The conventional economic framework, a.k.a. Econ 101, says the economy can be broken into 3 layers:

• People are calculators: they rationally pursue their self-interest given near perfect information about the world
• Organizations are calculators
• The Market is mostly efficient (with some help from the government)

The RTE framework says, that’s not how the economy works. The economy is like a game with complex rules that shape folks actions at different levels of the economy. In other words, the real world looks like this:

• People Aren’t Calculators: Behavioral Economics / Psychology / Anthropology / Sociology
• Organizations Aren’t Calculators: Organizational Development / Sociology of Organizations
• Political Economy: government sets many rules of the game, so players can try to win by:
  • Playing by the rules
  • Changing the rules

So if you want to make the world a better place, a simple, clean Econ 101 model won’t cut it. You’ve got to get your hands dirty and understand how the economy actually works. To do that, you need 2 perspectives on the economy:

• Practitioner’s Perspective: Understanding the rules that shape the actions of individuals and organizations in a particular niche of the economy.
• Movement Perspective: Stepping back, looking at the bigger picture, and forcing yourself to ask not what the most personally satisfying or most comfortable act we can take but what’s the most effective action.

Here’s how the 2 perspectives are related to the 3 levels of the economy:

• The 3 levels of the economy
• The metaphor of economy as a game with rules
• The ideas/principles embedded in the 2 Perspectives

What’s missing or needs work:

• Now that the idea of Perspectives has been rattling around in my head for a few weeks, it doesn’t feel like it’s working. I’m not sure why. It might make more sense to focus on the principles underneath the Perspectives rather than the Perspectives themselves. I don’t want to lose the impulse behind the idea of Perspectives. But I need something more fundamental, more bedrock.
• Issues like the role of race in the economy are implicitly in the framework, but they feel like they are getting buried.
• There isn’t a clear connection between understanding the mechanics of how the economy works and what really matters to us — our dreams, desires, fears, and overcoming feelings of helplessness. For example, where does a feeling like “we want our country to work again” fit in the framework?

According to a common narrative, we have lived through a textbook instance of the madness of crowds. If this were all there was to it, we could rest more comfortably: greed can be controlled, with some difficulty, admittedly; overconfidence gets punctured; even stupid people can be educated. Unfortunately, the real causes of the crisis are much scarier and less amenable to reform: they have to do with the inner logic of an economy like ours. The root problem is what might be termed “rational irrationality”—behavior that, on the individual level, is perfectly reasonable but that, when aggregated in the marketplace, produces calamity.

Take new, potentially dangerous types of securities:

If Merrill Lynch sets up a hedge fund to invest in collateralized debt obligations, or some other shiny new kind of security, Morgan Stanley will feel obliged to launch a similar fund to keep its wealthy clients from defecting. A hedge fund that eschews an overinflated sector can lag behind its rivals, and lose its major clients. So you can go bust by avoiding a bubble. As [Citigroup's CEO] Charles Prince and others discovered, there’s no good way out of this dilemma. Attempts to act responsibly and achieve a coöperative solution cannot be sustained, because they leave you vulnerable to exploitation by others. If Citigroup had sat out the credit boom while its rivals made huge profits, Prince would probably have been out of a job earlier.

In fact, Prince essentially said so at the height of the bubble:

Prince conceded that a collapse in the credit markets could leave Citigroup and other banks exposed to the prospect of large losses. Despite the danger, he insisted that he had no intention of pulling back. “When the music stops, in terms of liquidity, things will be complicated,” Prince said. “But as long as the music is playing, you’ve got to get up and dance.”

This is hardly a new insight; Keynes pointed it out many decades ago.

Whatever the asset class may be—stocks, bonds, real estate, or commodities—the market will seize up if everybody tries to sell at the same time. Financiers were accordingly obliged to keep a close eye on the “mass psychology of the market,” which could change at any moment. Keynes wrote, “It is, so to speak, a game of Snap, of Old Maid, of Musical Chairs—a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops.”

