Why Tech Can't Cure Medical Inflation

Computers in medicine aren't a cure. They might even make the system sicker.

Whenever President-elect Obama is asked how he'll pay for his ambitious health care reform plans, he invariably talks about the $80 billion in annual savings he'll get from bringing computerized recordkeeping to doctors' offices and hospitals.

If only that were true. While there are benefits that might be had from using computers more widely in medicine, doing so won't save us any money and, in fact, will likely make things more expensive. There's even a chance that the quality of care might get worse along the way.

That's probably counterintuitive to anyone contemplating the wall of file drawers in a typical doctor's office. Medicine clearly has yet to join the rest of the world in going digital; no wonder, the thought goes, that U.S. health care is so expensive.

But while paper records certainly have their inconveniences--filling out your thousandth questionnaire, say--they play a very minor role in galloping health care inflation.

Instead, the heart of the problem is the U.S. fee-for-service system, in which doctors get paid to do things to people. The more technical and invasive the procedure, the more money they make. Doctors have responded in the expected Pavlovian manner, collectively shifting away from basic primary care toward expensive specializations that run up costs without necessarily improving medical outcomes.

As any chief information officer can tell you, adding computers to this sort of inefficient process only makes the inefficiency happen more quickly.

Much of what doctors or policymakers know about technology comes from vendors, who are busy guilt-tripping the medical sector about being slow to get with it. But more quietly, health care economists have been studying the actual impact of these systems. Their findings should disturb those who look to information technology for an easy fix.

At no time in American history has it been more important to keep tabs on changes in the tax code--and believe us, plenty are on the way.

Dealing with the impending deluge won't be fun, but better to be prepared and sulking than caught off guard and suddenly short of cash. Meanwhile, there are plenty of moves to make before the end of the year--and certainly by next April.

Assuming your business runs on a calendar year and you want to cut this year's tax bill, you have three basic options: collect less money from customers, increase expenses or both. To what degree you do any of these should depend on how much cash you need today--and what you think President-elect Obama and company have in store for the tax code down the road. (That second part matters a lot to entrepreneurs looking to pass on their fortunes to the next generation.)

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Have questions about running your small business better? Go to the Forbes.com Small Business Exchange and ask our cadre of experts.

If you keep your books on a cash basis, every penny you collect before Dec. 31 will be taxed in April; likewise, every penny you spend will reduce taxable income and shrink your tax bill in four months.

If you keep your books on an accrual basis--meaning that you match revenues and expenses regardless of the timing of cash flows--you have a bit more flexibility. With big changes to the tax code on the way, "clients are asking more questions about the timing of income than ever before," says Mark Nash, a partner at PricewaterhouseCoopers.

Suleman Ali needed a change. So, in mid-2007, he left his programming gig at Microsoft to start a company--any company. On a whim, he wrote an application for Facebook, the social networking Web site, called Superlatives, which lets visitors rate their friends as the smartest, best-looking and such. It immediately caught fire.

"I basically started building it out of boredom, and people started noticing it three days after I launched it," says Ali. So did interested suitors: Nine months later, the 26-year-old sold his hobby-cum-enterprise, called Esgut, to Palo Alto, Calif.-based Social Gaming Network for "several million dollars" (he's not allowed to share the exact purchase price).

For all the troubles in the economy, the Internet continues to be a hotbed of innovation, entrepreneurship and, as development costs continue to decrease, stiff competition. Some of the most lucrative ideas have yet to hit the drawing boards. "I could almost make the case that the idea you think is really stupid is [the one that will] succeed," says Guy Kawasaki, partner at Garage Ventures.

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Ali financed Esgut, with an eight-employee roster, by selling advertising that runs alongside its applications. By the time he sold the business, the company's six apps had attracted some 14 million unique users. Now Ali is ready for round two. Despite the downturn, the young entrepreneur says he's in "brainstorming" mode with a high school friend and MIT graduate.

Everything you need to know to make sure you get a signal after Feb. 17.

In Pictures: 10 Tips For Switching To Digital TV

At the stroke of midnight on Feb. 17, 2009, the analog transmissions that have beamed free television over the air in the United States for over half a century will disappear for good. They will be replaced by digital signals, many of which are already broadcasting, in what will be the most significant change to television since the introduction of color.

The "digital switchover" brings with it higher image quality, better sound and a level of versatility and flexibility previously unattainable through free television. It also brings with it a number of significant headaches, as confusion over exactly who will be affected is inspiring panic in viewers fearful of being left behind in a haze of snow and static as the rest of the country moves into the future. Many of those who will be affected know that the deadline is fast approaching, but are unsure of how to prepare for it. Thankfully, a solution is simple, easily attainable and won't cost you a dime.

There are two major reasons for the switch from analog TV broadcasts to digital TV. First, digital signals offer superior image quality and allow for the transmission of high-definition signals over the air. This means that a properly equipped HDTV can receive local high-definition broadcasts that will look about as good as what you'd get from cable or satellite television.

