 Ladies and gentlemen, I'm going to do the introduction of Professor Epstein in absentia. And I sort of knew that that might be the case, because Richard was teaching a law school class that was over at noon. And he told me that he would be five or 10 minutes late getting over here, but he will be here. So my introduction, some of you have gotten the brochure. And did some of you get this? No, we had some. We'll send back a few more copies here. Take one and pass that. But in the brochure, I actually referred to Richard being my colleague in developing this series all the way back in 1981, which is 30, 31 years ago. We did the first series here at the university called Bad Outcomes After Medical Innovation, out of which we published a book with support from the National Science Foundation. And it was actually the success of that first seminar series in 81, 82 that led us year in and year out since then to do a health-related seminar series that cuts across a topic area of interest both in the medical side and also at the university side. And as you know, in recent years, some of our topics have been global health. And last year, we did health care disparities. And this year, we're doing medical professionalism. And in fact, next year, we're doing ethical issues in organ transplantation. And I think later today, this brochure is going to go to the printer. Our first version of the brochure for next year will be sent off to the printer, because we have lined up 24, 25 seminars featuring most of the leading spokespersons in the country on organ transplantation for next year. But just a quick word about Richard. Many of you have heard Professor Epstein before. He's something of widely regarded as a polymath who currently is dividing his time between NYU Law School, where he is the Lawrence Tisch Professor of Law, the University of Chicago, where for many years he had been the James Parker Hall Distinguished Service Professor, and now is the James Parker Hall Distinguished Service Professor Emeritus, and finally at the Hoover Institute at Stanford, where he's the Peter and Kirsten Bedford Senior Fellow. To sort of establish his polymath credentials, what I will tell you, what I will read to you are the courses that he's taught at our law school. Richard has taught courses in. Mind you, on most of these things, he's written books too. So it's not just teaching courses. But he's taught courses in civil procedure, constitutional law, contracts, corporations, criminal law, health law and policy, legal history, labor law, property, real estate development, finance, jurisprudence, labor law, land use planning, patents, individual estate and corporate taxation, Roman law, torts, and workers' compensation. As I say, for many of these topics, he not only teaches the courses, but in fact, writes the books. So that's Professor Epstein. He should be along any minute. So eat a little bit more, and Richard is going to speak today on deprofessionalization of medicine, the relationship between medical protocols and clinical judgment. What I'm going to do is to try and put this topic in what I would call a slightly broader context and to talk about the general way in which the ability to access information can influence the distribution of powers inside various sorts of organizations, which I think is really one of the fundamental challenges of modern industrial organization. And the reason I'm doing this is because I think that when people do medicine from the inside, rather from the outside, the dominant trope that they have is about how special they are given all of the particular issues and concerns that they have of the special relationships with patients and so forth. And the basic answer to that question, I think, is as follows. Every business is special. They all have particular kinds of concerns. And what you need to do is to have a theory which can work two ways simultaneously. One is that you have to be able to start from a level of high generalization and see the common features having to do with the diffusion and organization of power. And then the second is to figure out what it is about the particular cases, which answers this particular question. Is how much discretion unavoidably has to be exercised in trying to put together a comprehensive organization? And at what levels will it start to be exercised? One of the reasons why I'm interested in this is a general problem is that my own legal profession is undergoing much the same kinds of prevail that is taking place within the medical profession. And I thought it might be instructive before I talk about the particulars of the medicine side is to show you that I'm a bipartisan skeptic. And I'm going to talk a little bit about how it is that one sorts of organizes, for example, the practice of law. Oh, you want to do this Y kind of thing. What you want, yeah, I've got the napkin. What you have to understand about it is that the legal convulsions are every bit as great as they are in the medical business. Because the old line sort of large law firm, we handle all your cases, we do all your stuff, model is essentially disintegrated. And the reason why the model starts to disintegrate is that when you use models of fixed proportions, models where you have, for example, partners, call them senior doctors, residents, or associates, what you do in order to make this model work is to have to be confident that over the very large run of cases, each of the components of this particular system are receiving an income and amount less than they're contributing to the overall success with respect to the firm. As the nature and the types of information that become available start to change, it turns out that the assumptions that allowed you to keep these large firms together become almost untenable. And they start to break up into smaller groups, all of which are organized on very different lines. And I think you'll see the parallels to the medical sessions. I just talk about it a bit. So in the olden days, if you had a large firm like Whiten Case, you were the firm that have choice with respect to US Steel. But as you get better information and higher degrees of specialization, what happens is the people who start to buy legal services start to look at the particular firms. And they say, you know, you really have done an excellent job for us as an antitrust lawyer. But Franco, you're kind of thin on the sort of environmental issues that we have to do. And what you then start to do is to run a competitive boutique out there and start to ask whether or not if we take this part of the work away from one firm and give it to another firm, whether or not we're going to have better overall legal services than we would have had before. Well, when the new guys start to come in, they're going to realize that everybody's going to be very price sensitive about the way in which this thing works. And they will have to ask themselves the question, do they want the staff up the way the old firm did? Or could they find a way in which they could change the internal operation of their own organization so as to be able to deliver a pound buck? So that competition in these various kinds of end markets essentially puts a great deal of pressure on unremunative and unproductive services within the side of the firm. And so what then happens? You get firms saying, where can we cut? And at the same time that you get that, what you find out is that there are all sorts of ways now in which you could harbor and collect information that were not available inside the profession some time ago. So that one of the skills that used to be very important, how you could track down statutes and laws that affected your particular case. So you used to go to the library and send people there. And they had these big, bulky bottoms called shepherds. What you did is you go through it, and then you go online just to make sure that nothing happened in the last two weeks or a month that would do this. And you spent a lot of attorney time, fairly delicate, very skilled to do so. Once you start getting these online type of services that are available, you can digitize every document almost instantaneously anywhere throughout the legal system so that the search function, which used to take very sophisticated lawyers to do it, all of a sudden becomes much more routine. Or to put it in the terms of the sort of organizational experts of which I don't claim to be one, it becomes not a skill which has a market profit associated with distinctive activities, it becomes commoditized. When that means in effect, it's sufficiently standardized that you do not have to pay people to acquire special skills to do something that anybody who can push a button can start to do. So what does this start to do? Well, it means that you change the nature of the firm because these kinds of associates that you have turn out to be highly redundant and not effective. One of the things you do therefore is you go into what they call contract attorneys so that if it means that you've got a case in which there are very