Resources and Rationing: Managing Supply and Demand in Health Care

Stephen Harrison & Michael Moran. Handbook of Social Studies in Health and Medicine. Editor: Gary L Albrecht, Ray Fitzpatrick, Susan C Scrimshaw. Sage Publications, 2000.


Third-party payment for the health care of individuals is virtually ubiquitous and represents the majority of health-care expenditure in developed countries. Although both the assumptions that underpin such systems and their forms vary, all third-party payment systems function by disconnecting to various degrees the process of health care consumption from that of payment. One consequence of this disconnection is the reduction (again, to various degrees) of the disincentive to consume, with the further consequence that demand for health care tends to inflate over time. A still further consequence is that third-party payers must in some way manage the relationship between the demand for and supply of care. The dominance of third-party payment for health care is hardly a new phenomenon, nor is this need to manage supply and demand. Yet there have been two relatively recent developments.

First, discussion about the problem of demand inflation and of possible solutions has increasingly become both explicit and institutionalized. Discussion of ‘rationing’ in the context of health care is mainly a phenomenon of the 1990s and, although both the terminology and the substantive concept are sometimes contested, the latter has largely been accepted by health policy analysts. Second, there seems to have been a shift in the preferences of third-party payers for the kind of policies to be employed to address demand inflation; such actors have increasingly lost faith in policies aimed at the supply side and begun to prefer demand-side measures. Of course, neither of these recent developments are themselves explained by the basic necessity for the management of supply and demand; nor do third-party payers in specific countries make the actual policy choices.

What follows is divided into eight sections. The first explains the principle of, and rationale for, third-party payment for health care, distinguishing between the rationales for different forms of third-party payment, that is taxation, social insurance, and private insurance. The second explains and justifies the assertion that demand in third-party payment systems can be expected to escalate, whilst the third sets out the broad range of policy options for addressing this, together with the main dimensions of our analysis. In the following four sections we illustrate our analysis with reference to what may be called the ‘consumption histories’ of four developed countries: the United Kingdom, New Zealand, the United States, and Germany. We conclude, first, that in all of these the former preference for implicit approaches to rationing arose from a conjunction of particular ideas of citizenship with the presence of an established medical profession. Second, and despite important differences, the broad range of pressures on this conjunction and the recent policy trend towards explicit demand-side measures have been similar across these countries. It is far from clear, however, that the new preference is firmly established.

Third-Party Payment and Its Rationales

The principle of third-party payment is that financial contributions are collected from population groups, irrespective of the immediate health-care requirements of the individuals who compose them. Such groups may represent a more-or-less complete national population, or narrower groups such as the members (voluntarily or compulsorily) of social or private insurance schemes. These contributions are collected by ‘third-party payers,’ such as government or quasi-independent agencies or insurance companies, which employ the resources thus obtained to resource or reimburse health-care providers (such as professionals and hospitals) for the care of individuals held to be sick (Figure 1).

Such systems separate payment for care from its immediate consumption by the individual, and to varying degrees separate the financial contribution that the individual makes from the volume of care that she or he actually consumes. In a tax-financed system, the government acts as third-party payer by employing resources collected through the tax system (the flow of money across the bottom of Figure 1) to pay for citizens’ care in hospitals or by doctors. This does not necessarily entail the public ownership of provider institutions because tax revenues can be used for the public funding of private provision. Because the taxation system collects revenues to support public expenditure on services other than health, the share of the latter may not be hypothecated, thus allowing governments to shift their expenditure priorities. In a social insurance system, the third-party payers are social insurance funds, the number of which varies between countries. They may be nongovernmental bodies whose history lies in trade union and voluntary effort, or they may be managed by the state. In either case, their resources will remain ‘earmarked’ for health care and not merged with other revenues. Membership of a fund may be compulsory for some or all citizens. Typically, members make periodic contributions to the fund (see the flow of money across the bottom of Figure 1) based on a percentage of earnings. Employers may also contribute (although, of course, this can be regarded as money that would otherwise have been paid in wages) and nonearners may have their contributions to the fund met as a social security entitlement. The fund in turn pays the hospital or the doctor (as the case may be) for services provided to members, often at rates negotiated annually between organizations representing the various interests in the healthcare industry. A private insurance system treats the cost of health care as an insurable risk for an individual. Such coverage is voluntary, although it might be routinely provided as a condition of employment for some workers. In this context, the third-party payer is the insurance company, health maintenance organization, or nonprofit friendly society, and the flow of money shown in Figure 1 takes the form of premiums paid by policy holders, which provide the resources to pay hospitals and clinicians for their care.

Figure 1: Third-party payment for health care. Source: Adapted from S.Harrison (1988) Managing the NHS. London: Chapman and Hall.

The ubiquitousness of third-party payment can be explained in several different ways. From one perspective, it is largely a result of public demand on governments, perhaps coupled with political commitment to some sort of equity. From another perspective, it represents the dominance of provider interest groups such as the professions, who were indeed much implicated in the development of friendly societies and nonprofit insurance organisations such as BUPA in the United Kingdom and Blue Cross/Blue Shield in the United States. From a third, more radical perspective, it is a way in which the capitalist state either assists capital accumulation through the provision of a healthy workforce and/or legitimises its own existence in the eyes of its subjects (O’Connor 1973; Offe 1984). Government action is based on fear of revolutionary activity (as lay behind Bismarck’s rudimentary welfare state in nineteenth century Germany). From a fourth perspective, economists’ normative arguments explain (in the sense of justifying) third-party payment specifically by governments as a response to market failure: the difficulties ereated by the special characteristics of health care in treating it just like any other commodity.

