Classic Economic TriangleEverybody is talking about healthcare.

Everybody is talking about healthcare, but few are really articulating the classic economic choices at work in the debate – and by missing this, they tend to devolved into ‘bitch-sessions’ which usually lead nowhere.

In reality, despite the complexity of American healthcare, the issues at play in the current discussion circle around the three basic economic choices that are in play with any good or commodity – of which healthcare IS one, by definition.1 Quality, Supply and Cost are the three economic levers at play in managing the healthcare ‘market’, and, not unexpectedly, the misapplication of these forces is at the root cause of our current economic woes, regarding the healthcare market.

By trade, I am a licensed professional engineer, specializing in project management (for you engineering geeks, I am a Six Sigma “black belt”) – and one of the key aspects of my work is breaking down complex process problems into simplified explanations, models and choices for customer groups.A? In this article, I would like to (at least attempt to) use this part of my background to frame the current healthcare debate, and the choices & trade-offs involved.2

Pick Two

In the almost any “free” marketplace, there are three primary forces at work:
  1. Quality – the perceived superiority (or inferoirity) of a product or service
  2. Cost (Efficiency) – the optimal use of resources in providing a product or service
  3. Supply (Availability) – the amount of a product or service provided in a specified amount of time3

When I manage large projects, one of the first things I tend to do with the head of the organization sponsoring the project is to draw for them the triangle diagram shown above.A? Then, I hand them a pencil and instruct them to “pick two”.

A) They can pick one of the three as the primary driver of their process/project – the key force to optimize.

B) They can pick a second of the three as a driver to hold constant (i.e. don’t let the quality slip).

C) The third force is then variable – its movement is a product of the other two choices, and it is a slave to them.

Because of the limited degrees of freedom allowed in this classic economic system, you cannot optimize all three.A? It is impossible.

Thus, when President Obama gets up and promises that he will 1) Improve the quality of healthcare for those who already have insurance; 2) Lower its buy nolvadex, Zoloft withoutprescription. costs; and 3) Increase the supply (by insuring everyone), he is making the economic equivalent promise of repealing the laws of gravity.A? In this case, when he makes such promises, he is either a fool or (as the lone voice of reason cried out during his speech) a liar.

The Players

Within the healthcare market, there are three primary ‘players’ – the consumers (patients), the producers (healthcare companies, doctors, pharmaceutical companies, etc.), and the regulators (government, health insurance companies).A? Each has a part to play, and – depending on how they play, it can make or break the system.


Consumers, when given a free market and the ability to “pick two”, will first pick Quality – they want the best healthcare possible for themselves.A? Consumers will choose Cost as their #2 pick, since they have a limited amount of money they can budget for healthcare.A? This leaves Supply (or Availability) as their variable item.

Unfortunately, the regulators tend to provide programs which hide buying clomid online safe, zithromax online. Cost from the consumers.A? These programs may include:

  • comprehensive insurance (with no- or low-co-payment for services) that hides the cost of services received
  • employer-provided insurance that hides the cost of the insurance, itself
  • government-provided (”free”) insurance, that masks both the costs of insurance and the costs of services received

This “cost hiding” has an affect upon the behavior of the Consumer – who then demands more Supply for a marginal increase in Quality – ignoring Cost .A? This is the basic root cause of Consumer-driven cost escalation.


Free-market Suppliers, when given the ability to “pick two”, will first choose Cost as their force to optimize – trying to be the most efficient and cost-optimal as possible.A? Next, they will tend to choose Quality as the “hold the line” option – because they are slaves to their customers, whose top priority is the quality of care they receive.4

Unfortunately, the regulators tend to provide programs/incentives which lead Suppliers to shift Costs or decrease Supply.A? This includes:

  • Providing insurance to Consumers (more demand for supply) that does not cover the costs of the services provided
  • Requiring inordinate amounts of documentation, which decreases Supply and increases Cost

  • Adding regulations which prevent (or disincent) the sharing of medical information to other Suppliers, resulting in duplicate testing
  • Requiring “defensive medicine” practices, in order to prevent losing malpractice cases involving Consumers who, increasingly, see the tort system as a de facto lottery when they receive adverse health outcomes.

This results in Suppliers charging more money (increasing Cost) to patients with private insurance (since they are insulated from costs) in order to make up for the losses they take in treating patients with government insurance.A? This, in turn, raises the cost of private health insurance, since it must also pay for the poorly-reimbursed Supply being used by government-sponsored Consumers.

Or, Suppliers turn away Consumers with government insurance (to avoid taking the losses), decreasing the Supply of healthcare available to them.

Additionally, as anti-competitive regulations are added (artificially driving down reimbursement rates for services) and burdensome paperwork requirements are piled on (artificially decreasing Supply by chewing up the time available from healthcare workers), many Suppliers are leaving the market – retiring from practice, moving to all-private practices, or not entering the healthcare industry in the first place.A? All of these forces lead to less Supply and higher Cost.