exhaustive searches that you have to do which don't require a great deal of intelligence and sophistication, instead of paying in-house people and having to keep them on the payroll for the whole year out, what you do is you subcontract now to people. And all of a sudden the wage structure that you're paying is not going to be $250 to $300 an hour for somebody with this newly minted law degree. It's going to be $50 to $75 an hour because as the level of discretion goes, it turns out that the salary that's going to accompany it is going to disappear and go down as well. It also turns out that when you're dealing with large firms, another major piece of change which leads you to the contracted attorney, less important I think in medicine, but critically important in law, is that you find that your business doesn't come across the transom at uniform rates. What happens is you get crises, huge cases, periods of relative calm. And what happens is if you have yourself a large law firm, you're going to have a lot of redundancies in that firm because in the slack period you're paying people who are basically throwing darts into boards instead of people who are working flat out. So if you go back to this kind of contract system and think of a perhaps slightly more sophisticated attorney, what happens is you hire up for the crisis on short-term type of arrangements and then during the slack period you get rid of people so that the risk is now going to be transferred away from the firm which gets the primary business. So at this particular point, what it does is it looks like you can commoditize and contract out all sorts of routine business, but what is so different, this is a point which is important in law to some extent in medicine, on the structural side of medicine, but not in case treatment. Is that at the same time that basically the bottom end of the business looks more like bank tellers and less like lawyers, the top end of the business becomes more remunerative than it has ever been before. And this has to do with the relationship of discretion to the modern administrative state. Most of you have not thought the slightest bit about how administrative authority is derived from general legislation, but suffice it to say that virtually every standard grant of power that is given to a major organization, including those that directly regulate medical care, has something in there which says that fair and equitable regulations in the service of the public interest shall be required of everybody. Now this is meant to be a constraint and it certainly does rule out certain things. It means that you can't, if you're a key administrator, allocate 98% of the money that you receive to the treatment of your mother-in-law. In other words, you can practice medicine under these statutes the way in which the worthy Dr. Sigler does with respect to his friends. Take a mentally good care of them. Can't do it. And you can't make obvious kinds of discrimination based on race or national origin or the color of people's eyes, all sorts of things. That's all true. Nobody wants to do that for very much anyhow. So that when you're left with hundreds and thousands of decisions which do not have these kind of obvious flags and markers associated with them, calling about great improprietary, and what the administrative state has been forced to do, willy-nilly, is to say if we've got this level of ambition and the kinds of things that we want to do when we're running comprehensive cleanup programs for the environment, right, when we're running complicated labor codes, when we're trying to figure out all sorts of issues associated with trading stocks and securities, financial instruments, what is a systematically high risk is you necessarily create high degrees of discretion over a very few absolutely critical decisions. Do you make a list? Now sometimes you really want to be on that list because that's a list which makes you a preferred provider, which means that when somebody wants to prescribe in some complicated medical system, all they have to do is to fill out the name of the pre-approved drug. Sometimes it basically puts you on a hit list. You are now a very large company and you are treated as a financially systematic and significant institution. And so the folks under the Dodd-Frank that could regulate you to your eyeballs precisely because you're not at $50 billion, you're at $51 billion. And that difference will be near in one regulatory scheme after another. So the guys who make all the money in the system are the Honglers for good and for bad who essentially move people back and forth across these various regulatory divides. This is a highly discretionary business. It turns out that you have to have enormous knowledge of virtually standard economics, standard public choice theory, deep knowledge and understanding of the way in which a particular industry has worked, this historical evolution. You must know a great deal about the people who are on the commission. You have to be able to evaluate complicated reports, all of which are gonna be wrong in some way but nobody's quite sure which way it is. So that the way in which professional life is organized today is that you get the high discretion people with enormous incomes and anything that could be commoditized on the other side of the market is in fact going to be relegated down to much lower wages if you can run it this way. Now this is exactly the kind of challenge that is going to be faced by healthcare. When I was here for November, I was on the panel after two doyens of the American Medical Establishment of impeccable credentials and perfect cartel-like instincts I might add. They were Dr. Arthur Rubenstein and Dr. Chris Castle, right? Both of whom are Chicago style. And these are folks who have an enormous knowledge for the way in which the distribution of power ought to take place inside medical agencies. So when it comes to the question of how it is that you structure the provision of care inside the system, they both came up independently and correctly, they thought, with the proposal that it's only medical expertise that could drive the proper division in the way in which a healthcare system is going to be organized, which meant that they as deans and solans of this particular system would in fact take the dominant plan. Now I take a very different view. One of the things that I've done for many years is to teach in Mark's program to the basically the sum of people coming in on the special medical ethics program to discover to my infinite dismay that if you start talking about the phrase marginal cost of public good, you have to give a little definitional account as to the way in which these various terms are put together and to operate. And so my own view about the system is that the medical people will eventually have to do one of two things. They will have to either educate themselves in principles of management and business organization and economics, or they'll have to get the hell out of the operation because they won't know enough to be able to save themselves. That doesn't mean that they won't be consulted, but they don't have enough design knowledge. Now this has already happened by the way in law firms. So for example, if you wanna run a law firm, you look around and say, you know, this is a $2 billion a year business. Do we wanna take a guy who doesn't know the slightest thing about an organization chart, how to run anything and put them in charge? You say no, so one of two things either happens. If you think that the legal knowledge becomes so indispensable to being able to run the firm, you take one of your promising young things, say, your job is now gonna MBA for the next two years and we'll pay you your $2 million in salary so that you get this kind of education. And then you're gonna run this firm because you will now have at least the kinds of skills so that you can figure out who to hire, even if you can't do it yourself. As your CFO is your chief compliance officer, a lot of other things. And the same thing clearly starting to happen on side, the medical side. People have to get themselves dual degree equipment if they're gonna be able to do this, to give you an illustration of an early entrepreneur who was my student, who saw this so clearly back in 1973, the redoubtable David Kessler was a man who came to this law school precisely because he knew that if he wanted a career in the medical administration and he was running for FDA commissioner as a freshman law student, you could tell. He was, yes, yes, Lenny, he really was. And he was proud of it. I mean, it's not as though there was anything dark and mysterious about it. He figured out long before other people figured out that the dual education was well worth the extra three years in terms of your ability to straddle a field which is gonna require heavy inputs on both sides. And it turned out he was even more right than he thought because when it came to running medical schools of the imposition of various kinds of federal controls with respect to the