Thus, third-party payment systems for health care come in several varieties, but the principle that always underlies them is the detachment of the act of payment for health care from that of receiving it when considered necessary. They therefore separate the financial contribution that the individual makes from the volume of care that she or he actually consumes. This is not the same, however, as saying that there necessarily is no relationship between the amount required to be paid and the volume predicted to be used by an individual. They pool resources to smooth out the uncertainties of individuals’ health states requiring more expenditure than the individual is able to make. Thus, different as the three types of third-party payment systems that have been outlined may be, it is evident that they all share the fundamental rationale noted above: they all pool (or ‘socialize’) the financial risks of ill-health across some sort of population, which (as the bottom left-hand corner of Figure 1 shows) is analytically distinct from actual patients. Unlike out-of-pocket payment, third-party payment never limits the value of care provided to an individual to the sum of that individual’s contributions. Third-party payment is therefore a partial answer to the problem of the individual’s uncertainty about her future health-care needs; a partial answer because any type of third-party payment system might in practice make charges for, and impose access restrictions upon, certain treatments. Thus, rationing attenuates the extent to which (some) individuals’ problems are solved.

Third-party payment can also be a partial answer to the problem of equity, that is, to the empirical tendency for the poor and the sick to be the same people. However, the extent to which this occurs will depend on how widely the risks of ill-health are spread, and it is clear from the descriptions above that different variants of third-party payment achieve this to different extents. Tax-financed systems pool the risks across a whole national population and, other things being equal, spread the risk most equitably. Private insurance and any system of social insurance that employs a multiplicity of third-party payers is likely (other things being equal) to be less equitable because there exists the probability that poorer, sicker people will be found in some risk pools and richer, healthier people in others. The former group will therefore receive a poorer range of benefits than the latter.

Although these matters are to some extent technical concerns in health system financing, they are also deeply political for they manifest different normative assumptions about what risks should be pooled. Thus, a tax-financed system, in socializing risk across a single national population, might be said to seek to compensate for a broad range of inequalities, such as those resulting from social class, as well as uncertainties about an individual’s own future health. In other words, it has a universalist rationale, implying a notion of citizenship that includes social rights (Marshall 1950) in which effective participation by individuals in society is to be secured by state action (Flynn 1997). In contrast, a private insurance system seeks to compensate for a much narrower range of uncertainties: those related to the individual’s health over his own lifetime and within his own social group, implying a more restricted model of citizenship.

The Unsought Consequences of Third-Party Payment

Third-party payment systems risk the inflation of demand over time. Whilst this is often conceptualized as being ‘driven’ by variables such as ageing populations, technological drift, and/or rising public expectations, they are not sufficient conditions. Demand increases are more appropriately theorized in terms of two tendencies derived from the economic concept of ‘moral hazard’ (Arrow 1963: 946) which is not unique to the health-care field.

Provider moral hazard (or ‘supplier-induced demand’) arises from information asymmetries: the consumer’s lack of knowledge of a highly technical service coincides with a provider’s interest in increasing provision and allows the latter to affect demand. Whilst patients do, of course, make generalized demands in the sense of arranging a visit to the doctor or being taken to the accident and emergency department, it is typically (though not invariably) the physician or other clinical professional who translates such generalized demand into a specific demand for antibiotics, pathology tests, a specialist appointment, or a surgical operation. Conventional accounts cast such professional motivation in material terms. If the clinician is remunerated on a fee-for-service basis, there are clear incentives to maximize supplier-induced demand unless the total fees are ‘capped’ in some way. The same incentive may exist if the institution that employs the clinician is itself remunerated by the third-party payer on the basis of its actual costs or on any basis that is volume-sensitive. From such a perspective, a system in which clinicians were salaried would have the opposite effect of ‘underprovision,’ because there would be no economic incentives to perform beyond the level necessary to retain one’s job. However, this seems an unnecessarily narrow perspective on incentives; Donaldson and Gerard (1993: 33) have argued that where providers are salaried and do not have to bear the costs of treatment, simple ignorance of costs may lead to overprovision. We would go beyond this and argue that there may be ethical incentives to provider moral hazard. Even if the hospital’s budget is not volume-related and clinicians are remunerated by salary or capitation fees, one might still expect to see such demand increase as a result of the supplier’s desire to behave ethically, that is, to do the best possible for her patient. In an out-of-pocket payment system, this might be limited by the patient’s inability or unwillingness to pay, but in a third-party payment system such limitations are somewhat attenuated.

Consumer moral hazard arises where some of the third-party payers meet all of the costs of care. It encourages a higher rate of use than would occur if full costs had to be met at the point of use (Pauly 1968) because the demander assumes that the cost of his usage will be spread over a large number of taxpayers, fund members, or policy holders. However, if large numbers of people behave in this way, then total demand (for health care and hence for the resources to provide it) will rise. Consumer moral hazard in third-party payment systems for health care is the consequence of divorcing payment for services from their use. Third-party payment makes it easier for many people to obtain care than would otherwise be the case, but at the same time tempts them to increase their demands.

Two points are important to note. First, although analyses often focus on the price of services, it seems clear to us that non-money costs of obtaining care can be significant, even where no money charge is made. At the very minimum, the user must take steps such as telephoning for an appointment, rearranging a working day, travelling to the surgery or hospital, and perhaps sitting for some time in a crowded waiting area in order to gain access. Costs can be higher. One may react adversely to the drug that is prescribed, or the needle may hurt as it pierces the flesh; the prospect of gastroendoscopy or sigmoidoscopy is not a pleasant one for most of us, and in the extreme, one may die on the operating table. Second, and irrespective of cost, although people only demand services that they perceive to be good for themselves, such goodness is in the perception of the demander rather than in the reflection of some intrinsic feature. Consequently, consumer moral hazard in health care is not avoided by simply observing that many health-care interventions have not been properly evaluated by research; unless those who demand the services both know and care about this lack of research, their behaviour will be unchanged.

Thus, demand in a third-party payment system might be expected to increase over time because neither consumers nor providers have the incentive to moderate it. Whilst the two forms of moral hazard provide the immediate basis for the inflation of demand, in third-party payment systems, there are a number of secondary factors that may affect the propensity of patients and clinicians to increase their demands. One obvious candidate is demographic shift; many countries have an ageing population in both absolute and relative terms, largely brought about by greater total life expectancy and a falling birth rate. Because older people consume greater amounts of health care per capita than do younger people, an increase in the former section of the population implies an increase in demand for health care, all other things being equal.