But it’s one of those lessons that we have a hard time learning — largely because a) it’s a really lucrative game for many players on Wall Street and b) we keep bailing them out with no strings attached.

What do we do about it? For starters, says Cassidy, we need to rein in executive pay.

Even some top bankers have conceded that current Wall Street remuneration schemes lead to excessive risk-taking. Lloyd Blankfein, the chief executive of Goldman Sachs, has suggested that traders and senior executives should receive some of their compensation in deferred payments. A few firms, including Morgan Stanley and UBS, have already introduced “clawback” schemes that allow the firm to rescind some or all of traders’ bonuses if their investments turn sour. Without direct government involvement, however, the effort to reform Wall Street compensation won’t survive the next market upturn. It’s another version of the Prisoner’s Dilemma. Although Wall Street as a whole has an interest in controlling rampant short-termism and irresponsible risk-taking, individual firms have an incentive to hire away star traders from rivals that have introduced pay limits. The compensation reforms are bound to break down. In this case, as in many others, the only way to reach a socially desirable outcome is to enforce compliance, and the only body that can do that is the government.

What might this look like? For example, the Fed

should issue a set of uniform rules for Wall Street compensation. Firms might be obliged to hold some, or all, of their traders’ bonuses in escrow accounts for a period of some years, or to give executive bonuses in the form of restricted stock that doesn’t vest for five or ten years

What are the odds that any of this will happen? I’d sell short on this one.

A new food-labeling campaign called Smart Choices, backed by most of the nation’s largest food manufacturers, is “designed to help shoppers easily identify smarter food and beverage choices.”

Two “Smart Choices”: Cocoa Krispies and Froot Loops.

Eileen T. Kennedy, “president of the Smart Choices board and the dean of the Friedman School of Nutrition Science and Policy at Tufts University,” says, yes, these are smart choices:

“You’re rushing around, you’re trying to think about healthy eating for your kids and you have a choice between a doughnut and a cereal,” Dr. Kennedy said, evoking a hypothetical parent in the supermarket. “So Froot Loops is a better choice.”

If this was a movie, critics would say it was left-wing propaganda, with Dr. Kennedy a straw man.

Speaking of straw, that would probably be a Smart Choice too:

“You could start out with some sawdust, add calcium or Vitamin A and meet the criteria,” Mr. Jacobson [executive director of the Center for Science in the Public Interest] said.

Interestingly, part of the argument folks like Dr. Kennedy are making in favor of Smart Choices is that it’s based on research on how the non-rational ways people actually make decisions:

She said the program was also influenced by research into consumer behavior. That research showed that, while shoppers wanted more information, they did not want to hear negative messages or feel their choices were being dictated to them.

“The checkmark means the food item is a ‘better for you’ product, as opposed to having an x on it saying ‘Don’t eat this,’ ” Dr. Kennedy said. “Consumers are smart enough to deduce that if it doesn’t have the checkmark, by implication it’s not a ‘better for you’ product. They want to have a choice. They don’t want to be told ‘You must do this.’ ”

Ditto for Dr. Clark, another member of the Smart Choices board, who argues

the program’s standard for sugar in cereals was consistent with federal dietary guidelines that say that “small amounts of sugar” added to nutrient-dense foods like breakfast cereals can make them taste better. That, in theory, will encourage people to eat more of them, which would increase the nutrients in their diet.

Given what a sad excuse for propaganda this program is, is it really worth it for the food companies?

For starters, it’s dirt cheap. Depending on sales of their products with the seal, companies pay up to $100K a year — less than a 20th of a TV buy. In fact, it’ll save some companies money:

In joining Smart Choices, the companies agreed to discontinue their own labeling systems, Ms. Kennedy said.

And it’s a percentage game. If just some people some of the time use the Smart Choices label as an excuse — say, to give into their four-year-old’s insistence that they HAVE to have Fruit Loops — it’s a win. CBS already found one small victory:

Shopper Laurie Adams told us that she believed the green check mark meant that the product was a healthy choice.

