The Importance Of Behavioral Data: It Is Not What Customers Say, It Is What They Do.

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It is preposterous to assume what customers say is more important than where they place their feet and the price they pay for products or services. The customer’s mind is still elusive and challenging for entrepreneurs. If understanding the mind of the customer were easy, everyone would do it!

The insights of the Austrian School of economics tell us that people act purposefully toward future betterment. That is, customers and entrepreneurs both act to attain better future situations than their current situations compared to if they had not acted at all. Customers operate on a value scale, an important insight developed by Carl Menger, elucidating that value is in customers’ minds. In this regard, Menger urged entrepreneurs to “reduce the complex phenomena of human economic activity to the simplest elements”.[1] I echo the sentiments of Carl Menger, but some do not. For example, a recent article titled, 2 Simple Steps For Testing If Your First Customers Like Your Product recommends surveys and the search for “moments of truth” and “tipping points”. The only simple way of ascertaining customers’ product sentiment is through the market itself.

The market process provides excellent insights into customers’ unspoken motives and whether they like your products and services. The best way to figure out if your customer likes your products is to turn to market phenomena. That is, the market price, as reflected by customers’ subjective valuation and competitors’ offerings. Different opinions about the value of a product or service are drawn out through this process. The real test, the market signals, shows how much and to what extent customers are willing to sacrifice to attain your product or service offering.

The customer wants the product with high use value, intended for whatever purposes to help them reach their end. The value of any product is in the customer’s eye, the same way that beauty is in the beholder’s eye! We never truly know to what extent a customer chooses your product over a competitor’s. That is to say, the only reliable data on customer sentiments are that customers have purchased your products – the more, the merrier. Ludwig von Mises in Human Action expressed that, “It is ultimately always the subjective value judgments of individuals that determine the formation of prices.”[2]  Market prices and exchanges alert the entrepreneur whether the product is more or less valuable to the customer than the forgone opportunity to withhold their cash holdings. Money measures prices, and prices measure value. Buying and selling or market abstention determine prices. As such, prices are what customers are willing to pay for a product based on their subjective valuation, keeping in mind their future benefit from that product.

In his salient book, Economics for Real People, Gene Callahan agreed that “only real market prices convey information on the freely chosen values of acting man.”[3]

Therefore, it is sensible to observe market price signals as a means of analyzing customer sentiments. Customer dissatisfaction and loyalty occur when product or service incongruities exist. Market incongruities also exist between the entrepreneurs’ perceptions of changing market realities. The entrepreneur’s function is to address any market incongruities in which the customer, because of market changes, is better off than they were before. The market is in constant movement, which means customer preferences are in perpetual motion.

Retention of customers is a less complicated phenomenon that an entrepreneur might observe. Only individuals act in concert with one another in a spontaneous way to reach their goals in any given market. As the author of the cited article proposes, the concept of customer retention is somewhat misguided because retention relates to competitors’ actions and their substitutable products. The question should be, how many substitutable products exist in my ecosystem? Are other entrepreneurs doing the same that I am not doing?

First, the customer is the holder of the perception of value. Secondly, the customer making future choices is the cornerstone of the basic axiom of action. While taste preferences change over time, so do the market actions of your customers and your competitors. The first axiom of praxeology is that people act; they act to pursue a better situation based on the choices they are presented with. Mises reminds us of this in his work titled, Human Action. What the customer says and the action customers take are two different things, because it is the customers’ action that provides market signals to the entrepreneur. As long as you satisfy the customer’s needs and wants, profits will ensue, and losses decrease.

You strive to get rewarded for the risks involved with bringing new products to the market. Your competitors are seeking the same market reward.

Some do not understand how competition works as a signal of incongruities, leading to profits or losses. Indeed, competition exists so long as customers have market choices and can exercise them. The reality is that customers vote with their dollars and feet. They may voice their liking of your products, but at the same time, are enthralled with a competitors’ quality, service, and price of their product. Competition, therefore, acts as the entrepreneurs’ light post, guiding them toward market opportunities that may go unrealized or deterring them from those that are unfit.

Competition, in the Austrian view, is aimed at who can serve the customer best. Providing the best quality and product to the customer is the leading role of entrepreneurial competition. Competition is not and should not be insidious – rather, it should be productive and dynamic. If entrepreneur A wants to enter a market with capital to prove he or she can do things better than entrepreneur B, that should be his or her choice. Entrepreneur B will come to realize they missed many market opportunities only because that knowledge appears as a result of the competitiveness of entrepreneur A. For example, customers may choose the products of entrepreneur A one day and B the next.

It is not what customers say, but what they do. Entrepreneurial insight about the market and the changes that will occur should be the guiding light for entrepreneurs. Entrepreneurs have to ascertain how people will respond to changes. Customer purchases, retention, a likeness of products or services, and loyalty are results of entrepreneurial market observation, and not causes.

[1] Carl Menger Principles of Economics

[2] Ludwig von Mises: Human Action

[3] Gene Callahan:  Economics for Real People

 

82. David K. Hurst: Business School Fallacies and Acting Your Way to Better Thinking

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At E4E, we believe that Austrian economics can guide business execs and entrepreneurs to better thinking about how to manage businesses that thrive. Business educator David K. Hurst blames neo-classical, Chicago School economics for the bad thinking that pervades business today.

Key Takeaways & Actionable Insights

Here’s how he phrased it in our @e4epod Episode #82:

I emerged from Chicago believing, or at least accepting, the basic assumptions which lay behind business education at that time, which was heavily influenced by what I came to understand was neoclassical economics. That is, it believed in greed as the primary motivation. It was all about individual self-interest and utility maximization, I think, was the word. It was heavily rationalistic in that it believes that we ought to behave like little mini scientists with everything based on evidence and data and then lastly, the focus was very much on equilibrium, that markets were self-equilibrating and that the natural condition in organizations was stable. Stability was the norm and change was something that you had to manage and that if things went awry, it was mainly because you weren’t following standard procedures. Management was essentially about allocating resources… It was nothing about innovation… and making sure things ran in a steady, linear, rational fashion.