Another secondary source of demand for health care is the constant invention and development of new medical technologies, many of which are extremely expensive. The pharmaceutical and medical equipment manufacturing industries are important sectors of the economies of the United Kingdom, the United States, and Germany, and significant exporters. It should also be remembered that the term ‘technology’ carries a broader meaning than simply high or ‘hard’ technology, and encompasses ‘drugs, devices, and medical and surgical procedures used in medical care, and the organizational and supportive systems within which such care is provided’ (Office of Technology Assessment 1978: 2). New approaches to psychotherapy, new packages of care for the elderly, and new multiprofessional approaches to the care of stroke victims are therefore new technologies, and indeed may carry costs just as high as new drugs. The mere existence of new technologies does not create a demand; their use, or the demand for their use, depends on patients and/or clinicians perceiving that they might be beneficial. Their net financial impact on a health system will depend partly on whether they reduce demand elsewhere in the system, either by substituting for other interventions for the same condition or by helping patients to attain a state of health in which they perceive themselves to need less treatment than would otherwise be the case. Klein has linked the effects of demographic and technological change so as to reach a pessimistic conclusion:

Even if the limitations of medical technology in curing disease and disability are now becoming apparent, there are no such limitations on the scope of health services for providing care for those who cannot be cured. Even if policies of prevention… were to be successfully introduced, their very success in extending life expectancy would create new demands for alleviating the chronic degenerative diseases of old age. In other words, no policy can ensure that people will drop dead painlessly at the age of eighty, not having troubled the health services previously. (Klein 1989: 182)

A final secondary factor is public demand, which operates against a background in which health care is a prominent public and political issue in the United Kingdom, the USA, and many other countries. One element of this is the much greater public availability of information about health care, with particular emphasis on information about new technologies, the reporting of which is generally high profile in the media. Very recently, the Internet has begun to contribute substantially to the availability of such information (Coiera 1996). Alongside this growth of information, is an apparent increase in the level of activity by patient pressure groups, usually organized around a particular disease or health condition (Wood forthcoming). Such groups (which may also provide advice and other services to their members) are often supported by health professionals from appropriate clinical specialities and, naturally enough, press the appropriate health service bodies for what they perceive to be better services for themselves, including new technologies.

Dimensions of Analysis

At the heart of the rationing issue is the rise of third-party payment in health care. Although this arrangement has deep historic roots, one of the most striking features of modern healthcare systems is the way it has advanced, in part because the cost of care is beyond the resources of all but the super-rich if paid for directly out of pocket. The truth of this can be seen where market-based systems of health-care financing are most deeply entrenched. Even in the United States the proportion of health-care costs accounted for by direct out-of-pocket payments has fallen greatly in the last generation. In 1960 it accounted for 56 per cent of expenditure on care, but by the early 1990s direct out-of-pocket payments had fallen to 20 per cent (Levit et al. 1994: 22). The modern health-care problem can therefore be seen as a reflection of the way health-care financing has been collectivised through the sort of risk-pooling arrangements outlined above and through the way this process of collectivization, by breaking the direct link between consumption and payment, removes or weakens budget constraints on consumers of health-care resources. The problem facing health-care systems is therefore how to reim-pose, or reinvent, those constraints in a world where the collectivization of finance has to be taken as a given.

In the remainder of this chapter, we examine how policy makers have addressed the necessary task of managing the demand for, and supply of, health care. In so doing, we have focused on three sets of analytical distinctions. The first relates to the form of collectivization of healthcare finance discussed above. These forms can be taken as characterizing different consumption regimes: those that rely on tax-based financing; those that rely on social insurance; and those that rest on private insurance markets. Whilst no nation relies solely on one of these financing systems, there are systematic differences in their relative importance between different countries. Our topic can therefore be explored by sketching the consumption histories of different nations, and we have chosen four. The United Kingdom stands out as a nation committed in a particularly thoroughgoing way to tax-based financing. New Zealand is chosen as a nation that traditionally relied on tax-based financing, but in recent years has tried to revolutionize its financing and delivery system and to confront the rationing problem in a uniquely explicit way. We examine the United States because the sheer volume of consumption has made the rationing problem more acute there than in any other advanced industrial nation. Finally, Germany is selected as one of the largest, and historically better established, examples of social insurance financing.

Convergence of policy attention on a particular problem does not necessarily entail a convergence of the means chosen to address it. Therefore, a second set of distinctions concerns the various (not necessarily mutually exclusive) means of matching supply and demand. These can be roughly classified into supply-side adjustments, that is, those which aim to increase the resources available for health care, and demand-side adjustments, which aim to reduce or stabilize demand for services. Supply-side adjustments may be in the form of measures to increase the flow of revenue to third-party payers (tax or contribution increases, or co-payments) or to encourage a higher level of out-of-pocket expenditure as an assumed substitute for third-party payment. In publicly funded health-care systems, other supply-side measures include toleration of public sector budget deficits and relocation of public expenditure priorities so as to increase health-care expenditure at the expense of other public programmes. In any type of system, policy makers may seek to improve the productive efficiency of the sector by a range of management and organizational measures aimed at modifying the incentives facing actors in the system; examples are ‘managed competition’ (Bruce and Jonsson 1996) and ‘managed care’ (Robinson and Steiner 1998). In contrast, demand-side adjustments are aimed at rationing health care, that is, reducing or containing demand for it.

This relates directly to our third analytical dimension. Some demand-side measures operate implicitly so far as the patient is concerned. Examples include the erection of cost barriers that partially offset the effect of consumer moral hazard. Such costs may be financial (thus charges for services are a deterrent), but spatial, psychological, and procedural barriers may also be effective; remote or highly centralized facilities, user-unfriendliness, and strict ‘gatekeeping’ criteria tend to reduce demand. Other demand-side measures are explicit, that is, consist of more-or-less clear rules about patient entitlement; for instance, such rules may exclude certain procedures or drugs. The desirability of implicitness and explicitness are much debated. Some proponents of implicitness (Hoffenberg 1992; Mechanic 1992) have justified their position on the grounds that explicit decisions are too brutal for society to contemplate, whilst others (Hunter 1993: Klein et al. 1996) have concentrated on their conceptual and practical difficulties. Proponents of various degrees of explicitness (Harrison and Hunter 1994; New and LeGrand 1996) often stress the transparency as a prerequisite of fairness. Thus, a central theme in the politics of rationing is the analysis of the consequences of explicitness and implicitness.