In Pictures: 10 Tips For Switching To Digital TV

Second, switching from analog to digital frees up real estate on the broadcast spectrum for other uses, as digital signals are more efficient and take up less bandwidth. Telecommunications companies like Verizon (nyse: VZ - news - people ) and AT&T (nyse: T - news - people ) have spent nearly $20 billion to secure the rights to the frequencies that were previously occupied by channels 52 through 69, in the hopes of using that airspace to improve their wireless communication networks.

What the digital switchover is actually doing is changing the language that TV broadcasters use to communicate with your television. Since 1941, televisions in the U.S. have utilized a set of broadcast standards laid out by the National Television System Committee. Big broadcast towers sent out information over the air using these NTSC standards and were picked up by the television antenna in your living room. Inside your TV, an NTSC tuner interpreted the information and properly displayed it on screen.

The digital switchover is introducing a new language, a new set of broadcast standards, this one designed by the Advanced Television Systems Committee. On Feb. 17, those broadcast towers are going to stop speaking NTSC permanently and start speaking ATSC. But unfortunately, your old television set doesn't know how to translate ATSC into moving pictures and sound. Just about all televisions manufactured and sold after Mar. 1, 2007 feature ATSC tuners, but if you purchased a television any earlier than that, chances are your TV won't be able to pick up over-the-air broadcasts once the switchover occurs.

The solution: A digital converter box, essentially an external ATSC tuner that sits on top of your existing television and is linked between your antenna and your TV. The ATSC signals are grabbed by the same antenna you've always used, then passed to the digital converter box that translates the ATSC signals into something your NTSC television can understand. They are easy to hook up and available at a wide variety of stores, including big box stores like Best Buy (nyse: BBY - news - people ), Wal-Mart (nyse: WMT - news - people ) and Target (nyse: TGT - news - people ), as well as online retailers.

What Would Keynes Do?

The government should spend on stuff, not on bad assets.

Every day that goes by makes clearer the parallels between the current financial crisis and the one that led to the Great Depression. Then, as now, the core problem was one of deflation, or falling prices. But fixing it will require more than just low interest rates. This was the key insight of British economist John Maynard Keynes, whose theories finally explained how to end the Great Depression. They may be the key to solving today's crisis as well.

The Great Depression was so deep and prolonged for many reasons. Herbert Hoover stupidly signed the Smoot-Hawley Tariff, which crippled international trade and finance, and imposed one of the largest tax increases in American history in 1932, which was exactly the wrong medicine at the wrong time. Franklin D. Roosevelt at least understood that deflation was at the root of the problem, but he thought artificially raising the price of gold and preventing businesses from cutting prices and wages by law was the solution. In fact, it prevented the economy from adjusting, which made the situation worse.

What few people understood at the time was that the Federal Reserve was primarily responsible for the deflation and the only institution that could have done anything about it. As we now know, the Fed's tight monetary policy brought on a financial crisis that began with the stock market crash in 1929. Smoot-Hawley was also a factor, but it wouldn't have been capable of inducing such a crisis if Fed policy hadn't already put financial markets in a fragile condition.

In its initial stages, the Fed might have been able to prevent a full-blown depression by being a lender of last resort. It should have been aggressive about buying every financial asset it could lay its hands on and created as much money as necessary to do so. But it didn't. Instead, it was passive and, as the value of financial assets collapsed, banks closed and vast amounts of wealth simply vanished.

The money simply disappeared, because there was no federal deposit insurance in those days. According to research by economists Milton Friedman and Anna Schwartz, the nation's money supply fell by one-third between 1929 and 1933, which induced a 25% fall in price levels over that period.

As prices fell, businesses were forced to sell goods for less than they cost to produce. They couldn't cut costs easily because that meant reducing wages, which workers naturally resisted. Layoffs were the only way to cut costs, but this meant workers didn't have any income with which to buy goods, since there was no unemployment compensation either. This created a downward spiral that proved very difficult to stop.

The decline in wealth also reduced spending, and the fall in prices had the effect of magnifying debts. Debtors were forced to repay loans in dollars worth 25% more than those they borrowed in the first place. Farmers, who are perpetually in debt, were especially hard hit. In effect, if they took out loans that were worth X number of bushels of wheat and were forced to repay them with the same number bushels, they needed 25% more bushels to repay.

Yet Ten Sleep, population 350, is just as connected as any place these days, and home to a new company that is outsourcing jobs not from the United States to the Far East, but in the opposite direction.

Eleutian Technology hires people in towns across northern Wyoming to teach English to Koreans of all ages using Skype, the free online calling and person-to-person video service. Two years old, Eleutian already is one of Wyoming's fastest-growing businesses.

The company has close to 300 teachers hooked up to more than 15,000 students in Korea, and CEO Kent Holiday said he's just getting started.

"Our plan was never to be a company that had a few thousand subscribers," Holiday said. "It's a $100 billion market just between Korea, Japan and China, and so we wanted to be the leader and we wanted to have millions of users."

