Monday, August 10, 2009

Over relying on "competition"

I have spent more than a decade now extolling the virtues of competition in telecommunications markets. However, I really approach the task with trepidation. Unlike my colleagues I;
1. Will regularly emphasise that infrastructure based competition is not necessarily the target,
2. Note that simply eliminating barriers to entry is not the solution, indeed that excessive entry can have very negative effects for consumers,
3. Firmly believe in very specific behavioural restraints including on bundling and on-net pricing that only look attractive to entrants when considered in the context of the incumbent doing them too,
4. Recognise that consumers are easily misled and that in the long run misleading them is in no one's interest even though it appears to grow revenue in the short run,
5. Believe that markets are made - there is no amorphous concept called "the market" and that it is in the long run interests of producers to develop well designed markts.

This is all a prelude to criticising two pieces of business journalism in the SMH on the weekend that over-hyped "competition".

The first was by Ian Verrender and was primarily about the proposition that there is another financial shock on the way as asset prices get revalued with comercial property following the residential property falls.

The worrying part of the post is the role that Verrender thinks was played by competition in creating affordable housing. He writes;

The most significant development in creating ''more affordable'' housing in the past 20 years came not from governments but from financial engineers and investment bankers - they busted up the home mortgage racket among our big banks.

Those of a certain age can probably remember visiting a bank branch manager before financial deregulation in 1983. It went something like this: That house you want to buy? We'll lend you 60 per cent of the value at 13 per cent. If you need more, go to our finance company and borrow the rest at 19 per cent.

Those were the good ol' days, when banks offered 2 per cent on savings and a smidgen higher on term deposits. They were cleaning up. And because they rationed credit, they reduced demand for housing; prices were artificially low.

The statement is absolute crap. The rationing of housing loans and the need to grovel before your banker was created by the direct regulation of mortgage rates - the rates were set at rates below the level of demand. The bank deposit rate was never 2% at the same time as mortgage rates were 13%. The babks were "cleaning up" in interest margin but charged bugger all fees. Most of the other limitations related to technology and regulation that enforced separation between trading and savings banks.

Yes it is true that the Aussie home loans of the world when they entered offered new competition, but they first wiped out the Building Society and Credit Unions who'd been doing a good job in the "value" end of the market, and in the latter case by prosletysing thrift. And in the "bad" days of rationing the thing that counted was a savings record - something that is the counter of the debt binge we've lived through.

But just to remind Verrender and others - there would be no subprime crisis if there were not collateralised mortgages from which derivatives of derivatives of derivatives were built. The reason why asset prices inflated is because the true "cost of lending" got lost - the cost of lending consists of the cost of funds and the cost of defaults. Under the fancy schemes the cost of default got assumed to zero, and a cheaper source of funds (short term bonds) was tapped instead of deposits (again bcause of the myth of security).

Competition in banking has been good, but one part of it, encouraging competition against regulated firms by unregulated firms, and allowing regulated firms to have notionally "unregulated" off balance sheet Special Purpose Vehicles has been a disaster.

The second is an article by Alan Fels and Fred Brenchley. This is one of those classic all the problems in health care would be resolved by more competition in particular a device called Medicare Select. The usual anti-competitive bogies of the collusive medical practitioners together with the protected fiefdoms of health care workers.

I always find the concerns in Australia about health care astounding, as our system actually works quite well. We have the second highest life expectency in the world and about the lowest health care expenditure as a percentage of GDP in the developed world. While sun sand and surf, and a reasonable passion for sport, would help these figures, as would wide variety in diet and general qualities of water and accomodation, they really aren't indica of a health system in crisis.

The idea that we need "more integrated health delivery businesses" is a nonsense. Such a model, including e-health records within businesses, ignores the fact that we travel around the country and can get sick away from our homes. It also ignores the fact that those of us sensible enough to have a family GP already have a skilled practitioner who receives lots of feedback providing us with recommendations of which other carer to see in the system.

By all means enable my Medicare refund to be claimed by my health fund, and allow my health fund to include in its product suite some "gap" insurance. By all means use that functionality to improve the payment process so that I can swipe my health card at my doctor to get him/her paid both the Medicare amount and the health fund. It could even include the idea I've referred to before of the card having a credit function.

The managed care model proposed by these two (which they don't want called managed care - but what else is "Armed with this new funding and buying power, the various plans would be responsible for the full health-care needs of their members, negotiating prices and services from doctors, hospitals and pharmacies. This is the core driver for reform.") makes the assumption that the information problem in health care is "solved" by absorbing lots of providers into some hierarchy or network that represents that the price and quality are acceptible. This is the Sol Trujillo theory of markets - Governments should deregulte markets and ot break big firms up because the CEOs of big firms know what they are doing.

All I want on top of the existing system is health care providers to give "fixed price" quotes before you undergo the procedure - such quote to include the "insurance" component for follow-up care if something goes wrong. My favourite example is a bloke who paid $6000 to get a kiney stone removed but the procedure only got part of it - to get the rest costs more. My provider should be able to quote my Nett cost once they have my insurer details.

I worry about anyone promoting "integrated networks" because that's what they have in the United States...the place that costs more and has worse outcomes. The trade practices laws that might need to be got around are those that prohibit the collusion and third line forcing that these groups represent.

There really is already a lot of competition in Australian health care provision. It needs to be better informed by better information on prices, simpler processes for consumers and continued reliance on the GP as a quality control manager for patients. "Corporatising" health care and creating a few "networks" that "compete" is not a solution.

We need to understand the dynamics of competition and get aawy from Government = bad, private sector = good thinking, and embrace models of competition and co-operation that work through extended informal networks not formal ones or hierarchies.

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