The Sociological Character of Health-Care Markets

Donald W Light. Handbook of Social Studies in Health and Medicine. Editor: Gary L Albrecht, Ray Fitzpatrick, Susan C Scrimshaw. Sage Publications, 2000.

Introduction

While doctors have been competing amongst themselves and with other providers for centuries over technique, turf, patients, and the organization of work (Abbott 1988; Albrecht 1992), price competition is a new, largely American, phenomenon that has been aggressively exported and selectively adopted by a number of other countries. Economic arguments have had a dominant influence on health-care policy internationally, but I will argue in this chapter that they do not explain the actual workings of health-care markets, which are described better by sociological studies.

Economic competition and markets in health care, as observed in a review 10 years ago (Light 1989), embody a paradigm shift from the professional dominance that prevailed in most systems, even public ones like Britain’s National Health Service (NHS), to buyer dominance, from a doctor-led pressure for more services to a buyer or payer-led pressure for better outcomes, from an emphasis on hospital-based specialized treatments to prevention and primary care. This paradigm shift to buyer dominance promises better health at lower cost. Yet one can separate, as Prime Minister Tony Blair has done (Secretary of State for Health 1997), the results-oriented focus of a purchaser-led paradigm from a competitive strategy. Because price competition in health care is so fraught with dangers of selective marketing, inequalities, worsening care, and ironically higher costs, it is unclear how many countries will employ it and for how long. Already, one of the most sweeping adaptations, the transition of the NHS from the world’s largest administered managed care system to the world’s largest competitive internal market of contracts between purchasers and providers, has been replaced by reforms that emphasize cooperation and partnership because competition was found to be too disruptive, demoralizing, and costly (Light 1997, 1998a). Competitive markets in health care, then, may be a phase in the historical process of rebalancing relations between the countervailing powers of professions, patients, payers, and states (Light 1995a). Ironically, as states and other payers, counter the dominance of the medical profession, the health-care corporations they use as their agents are coming to dominate both.

Conservative economic theory itself provides as clear a picture as any of the depth to which market failures will plague health-care markets, and thus will lead legislators, doctors, nurses, or patients to limit or eliminate them. We shall start with a review of that theory and the major effort to overcome market failures in health care—managed competition. Because this analysis of competitive health care on its own terms leaves us with more reasons why it should fail than why it should be adopted, we turn to analyzing its proliferation as a social movement with the sponsors, ‘moral entrepreneurs,’ and agenda found in any social movement. This analysis concludes by identifying the dimensions along which competitive healthcare experiments have varied, dimensions that any research on them must attend. Finally, we conclude with some in-depth studies of healthcare market behavior, as examples of the many research projects that have yet to be done.

Medical Markets as a Theoretical Anomaly

All markets are social constructions, and customs, norms, and formal rules or laws regulate them all. Politicians, journalists, and business-people talk constantly about ‘free markets,’ but there are no free markets, except in their fantasies. Even ‘black markets,’ drug dealing, and organized crime have structure, hierarchy, norms, and rules, whose violation can prove fatal. Moreover, the advocates of ‘free markets’ would not want to live with the consequences if such markets were allowed, as Etzioni (1988) depicted in his modern classic, The Moral Dimension.

Risk and trust are core market issues that concern a given society. Deliberations about how much risk different parties should be allowed to bear and what levels of trust are to be assured reflect a society’s values. Societies regulate because they value certain levels of safety, of quality, and of externalities, including protection of the innocent. The key questions are, ‘How much risk do different parties bear in a given market?’ and How much can we trust those whose services or products we buy? Clinical competence is a good example. Licensing and certification requirements reflect certain initial levels of assured quality for patients, although subsequent quality of clinical work can vary a great deal. In the new market-based era, criteria and measurement of quality are becoming more stringent and more focused on actual performance and outcomes, in part reflecting the higher risks and problems of trust that are posed by capitated contracts and strong financial incentives to skimp on quality (Mechanic 1998).

Also, societies sometime regulate because they value access and equity, such as Ireland prohibiting health insurance companies from charging or selecting subscribers by risk in the name of community and solidarity (Light 1998b). They also regulate to avoid political embarrassment, as the British government did when it transformed the National Health Service from publicly administered services to competitive markets, but then clamped so many regulations on contracts with hospitals that it became nearly impossible for them to go bankrupt (Dawson 1995). This last example points to why markets in health care are a theoretical anomaly, because such markets exhibit so many forms of market failure. In order to understand why, one needs to understand the foundations of market theory.

The promise of developing markets in medicine stems from the ability and power of competition to reward promptly those who provide better value for money in terms of efficiency and cost containment. Competition is central to international policy for containing healthcare costs. Yet, for competition to benefit society, to reward greater efficiency and service, ten stipulations must be met. Without these ten stipulations to channel people’s pursuit of their own self interests so that society benefits, competition rewards collusion, product substitution, favorable selection, monopolization, and other strategies for winning that harm society. These stipulations and conditions are listed below (Abel and Bernanke 1993: 18-21, 316-17; Begg et al. 1987; Ormerod 1994).