The FDA isn’t going to stop this pathetic-but-profitable propaganda push, but they told the program they’ll be watching,

saying they intended to monitor its effect on the food choices of consumers.

The letter said the agencies would be concerned if the Smart Choices label “had the effect of encouraging consumers to choose highly processed foods and refined grains instead of fruits, vegetables and whole grains.”

Should be interesting to see what they find — and yet another chance to measure exactly how much People Aren’t Calculators.

A growing body of evidence suggests that doctors at some of the nation’s top medical schools have been attaching their names and lending their reputations to scientific papers that were drafted by ghostwriters working for drug companies — articles that were carefully calibrated to help the manufacturers sell more products.

If you asked Professor Saviro about the way drug companies infect the information patients and their doctors have to make decisions, I’m sure he’d say yes of course this is bad. But when he and many other smart policy geeks when they write about reforming health care, these appalling facts are never front and center. They’re quietly shoved under the rug.

A good economic framework wouldn’t let that happen. I’m not sure how to diagram this; this is my first draft.

A traditional model emphasizing moral hazard looks like this:

The RTE model adds in how drug companies try to shape market rules:

Market rules	Government sets taxes to push companies to pay for insurance	Big Pharma ghosts articles promoting their drugs
Organizations	My employer pays most of my health care costs	my doctor’s practice is biased towards these drugs
Individuals	Should I get this pill? It doesn’t cost me a lot	I am biased towards these drugs

Imagine if any economic discussion of health care was working from a model like this. How much time would these discussions spend trying to come up with ways of jacking up patients to get rid of moral hazard vs. asking how drug companies ended up with this much power and what do we do about it?

More importantly, if every economic argument worked off of a model like this, we might actually be having a debate right now. Because if you’re working from this model, the first question you’re going to ask when “death panels” are injected into the discussion is, which economic actors are pushing the idea of these nonexistent death panels?

Folks like Media Matters, the Rachel Maddow Show, and many blogs are trying to get these facts into the debate, but they dismissed as corporate-hating liberals. Part of the reason the media can get away with this is because traditional models only pay attention to column 2. But with the RTE model, you’re forced also pay attention to column 3.

And as RTE explains, this isn’t about evil behavior. It’s perfectly rational and expected behavior. Unlike lionesses, who can only win by playing by the rules of their ecosystem, corporations can also try to win by changing the rules of their ecosystem.

If policy geeks took seriously the realities that are baked into this model, we’d be looking at a very different kind of discussion.

UPDATE: I’m not naive enough to think that policy geeks determine media coverage. But if everybody who was serious worked from an economic model that didn’t deny reality, I think more reporters — and more importantly, more editors — would have a hard time just running quotes from policy geeks who didn’t use the model. Given the on-the-one-hand, on-the-other-hand style of coverage we’ve got now, the policy geeks who are just shills would still get lots of coverage. But at least the debate would have a little more reality to it.

Consumer demand drives the market, but it is largely the demand of subsidized consumers who are not actually paying at the margin for what they get. Suppose that in the market for groceries or cars we had consumer demand in the driver’s seat (as we do), except that people didn’t actually have to pay for what they purchased (or maybe they just had a small co-pay). Whole Foods and GM might like this, but it wouldn’t be good socially. Yet in healthcare, that’s effectively what we have, much of the time, for people on Medicare, Medicaid, or employer-provided health insurance that overpays at the margin (relative to the optimal insurance level) due to the distorting effect of the tax subsidy.

There are a number of problems with moral hazard arguments in healthcare. For example, the biggest hit in healthcare costs is when choose one sick, and if people were “actually paying at the margin for what they get” such that it would change their behavior when they were really sick, they’d probably go bankrupt.

But there’s a more basic problem with this argument. Saviro assumes consumers have meaningful info about the healthcare “product” they’re considering buying. If you want to buy a car from GM, you can see what Consumer Reports or Road & Track said about it. But what about the pill your doctor just recommended you take?