operation of the system, right? They also required the kinds of skills that he had acquired in law school. And if you then realize that if you figure this out in 1985 instead of 1973 is the way David figured it out, you are gonna be in there and the number of people capable of taking senior positions gonna be very thin because there are very few people who've done the kind of thing that you've done. Afterwards, you do it. So just being able to anticipate the way the market that gave this guy huge economic rents relative to all of his competitors all richly deserved because what he did is he figured out something which most people who were working in New York possession did not do. Mark and I met on an airplane in that year and I think neither of us were thinking about any of the ways in which the profession would be radicalized and modernized over this. Now let's just go back and start thinking about the firm process. If during the questioning you want to ask me about the fate of the individual mandate on Obamacare I would be happy to answer it. But now in effect what I want to do is to spend more of my time trying to figure out how you structure some of these fair things and so forth. The first thing to understand about the medical system is in many ways it's worse than the legal system. There have been accrued practices that have developed in dominant firms which had this very inefficient partner and associate situation which led to the end run by more modern firms which had different pricing and different management structures leading the older firms to essentially reform themselves so that the profession is largely unrecognizable for not only these reasons but others like multinational firms and stuff like that. And the force that essentially drives the change is summarized in two words, free entry. Now just to be very clear, let me explain what free entry is in a business. If I'm out there a free entry business means that all I have to do is to get a certificate of incorporation which the state will give me as a matter of duty, put up the sign saying Richard A. Epstein whatever it is I want to do medical services and I can compete for business with all of everybody else. There are no licensing requirements about fitness to do this as there are for example, licensing requirements that require you to establish that you're fit to practice the law. And MBAs for example are in some sense less valuable degrees than law degrees because they don't give you that quasi-monopoly protection that the organized bar has conferred lavishly on its guys. Now the AMA and the other organizations who deal with medicine, they are great in the cartel restriction. And what they do correctly perhaps is to say that you can't practice energy medicine if you're a jerk. And what we have to do is to have a licensing procedures in order to deal with the safety and health of the various individuals who are gonna be entrusted into your care. And what I want to do is to assume that there's some degree of truth to that argument rather than to belittle it. But what happens is one truth proposition does not negate a second truth proposition, which is the moment you can put anything up for safety and health reasons, you could always use this as a barrier against competition by new people. In fact, the entire history of regulation in international markets and so forth is that protection is always tried to go under various kinds of health and safety laws. So if you want to essentially basically make it impossible for your competitor to adopt an alternative form of regulation, you can impose a 10-hour workday limitation on people or 60-hour a week. And some guy who has people who work 16 hours a day can no longer compete in that market. And it turns out the 16-hour a day guy competes very novelly by having people sleep on the job and working two shifts with one set of workers instead of having evening workers and morning workers. That was the great case of Lochner against New York in which the Supreme Court, rightly in my view, realized that was put forward as a health and safety regulation in this context was used as a barrier against entry by a different firm using a different form of industrial organization which would have wiped the floor with the traditional guys by reducing wages without reducing quality. And the health and safety people come in there and say, if you've got all these sleepy people, they're gonna make contempt milk. And the answer to that is you can inspect the milk as it leaves the factory. You don't have to change the nature of the inputs to deal with this issue. Medicine is exactly the same kind of profession. And so you have here the terrible risk that the name of self and safety will be put to you so as to prevent competitive forms of practice taking place. How do I know that this is true? Well, let me give you a couple of examples which explain what's going on. One of them is we have rules with respect to licensing. And we also have rules with respect to relicensing. And relicensing takes place because licensing is peculiar to a jurisdiction. It's the state of New York or Illinois or California that does it. Doctors turn out to be mobile. And so the question is relicensing is when you go to California, do you have to be relicensed? I'm gonna give you the case of one eminent doctor who used to be here, Dr. Casper. Does everybody remember Regina Casper? Oh, yeah. Well, she was one of the world's leading experts and basically things having to do with anorexia and bulimia and similar diseases. She goes out to California and they say, lady, we're starting from ground zero. Will you please get letters of recommendation from all of your professors in medical school testifying to the performance that you did while you were there? All my professors are dead. Will you please then go back and get the records of their evaluations that are put in the chamber? Well, it turned out that building burned down. This is all true, by the way. Well, then what we have to do is to subject you to other kinds of exhaustive inquiries to see whether or not you're fit to examine the practice medicine where in fact they would be honored to have her on the boards which actually examined for any of the specialty. And this went on for a couple of years before finally these guys were lent it and let somebody come in. So what you know is on the relicensing stuff, the health and safety issue, is basically taken care of by the previous licensor and a practice distinguished records and so forth so that you basically now have a decision where it's almost naked exclusion is being used as opposed to something else. And that's what happens if you don't have a system of natural licensing. So what you need in effect is a rule which says whether the state's like it or not if somebody's in good standing and practicing their home state for 10 years and they haven't been convicted of this, that or the other thing, they could practice anywhere in the United States by showing up. That would completely transform the nature of the medical market and the way in which one has to avoid this and the situation is you get organizations that come in there and they start hiring the doctors and the question is whether or not they could hire people who don't have the appropriate credentials. So that gets me to my second example. My view about this is that the state of medicine today is pretty much like the state of law firms has been. Is that you get wild overstaffing so that the many of the people who are performing various kinds of functions in fact are not needed to do the kinds of things because there are these quote unquote protocols that's the title of the paper which essentially get rid of the discretion associated with the operation. So how do you want to handle it? Well what you have to do is to think seriously about new entry and the last people who are capable of organizing a new entry on a systematic basis are doctors because as I've indicated to you before your business acumen is negative is zero and there's nothing wrong with that if you're a good doctor. But if you're trying to organize a firm you must be able to take advantage of a division of labor and have a firm organized by people who understand the regulatory structures, understand how you put offices together how to lease space and start hiring people and then what they have to do is to figure out is there a way in which you could find a team which will dumb down the requirements that you need without reducing the overall level of performance. And so in the medical type situation this comes to the question as to whether you're going to take the former socialist Troy and Brennan right who is now trying to run a CVC or something like this. Care mart. Care mart right. He's trying to figure out how it is that you organize for-profit medicine by breaking down the barriers to entry. It is not an accident that the guy has multiple kinds of training, right? I don't even think he is a doctor, is he? Yeah, he followed Kessler. He followed Kessler, the same idea. M.D.J.D. M.D.J.D. And