There must be many buyers and sellers so that no one’s actions are large enough to affect the market overall.
These buyers and sellers should have no relations with each other that might affect each other’s economic behavior.
Buyers can purchase from the full array of sellers/providers and products.
There are no barriers of entry or exit of sellers, so that failing sellers drop out of the market and sellers with better products or prices can enter the market easily.
There is full information about services, products, prices, and quality.
This information is free and quickly obtained by sellers and especially buyers.
Buyers choose to ‘maximize their utilities,’ that is, to seek the greatest gain that they can.
Market signals are instantaneous, and the market quickly clears differences between supply and demand through price fluctuations.
Price conveys all that buyers need to know to buy smart and measure their ‘opportunity costs.’
There are no externalities to these transactions, so that the buyers directly experience the full benefits and liabilities of their purchases.

If all these stipulations are met, and if people make only rational choices to maximize their predetermined preferences, then the ‘invisible hand’ of the market will benefit society with greater value. In addition, the model assumes that social welfare is based solely on individual utilities, which in turn are based solely on the goods and services consumed, and that the distribution of wealth is approved of by society (Rice 1998: 5). Even if all these conditions hold, the long-term effect of competition is not to save money but to generate new wealth. In the long run, competition rewards those who develop new products, open new markets, and identify or create new ‘needs,’ such as cellular phones, fax machines, all-terrain 4-wheel drive vehicles for suburban drivers, or hand-rolled cigars at the zenith of antismoking. Getting people in Beverly Hills to drive a Jeep Cherokee while smoking a $12 cigar and chatting on a cellular phone spurs economic growth. Thus, even aside from problems of market failure, using competition to contain costs in health care would seem to be a fundamentally shortsighted strategy that in fact sets the stage for health care to experience long-term growth as health-care corporations develop new services and create new markets. There are good reasons why Adam Smith’s famous book about generating wealth was entitled The Wealth of Nations, not The Cost Containment of Nations.

However, even if or when health-care services can be defined and priced (such as buying 20 hips or 50 cataracts), or when professionalism works well, many (but not all) aspects of health care fail to meet most or all of the ten requirements for beneficial competition.

Often, a few or even just one hospital or provider group dominate a local market, and often a few or even one purchasing unit is buying.
These parties almost always have long, entangled relationships, obligations, or rivalries that deeply compromise rational purchasing.
A major goal of competition in health care is to restrict and channel choice, and often political pressures limit what services can be purchased from whom.
There are high barriers to entry and exit in health care.
Market information about quality, service, and price is often incomplete, inaccurate, and fragmented.
Market information is very costly, asymmetrical, and largely controlled by the provider; access to it is often blocked (Saltman and Figueras 1996: 26).
Buyers, even with good information, do not make choices that maximize their preferences and utilities (Rice 1997).
Market signals are slow, or hidden, and markets can take months to ‘clear’ if at all.
Prices are constructed realities that do not convey all a buyer needs to know.
There are significant externalities, especially through cost shifting and selection.

Clearly, one would need a great deal of regulation and a rather special structural design to have competition in health care that was beneficial to society. The highly skewed distribution of risk underscores this point. Only 2 per cent of a population require medical care that consumes 41 per cent of the budget, and 10 per cent consume 72 per cent of resources, while 30 per cent at the other end consume none (Berk and Monheit 1992). The easiest way to ‘win’ in markets with fixed or capitated contracts is to avoid or undertreat the sickest patients, or get them to disenroll from your plan or practice.

Imagine, for example, the implications of providing cardiac services at a fixed annual rate. The distribution of care and costs over 100 cases tends to be normal. If pay is fairly set, at the mean, in theory nothing should change. Suppose that historically these cases cost 500000, or 5000 each on average, with some costing you 1000 a year at the left tail of the distribution, and others costing you 50000 at the right tail. However, average pay produces a strong incentive to avoid high-cost cases or to transfer them on to someone else’s budget. Often, I find that hospital and clinic administrators set up rules and threaten doctors whose patients stay longer or cost more than the mean. Their viewpoint is quite simple, although not statistical: the patient in room 203 is costing more than our per-case payment and is therefore causing us to lose money. The manager’s impulse is to break even or come out ahead on every case, but this means that the sickest patients get inadequate care as the manager cuts it to the mean.

Equally worrisome are pressures for providers to price contracts based on capitation below costs in order to gain contracts and market share, especially when combined with pressures to overpay for already-established books of business. Imagine the implications if the going rate for buying patients in the US HMO market is 1500(Tilpayyou75 million for your HMO with 50000 subscribers’) and a major insurer (Aetna) buys a huge HMO with a million subscribers (US Healthcare) for twice that price (Given 1997: 186). How will it ever recoup the extra $1.5 billion it paid, except by absorbing large losses or by reducing medical services? Moreover, Ruth Given has demonstrated that there are no economies of scale in HMOs beyond 50000 enrollees, and US Healthcare is already one of the most efficient, best-run HMOs in the world. Merging with Aetna did not make it more efficient, just bigger. In fact, 2 years later, The Wall Street Journal reported that Aetna had much worse service, hundreds of physicians dropping their contracts and services to patients, a 40 per cent drop in profits, and a $300 million per year write-off (Lagnado 1998). The chief executive concluded, nevertheless, that the acquisition had made Aetna more ‘vibrant.’