Let’s assume that unlike many folks, you’ve got the high-level reading skills and the time needed to read up about it. Here’s the catch: you can’t trust what you read. According to the New York Times,

A growing body of evidence suggests that doctors at some of the nation’s top medical schools have been attaching their names and lending their reputations to scientific papers that were drafted by ghostwriters working for drug companies — articles that were carefully calibrated to help the manufacturers sell more products.

Got that? Drug companies aren’t just paying doctors to do research. They’re also helping the lazy bums who can’t even be bothered to write the paper themselves. A case in point from a hormone drug lawsuit:

The [deposed] documents offer a look at the inner workings of DesignWrite, a medical writing company hired by Wyeth to prepare an estimated 60 articles favorable to its hormone drugs. In one publication plan, for example, DesignWrite wrote that the goal of the Wyeth articles was to de-emphasize the risk of breast cancer associated with hormone drugs, promote the drugs as beneficial and blunt competing drugs. The articles were published in medical journals between 1998 and 2005 — continuing even though a big federal study was suspended in 2002 after researchers found that menopausal women who took certain hormones had an increased risk of invasive breast cancer and heart disease.

One lazy physician who was assisted by DesignWrite was Columbia professor Dr. Michelle P. Warren.

Her article was published in The American Journal of Obstetrics and Gynecology in 2004, when women feared that Wyeth’s brand of hormone drugs could be causing particular problems. The thesis of the article was that no one hormone therapy was safer than another.

The published article acknowledged help from four people. But it did not disclose that DesignWrite employed two of those people and the other two worked at Wyeth. Court documents show DesignWrite sent a prepublication copy to Wyeth for vetting and charged Wyeth $25,000 for the article, information not disclosed in the paper.

When the Times contacted Dr. Warren, here’s how she defended herself:

She said she worked on the project in phone conversations and in meetings — contributions not reflected in the court documents, she added. She said that it was a mistake not to have disclosed the writers’ payment and affiliations in the acknowledgment; articles published today involve more detailed disclosures, she said. DesignWrite scoured the scientific literature on hormone therapy for the article, she said. “I would never undertake this without some help,” said Dr. Warren, who is the Wyeth-Ayers Professor of Women’s Health at Columbia. “It’s too much work. I am not getting paid for it.”

Holy crap…

Next week: what this means for building a better economic model.

Unfortunately, he turned off his behavioral economist brain and delivered a boilerplate pro-free-market argument:

Here is a thought experiment: Can you think of a domain where a government-run business competes successfully with private-sector companies? … More generally, it is hard to find examples where government-run businesses compete with private companies and win. One reason is that governments are not very good at innovation….

But what about the often-stated fact that Medicare has much lower operating costs than private insurance companies?… this is not an apt comparison because the new public plan would have marketing and other administrative costs that don’t apply to Medicare with its captive market.

All of this leads me to conclude that if we impose sensible rules on the public option [e.g., that it isn't subsidized], it will neither save nor destroy the health care system because it will simply not get much market share. And if we do not impose those rules, the public option will hurt rather than help.

I’ll let other bloggers bang on his argument against government. There’s a more interesting issue here: why did Thaler ignore the strange role of Medicare in this debate?

As Thaler says,

We hear from the right that an insurance plan run by the government will drive all private-sector insurers out of business and be the first step toward socialism, if not communism.

And yet nobody on the right is saying boo about the biggest, baddest government-run insurance plan — Medicare.

Medicare hasn’t just turned into the third rail. It’s become non-government. At town hall meetings, in between denouncing imaginary government plans to kill off grandma people are yelling, “keep your government hands off my Medicare!”

For a Behavioral Economist, this should be like catnip. It’s about as un-calculator-like behavior is you can get. But Thaler doesn’t touch it. Why?

It may be because he’s conservative. But I think it’s also a sign of a fundamental flaw in most Behavioral Economist work.

Behavioral Economists are fascinated by the impact of our brains on how we think. But they’re mostly silent about the equally critical impact of other people’s brains — the institutions we work in, the political efforts to shape public debate.