Holiday got the idea for the company after a short stint teaching English in Korea in the early 1990s. He went to work in Korea's telecommunications industry and eventually became a top executive of Korea Telecom (nyse: KTC - news - people ).

All along, he kept in mind that language education someday would be possible online. He made his move in 2006, getting grief from friends about quitting his high-six-figures job. "I said `You know what? The time's right,'" he said.

When Chrysler was near death and awaiting a government bailout in 1979, then-CEO Lee Iacocca ordered drastic spending cuts and required all checks above $1,000 to be approved by a senior vice president.

Chrysler LLC and General Motors Corp. need to follow the same play book now, industry analysts and management professors say, as they try to outlast the debate in Washington over whether they will get billions in government loans.

With no hope of getting credit elsewhere and auto sales at a 25-year low, both automakers are perilously close to having only the minimum amount of cash needed to operate.

Today, with GM alone spending $6.9 billion more than it took in last quarter and having operations in 34 countries, Iacocca's $1,000 limit might not be practical. But industry analysts and bankruptcy experts say both companies must take similar measures to ensure their companies live long enough to use any loans they get.

"You turn the electricity off. You do things like shut the proving grounds down," said Jim Hall, managing director of 2953 Analytics of Birmingham, Mich.

Top executives of GM, Chrysler and Ford Motor Co. went to Washington this week seeking roughly $25 billion but ran into so much opposition that Congress delayed voting on the bailout until the automakers prove they can be viable.

They must submit a plan to Congress by Dec. 2, followed by more hearings before any vote is taken. That means money won't be available at least until late December, probably not until early next year.

Meanwhile, the companies face huge expenses and a lack of revenue because car buyers are having trouble getting financing or are delaying big purchases because of uncertainty about their jobs. October was the worst U.S. auto sales month in 25 years, and November is looking only slightly better.

Chrysler CEO Bob Nardelli told the Senate Banking Committee his company had $6.1 billion in cash at the end of the third quarter after burning up $1 billion in cash per month from July through September.

GM fared worse. It burned up $6.9 billion last quarter and about $6 billion in the first half of the year and has warned that it could reach its minimums sometime next month.

Ford, while burning through billions as well, has a big stockpile of borrowed money and says it can last at least through 2009.

But without aid soon, GM and Chrysler will have trouble paying bills and may have to seek bankruptcy protection.

Inside both companies' headquarters, teams likely are looking to cut spending any way they can, including delays in new investments, experts say.

"They have to take really drastic steps in their cost-cutting," said Robert Wiseman, a Michigan State University professor who teaches strategic management. "Stop buying everything except for the most critical things they need for their operation."

GM announced Friday it is canceling its traditional holiday party for the media "due to the very difficult economic situation facing the nation, the state, the industry, and our company." The party will be replaced by a $5,000 donation to a journalism scholarship fund.

At Chrysler, Nardelli testified, there's a cash committee that scrutinizes requests every week.

But what they're doing now may not be enough. Some in Congress criticized the CEOs for flying to Washington on separate corporate jets. GM is reducing its leased fleet from seven planes last year to three, but the stigma remains.

Lawmakers also rapped the automakers' high labor costs and particularly the jobs bank, in which laid-off workers get 95 percent of their pay plus benefits even though they aren't working.

The United Auto Workers said it has cut the jobs bank and placed time limits on it in new contracts signed with the companies last year. Still, more than 3,500 workers are getting paid for not working, and that number is sure to rise as the companies continue to cut jobs.

On Friday, GM announced it would extend holiday shutdowns and make other production cuts at five North American factories. It also accelerated the closure of a truck plant in Oshawa, Ontario.

Harlan Platt, who teaches corporate turnarounds at Northeastern University in Boston, said GM should turn to the UAW for help.

"The bank right now is the union, and they're going to have to give up something in the near term so they have something very valuable in the long term," Platt said.

Initially the UAW said it already gave up a lot in the new contracts, agreeing to lower wages for new hires and to shift the companies' huge retiree health care costs to a union-administered trust.

But on Thursday, President Ron Gettelfinger softened his stance, saying that the union is at the bargaining table already.

"We would welcome all the other stakeholders to the table to make some concessions," he said.

In Washington, House Speaker Nancy Pelosi said lawmakers are trying to get reassurances that the companies have a specific plan to survive before the government hands over taxpayer money. But that might be troublesome for the automakers.

GM Chief Executive Rick Wagoner told reporters Thursday that the company already has shared a detailed plan confidentially with the Bush administration and key staffers in Washington. He's concerned that sensitive information could be made public.

"Historically things like your future product plans, technology plans and financial plans would be competitively sensitive information, and so for a variety of reasons, we wouldn't be sharing that publicly," he said.

Douglas Baird, a professor who specializes in bankruptcy at the University of Chicago Law School, says the automakers were too vague, giving Congress less information than companies normally give lenders when seeking bankruptcy financing.

"That's not the way you approach a lender in a work-out. That's just not the way it's done," he said.

Wagoner, he said, will have the difficult task of showing Congress how GM can be viable with its current structure.

"That's not going to be easy to do," he said.