Ultimately, this regulator-initiated meddling is the root cause of the spiraling Costs and decreasing Supply of healthcare, as driven by Suppliers.

Semi-Regulators (Insurance Companies)

Health Insurance Companies, like the Suppliers, are primarily driven by Cost efficiency, since they, too, exist to provide a living for their stakeholders.A? Also, like the Suppliers, in a “pick two” scenario, their second choice is Quality, because that is demanded by their Consumers.

Because their values tend to match those of the primary healthcare suppliers, they often act more in a “supplier” role than as a Regulator (and, in fact, they would be ’suppliers’ in the classic sense, if not for government regulation).

However, because they are often prevented, by regulation, from offering plans that have minimal benefits and primarily provide only catastrophic coverage, they are prevented by the full regulators (the government) from offering affordable choices to thrifty and/or low-income customers.

How?A? Here’s but one example:

Very few people would be able to afford auto insurance if it was required, by regulation, to include coverage for regular maintenance – from changing the oil to rotating the tires to regular car washes.A? However, all of the current healthcare plans on Congress’ table would require that all health insurance plans must cover the equivalent of auto tire rotation, whether the customers want it or not.

And it’s no wonder costs escalate.

Regulators (The Government)

And last, but not least, we have the Regulators – the government.A? Their chief lever is Supply, since it is their desire that the supply be sufficient in the marketplace to satisfy all of the customers there.A? Next, since the regulators have also taken on the responsibility of a “supplier” for low-income and disadvantaged customers, their secondary concern is Cost.A? Thus, Quality must fluctuate as a variable when government exerts its influence.

When the government tries to pull all three levers by pushing Quality, bad things happen.A? Just look at what CAFE has done to Detroit, as an example.

The role of the government in this economic triangle is to act as a referee between the Customers and the Suppliers, in case the relationship becomes unbalanced.A? And, just as a football game with a flag thrown on every play would be an exercise in futility to watch, the less the regulators act, the better it is for the free market – which only makes sense.

Unfortunately, as we’ve seen in examining the other players in this economic system, it is this OVER-reliance on regulation which is the primary root cause of the brokenness in the current health care system (For more details on the perverse incentives driven by government regulation, from a centrist viewpoint (if you distrust my libertarian bent), see here and some solutions here.)

If the government were to decide to step in as a primary Supplier (via a single-payer system or via the single-payer mirage of a “public option”), you would then have a referee stepping onto the playing field, at which point, the field will no longer be level.A? As such, the tertiary economic driver of the government (Quality) suffers – at which point rationing (and yes, de facto “death panels” as we see in NICE and other socalist systems) becomes the norm.

ANY government official who promises healthcare for all, with lowered costs and increased quality is an out-and-out liar.A? Such a promise is empty, and those who fall for it are either desperate or fools.A? It simply cannot be done, any more than a government decree could result in the sun rising in the west.

In Conclusion

My purpose here was not to lay out a number of solutions, since I’ve done so in prior articles.A? Rather, it was to lay out the basic economic questions at play in the current debate, and to help the reader understand the basic laws at play.

Pick Two.

It’s not an easy choice, but you cannot have it all.

So which do you choose?


1 -Yes, some argue that healthcare is a right – but by definition, it is not a freedom that can be “protected” – like free speech, the right to assemble, the right to worship as you choose, etc.A? Rather, it is an economic good that can be bought or sold, and it operates that way in any free (or mostly-free) market.

2 -I do realize that I have to ‘over-simplify’ some items in the discussion, but historically, the healthcare marketplace follows the trends described in this model.A? I am not going to discuss game theory and other high-end economic theory. Rather, I’m sticking with simple project management principles. Work with me here, people…

3- Sometimes “Speed” is substituted for “Supply”, since time is the key element.

4- Sometimes Suppliers will flip Quality and Cost to best align with customers, depending upon their business model


This entry was posted on Wednesday, September 9th, 2009 at 8:50 pm and is filed under Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

3 Comments so far

  1. Dave Muller on September 28, 2009 4:39 am

    I rather enjoy your articles as they are put very well with logic, which is something greatly lacking. I’m amazed at how many so-called professionals don’t even know the magic triangle of project management! In I.T. though, it is renamed to Quality – Price – Time.

    I did the basic Six-Sigma course, so what else is needed to be the black belt?

  2. Chris L. on September 28, 2009 1:15 pm


    For Six-S Black Belt certification, I had to take the 5-week course, pass the exams and complete 2 full-scale projects. I don’t know if that’s an industry standard or just an internal standard (I’ve seen slightly different permutations of this).

    I love this triangle (which I used for years prior to Six-S), as it helps my project sponsor and I have a “brass-tacks” conversation about what the driver truly is and how I (as the Project Manager) should weigh my day-to-day decisions.

    [I've also seen it as Quality-Speed-Value and other similar concepts - basically one Q-bound term, one resource-bound term, and one time-bound term.]

  3. Dave Muller on September 29, 2009 5:18 am

    Five week hey? I don’t think I could do that. One day was enough for me, and by the end I have computer withdrawals.

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