Basic Challenges to Health-Care Markets

A distinguished young health economist, Tom Rice (1997 1998), has recently challenged the foundations of competition theory. Condition 2, for example, requires that no one care about their relative standing or the conditions of others, both of which in fact play important roles in many markets and certainly in health care. Condition 10 means that the concern for others, like the uninsured, is an ‘externality.’ Rice shows that this affects not only equity, but also efficiency. The belief (or ‘preference’) that everyone, including the poor, should have access to needed medical care is a principal reason why no country (except the United States) has started with a market system (Rice 1997: 399).

Most important, Condition 7, on utilities, assumes that preferences are inborn or given. Evidence that they are influenced by marketing, or the media, or even by what you are used to having, violates this highly unrealistic condition. Notions of habit, norms, and custom wreak havoc with competition theory. Further, Rice marshals evidence that people often do not bother to get the information they need to maximize their preferences, and other evidence that even when they do, they often do not use it to their maximum benefit. A special problem in health care is that people cannot predict the consequences of their choices. To cover up these problems, economists used ‘revealed preferences,’ which means that whatever people end up with is by definition what they wanted!

Managed Competition as a Possible Solution

Extensive regulation and a special design characterize the most serious attempt to overcome these multiple forms of market failure in health care. In his design for managed competition, Alain Enthoven (1988) attempted to overcome Arrow’s problems and to meet several of the stipulations for beneficial competition. His model calls for consumers choosing among comprehensive, large-volume health-care plans (like American HMOs) that would operate within a set of rules designed to create fair competition. Put theoretically, a given clinical case may be emergent, contingent, and uncertain, but a hundred or a thousand cases exhibit regular patterns and distributions that can be costed and priced. Although Enthoven has altered his design many times to suit the audience and politics of the time, at its most complete (Enthoven 1988) his model emphasizes universal access, a common benefits package, excellent information, and a strong system of quality assurance so as to create a level playing field. Even then, he was so impressed by the ability of hospitals and providers to exploit any set of regulations that he added an oversight body to actively manage this highly regulated market. For ‘… without active collective management on the demand side, the medical plans would be free to pursue profits or survival using numerous competitive strategies that would destroy equity and efficiency and that individual consumers would be powerless to counteract’ (Enthoven 1988: 11).

Enthoven’s theory carries a strong message, namely that competition requires very extensive regulation plus a smart, well-paid watchdog to be sure that the providers do not circumvent or manipulate the regulations. Otherwise, the providers (sellers) have all the advantages, and the stakes are too high to attempt competition. Thus, price competition health care has been accompanied, not by deregulation but by intense talk and action about more regulation. In the United States, capitated or fixed-budget contracts began with relatively few of Enthoven’s safeguards, and soon the easy forms of winning that Enthoven had predicted became evident. A rash of regulations has ensued to protect patients from blocked access, underservice, suppression of clinical options and choice (‘gag clauses’), and other forms of abuse. Recently, the groundswell of protest led to more than 400 pieces of new legislation being passed in the 50 states to regulate ‘managed care’ (Brink and Shute 1997). These post hoc efforts respond piecemeal to fragments of the problems and satisfy no one.

Managed competition appears to surmount the obstacles to effective markets in health care, and it is uncritically embraced as the model for making health-care services more efficient and responsive via competition, but a careful analysis shows that the theory is seriously flawed, so that even if managed competition were implemented in its ideal form, it would not work as promised. First, managed competition leads to oligopolies forming in each market, and they would minimize the very competition the model aims to engender (Light 1995b; Sullivan 1995). Second, managed competition assumes that providers cannot be trusted but managers can. That is the key reason why Enthoven did not rest his case with competition framed by regulations to assure a level playing field. Third, it also does not solve the problems of uncertainty or contingency or information asymmetry, but instead puts them inside its basic unit, the HMO, where Enthoven assumes that managers will resolve all these problems better than professionals did in the old market structure. As the inside literature on HMOs indicates, many of them remain unresolved or are resolved in disturbing ways (n.a. (no author) 1998a). For example, the broad overlapping networks of providers shared by plans that are supposedly competition means that (a) the providers are in effect competing against themselves, (b) developing good clinical management tools and information is unlikely, (c) providers will be less interested in investing in a given plan’s program for clinical re-engineering, and (d) plans can win contracts by paying providers less and limiting services more (Eddy 1998; Ginsberg 1998: 4-5, Sullivan 1997). Managed competition also undermines public health and areawide programs, although many small collaborations are celebrated (Lasker 1997).