you know, you get the right set of skillset and you go in there and you try to break this thing down and to see if you could put together teams and the first thing that you try to do is to essentially ration the utilization of high-priced specialists under those circumstances where ordinary mortals will in fact do the job. And so this then starts to get you to the questions about skill and protocol and so forth. And I'm gonna begin again with a personal anecdote about my distinguished career in medicine which consisted of being a lab assistant when I was 15 years of age and essentially was charged with doing urine analysis which I probably messed up somewhere around, I don't know, 20 to 30%. Inattention was a serious problem even at that age. So you have these things and there were everybody else and what you used to do was take all these test tubes, right? And you'd fill them with stuff and then you put in the various reagents and you hold them up to the line. Everything was done mechanically and the good texts were fairly high-paid. Then somebody came along with something known as a machine. Now what you did is you took a drop of this stuff, put it in the machine, you got a touch bit up the other side and what you discover is essentially like in law. A whole variety of technological advances render a relevant a set of practices that people actually used to know. To give you but another illustration, it used to be really important if you were a lawyer or a philologist to know every reference to the words de bonis in the Latin text to figure out which were going. Now this thing is all on computer, you put in the words and it all comes up and all that knowledge about how you gather information based upon the years of study is rendered obsolete because the surgical protocols which in fact can do it in any language that you care to put it because it's just matching characters. I mean you could reduce something to a commodity as it were. Well that's what happens with respect to the tests that take place. More and more. There is this terrible book in some sense but very good book in another sense that Malcolm Gladwell wrote when I'm starting to talk about intuition and protocol and so forth. And what happens is intuition turns out to take second seat the protocol. One of the mistakes of his book is that he kind of treats them as though they're the same thing as heuristic shortcuts that get you to where you want to go. But in fact they work in completely different ways and the basic rule is the same as it is in everything. In an age of technological unsophistication at the outset, intuition will trump protocol and an age of sophistication protocol will trump intuition. So to give you another analogy you start playing chess and at the beginning the best chess players are intuitive. What they do is they know if you control the middle of the board you get more stakes you swap a rook for a bishop or whatever it is you're gonna be in fine shape. What happens is if somebody then can start to see nine pies through nine is half a move and all of a sudden intuition doesn't matter anymore because if there's one variation which tumps the intuition the machine will turn out to be fine. So that in a game in which there's no discretion, right? And no bluffing. So it's not like crossword puzzles not like bridge and so forth. Essentially the protocol starts to beat the intuition and that's what starts to happen with respect to medicine. And so there were these fellows at Cook County I don't remember their names but for years they were trying to figure out how you determine whether or not when you take a patient in who's presenting with various kinds of conditions do you admit them because they have a rhythmic or heart attack or something else, tachycardia you know the words I don't. Or whether you send them home on the grounds that it just falls presentation. And what they did and eventually is they found that if you asked three questions and did three simple steps the dumbest intern would outperform the most sophisticated specialist and reduce both kinds of errors simultaneously, right? What we're doing here is having lower costs and lower error. There's absolutely no trade-offs of any sort that have to be made. The protocol dominates. Once you get protocols like that and I don't care what it's for and I don't even care about the truth of the example it's just the logic of the argument. The number of the kinds of people that you need to run the machines change. You don't need a sophisticated doctor to put in three numbers. You can use a nurse as a system. You could then completely reorganize the nature of the practice to take into account the fact that you can get centralized information that is worth. This is even better than government because what happens is something which I think all of you kind of intuit in the way in which you look at your particular practices starts to intervene and to take place as well. That, what you now worry about in medicine is the tension between public scientific knowledge on the one hand and trade secrets on the other. Now why do I say that this is going to create the difference? If you're trying to run this thing as a proprietary operation so you're not the Saint and Fellows at Cook County who are basically doing this in the public domain and you develop one of these protocols inside your firm and you spend a million dollars to figure it out and you are now confident that it reduces both types of error and costs simultaneously. And then what you do is you say out of the benevolence of your heart you put it online. What you've done is you've created a public good and what happens therefore is your ability to realize additional revenues from your own reorganization is going to be effectively throttled by virtue of your fact that the competitors can take the information that you generated at your cost and use it in their business so that they will be able to supply the same goods and services that you can supply at lower cost. And if you go back to your good Blackstone on property rights he always says that those people who so shall reap it turns out when you're dealing with ideas and information you have to worry about exactly the same thing because if you allow other people to reap where you have sown the reapers will slowly close up and they'll become ciphers on the system as well. And so therefore what you start thinking about is trying to create these things privately which places you in enormous tension with the free and full dissemination of information that you'd like to get throughout the medical system. When I put this forward I don't want to be understood as saying that I think privatization is necessarily a good thing but I do want to insist upon is that if you're gonna have the private creation of information then privatization becomes an important thing to consider in the way in which you run the system. And these protocols essentially start to give you real advantages. So the question then is should we want to have public funding to create some of these protocols so that it could be widely available and the answer to that question at some level has to be yes. We really do want to create a system like this and so what you'd like the NIH to do is to take the folks at the county hospital and say here's a million dollars you develop this protocol on condition that once it's there it's available for free license by everybody who will comply with certain minimal conditions whatever those may turn out to be and you will then get the stuff inside the public domain. So then you say well you see now the public solutions dominate the private solution and that's wrong because you never get domination what you do is you get mixed economies in which both systems go because now suppose what happens is some guy sitting in a private company sees a problem that nobody else has seen and figures out a protocol that nobody else has done. Is this guy gonna turn this information over to the National Institutes of Health so they could put it out where in effect if he does that he loses the advantage and the answer to that question may well be no. He may decide I'm gonna keep this thing as a private protocol I'm gonna take the risk as you always do with trade secrets that the government to some other firm will develop a similar process independently to mine and the rule on trade secrets is you cannot stop independent invention even though you can stop copying with respect to the information that you have and he's gonna take that risk and think that it's fine or he may go over to some company and say look I'm going to make this thing public but in order to do so there's gotta be a 5% royalty coming back to me from any and all sales of this particular protocol once it gets put out there but what happens to the profession of medicine is quite simply this the more of this stuff that you can reduce to protocol the less rule there is for you guys with respect to routinized care and then this has to ask the question how does this start to map in to the way in which