When I got into the real world, I found that these principles were, well, wrong.

The right principles are those that Jesus Huerta de Soto includes in his Austrian theory of dynamic efficiency. David Hurst sums them up this way:

Of course the linear, stable, rational model is the way academics think businesses ought to run, if only they would listen to them, and the fact you can’t run them that way because the world is nonlinear. It’s dynamic.

Organizational Dynamism

To illustrate dynamism at work, David described a frantic time of disarray in a newly acquired company when a major project management problem arose, and sclerosis caused by hierarchy and central planning, multiple process manuals, traditional career paths and rigid job descriptions impeded a response.

Spontaneously, individuals on the front line formed small teams (they’d be called Agile today) to hunt down innovative and collaborative solutions to this and other challenges that arose. They were non-hierarchical, with no process manual, no reporting structure and no fixed operating plan.

Similar small, collaborative, horizontal teams multiplied to solve problems of business recapitalization, debt and cash flow management, innovation, pricing and many more. The business, after divesting unproductive divisions and products, became profitable, grew and thrived. There was improvement and it was, as David put it, non-linear.

New Organizational Theory: Boxes and Bubbles

David reflected on this experience and developed a theory to explain it. He observed that, in the dynamic crisis time, traditional hierarchy and procedure had faded into the background, and the spontaneous order of agile teams had taken the foreground. Both continued to exist.

I called them boxes and bubbles, boxes being the formal box structure which productive, large-scale organizations end up using, and bubbles were these soft, informal teams that we formed at a moment’s notice. They formed easy coalitions with each other and when they did the job, they burst. They disappeared and went back into the mixture out of which new bubbles could come.

The Theory Of Complex Systems

Applying complexity theory, David developed what he calls an organic approach to business management, modeled after natural ecosystems, such as a forest. Forests start off as weeds — small and fast — and end up as big and slow trees. Yet forests are dynamic: they renew themselves through fire, burning the obsolete, decadent growth to create the space into which new growth can come. At that stage, the forest starts to build a new community of fresh growth. It continues in an infinite loop, existing for indefinite periods of time.

David Hurst's Business Ecocycle Model

Austrian theory, of course, embraces the idea of complex systems. We know that any economic endeavor, any market, and any firm operates within a complex system of millions and billions of provider-customer exchanges, governed by the idiosyncratic subjective value scales of consumers and the entrepreneurs who strive to empathize with them and serve them. We know that these complex systems can’t be managed in any traditional, hierarchical, procedures-manual sense, and they can’t be predicted. We understand business cycles and adaptive behavior.

How Did Business Schools Come to Teach The Wrong Model?

How did the business schools get to teach their totally inadequate model?

They adopted this model in the late 1950s. Their goal was to come up with systems to produce economies of scale, how to produce more of the same. Like the steel business – very inefficient, highly polluting but facing tremendous demand for steel for rebuilding the world in the 1950s and there was no reason to change.

The theory that emerged was how to perpetuate this success. But nothing lasts unless it is incessantly renewed. Firms must innovate to maintain dynamic competitiveness. The organizational structure required to run something with economies of scale, a very mechanical, machine-like, productive hierarchy, is very poor at innovation because those are exactly the dynamics that you’ve got rid of in the pursuit of efficiency, in the pursuit of low prices.

The theory that businesspeople used to support them in this productive model was of course neoclassical economics. It appealed to them to explain why it was all about rationality and it was all about stability, keeping things the same.

The Uses of Knowledge

David tells us that Hayek became his guide.

It seemed to me that The Fatal Conceit applied to the corporate world, the mini socialist structures. I mean, when I graduated from business school, the Fortune 500 were the sort of last refuges of Stalinist bureaucracy. They were central planners, so Hayek’s critique applied to them. That’s the way they work. People at the top were dictators, that’s the word for it.

Businesses fall into what David refers to as a “power trap”, bureaucratic and rigid.

The boss would come and say, “Well, I want to do this deal so find me some assumptions that make it work.” Instead of getting evidence-driven strategy, you got strategy-driven evidence. It was totally inverted. The process was actually a process of power, and the structures are structures of power. It ends up with elites”.

The Organic Approach to Management

David described working with an entrepreneur in South Africa.

He was Austrian, but not an economist. He was a tool and die maker in Austria and he had come out to South Africa and he had set up a tool and die business to make fuel tanks for the automotive industry in South Africa. This guy was a wizard on the technology of stamping. It was just know-how, practical knowledge.

He wasn’t dealing in abstractions at all. It was all about practice and things emerged on the shop floor, “Oops. Okay, so that’s interesting.” He was continually experimenting, tinkering, and he was hugely successful because he had this extremely efficient, effective process. And he was not intellectual in the remotest. If you tried to ask him, “What principles are you operating by?” he wouldn’t be able to tell you and that was okay. It’s the power of practice and that the actions come first, and the words come later.

There is a space in my diagram, on the left-hand side, it’s all about acting your way into better ways of thinking and on the right-hand side, it’s about thinking your ways into better way of acting. The two are melded together. It’s a dance, if you will, between the two sides.

The way you come out of business school is thinking about the job of management like an engineer. You had this machine which required to be maintained, lubricated, fixed, parts replaced sometimes, but it was essentially a machine, a smooth running machine, and you think like an engineer.

I see the manager as a gardener. A gardener has engineering aspects, but they also have wilder aspects to them. The gardener creates the conditions in which, in the case of enterprises, people can grow. They grow people. That’s what it’s all about. I see this gardener as the one being able to conduct this dance. You need to dig up soil and replace it. You may need to tear down existing plants and put them on a bonfire and burn them, break out the chainsaw and saw. At other times, you need to supply structure, a lattice on which they can be trained and pruned and all that kind of stuff. The gardener seemed, to me, to capture this duality to the manager’s task.

