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 "marketoriented" or "public allocation" approach, government has to play a major role. The principal
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
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organize private and public purchasers of health insurance or plans under a few regional
brokers or "sponsors" to negotiate with regional networks of providers,
develop readily available and understandable information about health plan outcomes and
costs to facilitate consumers choosing quality, cost effective health plans and providers,
prohibit competition among insurers based on who can most successfully avoid insuring
someone who might actually need health care,
limit cost shifting and minimize the number of uninsured individuals while a national
solution is being developed, and
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.

http://www.rwhc.com/papers/gov_init.html