Complementing this theoretical analysis of the model is a description of what happened when managed competition was implemented, not for selected parts of health care as in the United States, but for the entire health-care system of the United Kingdom (Light 1997). Briefly, the implementation of managed competition greatly increased market and administrative costs, required extensive new regulations, caused or threatened to cause serious disruptions save for damage control, and raised overall costs. The government that introduced it abandoned it by the fifth year and was subsequently defeated at the polls by a government that promised to end competition and restore cooperation and partnership (Secretary of State for Health 1997). More broadly, an assessment of competition strategies used in Europe in several areas of public service found the results quite mixed (Hollingsworth and Boyer 1997).

The serious flaws of managed competition do not seem to matter much in the political economy of health-care policy because many politicians embrace it as a way to get the pressure of cost containment off their backs and on to providers. It also serves as a political ‘front’ or front-stage strategy for back-stage reduction of overall coverage and privatization of care for chronic conditions. Harvard economist William Hsiao (1994) reviewed the effects of competition policies in Singapore, South Korea, Chile, and The Philippines. In each case the data showed that it led to privatization, two-tier access, and sharply higher costs.

In the United States, unmanaged competition between HMO-like corporations is credited with halting the upward march of employers’ premiums, but backstage, employers have been dropping coverage for dependents and retirees, thinning coverage for mental health and some other areas, making coverage more shallow by limiting how much of given services one can get, and shifting costs back to patients through co-payments (Shearer 1998). The number of uninsured has been rising at about 1.2 million a year since the early 1990s; it then jumped by 1.7 million in 1997 to a total of 43.4 million, or 16 per cent of the US population (Pear 1998). Three-tier care is increasingly evident: stop-gap acute interventions for the poor, good care with hassles for the middle class, and what Reinhardt (1996) calls ‘boutique care’ for the rich. One example of ‘boutique care’ is Mt. Sinai’s eleven west hospital suites, with views of Central Park, a gourmet chef, a sofa covered in Scalamandre fabric, and dinner parties en suite (Bumiller 1997). The Robert Wood Johnson tracking project found that ‘few [17 per cent] private employers offer employees a choice of plans, give employees financial incentives to choose economical plans, or provide information so that employees can evaluate the quality of the care they receive—three hallmarks of managed competition’ (Long and Marquis 1998: 1).

In conclusion, economic theory provides strong reasons why price competition in health care is unlikely to produce the desired results and may be dangerous, but this does not explain why efforts to create markets in health care have proliferated, and nor does it explain how those markets actually work. We thus turn to a sociological analysis, first of why they have proliferated and then of how they work.

Competitive Health Care as a Social Movement

Analyzing competitive health care as a social movement provides a different sociological perspective: one that explains why an unpromising economic theory should gain such a worldwide following. Setting the scene were several background factors. First, for all Western countries, the oil shock of 1973 and the decade of slow growth, together with inflation (stagflation), meant that the cost of health care consumed ever-increasing proportions of countries’ gross domestic product and employers’ revenue. Second, the dominance of the organized medical profession meant an emphasis on hospital-based and specialty services that kept driving costs up. Whether in a system whose entire structure reflected the values of the organized profession, such as the United States (Light 1997), or in state-run systems, the organized medical profession dominated, and gave us the excesses, costs, and social pathologies of professionalism as a way to allocate resources (Freidson 1970a, 1970b). While fostering impressive advances in technique, the medical profession has emphasized the best clinical treatments for sick patients, downplayed prevention and public health, neglected the growing proportion of chronic conditions, and increased costly hospital and subspecialty care.

Third, the credibility of the medical profession became seriously challenged in the 1970s on three grounds: that very little of the long-term health gain of populations was due to clinical medicine, that large portions of tests and procedures were found by clinical research teams to be unnecessary or not beneficial, and that doctors varied widely in their use of costly procedures after controlling for clinical variables. These studies indicated that while the medical profession was running costs up, it was not making clinically responsible decisions and was not doing much good. These discoveries spawned a new era in which the government as buyer took over from the profession systematic research to assess the outcomes and evidence of different procedures that a profession should be doing (McCormick et al. 1997). This research is providing the basis for externally developed clinical protocols and guidelines (Hafferty and Light 1995). As I argued a decade ago, autonomy is not a defensible foundation for professionalism—accountability is (Light 1988). The era of autonomy came to an end, and the era of accountability began.

