforms as monopolists

MODERN MONOPOLIES: What It Takes to Dominate the 21st-Century Economy

Platform business is the hottest topic in organizational economics. Linear business  considered as a traditional value chain is exactly the opposite of the economics of platforms. Two years ago I explained in several posts the emergence of this model. In 2004 Tirole and Rochet defined the network externalities that emerged from multisided platforms. Nowadays it is the hottest topic and a new book explains the consequences.

The secret to tech companies’ success lies not in the tech, but in it’s business model. A platform, by definition, creates value by facilitating an exchange between two or more interdependent groups. So, rather than making things, they simply connect people. The book helps you understand what made these companies so successful, how to tell a good platform from the bad, and how you could build one too

And by definition, platforms are the new modern monopolies different from the ones we have known.

Although monopolies get a bad rap, they’re not always a bad thing. In the short term, modern monopolies are often a boon to consumers. They bring valuable new inventions to market, and, in the case of platforms, they build new communities and markets that would not exist otherwise. The downside comes much later, as the monopolist ages and starts to crowd out potential new competitors without delivering new value.

Today Amazon is the most valuable company in the world. That's it. Let's wait for the downside. It may be too late to react. Regulators should read today Jean Tirole and apply his recommendations.

PS. Go to the conclusion and you'll find this statement:

So where should you be looking to next? Well, there are a few industries where the three factors are starting to converge
The first industry is health care, which we’ve touched on at several points in this book. Here you have platforms connecting doctors and patients in new ways, like Doctor on Demand, Teladoc, and ZocDoc. However, these platforms are just going after the low-hanging fruit. There’s still a tremendous amount of waste and inefficiency in the healthcare sector, especially in the United States. And wherever there’s waste and inefficiency, there’s a platform opportunity. For instance, although they’re relatively popular with casual consumers, wearable health devices are just starting to make their way into formal health care. These devices offer tremendous potential for improving patient wellness. But in order for them to be useful, a platform will need to build a unified network of doctors and patients. Despite the recent entrance of Silicon Valley heavyweights Apple and Google, this market is still wide open.

PS. Four additional useful books on the same topic:

Evans and Schmalensee are the best authors on this subject and this is the recommended book for economists.

A historical perspective on platforms.

A book that connects platforms with other topics of interest.

A management perspective on platforms.

Allocating reseach funds by lottery

Contest models highlight inherent inefficiencies of scientific funding competitions

Research funding needs reform. In PLOS Biology, you'll find a controversial proposal: lotterys.

As fewer grants are funded, the value of the science that researchers forgo while preparing proposals can approach or exceed the value of the science that the funding program supports. As a result, much of the scientific impact of the funding program is squandered.

Unfortunately, increased waste and reduced efficiency is inevitable in a grant proposal competition when the number of awards is small. How can scarce funds be allocated efficiently, then?

As one alternative, we show that a partial lottery that selects proposals for funding randomly from among those that pass a qualifying standard can restore lost efficiency by reducing investigators' incentives to invest heavily in preparing proposals.

My impression is that we are not prepared to accept such a mechanism for allocating resources. In a world that claims for transparency, research funding allocated by the chance of winning a lottery seems like a joke. (Fortunately the authors of the article didn't received any fund!)