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| ISBN-13: | 9780817976538 |
|---|---|
| Publisher: | Hoover Institution Press |
| Publication date: | 09/01/2013 |
| Series: | Hoover Press publication ; |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 448 |
| File size: | 4 MB |
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National Health Policy
What Role for Government?
By Isaac Ehrlich
Hoover Institution Press
Copyright © 1982 Board of Trustees of the Leland Stanford Junior UniversityAll rights reserved.
ISBN: 978-0-8179-7653-8
CHAPTER 1
The British National Health Service as a Government Enterprise
Cotton M. Lindsay
This paper seeks to test features of a theory of government enterprise using the experience of the British National Health Service (NHS). It is hoped that in so doing a somewhat larger picture of results under such arrangements may be drawn than can be developed by actual description. A well-developed theory that has been confirmed by empirical testing can inform us about aspects of this behavior that have not been statistically analyzed. This procedure, if successful, can prove a much richer source of understanding than a piece-by-piece comparison of the NHS with other health systems. The method followed, therefore, involves presenting a model of bureaucratic government supply in which the implied behavior for these institutions differs from that predicted for similar private institutions. These implications are then tested by reference to the actual experience of NHS and American (largely private) institutions concerning remuneration and qualifications of physicians, hospital resource use, and other data on the operations of these contrasting forms of medical industry organization.
Bureaucratic Supply and Visible Output
When we consider the behavior of government enterprises, we often take for granted that they will behave as private firms do when confronted with similar choices. We assume, for example, that private firms which produce attractive, convenient, low-cost products will continue to do so when they are nationalized. We tend to think of such changes as purely administrative; hence, the internal decision making of the organization will continue unaffected. This assumption is incorrect. When government ownership replaces private ownership, profound changes are made in the incentive structure of the entire organization, which have implications for both the quality of the product and the efficiency of the production process.
In an earlier paper I developed a model of some aspects of decision making within a government organization in connection with a study of Veterans Administration hospitals and pointed out that there are two principal differences in the economic environments of private firms and government agencies. First, the private firm gets its direction on what to produce from the customer alone. A private firm watches the market performance of its product in competition with others and adopts features which the market will buy and drops those which do not sell. Government agencies like the NHS typically offer their product at zero price; hence, they get no information from this source. Their products always "sell"; they are free. Government agencies depend on the governmental process, the legislative and executive branches of government, to determine what should be produced and how much. If, of course, the governmental process transmits the same information which consumers themselves communicate to producers through markets then the information source can make no difference. The extensive theoretical literature on the democratic process suggests that information transmitted via these channels will not be unbiased. Even if a bureaucracy perfectly executes the instructions it receives from the legislature, these results will be different and possibly inferior to the results of market organization of production.
In this paper, we focus on a second difference between market and government agency organization of activity. It concerns the movement of information in the opposite direction. It is unfortunate but nevertheless true that giving the correct instructions is only part of the task of ensuring that things get done. This is a particularly complicated problem for producing organizations because the tasks we set for them are at cross-purposes. On the one hand, we want economical production. On the other hand, we want a high-quality product, and more quality can in general be obtained only at greater cost. These are balanced for us nicely by competitive private firms, which use information provided by profit signals. If the manager of such an enterprise is excessively zealous in his pursuit of economy, the quality of the product will fall as will price. This poor management will be reflected in the profit statement of the firm. If excessive quality is embodied in the product (at too great a cost), the cost increase will more than offset the increased revenue for the better product, and profits will also fall.
Needless to say, the profit picture of the government enterprise does not provide similar information. Government output is given away, and the agency invariably operates at losses, which depend only on the level of output and expenditure per unit. The balance between the two offsetting influences on producer decisions is therefore lost. Managers who are able to reduce unit cost by increasing the efficiency of their enterprises are, of course, influenced to do so. Those with executive authority must be rewarded for efficient management or they will not manage. Those who reduce costs by decreasing the quality of the product produced (and therefore give the appearance of greater efficiency) will not be restrained by lost sales. Zero-priced output sells, regardless of quality.