we should think about the practice of medicine? One of the things that's so clear to me as a malpractice lawyer is I'm not one of the guy whom you want to see walking into the room the first time there's a problem you'd rather be able to find some other way to resolve all of these things and we had I think about 10 or 15 years ago Mark we had this conference on how you manage your business in order to deal with medical error and this is the basic way in which you handle these particular problems is malpractice if you're thinking about this from a management perspective is that distant cloud over the horizon that you could barely proceed the single greatest risk of malpractice takes place in routine operations that have to be done every day with respect to thousands upon thousands of people and somebody through inattention or indifference does it wrong so you give them pills together that ought to be taken separately or pills separately that ought to be taken together and what everybody came up with was the fact that you wanted to reduce the level of discretion that you had in the workplace by getting a series of low level protocols that could be put together not even by trained nurses but by practical assistance of one sort and to deliver that with a very high degree of regularity the way in which you deal with malpractice is to cut it off at its source if you could reduce base rate error by an order of magnitude the number of cases that are gonna come through at the other end are gonna be reduced by an order of magnitude and at 2% of revenue hit through medical malpractice will become a 0.2% stuff problem not solved but what happens is if you think of the substitution of labor it's the high priced lawyers who deal with the malpractice cases get cut by 90% in the low priced talent that starts to deal with the administration of routine products gets increased by 90% so that what happens is the whole system starts to get changed and everything depends upon your ability to develop these kinds of practices now when you're dealing with protocols of this sort as in some cases you are with other protocols what happens is you have centralization of authority and control but the centralization of authority of control is done inside the firm it's not done by the national government and what you must understand is that this plea for centralization is firm specific and competitive markets and many people start to believe that that's not the way we're going to do it we're going to centralize it through national government let me talk about the Obamacast situation not from the constitutional issues but from the question of institutional design as to how it is they want to put together a competitive economy and the first thing to note is that if you're trying to regulate a competitive economy regulators essentially always face the following situation the greater the heterogeneity of the firms that are subject to regulation the more difficult it is to have a system of uniform regulation with respect to them because your general U-cases are going to have to have parts and subparts and after a while uniformity is defeated by heterogeneity now the correct response to this is this is why regulation is a very bad idea because the way in which you get innovations by firms is each of them develops their own protocol their own target population their own way to constantly dumb down the level of talent that you need amongst the foot soldiers in order to reserve the discretion there the pattern I've talked about and the moment what you do is you as the healthcare bill does it says that anybody who wants to come on to the exchanges right in order to provide healthcare to individuals who've been bounced out of the groups which is going to happen with alarming frequency I'm sorry to say we have to be able to regulate them and the only way we'll be able to regulate them is if we dictate a list of minimum essential services in four different plans that have to be supplied and in effect the way in which they have to be supplied so that the only way that you compete is over price and quality of service now nobody in their right mind would say competition over those two dimensions is irrelevant they're obviously central to any system but the way in which markets work is essentially everybody who understands the need to dumb down to rely on protocol in order to create these substitutions is always going to try to find a novel way in which to do it and what you'd like to do is to have as many of these different paradigms come up because what will happen is then you'll get survival by natural selection in a good sense those people who experiment with lousy protocols will turn out to lose market share they will reform themselves of parish and those that get good protocols will do exactly the opposite and when you start to stand in eyes in this particular fashion what happens is you're now putting all your eggs in one basket you're now having centralized system so the obama care people understand i think quite rightly that the model of commoditization which doctors will resist is in fact the wave of the future but like everything else they do this so terrible on matters of technique that they come up with the wrong kind of solution solutions to do this killing the very kinds of innovation that they want to create and even more ominously creating a situation when you create in addition to protocol subsidies which make it very difficult to allocate your resources across firms what you then have to do is if you give subsidies to individual workers you have to make sure that they're not going to be captured by the firms because you don't want to subsidize them so by the time you're done with pushing money in at one time and regulating the amount that you could take out at the other time are you all familiar with the term medical loss ratio it's basically a requirement that you spend a certain fraction of your money on medical care not on administration and they come up with numbers that have never been achieved in the history of the provided private provision of medicine which leads now to another kind of regulatory force so what's the lesson that we want to have uh... in order to do with this it's that you want to take question you want to get rid of the barriers to entry stuff you want to see how much you could commoditize you realize that the moment you commoditize exactly the opposite phenomenon will happen there will always be somebody who's going to have to organize the protocols organize the arrangements handle the few difficult cases that survive so you'll get some highly sophisticated people running these operations doing your difficult operation but the basic success of the system depends upon keeping the routine operations under place and you can do that through firms you could try to do it through government regulation generally speaking the government regulation for the systems that i've said will fail relatively badly because trial and error which is the nature of this particular game is something that does not mix very well with regulation what does it say for doctors well you're going to get protocols in one way or another uh... the unearned and rents in the medical profession this is what's going to happen your standard dermatologist pediatric persons and so forth even if they keep their jobs the wages are going to be driven down and your elite surgeons a tiny fraction of people your super diagnosticians and so forth will do very very well indeed under the system but averaging comes assure going to fall lawyers there's a little bit more need for discretion in the system than there is for you so we will have a larger fraction of the elite guys relative to you because the regulatory state is so insane that the guys who will surely benefit of this protest system of health care is upheld will be the lawyers and management consultants who take you helpless doctors and try to preserve some semblance some shred of dignity for you against what you will find to be a highly oppressive system uh... that will be put into place this is already happened and who gets the money it's the guy who can arrange the waiver from the imposition of the care restrictions waivers already for three million people i mean it's big business being connected being a lobbyist being a lawyer knowing which strings to pull the money in medical care now is getting waiver from conditions and on that happy note i'm happy to take any all questions from any and all on that happy note the paper is open for questions in the model that you put forward with law firms and medical care uh... how does it sustain itself yeah so you have the discretionary on top and the modified on the bottom how do you grow like the associates of the residents into the discretionary seems to me that the current the old system uh... part of the reason it was set up that way is you know for the growth model it was in effectual in many ways there is a lot here's the first one you need to grow many fewer people so that the problem is that of being in is going