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A novel approach to solving healthcare?
Mon, 18 Jan 2010 02:22:00 -0800

In honor of MLK day, I'm not writing about my livelihood, marketing, but rather about a slightly larger and more relevant topic, health care. Don't worry, faithful readers, you'll get more abstruse marketing ideas soon.

I started thinking about this problem in detail because I've recently switched employers, which has meant switching health insurance companies. This has led to the typical bewildering array of changes. Some Doctors take one insurance plan (the old one) but not the new one. Others take plan 517b but not 517c. Other Doctors, such as our internist, don't take any insurance. I don't blame her. In short, it's frustrating for me, but it's far worse for many Americans who have no insurance at all.

At the start of the health care debate, I, like most Americans, couldn't begin to think about how to solve the problem. I only knew that there was a problem. The problem, as most Americans know, is threefold:

Healthcare costs are soaring at double-digit rates
Too many Americans are uninsured
The landscape of insurance companies is bewildering and makes it very difficult for people to move jobs

Recently, I started thinking about health care in a simpler way. There is health care supply (Doctors, drugs, hospitals, and machines) and demand. It's like any other system. The problem is, demand is growing extremely quickly, while supply can't keep up. Supply in this case is not just the number of Doctors, but the number of therapies as we get more and more ambitious in what conditions we can treat effectively. This, as any first year economics student could tell you, will lead to an increase in price. This increase in price is, every year, putting health care out of the reach of more and more Americans.

In attempting to fix this problem, the Congress has proposed a set of laws which will only make the problem worse. Some of the symptoms of the supply-demand imbalance have been insurance companies tightening up their underwriting policies to prevent enrolling those with preexisting conditions. So, Congress has outlawed these practices. This will simply lead these companies to either (1) exit the market or (2) raise prices again, for everyone. Another approach is outlawing "lifetime limits" on health care. Think of this as an insurance-imposed constraint on potential demand for health care. Once again, it is being done away with. More insurance companies will exit the market or raise prices. This does nothing to help anyone.

At the same time, Congress is covering more Americans with subsidies. This will increase supply, but it won't increase it enough. There is just no possible way to increase supply enough to moderate prices in this system, because we're talking about life and death issues--people will always want infinitely more health care, and I don't blame them. I do too. Without some form of rationing in place, things will only get worse, and the new bill does nothing to ration health care. It will also ensure that a larger and larger proportion of our GDP goes toward health care, which means higher taxes, more borrowing, or both. I'd argue that in the long run, this will wreck the country.

Speaking of rationing, any good or service can be rationed in one of two ways. The most common is market rationing, where a supply and demand naturally balance each other out. A more discredited method is government intervention. This means the government decides what the supply is, and who gets it. When you think about it, the reason health care prices are out of control in this country is that we have reverse-govenment rationing combined with a free market. Many are mandated by the government to receive coverage, while few can pay; at the same time, we have an innovation-driven supply side. The new laws just make this worse and more aggregious than it already is. I would have had more respect for those in Congress had they said the following:

"There are two choices. We can ration by the free market, or we can ration centrally. Free market rationing means none of you who are poor will get health care. Rationing centrally means that those of you are too sick to save or near the end of your lives will be denied care. We need to understand that these are the two options. Let's pick one, or the other, or something in between. Any reverse rationing has to be balanced by real rationing--taking health care away from someone else--or by raising taxes."

At this point in this imaginary debate, I would have presented my approach, which would have been immediately shouting down by Democrats and Republicans alike. The approach has four basic components. First, mandatory health care savings accounts for all Americans. Second, mandatory catastrophic care insurance for all Americans. Third, outlaw Doctor-specific or hospial-specific rates for insurance companies. Doctors and hospitals and pharma companies charge the same price to all buyers. Fourth, a clear income floor beneath which health care savings accounts and catastrophic care accounts are subsidized progressively by the federal government.

Mandatory HSAs would work just like 401(k)s and IRAs. Americans could contribute to them tax-free. By making these "real money", Americans would pick their Doctors and hospitals on the basis of who gave them the best deal. Prices would moderate. Ineffective treatments or dubious drugs would shrivel up and die. There would be no insurance companies. You could go to any Doctor you chose, based on their price and their effectiveness. You would pick a $30 blood pressure drug over a therapeutically identical $300 drug. The maker of the more expensive drug would lower prices or go out of business. Would this "stifle innovation?" I don't think so. I think it would bring innovation back into the realm of the free market.

