Why Neither Competition Nor Regulation Is The Whole Answer
by Robert M. Sigmond
Summary:
The full potential of competitive marketplace incentives and
governmental regulatory incentives
in the health field will be achieved only in effective interaction
with voluntary incentives. This article examines the relationships
among regulation, competition, and voluntary discipline and
the implications of a balanced approach in health planning.
The
health care field is in a constant state of change, reflecting
new developments in science and society. Change occurs as
individuals and institutions associated with all sectors of
the field react to a wide variety
of direct and indirect positive and negative incentives.
Some
of these incentives are associated with competition and free-enterprise
marketplace forces. These are quite important, because the
ways that money changes hands inevitably have impact on human
and institutional behavior.
Some
of these incentives are associated with regulation and governmental
police powers. These are quite important, because most of
us still do respect the law and wish to avoid entanglement
with legal processes most of the time.
Much
current public policy discussion centering around health issues
seems to imply that the only effective incentives are associated
with marketplace competition, which ideally stimulates innovation,
and government regulation, which ideally stimulates compliance
and conformance. This perspective would assume that the key
question is, What is the ideal balance between the two kinds
of incentives?
But
all effective incentives in the health field are not associated
with the two forces of competition and regulation. As I see
it, after accounting for competitive and regulatory incentives,
there is still a very large balance left over. This balance
of incentives that lie somewhere between competition and regulation
and are frequently overlooked, especially by those who concentrate
on "macro" formulations as contrasted with "micro"
formulations is the subject of this article. The question
is not how to maintain a balance between competitive and regulatory
incentives. The real question is how to maintain an effective
balance among competitive, regulatory, and voluntary forces
and incentives in a cooperative, community framework. Or,
put another way, how to restore some balance into the national
debate by renewed attention to voluntary forces.
Historically,
until quite recently, throughout most of the health field,
voluntary incentives associated with peer approval, pride
of workmanship, avoidance of embarrassment, and altruism have
taken precedence over financial gain and fear of penalties
and punishment. Despite appearance to the contrary, voluntary
incentives are still strong in the health field. This article
will attempt to demonstrate that the full potential of competitive
marketplace incentives and governmental regulatory incentives
in the health field will be achieved only in effective interaction
with voluntary incentives.
Government
regulation and voluntary initiative. Three key points about
the relationship between government regulation and voluntarism
are frequently overlooked in current public policy-discussions
in the health field:
1.
The success of any form of government regulation depends upon
voluntary conformance by the vast majority. Prohibition against
alcoholic beverages in the '20s is the best-known example.
Current
efforts by law enforcement officials to get the National Safety
Council to promote voluntary adherence to the 55-mile speed
limit so that enforcement can be effective are a more recent
demonstration of the point. Most of us obey red lights in
driving because it seems like the right thing to do, not because
of fear of getting arrested. And so on. In any area of regulation,
if most don't voluntarily behave in conformance with government
regulation, because it seems right and proper to do so, the
regulations usually can't be enforced.
2.
Government regulation is much easier to administer when the
vast majority of those affected are voluntarily, for one personal
reason or another, committed to tougher standards than government
regulations. Here again, you can think of many examples. I
learned the motor vehicle code in order to get my driver's
license some years ago, but I don't keep up to date on these
regulations, because I am committed to commonsense driving
practices that I am positive are much more restrictive on
me than the
legal requirements.
3.
Government regulation works best when formal voluntary mechanisms
exist that maintain tougher standards than the law provides
and that encourage and assist with voluntary adherence to
higher standards than the law requires. Not only do most people
avoid illegal littering in my neighborhood, but many belong
to a civic association that promotes and helps organize action
reflecting pride in our community and discourages action not
in our neighborhood's interests.
These
kinds of classical interrelationships between regulation and
voluntarism have existed for many years in health. Physicians
are licensed by the government but give little attention to
licensure requirements, because they voluntarily adhere to
higher standards of important voluntary organizations like
specialty boards and colleges and hospital medical staff organizations.
Most physicians are not worried about losing their licenses,
but they do keep their records up to date for fear of losing
their staff appointments in voluntary hospitals. Many hospital
executives are barely aware of the government's licensure
requirements, because they adhere to the standards of the
Joint Commission on Accreditation of Hospitals, which are
both tougher and more flexibly administered.
Generally
speaking, government regulations with respect to quality,
efficiency, effectiveness, safety, and community service can
be safely disregarded by institutions with genuine commitments
to these goals. In almost all instances, they can be disregarded
because the institution meets the requirement and more, in
other instances, the regulation is unlikely to be enforced
in an institution that is clearly maintaining
high standards.
Future
changes in regulations applicable to various classes of health
manpower can be forecast by observation of those regulations
that are being routinely disregarded in the "best"
hospitals. First-class hospitals started intravenous (I.V.)
teams of nurses back in the 1940s, when starting an I.V. was
clearly limited by law to physicians. Later, first-class hospitals
started using I.V. technicians when I.V. administration was
clearly limited by law to registered nurses. And so it goes!
Such behavior would not have been tolerated in second-class
institutions, but first-class institutions did not have to
wait for the regulations to be changed.
Government
regulation typically deals with the "outlyers,"
with marginal operations and bizarre behavior.
In a responsible society, this is as it should be. Exceptions
to this rule almost invariably reflect
temporary breakdown in the normal workings of voluntary discipline
and initiative.
When
most of us with managerial or governance responsibilities
in the health field think about regulation,
we automatically think of government regulation. But if you
ask a physician or a nurse or most other health workers, most
of whom work for hospitals, they know who the regulator is.