If a Behavioral Economist like Thaler took political economy seriously, he’d have to make a very different argument. For example, he’d have to explain why if the public option won’t “get much market share,” are insurance companies pouring millions into strategies that, among other things, tries to convince people that Medicare isn’t really government? Because it isn’t just a lone nutjob at one town hall meeting who’s said it; this strange outburst has happened often enough that it’s probably on somebody’s list of talking points. And can’t be the insurance companies’ strategy to ensure they’ll still be able to compete; there are much less bizarre ways to argue for “sensible rules on the public option.”

You can certainly be a free-market cheerleader and take political economy seriously. But you have to work a hell of a lot harder than Thaler does here. And that’s why I think it’s crucial for liberals and progressives to force Behavioral Economists to take the next step in exploring how people aren’t calculators.

Kuttner, Dean Baker, Jamie Galbraith, they’ll all write that “markets accomplishments much superbly,” “the market is an incredibly powerful force,” etc. But they sound like a little kid who’s been forced to say thank you for the socks she got for Christmas.

Here’s what’s missing: the feeling I got when I bought my iPhone.

I’m not going to irritate/bore you to death with a ten-page rave about my iPhone. I’m sure you already got enough of that from your friends when it first came out — or maybe you are one of those cruel people who splattered friends with iPhone-love drive-by’s. Let’s just say the iPhone was the shiny red bike I’ve been waiting for. And that it feels like Round 2 of the Net, where the Net is no longer deskbound and instead it & all the people on it are with you wherever you go.

But as an economy geek and a one-time small-business owner, it wasn’t just the iPhone itself that blew me away. It was the business model behind it (once Steven Jobs came to his senses and opened up the iPhone a little).

Many a bright software idea has crashed and burned because its inventors couldn’t hack the business side. With the iPhone’s App Store, getting credit cards to work, providing tech support if someone had trouble downloading your app, and a dozen other business problems that could sink a software company — these daunting problems mostly disappeared in exchange for 30% of sales. And since apps could be sold for as little as ninety-nine cents, buying an app wasn’t a big risk for a customer who didn’t know you. The idea of this business model been kicked around for a long time. But Apple was the first to figure out how to execute it flawlessly.

If you’re writing about economy, I think you’ve got to be able to capture this feeling — the delight in the creation of a new product as well as the brilliance of a new way producing and marketing a product to turn it into a profitable success. It’s a feeling Wired captures better than just about anybody else.

Maybe I’m being a bit unfair. If you’re reading a book called The Squandering of America, do you really expect to find a love song to entrepreneurship? But I think the fact that you find almost no trace of the exhilaration of the market in books like this points to a weakness in our side. We do outrage really well. But owning up to more complex feelings? Not so much.

An economic model that captures the excitement of entrepreneurship and the power of solidarity — that’s not an easy thing to pull off. But if the model’s going to succeed, I think it’s got to do it.

UPDATE: between this and the last entry on Kuttner’s book, it might sound like I didn’t think much of it. That’s not the case. I’m just using my reaction to a few elements in the book as a springboard to figuring out the RTE model. Squandering America is smart and nuanced, and Kuttner’s managed to pack an amazing amount of interesting economic history details into a very readable story. It’s definitely worth checking out.

An imperfectly rational human being challenges a really important idea: the notion that markets work well because individuals can be counted on to make the best choice for themselves.

But there’s another, less obvious reason. Economists like their models the way Martha Stewart likes her doormat: clean and under control. Their reaction to the little-kids-with-muddy-bare-feet messiness of how people actually make decisions?

“Behavioral economics has identified a dizzying array of human foibles. We clearly can’t incorporate all of them, and because of that, people feel that incorporating one error into your model may be just as unrealistic as incorporating none,” says Ed Glaeser, a professor of economics at Harvard University.

Or to use more technical language, ewwwww.

So if you decide that you can’t ignore the muddiness of reality, what do you do? That’s the reason for the next step in the model: Understand the Actors & Their Ecosystem. If we want to push the economy towards a particular value that matters to us, we can’t make simple assumptions about the way the world works just because it’s easy. We’ve got to dig in and get dirty.