At first, Americans would revolt at such a system. It sounds too much like "work." We've been accustomed to thinking of health care as a public good we don't have to worry about. But, as Americans got used to it, they'd see prices immediately moderate. They'd also see that health care quickly got much less confusing. Finally, they'd see their accounts grow in value, ensuring that they could cover health care costs as they got older, and even, in some cases, pass saved money they didn't use on to their children for college.

Of course, people also get very sick from time to time. These sicknesses can eat up even a $100,000 balance HSA balance in months. For cases like this, a government catastrophic pool would kick in. This would be funded by a tax, like Medicare. The pool would be accessible by patients with certain conditions, like metastatic cancer or a massive car accident, that would be pre-defined by statute. Every three months, a certain amount would be deposited into the patient's HSA, and once again, the patient (or the patient's family) would be responsible for allocating the funds. The inflow to the HSA account would be a fixed number set by condition. For example, $25,000 a month for colon cancer treatment. At the end of the condition, any unused money would go back to the government.

Of course, this is the element most like the current system, and most susceptible to abuse. However, this is where element three would come in. Because hospitals and Doctors couldn't charge different rates to different people (or firms), the government would know what it truly cost to provide care for a condition, and people would know they could pay for their catastrophic treatment out of the government lifeline. There is still potential for abuse here--no doubt about it--so this would need to be monitored closely.

Element four makes sure all Americans are covered. If you made, say, $60,000 a year as a household, you might qualify for a $4,000 tax credit towards your HSA, ensuring your family could pay for preventative health care. Medicare and Medicaid would be gone. Seniors might also get an additional tax credit to account for increasing health care costs as people reach their 60s and 70s. One other legislative element could be a five- or ten-year phase-in period during which catastrophic funds could be used for preventative care as HSA balances increased over time. The total pool would be mandated as a fixed percentage of GDP--say 2%--and would be gathered through income tax. Yes, it's tax, but remember, Medicare goes away.

So, this system, when you think about it, is novel for one reason. It does away with insurance companies. Insurance companies are great in theory, but in our case, they've distorted the market to the point where prices bear no resemblance to the underlying value of services provided, with governmeny playing key enabler. Furthermore, they've created a bizarre landscape that ties Americans to their jobs and stifles innovation. While I'm sure this proposal needs tuning, it seems to accomplish two goals: keeping prices in check while ensuring that all Americans receive a morally acceptable level of health care. Of course, none of this will ever happen, but one can dream.

Boiling the Leno Thing Down
Tue, 12 Jan 2010 09:41:00 -0800

Every once in a while, you see a picture that takes a news story and basically explains it better than any interview or analysis can. As my friend John Shomaker said as a preface to his email,

"Money chart. Ridiculous discounts to other shows. Did you ever see it - horrible. Not funny at all, and yet Leno thought it was a different format. Same show, just earlier, but with horrible writers."

I guess that about covers it for Jay Leno. Sorry man. You're just not that funny.

Affordable Transaction Economics
Mon, 11 Jan 2010 02:45:00 -0800

I'm always looking for more scientific ways to spend money on marketing, as people who consistently read this blog know. I spend a lot of time looking at Return on Marketing Investment (ROMI), for example. Lately, I've been dealing a lot with pipeline marketing strategy, and I stumbled upon something that is probably fairly obvious, but I thought I'd outline it formally.

My friend and mentor Tim Furey wrote a book in 1999 called The Channel Advantage. It was a great book, and its simple premise was "match the transaction to the channel that can afford to handle it." There were other key ideas, but this was the one that stuck. In other words, rebuy channels go through e- and tele-channels, big new servers through face-to-face. The reason, simply, is that it costs $10 to take an inbound phone order, and $250 (at least) to drive out to someone's office.

I wanted to take this concept and apply it to a more dynamic problem, the pipeline, specifically nurturing leads. When you think of a lead, it has a "born on date" and then you continue to do "stuff" to it that costs money. Every time you do "stuff" the acquisition cost has increased. So, a key metric for lead nurturing has to be "cumulative marketing dollars spent." That's the basis for affordable transaction economics (ATE) applied to lead nurturing.

In other words, affordable transaction economics (ATE) is simply a way to optimize pipeline marketing activity at every stage of the relationship. The one premise is “don’t spend more cumulatively on a lead than we forecast the lead to contribute to our operating profit.” ATE depends heavily on a lead scoring model, ideally one that can forecast the total value that will result in a lead. Say at day 1, my forecasted lead value is $10. That means that I should have spent no more than $10 on acquiring and nurturing that lead. But, on day 2, we get a lot more information from that lead, and the forecasted lead value goes up to $200. Now, I can afford a telephone call and more. This continues on and on. A case example of how ATE can be used to guide spending on lead nurturing is outlined in the table below.