Fourth, politicians and policy leaders in most countries declared that health care had become unaffordable and was jeopardizing the economy. This claim of a ‘cost crisis,’ still present today as a powerful political force, needs to be regarded with the irony of comparative perspective. For it is not clear at what point medical costs might create a crisis. The United States is spending 14 per cent of GDP on health care and has one of the strongest economies in the world. Moreover, each country has its own homegrown sense of when health-care costs are unaffordable. For the British, the real possibility that expenditure for the National Health Service might exceed 5.5 per cent of gross domestic product (GDP) perpetrated a crisis in 1988-9 that spurred Mrs Thatcher (then Prime Minister) to restructure the entire health-care system in order to contain costs. The rest of Europe spent on average nearly 8 per cent of GDP, but British leaders never discussed such a possibility. In Germany, the line not to be crossed for a long time was about 8.5 per cent. When expenditure threatened to exceed that, a grim determination set in to do whatever it took to hold the line. German policy leaders would have been ecstatic if their costs were only 5.5 per cent. The French, on the other hand, would break out champagne if their costs were only 8.5 per cent. Their line in the sand (more like a tire track), however, would be cause for celebration in Canada, whose level of intolerability is about 11 per cent of GDP. Thus, the cost-crisis factor is real and powerful but is also a constructed reality, not grounded in solid evidence or research.

Fifth, there was a worldwide paradigm shift towards portraying the state as inefficient, incompetent, and inflexible, and calling for competition, deregulation, and privatization to replace state functions (Saltman and von Otter 1992; White and Collyer 1998). Deep forces, which lie beyond the scope of this chapter, underlay this shift and can only be mentioned briefly. They involve inherent contradictions in the roles that the modern state plays as both a promoter of capitalist growth and a provider of social services that take care of the social needs created by, or neglected by, business (O’Connor 1973). In the United Kingdom, for example, the prices that the National Health Service sets for pharmaceuticals aim to support a major industry and export business, but are by that goal an extra burden and drain on the very tight budget for health care. In the United States, where the medical-industrial complex is a huge, profitable, and rapidly growing sector of the economy, one finds states that aim to attract more companies from this booming sector. However, at the same time, states take strong measures to hold down the technologically driven spiral of their own health-care costs.

Competition to the Rescue

When conservative think-tanks throughout Europe and the United States started formulating strategies of competitive markets for containing health-care costs in the early 1980s, they provided a solution to the constellation of problems described above. Nations believe deeply in the benefits of competition in the many markets where it produces better products and services and economic growth, and the appeal to politicians of passing off the political heat from the recession squeeze on financing services to private vendors was very appealing. Economists, as academic entrepreneurs and as staff at the World Bank and international consulting firms, vigorously promoted their diagnosis and solution (Hacker 1997). Healthcare systems, they argued, were steeped in bureaucracy, riddled with perverse incentives, organized around hospitals with their costly brand of subspecialty medicine, and arrogantly insensitive to patients’ needs. Competition would align incentives, reward the more cost-effective providers, put prevention and primary care in the driver’s seat, and be responsive to patients. In short, competitive health care became a social movement, with its prophets and moral entrepreneurs.

Enthoven played a key role promulgating managed competition for health care, travelling throughout the world and meeting with ministers, politicians, and business leaders. American-based consulting firms took up the cause and created a variety of ‘products’ and systems for transforming health-care systems into markets like the one that caused the British so much trouble and additional cost. The fees for such transformations ran into millions of dollars. US AID (1996: 7-9) and the World Bank have embraced market approaches to health care and insist that developing countries and poorer countries in the Eastern block of Europe convert their health-care systems as a condition for receiving economic aid and loans. Hsiao (1994 1995) has described the results in several countries or regions: higher cost, reduced access, profiteering, and less control over costs. Twaddle (1999) shows in detail for Sweden the degree to which, despite the economic challenges and weaknesses of the healthcare system summarized above, there was neither an economic crisis nor a health-care crisis sufficient to warrant so fundamental a change as the competitive paradigm represented. Rather, one must conclude it was a politically driven social movement.

Fligstein (1985, 1990) has done important historical research on industries, which suggests that when they face a basic crisis, they search for a new ‘conception of control’ that will enable them to redefine their business and regain a stable, profitable environment. Let me suggest that governments do the same, and that competition policies reconceptualize governmental services and government itself so as to deflect the blame for costly social services away from politicians and on to private contractors, and to make those services more efficient. A large, comparative review of those policies 10 years later finds the evidence very mixed as to whether they saved money or improved services (Hollingsworth and Boyer 1997).

The distinguished health economist Robert Evans (1997: 427) makes a sociological analysis of this social movement in terms of class and power. He marshals evidence that ‘… greater reliance on the market is associated with inferior system performance—inequity, inefficiency, high cost, and public dissatisfaction,’ so that one must look to the beneficiaries of this policy bandwagon who are ‘going for the gold.’ The advocates, and beneficiaries, he concludes are suppliers, providers, insurers, and their political friends, because competition and privatization redistribute national income in their favor, in the name of ‘an intellectual framework that makes distributional questions difficult or impossible to ask’ (Evans 1997: 432). Evans unpacks that framework, and also shows that the wealthy gain at the expense of the working class.