Measuring Unmeasurables

Peter Drucker said that there a lot of unmeasurable things which are absolutely valid and are absolutely critical. Like Mises, he understood that measurement is always about the past. It’s always about what happened. He says,

The things that really matter are the unmeasurables that refer to the future.” The example he gives is the ability of the enterprise to attract young, high motivated people. He said, “If you can’t attract these people, eventually it’ll show up in the numbers, but it’s not something you’ll see in the numbers right now because it hasn’t happened yet. It’s straws in the wind.

How do you measure unmeasurables? Through Hayekian knowledge theory: getting everybody in the organization talking to each other about what’s happening, about what they’re seeing every day, because that’s where it’s happening, on the ground. This is all a part of acting our way into better ways of thinking, getting ideas, seeing the opportunities emerge out of what we’re doing, out of the action.

Free Downloads & Extras From The Episode

Austrian School vs. Neoclassical School: Download PDF

David Hurst’s ecosystem model (JPG): View Image

David’s book, The New Ecology Of Leadership: View on Amazon

David’s original HBR article on “Boxes and Bubbles”: Download The Paper

“The Austrian Business Model” (video): https://e4epod.com/model

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Why All CEO’s Can Benefit From A Familiarity With The Austrian Business Model.

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For our Economics For Business initiative, we have adopted the motto: Think Better, Think Austrian.

Everyone in business can benefit from studying and understanding the fundamentals of economics. By this, we do not mean the economics of GDP and employment levels and the money supply, and not the economics of the Federal Reserve and the Treasury Department. We mean the economics of human action – how and why individuals behave the way they do in markets, in buying and selling, and in everyday life. Businesses are successful when they fit into and contribute to the everyday lives of customers, and economics provides understanding of how to do so.

The brand of economics that helps you to think better is called Austrian economics, because it originated at the University of Vienna. You may have heard of the Chicago School of Economics, made famous by Milton Friedman and others. Many so called “schools of thought” are named for their geographical origins.

Austrian economics is a tool for business because its thinkers have developed a particularly rigorous body of economic theory, and its practitioners have translated the theory into a complete toolset for application in business. Mainstream economics is not particularly useful for business, for many reasons. Insofar as it deals in fictitious aggregates such as GDP or “the automobile industry”, it can’t help firms who are making decisions about real resources to serve their customers and enable their employees. Insofar as it mathematicizes economic processes for analytical ease, it can’t help firms who deal in trust, loyalty, service, and human values, rather than equations. Mainstream economics can’t be used to strengthen your business model.

Austrian economics, on the other hand, can provide exactly that level of practical utility. In fact, Austrian economists have developed an Austrian Business Model to demonstrate the applicability of this brand of economics in business. The ABM is a framework from which any company can develop or refine its own unique business model suitable for our fast-accelerating digital age. If you are a CEO contemplating the sustainability of your firm’s business model, the ABM will provide you with some new ways of thinking.

A new way to think about value.

Value is one of those terms that is used loosely in business, which leads to flawed understanding. Business schools and business writers refer to “value creation”. Often, they mean market value, the dollar difference between the stock market value of the number of shares outstanding at one point in time and some earlier point in time. Sometimes they equate revenue or profit generated with value. In these cases, value is objective and can be calculated and allocated a dollar denomination.

Austrian economics defines value as subjective. It is a feeling in the customer’s mind, a complex outcome of cognitive, emotional and biological processes, both conscious and unconscious. Value emerges for customers as they live their life and try to assemble an ecosystem of services to help them make it better. This value is context-dependent, idiosyncratic and changeable. This value is created entirely in the customer’s own domain. Firms can’t create value.

This is a very different premise than we are traditionally taught at business school or even in the everyday language of business discussion. For example, a popular book on business models makes this statement: there is something about some firms that makes them more profitable than their rivals. In the framework of the ABM, we would say: there is something about some customers’ desired experiences that makes facilitating them more profitable than other customers’ desired experiences.

This value perspective can stimulate some new behaviors in firms.

  • Obsessive and total focus on the customer — identifying them, understanding them, letting them lead the process of value creation.
  • Selection of a precisely defined group or cohort of customers as your audience, with continuous development of ever deeper and more detailed understanding of their subjective preferences.
  • Development of a value proposition — a hypothesis about how you will help the customer to an experience that they will value. It’s simply that — a hypothesis that you will test as much as possible for verification, but which is never proven until the cycle of market exchange, experience and evaluation is completed.

This business model starts with developing deep understanding.

A new business relationship with value.

Value is what customers seek. Their life is a search for value and an assessment of whether value was realized in their everyday experiences. If your business can not create value, what can it do? The answer is : facilitate value – make it more possible for customers to enjoy their experience.

A design approach can be used – experience design. Experience design consists of imagining every element of the customer’s experience, based on their value learning cycle. What is it about your value proposition that will make them anticipate a valuable experience? What will make them feel that this experience is preferable to any alternative they have, direct or indirect? What will cause them to exchange value — give their dollars for your offering — and what is the price they will be willing to pay? What ensures that they will assess the experience positively after the event?

The key to design is (1) to imagine every possible element of the subjective experience, empathically embracing the customer’s individual context; (2) to understand that every little detail counts and that small differences in delivery can make a huge difference to the perceived experience. In fact, since customer service is so highly developed in modern economies, it is the small details that generate differentiation and uniqueness for your brand.

Since the business is never in control of value, it is important to make measurement part of experience design. Once in the marketplace, your value proposition goes “wild”. You no longer control it. The customer is creating the value and you are not. The best you can do is to be available if they want to invite you into their process, and to be observant of their behavior. Measurement is observation. Don’t presuppose, but do collect data, preferably qualitative data at the individual customer level. This is your raw input for continuous improvement.

Phase 2 is a customer-led design and assembly phase for the entrepreneur.

An experimental approach to value exchange.

Austrian economics sheds bright light on exchange – the transaction between seller and buyer. Exchange is governed by uncertainty – a business can’t know or predict with accuracy what the customer is going to do in the future, or how they will view the terms of exchange. Will the customer perceive sufficient value to even enter into exchange? It’s the ultimate market test. The customer is weighing the benefits they subjectively perceive against the costs, which include money but also any other difficulties or barriers they perceive to making the exchange. Is participating in your offering totally convenient (which is the general standard today) or is there anything in the experience that makes it less convenient and less compelling?