The constraint of spending no more cumulatively than the forecasted operating profit is an outer limit, by the way. There should be some percentage of revenue that marketing targets for acquisition cost—say, 10%. This target will usually be lower than operating margin.

What does this mean operationally? For marketers who own the upstream end of the pipeline, it means creating two new metrics, cumulative spend per lead (CSPL) and forecasted affordability per lead (FAPL). When CSPL > FAPL, this metric should turn red. These KPIs are nice because they can flow from the individual lead level all the way up to a line of business. To do this, we need to think about what affordability is (how much should I spend per dollar on acquisition?) and we need a good lead scoring model that look at eventual lead value.

ATE can also be used very effectively as a planning framework for designing lead nurturing campaigns. Essentially, the marketer can now plan the mix for a $1 lead, a $10 lead, a $100 lead, and a $1000 lead. This simplifies thinking considerably around what can be very hairy process flows.

Are Marketing Data Expanding Faster than the Universe?
Mon, 04 Jan 2010 05:33:00 -0800

I'll start by making a statement that I think I can back up: the amount of data available to marketers is growing geometrically, not linearly. Linear growth of marketing data would mean something like the following: An individual starts a new company on January 1, 2010. He buys a list of 1000 names to market to. A year later, he has added 100 names to this list, for 10% growth. A year later, he buys 110 names to market to, for a further 10% growth, and so on, and so on.

Exponential growth is different. When things grow exponentially, they grow as a square of the original. For example, instead of a marketer having 100 names and then 110 names, he’d have something like 100^2 or 10,000 names after a year. This can’t keep up, because we’d simply run out people in the world after two or three years.

The issue is more complicated than this, though, because we’re really talking about not just the number of names growing exponentially, but what we know about these names growing, too. And, to make it even more complicated, we now know more about how these names interact with one another—the network—every year (the gift of Web 2.0). So to recap, we have three sources of information growth for marketers:

1. Increased size of the known universe of names, companies, etc.
2. Increase in what we know about these names
3. Increase in connections between these names, companies, etc.

As far as (2) goes, this is where most of the action is today, and that’s not because people are doing more things that are relevant today that they were 20 years ago, it’s because they’re doing them in a browser, or on a mobile device, or on a game console, and they’ve been cookied or their IP address has been matched in the back end or… you get the picture. And this digitization of behavior is only going to get more extreme, barring a zombie attack or a second Luddite revolution.

The question is, what is the doubling time for marketing (or social science) data today? For microprocessors, according to Moore’s law, speed doubles roughly every 18 months keeping price constant. This has held up fairly consistently over the past 20 years and in my mind is a great empirical proof that de Chardin’s theories on the Omega Point might be true. It would be a great academic study to look at the doubling time for marketing data to add to the table in this amazingly cool article. If you have doubt of the amount of information available about people growing exponentially, take a look at a Facebook event stream. Your life, time stamped.

There are two constraining factors here worth noting, though. The first is information (not data) capacity: A company cannot possibly afford to keep up with exponential doubling of marketing data, whether the "double life" is 18 months or 36 months. It’s not a question of storage cost, it’s a question of ability to deal with the data from a logical perspective. The marketing talent at a company, no matter how big, simply cannot deal with a doubling of information every 18 or 36 months. It's kind of like central planning-- the data has to be federated and put into a competitive marketplace to reach its full potential. So, there has to be some kind of consortium to deal with this complexity, or intermediary vendors distilling the stuff into bite-sized chunks for industries, roles, etc. And, I'd argue, this is exactly what we've seen happen over the past twenty years, starting with retail scanner data in the early 1980s.

The second constraining factor is the question of information ownership and “walls”. What do you think the amount of proprietary information—defined as that owned by a company and no one else—that made up “all you could know” about a customer? I’d guess in 1975 it was 75%. I wonder what it is now? 20%? And what is the final resting point? It’s lower than what it is now. The point is simple: what a company can know about a customer is more than ever sitting out in the public domain, but the challenge is, what do you do with it? This thought experiment, in my view, makes a strong argument for moving towards cloud computing when it comes to marketing applications.

I’m not sure there’s a conclusion here, but I do think it’s worth noting for all of marketers that we’re in the middle of our own Moore’s law moment, and we better keep thinking about how we capitalize on it.