Whether implicit or explicit, rationing mechanisms are likely to be underpinned by one or more of a range of criteria, of which the following five are perhaps the most widely advocated. First, the rule of rescue gives priority to persons in acute or life-threatening conditions and tends to locate moral content in trying rather than in succeeding. This is likely to generate significant opportunity costs, although this is not an analytically fatal flaw (Goodin and Wilenski 1984). Second, deserts are sometimes used as the basis of an argument for exclusion, often in the context of a health state that is considered to be self-inflicted (e.g., by smoking). Third, prospective effectiveness of a health-care intervention is widely argued to be a common-sensical rationing criterion (Evans 1991) and may be enacted into the policies of third-party payers. The existence of uncertainties about effectiveness undermines a good deal of the force of arguments that whatever is effective should be provided, although the ‘prudent insurance principle’ (Dworkin 1994) provides a thought experiment for dealing with such difficulties. Fourth, cost-effectiveness and cost-utility are espoused by those who maintain that the cost, as well as the degree of effectiveness, of interventions should be considered. This position has given rise to a number of artificial measures of health outcome such as quality (or disability)-adjusted life years. In general, the theoretical properties of such appproaches are utilitarian in the sense that they aim at the maximization of health gain in return for any given level of expenditure. Finally, as noted above, third-party payment systems are underpinned by a desire to enhance equity, that is, to ameliorate the position of people who cannot afford the care from which they might benefit. Equity and equality are therefore concerned with the distribution of services or of health status respectively, a criterion that may trade off against cost-effectiveness.

The United Kingdom: Rationing in a Command-And-Control State

The consumption regime established in the United Kingdom with the foundation of the National Health Service (NHS) in 1948 had several striking characteristics. It combined formally generous entitlements—a system of universal access to almost free health care as a right of citizenship—with, by international standards, low levels of spending on care. Saltman and Von Otter (1992) identify the system that was established as placing Britain (with some Scandinavian countries) in a family of ‘command and control’ systems, where administrative means are the predominant mechanism for allocating resources. The secret of Britain’s success in reconciling universal access with effective cost containment lay in the existence of a powerful, implicit rationing mechanism. The formally generous entitlements offered by the NHS translated, for most citizens, into something more circumscribed: not an automatic entitlement to health care but an entitlement to access to a primary carer, typically the general practice physician (GP) working in the community. The GP system offered a mode of care with little access to modern high-technology medicine. The referral system meant that the GP’s surgery was the access route to the more sophisticated—and expensive—care in the hospital. The system turned the GP into a significant gatekeeper regulating access to health-care resources. In the hospitals, specialists dominated most of the history of the NHS decisions about treatment, with substantial control over the waiting lists for access. Thus, although a narrow range of charges (including prescriptions and dental work) was introduced early in its life, rationing was largely based on the exercise of professional authority. The flavour has been well caught by two American observers of the system at a moment when professional authority was still reasonably secure, speaking of one critical set of rationing decisions, those governing access to kidney dialysis:

Confronted by a person older than the prevailing unofficial age of cut-off for dialysis, the… GP tells the victim of chronic renal failure or his family that nothing can be done except to make the patient as comfortable as possible in the time remaining. The… nephrologist tells the family of a patient who is difficult to handle that dialysis would be painful and burdensome and that the patient would be more comfortable without it. (Aaron and Schwarz 1984: 101)

The wider character of the political settlement that underlies this has been vividly described as ‘the politics of the double bed’; the setting up of the NHS

did not mean the triumph of bureaucracy over professionalism or the subordination of doctoring to ministerial diktat. Instead it created a situation of mutual dependency. On the one hand the state became a monopoly employer: effectively, members of the medical profession became dependent on it not only for their own incomes but also for the resources at their command. On the other hand the state became dependent on the medical profession to run the NHS and to cope with the problems of rationing scarce resources in patient care (Klein 1990: 700 [italics added]).

This consumption regime might be summarized as involving three partners, one of whom occupied a subordinate position. The two dominant partners were the state and the medical profession, united by the mutual dependency summarised by Klein; the subordinates were the patients. The modern story of rationing as an issue in Britain is the story of the decline of this consumption regime and the struggle, so far unsuccessful, to replace it with anything as stable and successful. The consumption regime established at the foundation of the NHS declined because of the changes in the disposition and the resources of the three partners.

The heart of the implicit system of rationing involved acquiescence by the state in the allocation decisions of medical professionals, but while health care in the United Kingdom was cheap by international standards, the proportion of national resources was nevertheless rising significantly. In 1960, total health-care spending was 3.9 per cent of GDP; by 1984 the figure was 5.9 per cent (OECD 1987: 55). Because it was overwhelmingly tax-financed, it bulked large in the spending of the central state which, by the 1980s, was struggling with the problem of economic decline by trying to cut back the public sector and squeeze greater efficiency from what remained. The wider political consensus that created high levels of public support for the NHS paradoxically impelled the state to abandon its side of the bargain with the medical profession. The one option closed off even to radical conservative administrations was public abandonment of the universalist principles of the NHS, but in the 1980s that constraint made it even more imperative to invade the sphere of clinical autonomy in order to squeeze efficiency out of the system:

To secure improvements in efficiency, the government’s recent policy has comprised a battery of centre-driven, top-down initiatives, and controls, including a regional review system, performance indicators, policy scrutinies, cost improvement programmes, competitive tendering, and changes in management structures and processes. (Harrison, et al. 1990: 86)

If long-term pressures were making the state a less compliant partner of the profession, long-term social changes were also making patients less compliant subjects of medical authority. The world of the late 1940s, into which the original rationing ‘compact’ had been born, was one in which (compared with the 1980s) patients were less educated, less aware of their roles as consumers, less exposed to information in the media about clinical decisions and options, and less willing to organize in defence of their interests. Freemantle and Harrison’s (1994) study of Interleukin-2 provides a graphic example of the breakdown of the implicit rationing system. In this study, a specialist at a leading cancer clinic, faced with a dispute with managers about access to resources to fund treatment for critically ill patients with an expensive new drug, drew the tabloid press into the issue. The most striking feature of the case is the way in which, in the wake of the collapse of the old system of implicit rationing, all three of the original partners—funders, clinicians, and patients—have been drawn into an increasingly open distributive struggle.