Up next: getting dirty on the farm.

Some software designers argue that the way to avoid this mistake is to use “user-centered design.” Don’t assume that nurses in a hectic hospital see the world the same way software geeks in quiet cubicles do. Instead, go talk to nurses, doctors, administrative assistants, and everybody else who’se going to use the system. Watch how they work. Use what you learn to create a clear picture in your head of the different kinds of users who’re going to use the system — what matters to them, what assumptions they make. Then create “user scenarios” that explain how each type of user would expect to use the software to do their job.

It’s the same idea as in industrial design. Here’s what Toyota did when they wanted to build the Toyota Tundra:

In August 2002, Obu and his team began visiting different regions of the U.S.; they went to logging camps, horse farms, factories and construction sites to meet with truck owners. By asking them face to face about their needs, Obu and Schrage sought to understand preferences for towing capacity and power; by silently observing them at work, they learned things about the ideal placement of the gear shifter, for instance, or that the door handle and radio knobs should be extra large, because pickup owners often wear work gloves all day. When the team discerned that the pickup has now evolved into a kind of mobile office for many contractors, the engineers sought to create a space for a laptop and hanging files next to the driver.

But they couldn’t just pay attention to users’ needs. They also need to understand the needs of the folks who have to figure out how to build the truck.

Design engineers, however, cannot simply create the best truck they can; they need to create the best truck that can be built in a big factory. In other words, Tundra’s design engineers had to confer with Tundra’s manufacturing engineers at every step of the way to create a truck — or 31 trucks, really — that could be assembled efficiently and systematically.

Once in a while, policy geeks pay the same kind of attention to how folks actually work. But just as often they act like the software geeks who build brain-dead healthcare systems that cause as many problems as they fix.

A few years ago I heard a health care expert cheerfully explain how to create financial incentives to keep people from going to doctors unnecessarily. I wondered if he had any clue about what it was like to have a low-wage job and not have any health insurance. The folks I used to treat when I worked in a free health care clinic didn’t need extra financial “incentives” to not visit us. They already had a big financial incentive — they didn’t have sick days, so if they didn’t show up they didn’t get paid and they might get fired. He didn’t know anything about their world — and he didn’t want to, because it would complicate his neat little healthcare model.

The same is true for developers if you’re trying to encourage smart growth. If you don’t understand their world, it’s easy to create rules that’ll make even pro-smart growth developers ask, what did I do to deserve this? And you’ll miss out on opportunities. For example, for developers time is money. So if you can create rules that save developers time — like fast tracking permits that are smart-growth friendly — you can create real financial incentives for smart growth without spending a dime.

If you start from my model’s three assumptions about people, organizations, and markets/politics, this won’t fly. If you want to shape the economy, you need to think more like Toyota Tundra designers and sweat the details of the worlds folk really live in.

We’ve even got an advantage over the Tundra designers. When making a truck, giving customers a say is a good idea. When making a better world, making sure everyone has a say is their right. They own the joint, so they get to have a vote.

I don’t yet have a good name for this approach. For now, I’ll stick with a not-great name – user-center policy design. If you’ve got a better one, help me out and put it in a comment.

But in an article entitled “The Dubious Promise of Digital Medicine,” Business Week pours a big bucket of cold water on this enthusiasm. To understand why computerizing healthcare records is running into trouble, we’ll take a look at the problem using the three assumptions about the economy I explored in the last few posts.

People Aren’t Calculators

In theory, Healthcare IT should be able to radically reduce the number of medical errors. For example, with computerized records nobody has to decipher a doctor’s handwriting. In practice, the track record is mixed.

The Joint Commission, a nonprofit group that inspects and accredits 15,000 health-care organizations, … issued a warning in December about problems with complex health-tech systems. It cited one U.S. pharmaceutical database that found 43,372 medication mistakes, or about 25% of the total reported in 2006, involved computer technology. The problems included flaws in data entry, inadequate software, and confusing screens.