Government administrators acknowledge this problem by engaging in quality control efforts far beyond the scope observed in the private sector. The mountainous paperwork observed in connection with the operation of government agencies clearly represents an attempt to monitor the products of these agencies to prevent them from cutting costs at the expense of quality. To the extent that all aspects of government output can be monitored at reasonable cost, this tendency will be vitiated. For many government products (and services are particularly troublesome in this regard), certain features of the output cannot be monitored at almost any cost.
Those aspects that cannot be economically monitored are referred to as "invisible." Cost-conscious government administrators will invest less resources in these invisible aspects of the products they supply than will private producers. Consider some examples where the operation of this principle is at least hypothetically at work. Government may easily collect data on the volume of mail that passes through a particular postal region. It obtains information on the speed with which mail is delivered only with great difficulty. Speed is thus an invisible characteristic of mail service. It is not therefore surprising that private messenger services offering rapid delivery of letters and parcels between stations successfully compete with the subsidized U.S. Postal Service. The testing of reading and quantitative skills can be accomplished at low cost, while measuring the extent to which public schools impart a genuine appreciation of literature and analytical skills is very costly. These latter characteristics of the educational process are therefore invisible and receive inadequate attention in many public school classrooms keenly attuned to trends in standardized testing results.
Invisible Characteristics of Health
This model of government enterprise was originally developed to study the supply behavior of American Veterans Administration (VA) hospitals. It has already proven its usefulness in predicting deficiencies in certain output characteristics of the hospital and medical sector. Several implications for the model for VA hospitals may be applied directly to the care provided for the whole of the British population. We shall consider each of these implications in turn.
One of the most important implications for any health system is that government will tend to spend less on medical care than people would spend on themselves. Medical attention is demanded for many reasons, and many characteristics of the demanded care are predicted to be invisible. Medical customers demand pleasant surroundings and prompt attention by their physicians. They demand privacy in their hospital accommodations and answers to their questions about their health. Even when well, they seek reassurance about troubling symptoms and ailing relations. Because it is not observed, provision for this aspect of service will be given less attention in the budget. Bureaucratic managers will devote fewer resources to providing this type of care because it cannot be counted and does not therefore reflect favorably on their recorded performance as managers.
Because it does not spend on such invisible output, the NHS finds it possible to operate at a much lower per capita expenditure level than does the health care sector in the United States. Thus it is not surprising that the Health Service consumes only about 5.3 percent of the British gross national product (GNP), while total expenditure in the United States on health consumes about 10 percent of our GNP. This does not imply that Britain's organization is more technically efficient in producing health care than ours. Lower cost is an implication of organization of health under a bureaucratic system. Medical care in the United States is more costly because it is a more varied, higher quality product.
It would be incorrect to infer that a McDonald's dinner is more efficient than one at a gourmet restaurant even though they were equally nutritious. It is similarly incorrect to infer that the British Health Service is more efficient than the American system simply because it spends less per capita and achieves the same record with respect to health statistics. Indeed, health indicators are one of the few sets of visible characteristics available with which Parliament may assess the performance of the NHS. It is not surprising that such indicators do not fail to show that health under the NHS is maintained at levels equivalent to those in other countries. If the aim is to give the appearance of a high level of health produced with minimum resources, then resource use has been quite intelligent in the United Kingdom. It is important to keep in mind in reading such reports that it is precisely those areas where statistics are unavailable that NHS care is likely to be found deficient.
The Economic Experience of Physicians
Let us consider the case of physician care. Our theory of government enterprise predicts that government managers will find it uneconomical to reward such invisible characteristics of physician care as providing information not related to the patient's health, pleasant surroundings for outpatient visits, and similar features likely to be associated by patients with higher quality care. They will therefore inadequately reimburse doctors for providing such niceties. Physicians will have an incentive to spend less time with each patient since attendance to the patient's health needs is the only monitored characteristic. We would therefore predict that health service may get along with fewer physicians since each is providing a narrower range of services and doctor time is not devoted to providing these invisible characteristics. We are not surprised to find therefore that since 1960 there have been consistently between 21 and 27 percent more doctors per capita in the United States than in England and Wales.