This distributive struggle has as yet failed to result in any settled successor to the traditionally established implicit system based on the exercise of clinician authority. Although purchasers of care in the NHS quasi-market introduced in 1991 could explicitly decide which package of care to fund (and not to fund), Klein and his colleagues found in their study of priority setting that purchasers were not making anything other than marginal exclusions—for instance, of cosmetic services like tattoo removal (Klein et al. 1996). A House of Commons Select Committee investigation of priority setting practices by health authorities showed striking variations in such practices and, more important, in the actual likelihood of patients receiving access to resources (cited in Lenaghan 1997). As Lenaghan remarks: ‘Variations in healthcare provision are nothing new, but the purchaser-provider split has made them more explicit and, more importantly, revealed variations in the criteria used to justify these decisions … explicit rationing has not been accompanied by an explicit or shared understanding on how such decisions should be made’ (1997: 907).

The effort to reach this ‘shared understanding’ has involved taking two very different paths. One involves using political mechanisms to create consensus about priorities, without arriving at any view about the substance of decisions in advance. This is the essential rationale of arguments for the introduction of more accountable and representative decision-making institutions into the NHS (Hunter and Harrison 1994). It is likewise the rationale behind mechanisms (such as user panels and citizen juries) that draw on the modes of discursive democracy to try to create conditions for informed consensus among citizens about choices. Two obvious problems arise in taking this road. First, there is the danger that the effect of opening up the process in this way only widens the range of distributive struggle which has been created by the decline of the old rationing system. Commitment to public deliberation involves a trust in what Canovan has called the ‘redemptive’ capacity of democracy, its ability to produce, where appropriate debate is encouraged, reflective and considered judgements rather than views based on prejudice (Canovan 1999). A more concrete problem is that creating a consensus, and trust in the processes that produce decisional outcomes, is a long-term business whereas time is precisely what is not available because the need to make judgements about priorities presents itself daily, often in circumstances of personal tragedy. At the time of writing, the newly elected Labour government seems to be exhibiting a preference for returning to the use of professional authority as its main rationing device, albeit by emphasising the GP rather than the specialist role.

The alternative path to a shared understanding may be labelled ‘technocratic’ It involves employing a rational calculus and using a range of data and analytical techniques to arrive at a judgement about the most effective deployment of resources. Some of the possibilities, and some of the problems, are illustrated by the New Zealand case.

New Zealand: Technology and Rationing

The consumption history of the New Zealand system is unique in two striking ways: it was the first capitalist democracy to commit itself to full universalism (in the late 1930s) and the first (in the 1990s) to try seriously to dismantle that universalism. The reforms introduced in 1938 by the then Labour government were largely funded, as in the system introduced in Britain later, from general revenues (Roemer 1991: 205-8). It came under pressure in the 1980s, more from without than from within the health-care system. New Zealand’s exclusion from some of its traditional markets for agricultural goods (especially as the result of the creation of trade barriers around the European Union) created a severe, prolonged economic crisis. This produced immense pressure for economic restructuring, for the dismantling of the historically well-established welfare state, and, by 1993, for the introduction of reforms to the health-care system that both attempted to create a managed market and to define

‘core health services’ for which government funding would be available although not necessarily fully funded by the state. (OECD 1994: 237)

Many of the key institutional features of the New Zealand reforms are now being rethought (Ham 1997; Hornblow, 1997). One institutional legacy of the reforms, however, arises from the original commitment to identify a set of core services: a National Advisory Committee on Core Health and Disability Services, with the task of advising the Ministry of Health on ‘the kinds and relative priorities of public health services, personal health services, and disability services that should, in the committee’s opinion, be funded’ (cited in Hadorn and Holmes 1997a: 132). The Committee was initially under pressure to develop a single authoritative list of services that would be guaranteed funding, the sort of ‘basic benefits’ package that has been introduced in some other jurisdictions, such as Israel (Chintz and Israeli 1997):

From the outset, however, the Committee has taken a different approach. It has preferred to define eligibility for services in terms of clinical practice guidelines or explicit assessment criteria which depict the circumstances under which patients are likely to derive substantial health benefit from those services, bearing in mind competing claims on resources. Thus, for example, patients could reasonably expect to receive coronary bypass graft surgery at the taxpayer’s expense if (and only if) their clinical circumstances were commensurate with a likelihood of substantial benefit from that procedure. (Hadorn and Holmes 1997a: 132)

The National Criteria project has begun the realization of this process of priority setting. It has developed assessment criteria for five important elective surgery procedures, including hip and knee replacement and coronary bypass surgery. Rankings are determined through a points system based on interval-level measurements, added to form a linear model of priority. Points are assigned for both clinical and social factors. Thus, for joint replacements points are assigned for a range of measures of pain suffered, impact on functional activity, and movement and deformity. Social factors scored include the patient’s age, time spent on the waiting list, and the threat to independence from the condition suffered. A critical feature of the scheme is that it is not intended to assign patients to categories that definitively guarantee or exclude entitlement to treatment. It is intended to interact with political judgement about the volume of resources to be allocated to health care. The possibilities are illustrated by the particular case of coronary artery bypass grafts. An audit of patients on waiting lists for surgery in 1996 produced an agreement amongst clinicians that a clinical threshold of 25 points before considering bypass grafting was reasonable. On the other hand, current funding suggested that only those scoring 35 points or above would receive surgery: ‘the minister agreed to be held accountable for any gap between what is clinically desirable and what is financially sustainable, reasoning that appropriate funding levels must take into account competing claims on resources—adjudication of which is ultimately up to society to resolve through democratic processes’ (Hadorn and Holmes 1997b: 138).