The best way to solve this challenge is to experiment with as many offer bundles as you can in order to observe market results. Does your service sell better online or direct-to-customer? Do customers prefer to subscribe or to buy by the unit? If they try, do they convert? Test as many bundles as you can.

Once you have established the right bundle and willingness to pay, calculate your cash flow and choose your costs in order to generate the margins and profits you require. This is the opposite of the margin math taught in business school, where firms calculate their costs and then add a margin. Austrians discover the price the customer is willing to pay, and then choose the costs compatible with that willingness to pay. The customer determines the price of the exchange, not the business.

Phase 3 is an experimenting and testing phase for the entrepreneur.

Value Agility

You’ve achieved some marketplace results. You’ve established that the customer perceives value in your offering and they’re willing to pay a price that generates positive cash flow and profit.

That same marketplace is incessantly changing. Your approach to the 4th stage of the Austrian business model is dynamic. You make sure that you have all the feedback loops required to receive marketplace data about the acceptance of your offering, and any changes in customer preferences and competitive behaviors. You manage 360 degree monitoring of the customer experience and you anticipate and expect that your experience design, however excellent, will erode over time. The customer will demand something even better, and competitors will aim to match or improve on your delivery. It’s important to keep your model of customer value preferences fresh, and to be planning and preparing new and improved value facilitations. You find ways to maintain flexibility in your capital structure to facilitate the required agility.

Agile businesses continually test and evaluate innovations, and introduce them to the marketplace. Value improvement and value innovation are your goals. The process never stops. The journey never comes to an end.

Your business model must yield sufficient cash flow for substantial amounts of new capital investment each year. Your organizational design must facilitate the addition of new capabilities and the discontinuation or de-emphasis of existing capabilities that no longer are perceived as unique or compelling by the changing customer. Agile businesses monitor their dynamic capability — how much is being added, how much is being changed or updated. Are you keeping up with the customer, the ecosystem in which you engage, and your competitors?

Phase 4 is a phase of continuous dynamic change for the entrepreneur.

You can learn more about the Austrian Business Model here.

 

How Free-Market Entrepreneurship Is Transforming The Economics Of Healthcare In America.

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Podcast Transcript: Conversation With Dr. Keith Smith of the Free Market Medical Association (fmma.org); September 1, 2020

Listen to the full episode here.

Hunter:

Dr. Smith, welcome back to Economics for Entrepreneurs.

Dr. Keith Smith:

Thank you. Thanks for having me again.

Hunter:

Since you were last here, you’ve become famous. You’ve appeared on several podcasts, including Econ Talk with Russ Roberts, where you were voted the number one most popular of 2019, which tells us that people are highly interested and highly motivated by what you have to say. We’ll try and add to that today. Last time you were here, we talked about Austrian economics and how it influenced you in setting up the Surgery Center of Oklahoma, but today let’s focus on thinking about a free market in healthcare and the role of entrepreneurship. That takes us to FMMA.org, which is the website of the Free Market Medical Association, the home of free-market medical services; tell us a little bit about that. You say you’re dedicated to bringing together buyers and sellers, which sounds to me like an economics-based view of the healthcare industry, so please tell us about FMMA and who are the buyers, and who are the sellers, and how are you going to bring them together better?

Dr. Keith Smith:

When I just think about the question, bringing buyers and sellers together, that is an indication of a truly dysfunctional set-up in the market – that that question should even be posed. Buyers and sellers together are typically what forms a market, and that mission of the FMMA, which is very tough work, bringing buyers and sellers together, really has to overcome much that has been thrown in between buyers and sellers. I think whenever we look at the Free Market Medical Association, we have to acknowledge that bringing buyers and sellers together is something that is meant to overcome all of the obstacles that have been placed between them. And Jay Kempton and I, the co-founders of Free Market Medical Association, we both know really good things happen when buyers and sellers talk directly and are haven’t succumbed to the Kool-Aid that all of the intermediaries that profit from buyers and sellers not talking directly have served them.

The buyers are basically anyone who is a patient or anyone who is likely to be a patient, which means everyone. In all likelihood, everyone in the world, certainly in this country is a buyer. Some patients are direct buyers. They pay with cash or their own personal funds. And then some people are indirect buyers who have an ombudsman or an intermediary or a proxy purchase for them. There are advantages and disadvantages when a proxy is involved, but Surgery Center of Oklahoma and all the other members of the Free Market Medical Association, we deal with proxy buyers as well as individual buyers spending their own personal funds and treat them all the same, afford the same price to them all. But a buyer is basically someone who has sticker shock.

Jim Epstein from Reason Magazine picked up on that early, that a buyer is someone who we would all characterize as an individual who actually cares what it costs, and there are a lot of people in the United States who receive medical services who could care less what it costs because they’re not paying the bill. They don’t have the sticker shock. So our focus in developing a free market must begin with those who actually care. Whether people know that they should care what it costs is kind of beside the point, because everyone should; to the extent that the government remains involved in the purchase of medical services to the degree that those services are unaffordable, everyone’s tax burden is much larger because there are so many patients and buyers out there who really don’t care what it costs, a shocking number in fact.

So a buyer in my mind, someone with sticker shock and a seller is someone who has medical services to offer on the marketplace, and a true seller is one who will attach a price to it and then allow the market to judge whether it’s a value or not.

Hunter:

So the idea of a free market seems obviously very attractive, but very, very difficult in today’s healthcare environment. You could call it the un-freest market that we experience. It’s the most regulated, the one most opaque as a result of special interest machinations. I think of the procurement committees and the formulary architects and so on. Take us a little bit further and tell us what we can achieve for the customer first, those buyers who have sticker shock, which is always the first concern of a market. What can we achieve for them?