to be point two and something like that and secondly what you will do in effect is you will probably find more systems in which self financing is going to be required in order to get yourself up that particular ladder because it's going to be very expensive for firms unless they know that you're going to stay with them for a very long period of time to do the financing because the free-riding problem is going to be acute we train you for four years and off you go so what you see in business is is a variety of self financing shared financing models which are very good and let me explain briefly what they are you want to send somebody back to get the nba or an advanced degree in any firm what you say is we'll pay the tuition in the following way you go out and borrow the money from any bank and what we will do is when you're here for one year we will pay off twenty percent of that loan you're here for two we pay off forty you're here for five you get it all paid off so what you do is you never give them the money up front what you do is you give them a promise that if they remain inside the firm that then we will get this off and that is a way in which you can handle the financing problem because people don't have enough human capital and also handle the defection problem that otherwise takes place and it took a long time you know I managed to state this paradigm to you in what thirty seconds you know how many years it took firms to figure out what they were supposed to do and then it becomes even more complicated given the kinds of people promotions lateral transfers buyouts carry one of the reasons why it's so difficult to run modern businesses today is that the more elite people you have particularly in law firms right not so much doctors the more likely your income is going to come in what they affectionately call in the trades carry which is you invent an invention you don't get cash out at the front end you get a piece of the participation which comes to you in cash when they cash out themselves by selling the firm by going public with something else uh... you start to put together a medical firm and a bunch of researchers that's the way they're gonna start to pay people is it a bad deal for you well you know number thirteen at google was a perfectly ordinary woman she just happened to get at the right time at the right place and eight years later she's worth three billion dollars not a bad deal to have taken a ten percent cut in salary at the beginning of the situation so you're gonna have to do that kind of financing and so forth to give you another analogy one of the reasons if you look at baseball you'll notice that there's a change in the mix of players the decline in the number of black players an increase in the number of Hispanics from the Dominican Republic and an increase in the number of white players right well there's an industrial organization explanation for that what happens is in the Dominican Republic the old system of indentured servitude is alive and well very poor company you can get people in the asylum to long-term contracts you're traded you can't do that in america the minor leagues aren't there so who do you get you get guys with college scholarships who gets the college scholarship it turns out essentially these people are internally financed by their parents and if you have black kids who have a low family income who can't do that they're gonna have to start moving away from the sports which it does baseball is extremely acute because if you're trying to figure out the ratio between training in town in baseball the training matters more than it does in a lot of other sports because if you don't know how to throw a baseball all these are unnatural actions so you're doing everything wrong when you're a gifted athlete and you're finished you know somehow or other God taught man how to jump and if you have a thirty six inch jump reach it's amazing if you're six foot seven you got a future add of you as they say in basketball you can't coach height and so forth so the sports turn out to have slightly different mixes and you start seeing the population start to move but the the question of internal self financing is an extremely important one and what happens of course is you go you know you live in new york city or your children do and all of a sudden you know getting into collegiate and Horace Mann and the st. Ann's you know at age three major human capital investments by your parents right so that by the time you get a kid out in twelfth grade where they can get themselves into a major college if they're lucky you've already spent a half a million dollars on their education uh... so it's a complicated this is a way an odd way in which privilege is up there and then these institutions aware about that so they make you pay even more money to get your own kids to give scholarships to try to get them mixed up does it work i think the answer is yes in a strange way these institutions of thrive notwithstanding their own limited kinds of redistribution policies which again gets you to a very key point redistribution is an essential feature of social life and anybody who thinks that you can run an economy where i'm for me and only for me all the time has never been in any kind of a charity drive religious organization medical institution in their lives but the question is who knows how to do it best and the answer is never the federal government never the state the private institutions turnout to be able to do enough to make the thing work but not so much as to bring it down uh... when you start looking at government they always go too far and take an idea so if you want a little progressive tax uh... you ask our local president you know our former guy here whatever the taxes it isn't progressive enough you never say i think the optimal level is this and we shouldn't go above it and we're above it maybe we ought to go down in private organizations you get that level of self-correction and that's why you want these complicated mechanisms to be kept out of out of government hands one of the many reasons any other questions yes sir is there any uh... reason that you're sort of advocating both within law and medicine division between an elite and a proletarian within the profession uh... as opposed to uh... having those sort of commodified tasks done by persons who are not part of the profession uh... legal assistance or there's a whole point but the rise of the paralegals yet another manifestation in the law firm and the rise of the tech is what the firm will do and essentially the core will get larger let me give you the university is another illustration the skill it takes to teach the german language is not the skill that it takes to get a new interpretation of faust particularly part two right so what do we do the language programs are now all taught by part-time instructors who are native in their language whose spouses are somehow are they here doing a phd in something or other else you keep it for three years you pay them respectable wages you give them health care coverage and then sign or you're gone what you never do for somebody who does a routine test today is to give them tenure inside the university with a lifetime contract and just as i've talked about the professionalization the same thing that's taken place inside university which the core of the elite which is the medical faculty of the law school faculty gets smaller relative to the size of the flotilla and in fact in the medical institution of course it's really difficult because you're running in terms of gross volume eighty percent clinical and twenty percent research or something like that you start you want to keep the research component primary in the operation you start creating classes of faculty members clinical people non-clinical people people with distinction people without distinction what do you have four-fold kinds of differentiations five-fold differentiations here it's exactly for that reason in the law school we do exactly the same thing but our academic faculty since we don't charge income is eighty percent of the business in our clinics which usually run for out money anyhow have to be supported or twenty percent of the business so it's not as pronounced but we have the same kind of situation you have to be prepared to operate more complicated industrial structures to take into account the differential levels of performance and you have to be prepared to bring in under the tent either by long-term contract membership short-term contracting arrangements people whom you never thought you had to do business with this is perfectly universal and the point i started with the debate you ain't so special right we're all doing exactly the same thing what's special about medicine is you have to know something about medicine that's why nobody here said richard we want you to get your latest views on the proper way to perform an incision for an appendicitis yet to be asked that question i'm happy to answer okay question you just went through a lot of interesting and a