As I’m sure you know from painful personal experience, a lot of software is built by geeks who don’t pay attention to how people actually think, let alone what it’s like to use the software in a hectic place like a hospital. And if software doesn’t work the way people think, it can actually increase errors.

Take the experience of Dr. Mark Del Beccaro, chief medical information officer Seattle Children’s Hospital.

Del Beccaro soon became troubled by incidents of children suffering medication overdoses despite alerts from the Cerner software. He asked the doctors involved whether they had seen the alerts onscreen. “They told me, ‘I get so many alerts, I click through [them],’ ” Del Beccaro says. “They do become mind-numbing.”

In principle, alerts are a very good idea. If someone’s tired or distracted, an alert could save someone from, say, ordering a very dangerous drug combination. But people only have so much room in their brains to handle alerts. If the people designing the software don’t take this into account, constant reminders could actually increase errors.

Organizations Aren’t Calculators

Why doesn’t the market take care of this? Healthcare IT vendors who do a better job of adapting to users’ real needs should beat the ones that don’t. In the real world this isn’t happening. Why? Organizations aren’t calculators — or at least not simple ones.

Hospitals are very complex organizations, often with their own organizational culture and ways of operating. That means that a healthcare IT system has to be flexible enough to fit how each hospital works. As BusinessWeek says, this creates “a fundamental tension”:

Info tech companies want to sell mass-produced software. But officials at large hospitals say such systems, once installed, require time-consuming and costly customization.

BusinessWeek cites a 2005 Pediatrics article on what can happen when the organizational needs of healthcare IT vendors and hospitals clash.

Digital technology slowed treatment in several ways, the researchers concluded. One example: Doctors and nurses in the intensive-care unit were accustomed to ordering medications and tests while a sick child was en route to the hospital. The Cerner system required that orders be submitted only when the patient arrived, costing crucial time.

Even “one of health technology’s best-known advocates,” Dr. James M. Walker isn’t happy with how this tension is playing out:

Vendors such as Epic, Walker says, sell relatively rudimentary electronic tools and expect hospitals and doctors to assure accuracy and safety. “This can be very tricky,” Walker adds. “A lot of us are trying to say: ‘Look, let’s slow down.’ ”

Why don’t healthcare IT vendors build systems that are more flexible? Here’s my guess: it’s harder to build than an inflexible system. If you’re going to build a flexible system, you can’t just take a look at the needs of one hospital (i.e., the first client you get). You have to study what goes on in a bunch of hospitals – and you can’t leave the details up to geeks, you’ve got to bring in folks with squishier, people-centered skills that many IT shops don’t value. You also need a smarter design to build a flexible system; you can’t just bang it out.

Then there’s the dirty little secret that if a system is too flexible, the vendor is leaving money on the table. A flexible, well-designed system may cost a lot less to install and customize – good for the hospital, not so good for the IT vendor.

And if an IT vendor’s system isn’t flexible, it can actually help the vendor gain more business – if you buy an inflexible package, you may have a hard time getting it to play nicely with another vendor’s software. Take what happened at Dr. Walker’s hospital. After spending $35 million buying and installing Epic Systems, they ran into a serious problem during a pilot project.

[Errors] began appearing at a rate of several a week in the hospital’s psychiatric unit. “The pharmacy would interpret an order as one drug at one dosage, and the patients were ordered the wrong medications at different dosages,” recalls Jean Adams, a nurse in charge of the IT team. Fortunately, astute staffers discovered the problem after a few weeks and began verifying the computer drug orders using the phone. Full implementation of the Epic system was put on hold. Adams says Geisinger traced the trouble to incompatibility between a common pharmacy database and Epic’s system.

Epic CEO Judith Faulkner says the episode at Geisinger, and similar incidents at other hospitals, taught her company that physician orders and pharmacy records cannot use distinct technologies. “It doesn’t work when you mix and match vendors,” Faulkner says. “It has to be one system, or it can be dangerous for patients.”