Dr. Keith Smith:

The second part of this FMMA initiative is the actual soaring of the quality that is actually delivered. And that’s why this is such a great message – why I get up every day just anxious to tell anyone that’ll listen, this is a good news message. And we’re not really used to good news messages in the medical industry. All you hear is the spiraling cost and the sporadic quality. But what a market does, a true market, when someone says and declares in a marketplace of sticker shocked buyers, “Here is what I do and here is the price I believe should be attached to it,” they’re declaring their own value. And if they’re not any good, then they will not be chosen. People will not vote for them with private funds or the proxies will avoid them because their reputation is on the line as an advising buyer.

So whenever people are not good, whenever people are frauds in a marketplace, they are naturally culled. So the good news is when people who are awful at what they do enter a marketplace and succumb to the judgment that the marketplace ultimately delivers, then their absence in the marketplace means that the better, more high valued players are those who remain. And obviously there are all kinds of shenanigans where different individuals and institutions and corporations buy exemptions to the judgment of the market. But if the market is truly allowed to work, those who are awful get culled and those who provide value remain, and the result of that for the customer or the patient is not only a better price, but quality soars as a result. You see cheaper and better, and that’s a pretty easy argument to make, and I think it’s a very difficult argument to make on the other side. I mean, who doesn’t like cheaper and better?

Hunter:

Right. Jeff Bezos always says, “I don’t think anybody will ever ask me to not be as cheap and to deliver more slowly.”

Dr. Keith Smith:

It’s funny.

Hunter:

That’s right. Well, it’s looking forward. I love your analogy there that markets are good news. They’re good news for buyers, the patients, and they’re good news for the sellers because it lets them excel and then you go to one more step on your website and you talk about entrepreneurship as a route to the free market. And there are a couple of interesting quotes there, Dr. Smith. You say, “In medicine and healthcare, entrepreneurship involves the restoration of the physician-patient relationship.” You’ve hinted at it, but tell us more about what’s eroded today in that relationship and how entrepreneurship will restore it.

Dr. Keith Smith:

Entrepreneurship, depending on whose definition of it you’re looking at, is decision making in the facing of uncertainty, and whenever there are intermediaries in the room, there is less uncertainty. And I fault many physicians for inviting intermediaries into the room to lessen their uncertainty. Physicians will have a waiting room that is full only because they are in-network for some PPO or insurance plan. In Surgery Center of Oklahoma, our waiting room has patients in there who have chosen to be there. We’re not in anyone’s network. So whenever you have an acknowledgment of what entrepreneurship is, where you really embrace and acknowledge the extent to which you are willing to take risk and put yourself out there so that people can either embrace or reject you, by necessity, you have shoved all of the third parties aside who are more than happy to be in the waiting room and the examination room determining not only what fee is assigned to a service, but also what care can be rendered to a patient.

So all of that erodes and interferes with the relationship that a patient and a physician should have. Patients should feel confident when they go see their doctor that they have an unapologetic advocate. I think that many physicians are medical advocates. I think most physicians are. But in order to be a complete advocate and to be a financial advocate, I think that physicians have to more and more assume the role that other entrepreneurs assume and bear some risk, and sort of put their chest and shield out there in front of patients. I hear physicians sometimes say, “I just want to practice medicine. I don’t want anything to do with the business or the money side,” and all they’re doing with that cop out statement is abandoning their patients to the financial wolves, many of whom are happy to step in and make a living off of that physician abandoning that patient.

I don’t think there’s any willful neglect. I just think that we’ve grown up with a system that has exploded so that it’s very difficult to navigate. It’s very creepy. But it’s actually very simple to reject all of the third parties, assume the proper role of the businessman and the entrepreneur, which actually allows the physician to assume the role of financial advocate as well as medical advocate for the patient.

Hunter:

You would think that, on the surface at least, physicians and other producers in the medical system are ideally placed for entrepreneurship. They’ve got the potential and actuality of being one on one with customers. They’re empowered to make on the spot judgments and decisions. They’re a locus of trust as you said. They can allocate their own resources. Why do you think that physicians don’t think of themselves as entrepreneurs? What is the resistance? Did the system create it or is this something else?

Dr. Keith Smith:

I think it’s a couple of things. I think the system itself has become such a complex mess, and sometimes I’ve even wondered if that was intentional and deliberate, meant to drive physicians away from their rightful place, which frankly in the past they more than willingly assumed. I think also there may be a psychological component where the proper risk adversity that a physician brings to medical management of patients translates into the same risk adversity when it comes to assuming risk as a businessman. So the risk that a physician should tolerate running their practice from a financial side should be much higher than any risk that they would tolerate in the medical management of patients.

 

But I think that there is some sort of unspoken psychological attempt to make sure that risk is equal. There also is a lot of fear amongst physicians now, that they never know when they’re going to get that next letter from an insurance company that says they’ve been de-platformed and they’re no longer in a network and they’re not going to be seeing patients from XYZ PPO anymore. And at that point, they’ve become completely addicted to that flow of patients. Or the government entity that cuts them off, or worse the government entity that just says, “Oh, by the way, we’ve decided starting next month this is what you’re worth.” So there’s a lot of fear amongst physicians and it has become difficult for them to bare their chest and say, “I am going to take control of this and assume some risk in order to get control of my life and practice again.”

The fear that is out there, the arbitrariness and the unpredictability of the timing of decisions of regulatory agencies, insurance companies, the government, there are a lot of things that are out there that make it very difficult for the physician that decides to work in that system.

Hunter:

I wonder how you’re going to change that mindset, Dr. Smith. There are a few ways you can do it. You can demonstrate the alternative model, which is what you do at the Surgical Center of Oklahoma. You can educate, here’s what entrepreneurship is all about and we’re trying to do a little bit of that here on our new Economics for Business platform. Or you can actually train business management skills, entrepreneurial management skills. What do you think is the path to changing that mindset that’s based on risk and fear that you just described?