significant information regarding the system's including problems with regulation uh... and ultimately that this protest system is essentially going to be worse off for doctors especially the beginning what i'm not clear about is whether or not it's going to be worse off for the patients boys at the right question to ask well let me tell you what i think the answer is it depends on who gets to do the reorganization of the business it will be unambiguously worse off if it's done by government providers what the reason why medicare has worked so well is you get private provision by doctors this isn't how recently when the price stuff has become unbearable uh... the folks who are getting the care pay zero marginal cost but what they do is they pay a lump sum per month they're huge transfers as you get older from people who are younger in the medicare and so forth what's not to like if you're in a system in which seventy five percent of your cost of being paid for by somebody else the problem is you cannot generalize that to national health you cannot have a system which a hundred percent of the population pays only twenty five percent of its cost you're not going to get the chinese to kick in the other seventy five percent for no return or whatever it is so at that point the question really is can you ration the services in an intelligent fashion and what we're told is we have forty five or fifty million uninsured people in the united states and this is treated as a fact of nature it's not a fact of nature it's a fact of regulation every time you impose a mandate and the president never voted against the mandate when he was in illinois never oppose one of the federal government you're making people buy something they don't want that cost them more than it's worth that sooner or later that tips the balance and they just drop the whole thing rather than taking the thing with the mandate what you do is you see the number of insured people through private health plans go from sixty to fifty now what they're trying to do is to force feed it in another way right through these various kinds of arrangements and regulations uh... the prediction is that somewhere between seven and eleven million people in the immediate run and maybe as much as thirty percent of the people who are now on private health care plans will be driven out of the plans because the requirements are so expensive that the employers will drop them think of this instead of like illinois every year another dumb mandate one supermandate this slide and ask yourself whether or not it's going to change primary behavior so my prediction is if you put this into place there's a serious risk of increasing the number of uninsured and then what happens is these exchanges are so crazily built that they won't be able to absorb them you cannot run a system coherently where you're trying to give basically a ten thousand dollar subsidy for somebody who puts in five hundred dollars to buy something for an exchange where the carriers on the other side are going to be so late with obligations and have to deal necessarily with the federal government that this market's going to actually open a standard exchange is exactly the opposite function what it is is the place the people to come so that if there's an exchange and there are ten guys who are selling figs on the fig exchange i can go to this one this one this one this one each of them figures out what they want to do and each of the customers it's that constant set of choices that do it but if getting into an exchange requires that you meet very onus requirements unrelated to solvency and reliability which is what people want out of an exchange uh... then in effect they're going to start driving people out so if the new york stock exchange started to say well we're only going to allow people to sell computers if they agree to the following eighteen terms about what they're going to sell us you know that exchange is going to shut down well that's exactly the kind of exchange you have in the metaphor the danger that you have to understand about this stuff is they use all the language of competition exchange and so forth but what is essentially um... how do we say it a hard government-driven control type system it is not anything like a market with an exchange insurance is upside down exchange regulation is upside down the subsidies across subsidies are unsustainable so my prediction is if you run it this way it will be worse unambiguously worse the way you make it better is to have competitive firms do the innovation and then let people decide you're going to tell me rightly most individuals can't figure out head from tails and so that's why you get agents they're called employers or they're called church groups or they're called some other thing so the general rule for dealing with insufficient information the correct response is use intermediaries the current response here is to have mandatory terms by the government which nobody then understands unless you've taken a look at the federal register recently you'll have no idea of how this stuff is coming out and not only do the consumers not understand the firms don't understand it and the regulators at the state level don't understand what it is that the federal government wants they complain all the time right now that they can't get it i mean i've been doing this constitutional jazz lately the interesting thing about it i i i'm going to claim the following you need so i don't need to be the liberal conservative i'm the only person who's commented on the constitutional issues who's actually tried to figure out how the dam system works from the inside everybody else knows about the mandate from some abstract sense but if you ask them to figure out the operation of the exchanges and so forth you can't do it i was on the radio this morning with a very liberal commentator from wnyc who sort of welcomed me with the enthusiasm of the bubonic plague and i started to explain how the thing was going to crater i don't want to talk about policy i want to talk about the law i said you can't understand how the law applies to a system unless you understand the system to which the law applies which he thought was outrageous for somebody to say that total ignorance is the way in which you want to evaluate all of these government programs we do want to hear reviews what did you tell us your views on the constitutionality of of the legislation but also of the last couple of days of of argument well let me just see i got to turn this phone off first it's going to be i don't know who it is and i don't care but i'll get it later it's been a huge surprise i mean i have to tell you very two times in my life do i find that i'm in excess you know demand but this thing has generated more interest i think than all the supreme court cases put together in the last twenty years that includes keelow it's just been an extraordinary keelow the case about the one guy that's because keelow generated no demand in anticipation of the decision just a reaction this one everybody knew this thing was going to go to the mess what happens is the american professoriate amongst constitutional lawyers is split probably eighty to eighty five liberal and fifteen to twenty percent and everybody's been out in full force so there's no question of who's getting the greater amount of volume on this it's not only that when you go to the commentary not the professoria they tend to be relatively liberal on balance but it's not as though guys on my side like me have been particularly shy you get huge amounts on one side and very very large amounts on the other side and a lot of it is trying to predict the way in which the justices will play the game and the arguments in favor of obama camp being constitutional on the individual mandate rest upon both political judgments and constitutional judgment the political judgment is five conservative justices will not decide that they want to stand in the way of truth peace project in the american way by upsetting the signal achievement of the obama administration and injecting the courts right into the middle of political controversies that they have long preached judicial restraint as a kind of an organizing thing and blowing up obama care is the ultimate antithesis of judicial restraint in addition to that to the ablest conservative judges in the united states jeff sutton of the sixth circuit and lauren silberman of the dc circuit have both opined given existing precedence there is no way that you could take this individual mandate and isolated out from the rest of the statute and so therefore in their view it's not the question of whether it's an action or not an action it's always a question of whether there's a choice you're always making choices you're always subject to regulation that's the position that was taken by sutton silberman in his opinion said national problems require national solutions healthcare is a national crisis right you just told me that so i haven't heard it before but i know it now and so therefore we can do it so the