The reference to democratic processes goes to the heart of the issues involved in judging the viability of the approach being piloted in New Zealand. In essence, the New Zealand scheme is yet another variant on a utilitarian approach to solving the problem of rationing. Once the principle is granted that social choice should be based on some additive scheme for balancing utility and disutility, then there is a powerful case for adopting the kind of linear choice model piloted in New Zealand on the grounds that it is more likely to produce decisions that maximize utility than the less systematically informed and more implicit judgements made, for instance, by individual clinicians. Key questions, however, concern not only the normative case for a utilitarian approach, but also the question of whether such an approach is politically manageable. The competing ‘rescue principle’ is deeply ingrained in the popular mind: witness, for instance, the extent to which it is widespread in popular approval for rescue services that operate on distinctly nonutilitarian principles such as lifeboats and mountain rescue. The attempt to operationalize utilitarian principles means a choice between ‘statistical’ lives and the lives of ‘real’ people whose condition can be dramatized in highly affecting terms. Mechanic puts the problem thus:

studies consistently show that public opinion gives higher priority to saving identifiable lives than to more cost-effective measures to save ‘statistical lives’. Any serious cost-effectiveness or rationing policy must come to terms with the rescue principle. (Mechanic 1997: 90)

What this suggests is that the viability of any rationing mechanism is heavily dependent on the cultural setting within which it operates, a point of some importance when we turn to the United States.

The United States: Rationing in a Supply State

The American health-care system is huge, complex, and extraordinarily diverse; so diverse, indeed, that some observers place querying quote marks around ‘system’ in discussing the United States (Wood 1995). Any sketch of the American consumption regime is likely to be inadequate, but perhaps the single most important fact is that health-care consumers have not, historically, shaped this regime at all. Jacobs has put the point thus in characterizing America as a ‘supply state’ as far as health care is concerned:

… the general sequence and form of health policy in the United States diverge from those of all other industrialized nations. The US government’s first and most generous involvement in health care focused on expanding the supply of hospital-centered, technologically sophisticated health care… In contrast to the United States, however, other Western countries have made the expansion of access their first and primary priority; governments have accelerated the expansion of supply in response to widening access and growing demand for care. (Jacobs 1995: 144-5)

This supply domination helps make sense of three important changes in the American system in the last generation. First, a generation ago the United States was not, by international standards, a remarkably expensive health-care system; more than three decades of more-or-less relentless inflation have left it unique among the advanced capitalist nations in the proportion of national wealth allocated to health care. A second change is in part connected to this. Over the last generation, across the OECD nations, there has developed a common trend to the universalization of access to a range of health-care services. In the United States, by contrast, access has been restricted. As Anderson puts it, summarizing data from twenty-nine leading industrial nations: ‘By 1995 the United States was the only country that still had less than half of its population eligible for publicly mandated coverage’ (Anderson 1997: 167-8). Finally, despite the enduring importance of private insurance markets, there has been a continuing collectivization of consumption in two distinct senses: third parties (public and private) now dominate payment, and in the delivery of care, the ‘liberal’ model dominated by solo practitioners is being displaced by various systems of managed care.

The American rationing response to the recent turbulent health-care history has also been highly distinctive and has been well summarized by Grogan:

… there are two main strategies that governments can pursue to limit the utilization of medical services…. First, they can limit care by category—by designating either specific groups, such as the elderly, or specific diseases or medical procedures, such as heart transplants, that will not be paid for by the government. This is an explicit form of limitation, because the government creates a set of policies specifying who or what is not covered. The United States is gradually adopting this strategy… The second strategy is not explicit: it limits the supply of medical services through policies for reimbursement… and the acquisition of technology. In general, countries providing universal health care coverage tend to pursue this second strategy. (Grogan 1992: 214)

This sets the famous Oregon experiment in context; although it is an unusually systematic effort at explicit rationing, it is part of the more general drift of policy in the United States. It is therefore ironic that the experiment has generated huge interest outside the United States, mainly in countries whose approach, as we have seen, is rather different. The obvious question is why have US rationing strategies taken this turn?

An answer that presents itself immediately is, quite simply, the depth of the cost containment crisis in the United States. There are numerous measures of the severity of that crisis: the unprecedented (by international standards) rise in the proportion of total national wealth devoted to health care; the extent to which the Federal budget has been dominated by the demands of fulfilling Medicare entitlements; the failure, despite all this commitment of resources, to produce either satisfactory health outcomes, or rudimentary access for a substantial section of the population. Yet, a ‘crisis as the mother of invention’ account can hardly be fully convincing, and the reasons are encapsulated in our earlier account of the range of possible policy responses available to authorities—responses that can be addressed to both the demand and supply sides. The obvious question is why should there have been such a clear tendency for the undoubtedly critical character of the American system to produce such a distinctive response?

An alternative answer draws on the context within which American health-care debates are conducted, in particular the dominant discourse that frames those debates. That context is provided by the commercial insurance market, which has dominated the process by which consumption has been collectivized in the United States in recent decades. Because commercial insurance contracts are written in the language of eligibility, both as far as single entitlements and packages of services are concerned, it is not surprising that such language is retained in framing principles for the rationing of public resources. Yet there is another irony here: the attempt to create basic benefit packages is itself a response to market failure, notably the failure of occupationally based health insurance schemes organized through commercial markets to deliver access to the whole of the employed population and its dependents.