Because of its monopsony power in the market for doctors, government will be able to pay doctors less than the competitive wage. The economic position of doctors will decline. How is this to be measured? The first task was to find a control group with which to compare the doctor's economic position. There is a distressing paucity of earnings data categorized by occupation and/or schooling in the United Kingdom. The British census collects and reports virtually no earnings information. The Review Body, established by Parliament to determine appropriate physician pay levels, found it necessary to generate its own survey data on incomes of other occupations. Ideally, the control group should possess qualifications and credentials similar to doctors. However, adequate time series data were available only for the general category of manual workers. Physician pay was taken to be the target incomes for general practitioners (GPs) that were set by the Review Body.
We compared the economic status of these occupations by calculating the net present values of earnings in each occupation. This method compensates appropriately for the differing life-cycle patterns in the earnings of different occupations and recognizes the large investments required to enter medicine. The rationale here is to view the decision to become a doctor as an investment and to analyze the economic attractiveness of this decision. In doing this it is necessary to make adjustments in these calculations for various characteristics of the two cohorts, which are probably dissimilar. One of these is native ability.
It is typically assumed that the group of people who ultimately succeed in completing all of the education required for medicine have higher than average ability. Manual workers probably have lower than average ability. An ability adjustment factor is therefore applied to manual workers' incomes. In the early literature on education as an investment, an adjustment was made directly to income differentials reflecting the portion due to education. In the mid-1960s, it was thought that approximately two-thirds of observed differentials were attributable to education. More recent evidence suggests that this percentage is around 80 or 90. The present analysis therefore adjusts manual worker earnings upward by 20 percent, reflecting the assumption that people with the ability to become doctors will have higher productivity in this alternative occupation.
This mode of comparison also requires that a discount rate be chosen to use in the present value (PV) calculations. General education is an alternative investment open to an individual, so this was used as a basis to determine the appropriate discount rate. Rates of return to education have yielded various estimates, as shown in table 1.1 Because physicians' earnings are delayed, the lower the discount rate employed, the better will doctors' economic positions appear relative to others. A rate of return of 12 percent was chosen for analysis, which is on the lower side of these estimates.
Present values for manual workers are calculated by discounting their income streams. Data limitations make it possible to analyze only the earnings of GPs. For these physicians, the present values are calculated by discounting their maintenance grants received while attending school and their career income stream. The earned income streams used are net of taxes. These present value calculations are done for each year from 1948 to 1978. To facilitate comparisons over the time period, the pound sterling values were translated into constant 1978 pounds using the retail price index for consumer goods and services.
The results of the present value calculations are presented in table 1.2. The differences in the present value of a doctor minus the present value of a manual worker are shown in the third column of table 1.2 and in figure 1.1. This difference shows the economic attractiveness of becoming a doctor over a manual worker as measured in 1978 pounds. The use of a higher discount rate would decrease this attractiveness in each year. Looking closer at these results, one can see that the attractiveness of becoming a doctor in the early years was fairly high, but deteriorated until the mid-1960s. For a few years from 1967 to 1971, the attractiveness of becoming a doctor rose again, but after that period started a severe downturn that has not yet abated. One can see that except for a short period from the late 1960s to the early 1970s, the economic attractiveness of becoming a doctor has deteriorated dramatically. This decline is also apparent in rate of return calculations on physician training reported in column 4 of table 1.2.
This evidence suggests that the attractiveness of a medical career has lost much ground since the inception of the NHS, and doctors now are being severely underpaid. We may estimate the extent of this over-and underpayment by determining what level of earnings would make medicine and manual worker careers equally attractive economically in each year. The average remuneration of GPs that would make such an investment economically attractive has therefore been calculated. The percentage of an over- or underpayment has been calculated by taking the difference of the actual and this "equilibrium" pay level and dividing by the equilibrium pay level. These results are included in the last column of table 1.2 and in figure 1.2.
Although all of this analysis concerns only the earnings of GPs, the same pattern should be observed in an analysis of specialists' incomes. The decline noted for GPs in the last decade should be even more dramatic for the case of specialists' incomes, which were affected more severely by the Incomes Policy applied during this period.
(Continues...)
Excerpted from National Health Policy by Isaac Ehrlich. Copyright © 1982 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
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Table of Contents
Contents
Foreword