Privatization

Ideologically intertwined with competition, yet analytically distinct, is privatization. One can have competition without privatizing public services (as in the NHS), and one can privatize without competition. While this chapter focuses primarily on competition, it is worth mentioning three primary types of privatization: of services, of assets, and of control. Based on the belief that private corporations will be more cost-effective, for example, Australia has privatized some of its health care at all three levels (White and Collyer 1997, 1998). The number of hospital beds and proportion of admissions has been steadily rising since 1980, supported by a growing number of people who buy supplementary health insurance (White 1991). The historically small private hospitals have also been amalgamated into large corporate chains, as they were earlier in the United States (Light 1986). Physicians have also played a central role, as they have in the United States, using their tradition of autonomy and private practice to acquire financial stakes in diagnostic laboratories, ambulatory surgi-centers, outpatient clinics, and dialysis centers. Intertwined with these two trends has been contracting-out to private management of emergency rooms, intensive care units, radiological and pathology services, and laboratories (White and Collyer 1998).

In theory, none of these developments necessarily means that access to health-care services as a right has to diminish. Indeed, it should mean that those services are being run more efficiently and are thus more available, but in fact, there is some evidence that ‘efficiency’ has come to mean raising someone else’s costs, as in the case of the Port Macquarie Base Hospital, or increasing costs but shifting them to future generations, as with the hospitals in Mount Gambier and Port Augusta (White and Collyer 1997: 18-20). The Private Financing Initiative in the United Kingdom is becoming the major source of capital for the health service, based on debt financing that costs little now but many times more in interest and operating contracts for the next generation (Light 1998a).

The private sector, through powerful organized lobbying, also begins to control the terms of the market and contractual terms themselves, rather than being competitive sellers in a buyers’ market, and the regulatory bodies are relatively weak (Self 1995). The ability to plan equitably and efficiently weakens (Offe 1975), as when private hospitals build next to public ones and siphon off their more affluent clientele (Duckett 1989). While Australian law seems to require that private hospitals build in ‘appropriate areas,’ the legal framework ‘is based on the … property rights of entrepreneurs, not the user rights of consumers nor the service responsibilities of government’ (White and Collyer 1998: 21). Therefore ‘the Health Commission has been unable to prevent the private sector from building hospitals in localities which will maximise revenue for the entrepreneurs and undermine the public system.’ In these ways, privatization has effects distinct from competition yet often accompanying it.

The United States is the extreme case of ‘any-thing-goes’ private competition. Insurers compete, providers compete, and market makers compete, at all levels, on both the supply side and the demand side, in all combinations of integration and decentralization, using every variety of agency imaginable, on vote-with-your feet volume as well as price, and allowing benefits to vary. Most of this competition and its data are proprietary. This makes it extremely hard for researchers, or even employers as buyers, to know which strategies are cost-effective, or even to know what is going on. To back up their faith in competitive health care to hold down costs, employers have been dropping coverage for children and other dependents, reducing the range of health-care services, or making coverage shallower.

Has Competition Saved Money?

Overall, American-style unmanaged competition between managed care corporations is widely credited with having reduced prices and unnecessary services enough to flatten health-care expenditures at about 13-14 per cent of GDP. However, a number of other factors may explain much or most of the slowdown in rising expenditure. First, general inflation became very low, so even if health-care costs continued to rise at the historic rate of 1.5-2 times inflation, it would drop from 12-15 per cent per year to 4-5 per cent. Second, managed care plans have attracted a healthier population; so by having fewer of the most costly 2 per cent of patients, they appear to be saving a great deal (Morgan et al. 1997). Now, in mature markets where mostly older and sicker patients are left unenrolled, managed care plans are finding their costs rising. Third, managed care plans have largely managed costs by forcing providers to take deep discounts on their historically high charges, and while that is a genuine saving, it is short-lived after two or three rounds of discounting reach a cost floor. Fourth, many impressive savings by large corporations have resulted from providers and hospitals shifting costs to weaker, less forceful buyers so that overall costs for a region look quite different. Cost-shifting explained the apparent paradox in the 1980s of individual savings and spiraling overall costs, and providers continue to do it as much as they can (Freeman and Reschovsky 1997).

An insightful analysis has been made of the Minnesota market, which was created more than 15 years ago through special enabling legislation sponsored by a coalition of major employers, policy leaders, and government officials (Sullivan 1995). The study found that just as our analysis of the theory would predict, managed competition led to rapid consolidation into bilateral monopolies or oligopolies, and that this concentration gave providers the political power to control the structure of the market itself. Although Minnesota is widely considered the model of managed competition, its costs and beds per thousand remain above the national norm. Nationally, hospitals have been merging to gain market power and, in the process, according to the senior researcher, ‘propping up inefficient hospitals that might not have survived if left on their own’ (n.a. (no author) 1998b: 1). A national review of large managed-care organizations found evidence that they lowered access, quality, and continuity of care, and they were too large to deal effectively with quality issues (Barr 1995).

In a follow-up study, Sullivan (1997) examined the critical requirement in competitive markets that quality be measured and reported so that consumers can reward high-quality provider groups and leave ones that evidence lower quality. He found that no such measures have been developed, and argues that for technical reasons they never can be, a view supported by the leading national authority (Eddy 1998). This leaves patients vulnerable to the central danger of competition, lower quality, and reduced access to stay under budget. He reviews detailed case evidence that this has happened but will remain the undocumented cost to patients of competition. In 1998, the three major HMOs in the Minneapolis region, in the most mature market in the nation, still had above-average costs and raised their premiums by 12-40 per cent (Winslow 1998).