Dr. Keith Smith:

Well, we’ve demonstrated, I think, by example at Surgery Center of Oklahoma that you can practice in a way that does not involve third parties. You can practice in a way where you are not leveraged by government money and thrive. Not just survive, but really thrive. The other part is educating everyone. I think that as physicians begin to realize that they need to acknowledge the system that they’re in, and also I think as physicians see that other physicians are unplugging and really seceding from this sick system, and how happy they are, and how successful they are, that tends to get rid of many of the fears that are paralyzing for people who are right on the edge who are ready to make this move.

At Free Market Medical Association, what we’re trying to do is educate everyone that it’s doable, it’s possible, it’s being done, it’s being done increasingly by more and more of the folks who initially said it could not be done. And then trying to unlock the mother lode of sticker-shocked buyers and trying to get the self-funded proxy buyers to send that signal into the marketplace, which would overwhelm the ability of us free marketeers to supply what they’d demand. And that signal is, I believe, more powerful than anything that we can do by example in our facility or inside of FMMA. The signal, when the buyers demand that the marketplace and the sellers provide high value price transparent services, we will have a market. It will be off to the races, and I think that is what we’ll unlock the system, that’s what will bring the current system to its knees.

And it’s so powerful. Think about Murray Rothbard describing the market as both beautiful and powerful. And it will not take a huge number of like-minded free marketeers to bring what’s already a just disgusting, criminal, broken system to its knees.

Hunter:

Well, at FMMA.org, Dr. Smith, talking about pricing, you have an online search tool. You say it’s like the grocery store for healthcare pricing. Your members can post their free-market bundled cash prices as you call them, and shoppers can search by keyword, they can search by product code, they can search by drug name, search by physician names. So it sounds like you’ve got one side of the platform going. Tell us about the kinds of suppliers who are providing this pricing and then we’ll find out what you’ve learned about the demand side of, as you say, your buyers demanding that pricing. But tell us about the platform on the seller side to begin with.

Dr. Keith Smith:

Shop Health is the tab at FMMA.org that you’re talking about. This was Jay Kempton’s idea from the very beginning: that we would basically have what amounted to a shopping mall with multiple stores inside and every store was responsible for what they sold and the prices they placed on any of their goods or services, and all that was required to be part of this shopping mall was membership in the Free Market Medical Association. As a buyer, this website where you can look at all of these goods and services and prices is free. There’s no charge. There’s no amount you have to pay. There’s no membership fee that allows you to see pricing. That goes along with one of our tenets at the Free Market Medical Association that pricing is not a product. You should not have to pay to see the hidden pricing inside of the box. That is not a marketplace. That is something very different, and that is a very powerful tool that fuels the cartel-like arrangement which exists now.

I encourage people to see Shop Health as a huge shopping mall inside of which are different businesses, one of which is the Surgery Center of Oklahoma, and our prices are available for people to see there. It’s a radical concept because it’s free to the buyer and it’s very powerful. There are more and more patients that seek pricing like that available and visible at Shop Health and use that to leverage a better deal at their local, otherwise price gouging, hospital. That is a market at work. It’s beginning to work anyway when a price gouger who wants no part of what we are all about at FMMA has to succumb to a sticker shocked buyer who says, “Hey, match this, or I’m flying to Charlottesville, Virginia to see Dr. Bill Grant,” or “I’m flying to Austin, Texas to see Dr. Kelly,” or “I’m going to Surgery Center of Oklahoma.” There is a marketplace that is developing as in self-defense. The price gougers have to respond to Shop Health and the other price tools that are out in the marketplace.

Hunter:

It sounds like it’s beginning to happen on the buyer’s side. You want to unleash those buyers who will demand pricing transparency, but a lot of them, as you say, are cartelized and they’re special interests within the system. It’s not in their interest to have pricing transparency because there’s so much special interest take from the high prices. Can those individual patients be the trigger for unleashing the bigger buyers or is there another step that we’ve got to figure out?

Dr. Keith Smith:

I think there is a tipping point and I believe that individual buyers are not great enough in number to get this tipping point where it needs to be: to become so unstable that the whole system that’s just so sick comes crashing down. I think it is going to take the proxy buyers, it’s going to take the self-funded companies who ignore the advice of their self-dealing broker and consultant, who begin to question, “They told me I was very lucky. I just have a 15% increase in my health spend this year instead of the 30% increase everybody else had.” Increasingly, that sales technique that brokers and consultants use is falling on deaf ears. Very ironically, what the government has decided to do to the economy with the virus lock downs has caused some self-funded companies to sharpen their pencils and to look for different solutions because margins are tighter.

Companies whose margins are tighter who have not been self-funded are beginning to self-fund. Keeping in mind that self-funding is where companies buy medical services for their employees out of operating revenue and bear the risk rather than pay an insurance company to bear that risk and make a ton of money for doing so. So, when the proxy buyers, when the self-funded companies step away and quit succumbing to the Kool-Aid sold to them by the brokers and all the other intermediaries, the PPOs, all of those people that are just getting rich off of this current system, when the self-funded buyers walk away from them and look around, they will see this free-market solution is just shining right in front of them. The ticket to save gigantic amounts of money while simultaneously rendering better benefits to employees, while also ensuring that they receive even higher quality care.

That proxy buyer of self-funded companies, when unleashed, will be the reason we experience that tipping point and then everyone will benefit. The individual patients will benefit, because as the market develops and prices fall, prices will fall for everyone. Quality will go up for everyone. This rising tide is going to flood everyone’s fortunes higher and it’s very exciting to think about. I think that there have been times in the last 12 years since we put our prices online, I’ve wondered if I would see it. I am now more optimistic than ever that I’ll see it not just in my lifetime, I’ll see it in my career where the people in this country reject the government’s handling of this industry, selling and auctioning all of these factors to the cronies who have ponied up in Washington and we will see a true market emerge and a real rebirth of the great tradition of medicine that the United States has been known for for quite some time.

Hunter:

That’s a wonderful vision. As you say, it’s very exciting. It’s certainly wanted and greatly wished for. Can you have that influence in pharmaceuticals, Dr. Smith? For a layman like me, it seems like the pharmaceutical industry, or cartel, or nexus, is the most impenetrable barrier to thoughtful and discriminating buyers. It seems like there’s no buyer power. Can your self- funding buyers have an effect there?