In theory, the costs of not locking out other vendors and the hard work of creating a flexible system could be outweighed by winning more contracts — after all, they’d be a better deal for most hospitals. But good luck making that argument in a healthcare IT company. Companies aren’t rational calculators, and selling that kind of gamble to the Top Brass is going to be tricky. And if all your competitors are facing the same issues, everybody may implicitly decide they’re better off not deciding to compete based on flexibility.

Politics Are an Inherent Part of the Market

Given these challenges – and the fact that Health IT can cost big bucks – it’s not too surprising that the feds are pushing hard to reshape the healthcare ecosystem to support Healthcare IT. Obama’s stimulus plan tried to solve the financial challenges by giving hospitals big incentives to computerize their records.

There’s also a stick: The federal government will cut Medicare reimbursement for hospitals and medical practices that don’t go electronic by 2015.

But when it comes to overcoming the nonfinancial challenges of Healthcare IT, the government hasn’t stepped in yet. For example:

When health technology fails for one medical provider, there is no central mechanism for reporting problems to others who use it. The federal government collects and disseminates this kind of information on drugs and medical devices. But tech contracts routinely bar medical providers from disclosing systemic flaws.

The U.S. Food & Drug Administration has been considering whether to regulate health technology in the manner it oversees medication and implants. That decision now falls to the Obama Administration, which faces opposition from industry groups arguing that additional red tape would impede adoption of helpful technology.

Instead, Healthcare IT vendors have been pushing for leaving oversight with a nonprofit called Certification Commission for Healthcare Information Technology, which has a heavy vendor presence and is chaired by a former CEO of a healthcare IT vendor. How tough are its standards?

Sharona Hoffman, a professor of law and bioethics at Case Western Reserve University in Cleveland, says CCHIT’s product testing, typically completed in a single day, isn’t rigorous enough. In an article last December in the Harvard Journal of Law & Technology, she and a co-author faulted the group for telling vendors the testing scenarios in advance and for not conducting ongoing monitoring

Got that? When the commission tests these aircraft carrier-sized systems that cost $35 million a pop, they usually test them for just one day.

Healthcare IT vendors might have a shot at convincing DC to back off. Why?

… red flags raised by doctors and researchers haven’t gotten much attention in Washington, in part because the health-tech industry has forged strong ties to the President, his top medical advisers, and Republican heavyweights such as Gingrich.

Take the new White House healthcare reform czar,Nancy-Ann DeParle.

[She] recently stepped down after eight years as a member of [healthcare IT vendor] Cerner’s board of directors. A former administrator of Medicare and Medicaid during the Clinton Administration, DeParle worked from 2006 through 2008 as a managing director at CCMP Capital Advisors, a private equity firm that invests in health-care businesses.

Similarly, healthcare IT vendor CEO Glenn Tullman, who used to work out with Obama, served on Obama’s campaign finance committee and is also tight with Gingrich:

Shortly after the stimulus became law two months ago, Tullman and Gingrich hosted a Webcast for thousands of hospital officials and doctors promoting the financial incentives. Since then, Tullman has worked with a client, the University of South Florida Health system in Tampa, to seek $15 million in stimulus money to hire 130 e-health “ambassadors” who would pass out free samples of Allscripts’ prescribing software to physicians. If the funding comes through, the $50,000-a-year representatives would receive a two-week training course from Allscripts, though the marketers otherwise are supposed to be independent of the company.

Conclusion

Sometimes Healthcare IT works really well – and when it does, it can be a godsend. The VA, for example, has saved millions of dollars through health IT. And my new doctors all work in practices that have been recently computerized where not only can they easily pull up my info but they can also electronically send my prescriptions to my pharmacist, which means that by the time I get to the pharmacist, the drugs are ready.

But making healthcare IT work well enough to drive down medical errors and health care costs overall won’t be easy. I’ll leave the last word to somebody stuck in the middle of this mess:

“Most big health IT projects have been clear disasters,” says Dr. David Kibbe, senior technology adviser to the American Academy of Family Physicians. “This [digital push] is a microcosm for health-care reform….Will the narrow special interests win out over the public good?”