Another alternative answer has been offered by Morone, who argues that the dominating influence is not an attachment to the market. It is rather that the preference for explicit and automatic policy solutions, and for rationing through openly specified packages, are reflections of a wider cultural characteristic: suspicion of government and a consequent search for policy solutions whose nondiscretionary characteristics limit the freedom of government to intervene in the lives of citizens. In Morone’s words:

…because Americans distrust both politics and politicians, they tend to seek solutions which do not rely on either. Rather than empowering political leaders to make political choices…. Americans constantly search for mechanistic, self-enforcing, automatic solutions which might operate without further politics or even self-conscious deliberation at the political center. (Morone 1990: 133)

The search for some rationing ‘formula’ is indeed part of this search for a ‘mechanistic solution.’ Yet that raises a question which, in one form or another, is always prompted by such cultural accounts: why should this cultural preference be so strong? The mystery is deepened because it is plainly not a universal feature of American politics and society, nor even of the American health-care system: in the case of the latter, for instance, the story of the last generation is also a story of the growing complexity of regulatory regimes, notably in relation to the exercise of constraints over professional autonomy. This is not to deny that the cultural preference exists; it is to wonder why it manifests itself here when it is suppressed or diverted in other parts of the policy universe.

Making sense of this puzzle takes us back to our opening characterization of the United States as a supply state. The United States is unique in that the rationing problem is implicated in two interlocked policy problems: lack of access to care for a substantial section of the population, and the failure to exercise cost containment in a uniquely expensive health-care economy. The expense of the system is closely connected to its supply dominated character, especially to ‘hospital-centered, technologically sophisticated health care’ (Jacobs 1995: 144). Every important comparative measure shows the United States to be an outlier in its utilization of high-technology medicine (Rublee 1994). That supply domination has also built powerful supplier interests in the American system that span professional communities and industrial sectors (Moran 1997). The forces driving producer interests have been intensified by the development of global markets in expensive medical technology; markets in which the United States is a dominating presence as both consumer and producer. In short, the ‘supply state’ character of the American system provides powerful disincentives to controlling costs by regulating the production and supply of high-technology medicine and powerful incentives to try to regulate by producing ‘non-political’ controls over consumers. The cultural attractions of ‘automatic’ rationing mechanisms identified by Morone do exist, but they are triggered by a particular constellation of interests in the American system.

Germany: Rationing in a Corporatist State

The German health-care system has been the prototypical example of health-care arrangements organized along corporatist lines, involving the attribution of public status and duties to private interests:

… a process in which policy-making powers are ‘contracted out’ to consortia of group representatives who engage in a semi-private type of bargaining, the results of which are then ratified as state policies or state planning. (Offe 1984: 249)

Corporatism in the German health-care system has had three key sets of actors. The first is the state, both at federal level and at the level of individual Lander (states of the Bundesrepublik). For much of the history of the post-war Federal Republic and before, the state’s role was neither to finance the cost of current care directly nor to organize its delivery, but to ‘hold the ring’ by providing the regulatory framework within which institutions doing the financing and delivering operated. The obligation to finance and deliver was delegated to institutions beyond the core state machine. Sickness funds (financed mainly by an obligatory payroll tax) collected the resources needed to pay for current care and negotiated with providers the terms under which it would be delivered. Doctors’ associations, especially in the ambulatory sector, were the third key set of actors: they agreed with the insurance funds the price for care, assumed an obligation to ensure that it was actually delivered to patients, disbursed to doctors payment for services provided, and, latterly, monitored the claims for payment made by doctors.

In this system, rationing (in the sense both of prioritizing the claims of individual patients and steering the flow of resources in particular directions) took very special forms. In part, outcomes were structurally determined, notably as an outgrowth of the occupational structure. The health-care system, as a subsystem of the wider German welfare state, reflected the features of Esping-Andersen’s famous characterization of the German welfare state as one in which entitlements were closely linked to class and status. A striking instance is the way in which the funds for Beamten (the most privileged strata of the civil service) offered superior services (Esping-Andersen 1990: 222-4). Prioritization was also moulded by the institutional form of the health service, which has long been distinguished by an unusually clear separation (clearer even than in the United Kingdom) between ambulatory care and hospital care. Access to hospitals (including outpatient services) has been at the discretion of doctors in local practice, who in turn have a monopoly of all ambulatory care.

What is most obvious about these two instances of the process of prioritization is the way they were the outcomes of occupational structures and institutional arrangements, rather than of any debates about priorities. The opaqueness of these processes was sustainable in an era of generous resources and expanding entitlements, an accurate characterization of the West German system until the mid-1970s. By international standards, both the generosity and comprehensiveness of the German post-war entitlement system have been striking; by the mid-1970s, for instance, the German system matched that of the United Kingdom in its universal range, and exceeded it in the range of entitlements and probably in the quality of the services delivered (Knox 1993: 49-50).

The pressure under which German health-care corporatism has come is evident at the macro-, the meso-, and the microlevels. Macro-pressures spring from growing doubts about the wider viability of Modell Deutschland, in particular the viability of a generous, occupationally based welfare model in a world of global competition, capital mobility, and pressures for labour market flexibility (Leaman 1988). Mew-level pressures are illustrated by the destabilizing effect of changes in occupational structure on the institutions of health-care corporatism: the shift to white collar and professional employment, coupled with the development of chronic structural unemployment in some traditional industrial areas has threatened the financial viability of many funds that catered disproportionately for manual workers (Wysong and Abel 1990). The extreme example is the way the collapse of the old East German industrial economy after reunification has forced state intervention to support the insurance funds in the former GDR (Henke 1991). Micro-level pressures are illustrated by the effect of the incentive structures created by the established corporatist modes on the behaviour of individual patients and doctors, which resuscitate problems of moral hazard. Since there has been neither a cost nor a limit to the consultations a patient may have with an ambulatory physician, the result has been, by international standards, a high level of utilization, and the fee-for-service payment system has encouraged opportunistic (and occasionally fraudulent) charging by ambulatory physicians (Albritton 1993: 55-7).