It's the person who signs their checks, the person who says
no when they want a yes. For them, the managers are the regulators.
The sooner we recognize that the key regula-tion in health
service is what management does in response
to community and customer pressures. the better. Government
regulation will and should always be there, but only applicable
to the extent that the management of community institutions
doesn't face up to
society's expectations.
A
New York study of the impact of government regulation on hospital
costs concluded that it accounted for 20 to 25 percent of
the entire bill. Of course, if all the regulations were removed,
most hospitals would continue to incur all of the costs involved
in meeting governmental regulations and beyond, because
almost all are required for sound hospital service, which
takes precedence.
The
keys to regulation are (1) individual self-regulation and
discipline, backed up by (2) institutional regulatory mechanisms
that encourage self-regulation and discipline, backed up by
(3) voluntary standard-setting agencies that encourage institutional
self-regulation and discipline, backed up by (4) governmental
regulation to identify and, if necessary, punish the laggards.
Voluntarism can't do it alone, because there will always be
laggards who are a threat to society. But government regulation
can.t do it alone, because government must necessarily be
concerned with equity and with formal processes, minimum standards,
and measures of equity, which fall short of society's expectations.
Everyone in society wants equity for all, and the best for
his or her family in time of need. There's no way that government
can meet those expectations, except in partnership with voluntary
community cooperation.
Marketplace
competition and voluntary initiative. Five key points about
the relationship between marketplace competition and voluntary
initiative and discipline are frequently overlooked in current
public policy discussions in the health field:
1.
Advocates of competitive incentives frequently refer to the
desirability of changing various interferences with the automatic
working of the marketplace, like prepayment and insurance,
so that we can return to an efficient marketplace approach
to allocation of resources. But the fact is that there never
was a time in this country when the marketplace played a significant
role in price determination in the health field, particularly
hospitals. Before so-called third-party payment, most people
didn't pay or paid very little. Voluntary philanthropy and
Robin Hood philanthropy played a much larger role. There was
little or no price
competition ever.
2.
The "unseen hand." so important in marketplace theory,
is almost inoperative in the health field, when it comes to
buying specific services at time of need for reasons that
are well known to economists. More attention to creating conditions
for free-market price competition for specific health and
medical services could be helpful, but it is not likely to
have as significant impact as some think.
3.
Competition among hospitals and other responsible health agencies
for resources physicians, nurses, capital funds, and so on
has been with us in quite intense form from the beginning.
That's nothing new, and there's nothing wrong with it, so
long as such competition is tempered by the necessity to respond
to society's expectations. For a wide variety of well-known
reasons, even this kind of competition for resources can be
counterproductive in the absence of a commitment to areawide
planning. Hospitals do compete, but not primarily on the basis
of prices charged to sick people. We must find ways to ensure
that such competition is socially productive, by channeling
competitive drive within the guidelines of areawide planning.
It's hard to do, but it can be done.
4.
The major traditional outlet for free-market price competition
in the health field is in selling goods and services to community
health agencies, especially to hospitals. This continues to
represent the major potential for price competition. It is
growing beyond the traditional goods and services to include
contract services, even the entire management of hospitals
for community boards, now the fastest growing segment of the
investor-owned hospital chain industry.
5.
Competition in selling health protection and insurance and
health systems is nothing new. It has always been with us,
and very intense, as all insurance salesmen know. By and large,
Blue Cross and Blue Shield have won out in these competitive
struggles, but not always. Price has played a part in these
competitive battles, but it has not always been the primary
consideration.
Fortunately,
influential marketplace economists are pressing for greater
price competition in selling health service systems as contrasted
with specific services. As far as hospitals are concerned.
Blue Cross has been marketing hospital systems since it was
started by Justin Ford Kimball in 1929 at Baylor Hospital
in Texas. The sooner that hospitals join Blue Cross in marketing
hospital systems competitively by the month, the better.
This
notion inevitably leads us to go beyond capitation payment
by the buyers to capitation payment to the sellers. Unless
hospitals do begin to compete on a capitation basis, they
inevitably will be severely squeezed as inpatient utilization
continues to drop in the decade ahead.
A
balanced look at incentives. When viewed in terms of the requirements
of effective community health services, there are a wide variety
of positive and negative incentives associated with the marketplace,
with government regulation, and equally important with the
goals and methods of operation of nongovernmental organizations
and community leaders.
Everyone
can be enlisted in an effort to rationalize our health services
and make them more responsive to individual and social imperatives.
It is in the complex give-and-take of money, resources, privileges,
service, license, pain, punishment, and recognition that these
incentives are found. Sensitive management of these give-and-take
situations by all parties involved, with continuous regard
to broad community interest, is the key to balanced use of
incentives for change. With the help of areawide planning,
every participant in the health system whether as a consumer
of health services, a paying agency, a philanthropic agency,
a physician, a hospital, a medical school, a hospital or medical
association, a union leader, a large employer or benefits
manager, or what have you can play a role in providing positive
and negative incentives to others.
For
hospital trustees, the implications of this analysis are clear.
By their own example, trustees should challenge all elements
in the system to think through their community and public
serviceq responsibilities as well as their self-service responsibilities, and trustees
should help others to see how to link the two.
With respect to competition, wasteful competition should be
avoided, in contrast with competition to meet community standards
competition to break par rather than to break competitors.
With respect to regulation, rigid regulation should be avoided
whenever self-discipline and voluntary regulation can carry
the day. Government regulation should be reserved for those
who richly deserve that approach and even then, that regulation should be carried out with a wide range of
sanctions and rewards.