Government Intervention in the Private Sector?

by Tim Size


This article was written as a guest editorial for The Journal of Rural Health, Summer 1992 and is consequently copyrighted by the National Rural Health Association. Used on this WWW page with their permission.


We have entered an era of substantial restructuring of both the financing and delivery of health care in the private sector. The question at hand is not whether government becomes more involved but how it does so.

Late last year, the National Governor's Association stated it best in A Healthy America: The Challenge for States: "In essence, there are two polar positions regarding health care resource allocation - a market-oriented approach or a public allocation approach" (emphasis added). In other words, beyond tinkering with the status quo, we have one fundamental choice: either get serious about competition or move toward a Canadian-style system

The current debate is frequently described as a contest for or against government involvement, for or against regulation. This is a major misunderstanding of our only two basic alternatives. In health care, the absence of regulation does not create competitive markets with their economic and service advantages. One of the country's foremost experts on health care competition, Alain Enthovan of Stanford University, cites several reasons for the failure of competition in health care markets: risk selection, market segmentation and product differentiation, information cost, discontinuity of coverage, "free riders", a "live and let live" attitude among providers and entry barriers into the market.

Due to these problems, competitive markets in health care just don't happen; they require significant intervention by both government and the private sector. Whether we want a "market-oriented" or "public allocation" approach, government has to play a major role. The principle issue is what type of legislation and regulation, and to what end?

The re-introduction of provider wage price controls through a rate setting commission is the wrong way to go because quality and efficiency will decline. Health care managed by a central bureaucracy in Washington, DC, or in each state capital - however bright, hard working and well meaning - will become increasingly inefficient, unresponsive and remote from patients and local communities. Costs can be driven down by a health care czar by simply limiting what people are allowed to spend, but quality and efficiency can only be achieved by committed and empowered local organizations and individuals.

If not rate-setting, then what? In the early 1980s, health maintenance organization (HMO) development was actively encouraged as part of the initiative to bring competitive forces into play. HMO's have made a difference but we now need to go further and complete the job of creating competitive health care markets. We need congressional and legislative agendas to

• organize private and public purchasers of health insurance or plans under a few regional brokers or "sponsors" to negotiate with regional networks of providers,
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• develop readily available and understandable information about health plan outcomes and costs to facilitate consumers choosing quality, cost effective health plans and providers,
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• prohibit competition among insurers based on who can most successfully avoid insuring someone who might actually need health care,
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• limit cost shifting and minimize the number of uninsured individuals while a national solution is being developed, and
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• eliminate the ability of one or two health plans or providers to dominate a single regional market.

Obviously considerable thought and care needs to be given to the development of this legislative agenda, particularly in how we can best meet the unique needs of the state's various underserved communities. The role for government in regulating the health care market is complex, if not more complex, than the direct regulation of individual participants, it is the larger potential benefit of this approach that justifies the combined public and private effort.

A market-oriented approach is superior to a public allocation approach because it will increase quality of care with incentives for high quality plans and providers, contain costs with incentives for efficient plans and providers, offer consumers benefit and provider choices that are sensitive to local preferences, target the great majority of health care costs, promote ongoing system innovation and improvement, and improve health and reduce long-term costs through incentives for investment in community-wide prevention programs.

We need to stop talking about whether government should be involved and focus on how it can be most effective in its involvement. Government intervention is needed to initiate comprehensive health care reforms based on getting serious about competition and developing regional markets that are actually competitive.

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