Pressures at the three levels are clearly interlocked. They explain why the German system has been in a virtually perpetual state of reform since the end of the ‘long boom’ in the advanced capitalist world in the middle of the 1970s. These changes have had three particularly important sets of consequences for the prioritization process. They have led to greater transparency, choice, and hierarchical control, although not all these changes are readily compatible. The shift to transparency is illustrated by the spread of patient co-payments. Although Germany continues to offer a remarkably generous range of universal, free entitlements, the history of reform in the system since the mid-1970s is one of the unremitting spread of co-payments (Alber 1992: 74). Transparency has also affected providers, notably in the growth of monitoring of the charging practices and treatment patterns of ambulatory doctors by their own associations. Increasing transparency has powerful implications for a system where, historically, rationing was opaquely accomplished by the workings of structural forces and institutional barriers. The same can be said of the growth of choice, especially of choice in finance. The established system had the two characteristic features of German welfare corporatism: it involved compulsion over workers, and it was occupationally stratified. Health-care reforms of 1993, however, included a provision for the introduction in 1996 of ‘an almost free choice of sickness fund for the members of the statutory health insurance scheme’ (Schwartz and Busse 1997: 116). The change is a response to both meso- and micro-pressures in the system: to the shifting occupational structure which has diminished the significance of the historical core of the insurance funds, which catered for manual workers, and to pressures for greater incentives for micro-efficiency.

If these changes are pushing in the direction of greater diversity, the growth of hierarchical control is pulling the system in a very different direction. This has involved the strengthening of control within the corporatist institutions themselves, notably by the spread of global budgets within which the partners are obliged both to bargain and to allocate resources (OECD 1992: 61). More important still is a fundamental transformation of the allocation of authority between the state, traditionally only a ringmaster, and the other corporatist partners. Since the mid-1970s the state has reconfigured both itself and many of the most important interests in the system (Dohler 1995). The transformation of the role of the state at Federal level has been substantive, involving, in particular, a historically unprecedented intervention in the previously autonomous domestic economies of the individual funds to redistribute resources between funds according to risk structure and fund resources (Schwartz and Busse 1997: 116). It has also involved a steady augmentation of the state’s capacity and inclination actively to steer the system. One sign of this is the succession of fundamental structural reforms sponsored by Federal Government legislation, first in 1989, and then, more radically, in 1993. Another has involved the ‘drip feed’ effect of 20 years of the institution for Concerted Action in Health Care. Although founded in 1977 as a forum for the corporatist partners, it has developed in two particularly important ways; it has negotiated national targets (not always observed) for the total resources to be allocated to health care, and through its machinery of expert advisers, it has been at the centre of two decades of debate about the allocation of resources to health. The latter is particularly destructive of one of the key features of the established corporatist system of resource allocation, its implicit character, for the debates naturally force to the surface issues that would otherwise remain subterranean. A report of the Advisory Council in 1994 examined the issue of what range of entitlements were sustainable beyond the year 2000. The report raised the issue of whether there should be a ‘basic benefits’ basket, and discussed a range of medical and social criteria by which decisions about inclusion might be made.

In every democratic political system, rationing is a delicate task, and rationing by explicit criteria is particularly delicate, but there is an obvious added sensitivity in the German case given the nation’s history between 1933 and 1945. The old corporatist system of implicit rationing was highly functional in a society where open discussion about life-affecting medical choices called up echoes of the experience of the Nazi years. All democracies find rationing difficult: Germany especially so.


In capitalist democracies, the most important socioeconomic configuration in the modern world, the majority of rationing of goods and services of all kinds is achieved through the mechanisms of the market, and there is a widespread consensus supporting direct out-of-pocket payment in the market as a rationing mechanism even for some of the most basic material necessities such as food, clothing, and energy. In such cases, this consensus seems to rest on an economy of comparative historical abundance. Conditions of scarcity often produce widespread public support for the use of some administrative mechanisms to allocate resources: the best documented are the systems of rationing developed in wartime, such as the ‘total war’ economy of the United Kingdom during the Second World War.

The rise of the welfare state has also resulted in an array of services that are fundamentally conceived as entitlements of citizenship, even when this language is not itself used. Citizenship entitlements create a second arena, beyond the special and usually temporary circumstances of war-induced scarcity, when the consensus in support of market-based rationing systems is breached, at however minimal a level, there is a presumption of access as a right, rather than depending on the resources to command supply in the marketplace. The scope of such ‘welfare citizenship’ varies across nations, but across the world of capitalist democracy some form of health care is universally accepted as a citizenship entitlement, thus putting it outside the domain of market rationing. That is true even in the most ‘marketized’ system, the United States: this is the significance of Medicaid, which is intended as a safety net, albeit a most rudimentary one, for the very poorest. The extent to which health care is conceived in terms of a citizenship entitlement sets a limit to the extent to which rationing can be accomplished on the supply side by imposing new charges (although all the systems that have been considered in this chapter do employ some charges). A consensus supporting charges seems to be achievable only by picturing them as a demand-side solution to the problem of countering moral hazard among patients/consumers of free goods, or by creating a distinction between a ‘core’ and a ‘periphery’ of health services. The latter explains the popularity in so many different jurisdictions of the search for a ‘basket’ of basic services.

The problem of health-care rationing was eased historically by a particular conjunction; the rise of health-care citizenship entitlements was accompanied, or even preceded, by the development of medical professions with substantial authority. This allowed states to shift the rationing process to the sphere of professional competence, that is, to rely on implicit rationing. A combination of political, cultural, and economic changes has both damaged the authority of doctors as arbiters of resource allocation and fractured the compact with states and other third-party payers on which the delegation of the rationing task rested. In general, economic growth has been uncertain. Because government expenditure is an important component of health expenditure, the widespread acceptance by governments of the principles (if not the precise prescriptions) of monetarism and supply-side economics, both macroeconomic paradigms hostile to deficit financing (as inflationary or simply as ‘bad housekeeping’) and high taxation levels, has entailed a need to restrict supply. In systems where employer contributions (via terms and conditions of employment) are an important source of health-care funds, higher industrial costs are seen as affecting competitiveness.

The decline of implicit, clinician-determined rationing in favour of the more explicit arrangements explored by the countries described above is a comparatively recent development, although it should be noted that the explicitness of the mechanisms proposed has not been entirely matched by the explicitness of the rationing criteria that they generate. These shifts of preference towards both demand-side measures and explicit mechanisms has largely taken place over the last decade, implying that the solutions reviewed in this chapter have a highly provisional character.