Dr. Keith Smith:

I think that we’re beginning to see the breakdown of the grip that Big Pharma has on the industry. But we have to keep in mind that the FDA is largely funded by Big Pharma. So once people realize that the FDA is meant to regulate are those who fund the FDA, it’s not rocket science to take it from there and realize the FDA is not about to harshly regulate those who pay them the most in Big Pharma. So you work very hard to expose the middle men, like the pharmacy benefit managers. You work very hard to make people aware that large PPOs and insurance companies actually own their own pharmacy benefit manager intermediaries. I mean, you can extrapolate what that means.

But ultimately you run into the culprit, the ultimate culprit everyone has to keep in mind is the federal government. It’s Uncle Sam. I tell everyone we can bash the pharmacy companies, we can bash the PPOs, and they all deserve a good bashing. But Uncle Sam is driving the getaway car. None of these shenanigans are possible without Uncle Sam riding shotgun for all of this thievery. And the FDA, as Dr. Robert Higgs has pointed out, is truly a criminal organization, and unless there is a severe curtailing if not privatization of the FDA, I don’t think we’ll get a long way with Big Pharma. I think there will be some gains, because as the prices of actual medical services plummet, people will wonder, why do pharmaceutical products continue to accelerate in price, and that will put pressure on them. But the FDA is the real boogeyman and they are going to protect their clients with all they’ve got as long as they have that power.

Hunter:

What’s the role of the big insurance companies in your future vision of the free market, Dr. Smith? They seem to be on the side of the cartel as opposed to the side of the individuals. How do you think about them in the future?

Dr. Keith Smith:

Well, the insurance companies now, to quote Jay Kempton, are not insurance companies. We need insurance and we need insurance companies. We just need them to get back into the insurance business. All they are now are money handlers and money changers. So they make people pay to see the pricing in the box. They extend these false discounts and skim off the difference. So there is not really any assumption of risk by PPOs. One hospital administrator referred to a PPO not that long ago as an ATM for his hospital. In some markets, the PPOs are in control of the hospitals. In some markets, the hospitals actually own their own PPO. So all of these types of arrangements are a disaster and they have nothing to do with insurance or the assumption of risk. So as long as insurance companies will get back in the business of insurance, I’m all for them.

Of course, Obamacare made sure there really were only about four insurance companies left. There’s this 30% loss ratio which only the big boys could tolerate. So there was a vaporization of the smaller insurance companies. They all went out of business or there was this huge consolidation because they could not comply with that requirement in regulation that only the largest four or five could tolerate. People say, “That’s great. We need to force these insurance companies to make sure that 70% of all the premiums that they collect are paid out of medical expenses.”

Well, the huge insurance companies love that, and all the little ones went out of business. So regulations like that, they need to go away and then you see a whole bunch of insurance companies and then you have competition in the insurance sphere. And then you have real insurance, not what we have now.

Hunter:

So a lot of what we’re talking about on the negative side, Dr. Smith, is centralization. Centralization of regulation at the FDA and these big insurance companies that you just described and other forms of cartelization as you’ve talked about it. Taking a look at the Free Market Medical Association, it looks like you’re thinking in decentralized terms. You’ve got a very contemporary organization with local chapters that have significant autonomy. Your Shop Health infrastructure is a platform, so suppliers can upload their own products and buyers can do their own searches. Is this decentralized organization part of the future of the free market as you’re thinking of it?

Dr. Keith Smith:

Yes. And I think it’s consistent with F. A. Hayek’s concept of the knowledge problem. What’s going on in the market in Arizona is very different, in all likelihood, than what’s going on in the market here in Oklahoma. The response to challenges there, the response to consumer preferences there should be different. All that Jay Kempton and I have insisted on is that members adhere to the pillars, and that is basically that they adhere to the golden rule, that they adhere to mutually beneficial exchange and that they offer a service at a price to anyone who wants to buy at that price and not have multiple prices, and that people do not have to pay to see the price. So there are some very basic tenets at the Free Market Medical Association that we insist on, and that frankly, we’ve enforced in the past. But after that, the local chapters are free to respond to consumer preferences in their area as they see fit. One result of that has been for people like me and other members to benefit from the experience gleaned from encountering market challenges and difficulties in other states that we had not yet encountered.

And I know that if a certain issue comes my way that has faced Bill Grant in Virginia or the folks in San Antonio, an issue that I’ve yet to face, I’m already armed with the ideas of how I might respond or what the consequences for not responding might be. It’s a confederation if you will. It’s a very, very open-sourced organization, and everybody benefits from that.

Hunter:

It’s very Hayekian, as you say. General rules that apply to everybody. And it’s also what Jesus Huerta De Soto calls entrepreneurship, which is the creation of new information and then sharing it among everybody once you’ve created it. So your members are creating new information in their local areas and, as you say, everybody gets to benefit.

You’ve got an FMMA annual conference coming up, Dr. Smith. And I saw from that website that the theme is Mission Possible: Healthcare Entrepreneurship as the Antidote to the Broken Healthcare System. You talked a lot about that today and it’s more than Mission Possible, it’s Mission Exciting according to you and I’m excited by it. Who can attend? How do you attend? What should people expect from this annual conference? Tell us about the conference.

Dr. Keith Smith:

The conference is packed with just rock stars if you will, yourself and Peter Klein included. And it’s attendable virtually — free of charge. We also have a limited amount of in person availability based on the constraints we’re facing in this day and age. It’s very exciting. I wish of course that we could do it in person like we’ve done in all the past years, but I believe we’ve come to that place where those of us who say that you can place a price on the medical service you offer are not seen wearing a tin foil hat. If anything, the conversation has flipped. Those who are unable or unwilling to place a price on the service that they offer, and I mean a bundled service, so I mean if there are multiple individuals involved in rendering a care episode, they are expected to get together and provide a bundled price. And the light is shining brighter.

