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?

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.

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?”

You might ask, did these economists ever have a real job? If so, were they taking Acid or Ecstasy most of the time? How did they get the idea that what was going on was even remotely rational?

Now many economists will freely admit that sometimes organizations make decisions that aren’t entirely rational. But over time the competitive pressures of the market will smooth out the effect of these irrational blips — the more rational companies will outcompete the less rational ones. So, it’s safe for your model to assume that organizations act like calculators.

If only it were true. Sometimes in the world of IT, where I work, it feels like life inside corporations is a reality show called Survival of the Least Stupid. Sure, if a company keeps making crazy decisions it can wipe them out (or, in the case of GM, get them bailed out by the Feds). But for any decent sized company, there’s plenty of give to recover from astonishingly irrational decisions.

Also, managers in organizations make a lot of their decisions based on what their peers in their industry are doing. If all your competitors are making the same mistakes, you can do some pretty stupid stuff and still compete quite nicely.

It’s also not uncommon for organizations to be extremely rational and efficient in one part of the business while throwing their brains out the window in another. I once worked as a contractor for a company that calculated to the penny how much money they could squeeze out of their janitors while on the IT side listened attentively to their inner child, who was screaming, “I want that shiny new red bike NOW!!!!”

Even when organizations have made rational decisions, implementing those decisions can be really hard. Organizations are their own mini ecosystems, with different units having different types of resources that shape their behavior in different ways, making them more or less resistant to certain changes.

Then there’s backbiting, turf wars, and all the other festivities known as office politics that can easily kill a rational decision before it ever leaves the crib.

Sometimes even knowing whether our rational decision has been implemented can be challenging. Take what the HBO series The Wire called “juking the stats.” From police precints to schools, The Wire showed how decent people were forced to distort reality to get the optimistic statistics the Top Brass demanded.

The difficulty of actually implementing rational decisions once they’re made is why we have the industry known as Organizational Development. It’s devoted to churning out scads of books, seminars, and consultants that try to explain how to go about changing your organization — or, to put it another way, getting your organization to act the way economists say organizations act.

Pretending that organizations or people are calculators doesn’t make sense. If we start from assumptions that are based in the real world, I think we’re going to end up with a much more useful model of economy.

Next up: a concrete example.