Europe: Cautious Experimentation

In Europe, the competitive health-care movement has revolutionized thinking but led to more measured, targeted actions. The movement caused people to challenge all the old assumptions. Why is the hospital the center of the health-care system, rather than the institution of last resort? Can nurses do many of the things that doctors now do, and primary-care teams handle many of the cases now referred to specialists? How much of what is done is unnecessary? How effective are the procedures and drugs now used? Let’s find out, and let’s set up evidence-based guidelines to reduce unnecessary variations in practice. Then, why not pay providers based on performance? Services should be audited. Quality should be measured in terms of outcomes, not inputs. As for new technologies and drugs, we need a method by which to see if they are worth adding. Why not educate and mobilize patients and their caregivers to manage a large percentage of their health problems on their own? At the end of the day, let’s also calculate firm budgets for all services, or sectors, so that providers have incentives for carrying out all these new ideas.

This paragraph captures the spirit of what European systems are doing (Saltman and Figueras 1996), and much of it does not involve straight competition, like selling cars or computers, but such revolutionary re-thinking was certainly spurred by competitive health care as a social movement. The overall goal, in Hirschman’s (1970) terms, is to take a fixed welfare service in which there is loyalty but no exit (a no-choice public system) and introduce voice and exit through choice. Reforms might be regarded as making public services more democratic by giving patients or clients voice and choice (Saltman and von Otter 1992: 97). The intent for providers is to put them on notice as accountable, self-governing entities. The market can be set up within the public sector as an internal market, or be open to competition from the private sector.

A common mistake is not to make private competitors as accountable as public ones, not to require from them full information on quality and service. In the meantime, transaction costs (management, marketing, profit, office overheads) tend to rise, from about 2-4 per cent for state administered systems like the US Medicare or the Finnish systems, to about 8-12 per cent. Ways to link productivity to payment or budgets, forms of capitation, and a higher degree of accountability characterized many reform initiatives (Saltman and von Otter 1992: 15-21). Other themes were to break down organizational and budgetary barriers that protect hospitals and prevent most cost-effective integrated services, to integrate primary care and social services to the same ends, and to devolve planning or even spending to municipal or district levels. Delegation and decentralization can also take political heat off the central government. Of particular interest were efforts to create consumer-led competition between units only within the publicly planned, financed, and accountable health-care system (Saltman and von Otter 1992: 50-3, 83-5). Patients could choose which primary-care team to join, and expectant mothers could choose which maternity unit they wished to use, resulting in those units receiving proportionately more or less money.

Types of Competitive Health Care

The complex literature and range of experiments involve certain dimensions that can be identified for policy or research (Saltman and von Otter 1992: 85-95).

Provider side competition versus provider and buyer competition. The market can be set up to limit competition to the provider side or to make insurers compete as well as providers. Many of the former socialist countries in Eastern Europe and the former USSR have wanted to emulate the Bismarkian model of competing insurance funds, and an important review finds that this has increased class discrimination, costs, and overheads (Deppe and Oreskovic 1996). Many other countries have chosen just provider competition because competing insurers can so easily exploit high-risk or sick patients (Chernichovsky 1995; Light 1998b).
A focus on reducing demand versus a focus on reducing supply. Reducing demand features various kinds of cost sharing and incentives for patients and for doctors. According to an authoritative review, they produce severe equity problems and ‘have not worked well’ (Saltman and Figueras 1996: 39). The latter include controlling the supply of doctors, beds, and hi-tech equipment, creating substitutes for hospital care, and especially setting firm budgets.
Level of competition. Some countries set up competitive markets primarily among primary-care providers. Others focus on hospitals and subspecialists, where the stakes and risks are much greater. Still others foster competition among providers of chronic and long-term care services, often in conjunction with privatization, or any combination of the above. Each of these markets has quite different profiles of risk and of providers, so that the implications for fair competition differ considerably.
Degree of decentralization. Decentralization promises local sensitivity, working partnerships, responsiveness to patients, and innovation. It can also lead to greater inequality, inefficiency, and fragmentation. Self-government and privatization increase as decentralization is extended to smaller and smaller units.
Degree of integration. Some reforms aim to combine the historically segmented and administratively ensconced governmental services, such as community nursing, community mental health, social services, housing, rehabilitation, and primary care, into horizontally integrated units that coordinate what services are needed from each of these segments for a given subpopulation. Others aim at more strictly medical integration, as implied in disease management and clinical protocols, so that interdisciplinary teams address the array of patient needs that span specialty fiefdoms. A third kind of integration is more vertical, i.e., to combine hospital services with primary care and specialty nursing care. This can only be done with integrated budgets and a forceful purchaser, both of which are largely missing in most national reforms. The United States, while extremely expensive and wasteful, has the advantage of developing markets based on all-service integrated contracts which reward any gains in vertically integrated services, such as fewer admissions and quicker discharge made possible by more extensive outpatient clinical management. These contracts have forced hospitals, specialists and primary-care physicians to combine into all-service, managed-care organizations (Robinson and Casalino 1995, 1996).
Agency. Reforms vary from having the patient as agent, by choosing which group to sign up with as in the Stockholm experiment, to having the patient’s doctor or the area authority or council as the purchasing agent for a population of patients, as in the British 1991-98 NHS reforms.
Price versus volume focused. The market can be set up so that provider groups compete on price, as in the 1991 NHS reforms (although little price competition actually resulted), or to make provider groups compete for customers (i.e., patients) at the set price of the system. This latter, money-follows-patients, approach has been effective in Stockholm because the size of a clinic’s budget varies directly with the number of patients they attract (Twaddle 1999).
Uniform versus variable range of benefits. The market can be set up with the same, system-wide range of benefits, or competing groups can be allowed to offer differences in range and depth of services. This latter approach is rare outside the United States because it quickly turns competition into profitable risk selection.