I think the accountability light is shining brightest on those who are unwilling or unable to do it. And I would argue no one’s unable. Anybody that’s not providing prices is unwilling. So the conversation has really changed. I don’t think I’m seen as a tin foil hat or crazy like people thought I was and characterized me 12 years ago when I put prices online. Now, if anything, it’s switched around. There are state and federal laws that are being considered to force people to post prices. And I’m not in favor of that, because I think that just provides the legislator, particularly the unscrupulous ones, an opportunity to sell exemptions. And I don’t believe anybody ought to be forced to do anything except by the market. I think the market forces people to do what is aligned with consumer preferences. You don’t need laws.

But if you think about the idea that we’ve come all the way from “it’s impossible to post prices for medical services” to “you’re going to be punished and you’re going to be fined if you don’t provide prices attached to medical services”, this argument, the whole narrative has changed. So this is not just Mission Possible, this is Mission Imperative. People are going to start to feel the heat from one source or another for not providing prices. My preference is they feel the heat from losing business. And in Oklahoma City, I’ll tell you that’s the case. But all over the country, I hope that everyone including the price gougers respond to the market pressure, not the pen of the legislator. But I think this is Mission Possible and it’s very exciting and I think more people acknowledge that. But it’s Mission Imperative. And there’s going to be a lot of pressure brought to bear on those who refuse to exit their price gouging roles.

Hunter:

Hopefully, it’ll become Mission Irresistible and Mission Inevitable.

Dr. Keith Smith:

Yes.

Hunter:

It sounds like you’re getting there, reaching that tipping point, or at least that the tipping point might be quite close. Well, congratulations on everything you’ve achieved so far, Dr. Smith. In anticipation of the future, just one more thing about the conference, what’s the date of that?

Dr. Keith Smith:

The date of the conference, the virtual day is the 11th of September and then the next day, the 12th of September is the live part that we’ll have here in Oklahoma City, which also will be viewable by the virtual attendees.

Hunter:

Excellent. Well, we’ll provide the appropriate links on our podcast page and we’ll use whatever social media reach that we have to get the word out. And as you said, everyone’s welcome. Anybody can attend. If you do attend, you’ll get to be part of a wave that is taking us to a better future in health care. So Dr. Smith, thank you very much for today. Thanks for all that you do and well look forward to the conference on the 11th and 12th of September. Thank you.

Dr. Keith Smith:

Thank you, Hunter. Thanks for having me on the show again and for your tireless efforts promoting all that’s going on. We are so appreciative.

Hunter:

It’s a good cause. Thank you very much.

 

81. Dr. Keith Smith: The Free Market Medical Association Brings Entrepreneurship to Medical Services

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Dr. Keith Smith, co-founder of The Free Medical Association (FMMA.org), is an entrepreneur and free market warrior who is undaunted by the seeming scale of his innovation task: to bring to healthcare the kind of customer experience only entrepreneurial free markets can deliver (see “Pillars of the Free Market Medical Association” PDF).

He is laser-focused on the problem to solve.

(Full episode transcript available here.)

Key Takeaways and Actionable Insights

The aim is to bring buyers and sellers together.

As Dr. Smith explains, simply stating that there is a need to bring buyers and sellers together is an indication of dysfunction in the market for healthcare. Buyers and sellers talking directly with each other is what makes a market: willing buyer, willing seller, mutually agreed price.

Buyers are patients who care what healthcare costs. Today, they have sticker shock.

Buyers who care about price can be direct-buying individuals, and their proxy buyers, who can include self-funded employer health benefits systems, more and more of which are emerging. Innovations like Health Savings Accounts and high-deductible insurance policies are bringing more direct buying into the market.

Willing sellers should be complete and comprehensive advocates for the patient, across the whole range of their needs, including financial aspects.

The targeted customer experience is for patients to feel confident when they visit a doctor that they have an unapologetic advocate. Today, physicians are medical advocates, but to be a more complete advocate, physicians must think and act like entrepreneurs, bearing some risk in serving their patients. Many say, “I don’t want anything to do with the business side or the money side of medicine.” By doing so, they are abandoning their patients to the financial wolves, many of whom are willing to step in and make a living off the patient. It’s not so much willful neglect of the patient’s interests, as simply caving in to a system that has become extremely difficult to navigate.

A problem in healthcare is the dominant presence of intermediaries between the buyer and the seller.

Dr. Smith described the wide range of intermediaries, cartels and proxies that get in the way of a direct, transparent and mutually beneficial relationship between buyer and seller. Insurance companies are “money handlers and money changers”, keeping healthcare prices high, so they can offer false discounts and skim off the difference. There are brokers and consultants to employers, whom Dr. Smith calls “self-dealing”, who add a layer of costs. There is Big Pharma, the pharmaceutical industry that largely funds the FDA, making it inevitable that the regulator will protect the pharmaceutical companies and their business model and their pricing.

In the end, the “ultimate culprit” is the Federal Government. None of the financial abuse of the patient would be possible “without Uncle Sam riding shotgun for all of this thievery”.

A solution lies in decentralization, disintermediation and the application of Hayekian knowledge theory.

Dr. Smith alluded to F.A. Hayek’s concept of dispersed tacit knowledge in describing the FMMA’s decentralized approach. The Free Market Medical Association establishes local chapters, who follow a small number of “pillars” regarding price and value and mutually beneficial exchange, including equal pricing to all cash buyers of the same service. The chapters are completely free to respond to customer preferences in their own local market. These chapters create new knowledge based on their transactions and experiences in their local market, and can share it with all other chapters.

Austrian principles of decentralization, free exchange without intermediaries, and the recognition of the value-creating dispersed knowledge of patients and entrepreneur-practitioners are Dr. Smith’s starting point.

Free Downloads & Extras From The Episode

Pillars of the Free Market Medical Association: Download PDF

The Free Market Medical Association’s annual conference, “Mission Possible: Healthcare Entrepreneurship as the Antidote to the Broken Healthcare System”: FMMA Annual Conference

“The Austrian Business Model” (video): https://e4epod.com/model

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