Transaction Costs

In this exploration of the adjacent possibility, I want to use my MBA voice and vocabulary words. Transaction costs are expenses incurred in making an exchange. Initially, as popularized by Ronald Coase, it referred to costs for institutions.

Let’s try an example. I need a television. The neighborhood big box store sells it for $100. But I am looking for a deal, so I spend 10 minutes on the Internet and find the same television for $75, twenty miles away. I drive to the distant store to get my $25 savings. Or did I? Ten minutes of searching, 40 minutes of driving, 1 gallon of gas; my transaction costs were close to $20 (50 minutes of my time at $15/hr. + a gallon of gas) So my actual savings, $5. Transactional costs impede exchange, creating frictions. Reducing transactional costs facilitates exchange. That is why the first big box store offers to meet any other store’s offer, and then I realize that $25 savings.

Oliver Williamson broadens the exchanges to include ideas, emotions, gifts, all of the transactions between individuals. He received the Nobel Prize in Economics for his insight. Waiting in a line is a transaction cost. Presumably, that is why reservations were created to lower those costs. Gifts can have transaction costs; people feel ‘beholding’ when given a gift; that is one reason giving gifts to physicians and healthcare workers is discouraged.

Williamson characterized transactional costs along several parameters, but my interest involves both the frequency of transactions and the exchanged value (the MBA term would be asset specificity). I have adopted a visualization from Rahaf Harfoush examining digital transactions along the axis of intimacy and engagement substituting the patient’s view of risk for exchanged value and their engagement for frequency. Single serving – both a short term commitment and little risk. These are visits involving the everyday aches and pains, the reassurances, earaches, sore throats, strains, and sprains. Ecosystems – the risk remains small, but there is a long-term engagement. These are the annual physical examinations, the screenings, the ‘checking in’, the checking up.  Flocks – short-term engagement with, in the mind’s of patients a risk greater than a sore throat; home of the acute interventionalist, orthopedists fixing fractures, general surgeons doing cholecystectomies, cardiologists doing catheterizations and internists diagnosing problems less tractable than earaches or treating an infection with intravenous antibiotics. Finally, tribes – here the risk is real, the engagement long-term; tribes manage chronic diseases, atherosclerosis, diabetes, respiratory failure, rheumatoid arthritis.

Each specialty and practice involve varying degrees of care within all four quadrants. Cardiologists provide chronic care to their tribe, catheterization to their flock and screening for the ecosystem. Primary care providers may spend more time in single services as well as manage the chronic diseases of their tribes. When screenings are positive, they referred to an interventionalist’s tribe. Navigating the borders within a practice is fuzzy because the frictional transaction costs of engagement and risk vary from patient to patient.

When viewed as transactions, the evolving nature of physician practices become clearer. Each quadrant because of its different transaction costs follows a divergent path. Single service provides infrequently needed service; it is commodity driven. Single service is readily provided by urgent care centers be they freestanding or incorporated into Walmart or Walgreens. The same holds true for Ecosystem services, consider the executive physical centers. With little risk, transaction costs to patients do not necessarily require significant physician-patient engagement; they are reduced to cost and convenience. Traditional practices, providing bespoke care, cannot compete on these terms. Providers in these spaces either must compete as a commodity or create a new value around patient-physician engagement; hence, the rise of concierge practices. Single serve and ecosystems are the institutions described by Ronald Coase.

Transaction costs for flocks and tribes have a different hierarchy. Cost is borne primarily by third parties resulting in muted cost signals. My experience as vascular surgeon suggests that transactions costs revolve primarily around risk. Interventionalists’ practices and the care of chronic illness both share greater risk. What reduces these transactional costs? Two somewhat entangled words, trust and empathy.

Empathy, sharing vulnerability, signals a willingness to engage with another individual, it invests the physician-patient relationship requiring and simultaneously fostering trust. Trust acts as both the glue, binding the flock and tribes, as well as the WD-40 facilitating movement between these groups. Tribes and flocks are areas described by Oliver Williamson. These are relational transactional costs fostered by reputation e.g. she is a caring, able surgeon, or he is a devoted internist, built from one-to-one interactions. The scaling of the relational transaction is intrinsically more challenging, so we seek substitutes. Mid-level providers, particularly nurse practitioners are filling these roles. Consider the nurse practitioners involved in cardiac surgery or the nurse navigators in oncology. Whom do you think provides the greatest amount of empathy, the laying on of hands, the cardiac surgeon or their nurse practitioner; the oncologist or their nurse navigator? These empathizers’ lower transaction costs for patients, enhancing the practice. That they do it at a reduced cost and with greater ability than some physicians would seem a win-win.

But physicians, as professionals, have struck a ‘grand bargain’ with society. Atul Gawande captures the essence of that contract:

The public has granted us extraordinary and exclusive dispensation to administer drugs to people; even to the point of unconsciousness, to cut them open, to do what would otherwise be considered assault, because we do so on their behalf – to save their lives and provide them comfort

The technological advances of medical care in the last 100 years immeasurably increased our ability to save lives; we look at once wistfully and with some disparagement at the family doctor of the 20’s providing more comfort than ‘cure.’ Physicians who lower transaction costs by turning compassion over to empathizers’ risk crossing the fuzzy borders. Some interventionalists have crossed the border from flock to single service provider. Provision of care for chronic illness by ‘any willing provider’ moves a practice from tribe to ecosystem.

In a world that devalues relationships, the worlds of single serve and ecosystems, empathy is too high a transactional cost and is replaced by a simulacrum. For tribes and flocks, the transaction cost of empathy is nil, it is a gift, “neither traded or sold, but rather given without an explicit agreement for immediate or future reward.” In the reciprocal exchange between physician and patient, the gift will be returned, in satisfaction, loyalty and trust.