betting was that if you've got the conservative guys backing off the intervention and the liberal judges and the liberal common days are hundred percent lined up in favor of it that they'd be a crack in a rather fragile five alliance so the betting was probably eight one maybe seven two and you kind of line people up what you said is thomas well he's hopeless his music closest to mark strike this thing down but he's only one guy elito might go along scalia he's already said that he's a faint hearted originalist which means that he doesn't have the fiber to do this kind of stuff and then they say oh robert's he's a chief justice he's got to be a statesman canada he's always a middle man he'll talk conservative and move to the left in the end seven two eight one and jeff tubin and i were on charlie roe's show with uh... walt the delinquent and and jeff always is overconfident about his predictions and he was just doing it and lauding it over me you know richard all your arguments are going to fall on deaf ears don't you understand this is two thousand and twelve next day he says what a contest that was after the first day after no the second the second day the second day on the mandate because all the seven five guys come out with machine guns and they're the conservative guys now they didn't stay that way kennedy soft but his first question is are you telling me that the government is in the position to create commerce so that it could regulate it now that's a hostile question that's not meant to be friendly this was after two seconds of introduction this poor guy was thinking that kennedy would ask a balanced question are you nuts to try to do this young man is what he was telling varely he was thrown for a loop as i would have been in the same position so i thought it was really completely ungracious of the liberal commentators to say you know our case is great but this guy managed to wreck it he's a lousy lawyer i don't think he was a lousy lawyer at all i think he did his level best job was reasonably well prepared managed to get out the central cases but what happened is the supreme court guys weren't fighting on the right and i think you know my view is if you get out there you start saying in public the way in which you know we're going to try to domesticate justice galeer and the way we're going to try and seduce justice robbins and the way we're going to try to flatter justice kennedy it gets people very upset i don't want to be a laptop for anybody and when you then do the political economy the price is striking down the statute is its popularity is still less than even and nothing has changed and my view is the more you know about it the less you like it as you start to see them trying to implement that you see a real amount of dissolution there's a very low political price the liberals of course they were completely predictable in what they said and they knew exactly what they wanted to say bryer who's never found anything which the administrative state cannot do in his entire academic career or his judicial career was leading the particular charge kagan who's very similar was close behind him sort of my all and ginsburg they've never seen a government regulation they don't like they're like will rogers when it comes to this stuff they are for solid everybody knew that they were solid and boy do they sound solid and you know poor rooth was trying to build up our friend miss our friend really and uh... what i've given what i've said today it's very instructive to do it against this and what you're saying sir is that health care is unique and what have i been saying exactly the opposite right is that if you understand the way these systems work you could find parallels and so forth i don't think the lawyers for the government did this because clement and and what's the name carbon are buried that they're not my kind of lawyer uh... in the sense that supreme court lawyers they like doctor they don't want to blow anything up uh... they are not interested in going back to first principles they have this peculiar view that the job of an advocate before the supreme court is to win cases which is something which really doesn't enter my mind very much and quite the same way as it does theirs i'm not a repeat player so they were trying to tamp it down there were several cases where they could really attack the justices but they didn't want to alienate anybody carbon made some serious mistakes making silly distinctions that you didn't need to know clement was sort of regarded as the dean of this business he his great achievement was i don't think in his argument he really made a kind of gratuitous error um... they split the argument and that's extremely important before the supreme court on the merits of the kids make a gratuitous error i mean a lot of them and and really made a few of them eating condo that and carbon certainly made several not making mistakes is an extremely important on the merits of this thing let me give you the secret about american constitutional text doesn't matter very much what matters is attitude if you were serious about this is a textual matter the power to regulate commerce amongst the several states would mean that the united states government provide emergency medical service for anybody who's injured on an interstate that's what it would basically and the new deal stuff expanded it beyond recognition and everybody's arguing on the assumption that that's the law so you can't be spent a lot of time on the text because the text essentially points to where nobody wants to go except me uh... very few people so you then argue this what then turns is what kind of mood music do you bring to the issue and what do i mean by mood music and i'm very serious about that constitutional law has different standards of scrutiny if you think the state is wonderful is not going to make many mistakes and do all sorts of good things you're highly deferential and you call that rational basis if you think that these guys are going to be just terrible with strict screw so in the history of american law economic regulation we assume that the solans of the new deal know what they're going to do when they want to cartelize every industry in town we give them their way but by god when it comes to race we look at you so closely because we know there's a history of discrimination we're going to stop it and then it gets crazy when there's no discrimination as with the voting right acts all of a sudden you're starting to scrutinize who can run for a public utility commission texas right but there's no issue involved well everybody thought they were going to be wearing their rational basis shoes and it was clear from kennedy's first question all the way down through that they were not playing that they were playing a game in which high levels of scrutiny were demanded and there's nothing you could do from getting them to turn the switch there all the rational basis precedence out there that you can rely on and there are a few strict scrutiny cases you want to and at the five decide they want to do it all they need to do to get rid of all the precedence against them is to say we've thought deep about this the idea that you could force somebody into a business relationship in which he has no interest is sufficiently novel that we require a higher level of scrutiny to see whether or not that may be imposed and demand it that's all you need to do one stand so when ruth kinsman when when sander they are kind of want to hold the financing bill all she said is the notable progress of the live route set and you knew that the thing was going to be of help because she had signaled which side of the deference issue what people don't know is whether kennedy will keep to his mind during the questioning of the lawyers for the private side he sounded more sympathetic to the bill this morning i mean my the commentator the brian lehren's name in new york he read this passage taped it a lot but that's a rapist doesn't that indicate that he's going to change his mind i don't think so at which point i was a trader to his course now look am i biased in this case no am i interested yes i wrote three briefs in the case i wrote one on the mandate one on the medicaid expansion one on severance and they've all taken positions which are somewhat orthogonal to the ones that were taken in the main briefs being much more pugnacious which is my my view about it is that nobody will follow me but the purpose of writing pugnacious briefs is to make the people who have a chance of winning look moderate which they are compared to me i mean this is no exaggeration i mean i'm going to do a lot of clock unraveling what's there not and what am i trying to get rid of cartel is essential the progressive movement is a cartel expert and the reason they need this huge commerce powers to do that so on that particular note is twenty after i think it's probably time to quit and let you all people go back and i'm going to do something this afternoon which is useful i'm going to teach roman law roman law thank you all