Sociological Studies of Market Behavior in Health Care

Sociologists have barely begun to research the effects of different market arrangements along these eight dimensions on clinical or administrative behavior, or on patients. Yet such research promises to be insightful, and it can draw on broader developments in economic sociology over the past 15 years. A brief review indicates their promise for research into health-care markets. Economic sociology is a burgeoning field, led by Americans, in which the model-driven characterization of market behavior has been replaced with detailed empirical studies. The neoclassical theory of markets was, on the face of it, sociologically deprived, because customs, culture, and roles do not exist, only rational ‘buyers’ and ‘sellers.,’ Power, influence, and institutions do not exist. Ethnicity, class, and prejudice do not exist. Friendships, networks, trust, and loyalty do not exist (Hirsch et al. 1990; Perrow 1990; Zukin and DiMaggio 1990: 3-13). As Granovetter (1985) pointed out, anonymous social atomization is a prerequisite for perfect competition. Neoclassical theory seems to have persisted for so long because it promotes the interests of the wealthy and powerful, and its simplifications produce elegant, powerful predictions, even if wrong. The Hobbesian problems of order and malfeasance are bypassed.

The problem is that the assumptions underlying the economic model are not only very simple, they are also very strong and wildly unrealistic…. The cost is that economic policy premised on [such] simple assumptions often leads to unintended—and dysfunctional—consequences (Bower 1983: 181).

Even economists began to recognize that the ‘neoclassical formulation appears to beg all of the interesting questions’ (North 1981: 5). A new institutional economics developed into a major school (Williamson 1975, 1985) that recognized and analyzed institutional forces, but largely as agents of efficiency (Granovetter 1985). However, it is not clear that efficiency is the sole, or even primary, goal of actors in markets, and sociologists have found that the key term, efficiency, is actually used in confusing and contradictory ways (Granovetter 1979; Obershall and Leifer 1986). Likewise, Eccles (1985) found that there is no technically neutral, universal criteria for determining price. This research implies that ‘efficiency’ and ‘price’ are socially constructed realities, as are measures of ‘performance.’ Meyer and Gupta (1994) have identified an ecological dynamic that produces successive cycles of performance measures. Thus, a sociological approach to health-care markets would investigate what terms like price, efficiency, and market mean to the parties involved. It would also investigate how people’s relationships and networks affect economic behavior, how power is organized and manifested, how the state and political values frame markets and competition, and what roles institutions play in markets. What follows are just two examples of important work in the sociology of health-care markets.

Disability as a Business

The variability and indeterminancy of health care may be insurmountable sources of market failure, but to the entrepreneur they spell o-p-p-o-r-t-u-n-i-t-y, as Albrecht (1992) amply illustrates in his analysis of the organizational, cultural, and professional dimensions of making disability into a multibillion-dollar business. In an early study of agencies for the blind, Scott (1969) found that these agencies helped the blind but in ways that kept them dependent, and when they ran short of clients, they loosened the definition of ‘blind,’ thereby doubling their client pool. (At the right tail of a distribution, one does not have to loosen it much to double the area under the curve.) Scott called his book, The Making of Blind Men. Albrecht points out that definitions of ‘disability’ and coverages have also been expanding, that professionals and businessmen share common interests in the expansion, that profit margins are high, that hi-tech interventions predominate, and that large corporations are consolidating the market. Pharmaceutical firms, hospital chains, insurance companies, consulting companies, and managed care corporations are all developing products and programs around the realities and indeterminancies of disabilities. ‘The focus of the programs was on providing a modicum of help to individuals who had specific diagnoses and were covered by insurance, not on returning every person with a disability to his or her highest level of functioning regardless of ability to pay or earn income’ (Albrecht 1992: 223). For example, National Medical Enterprises, a major for-profit hospital chain, acquired the nation’s second largest nursing home chain, then a respiratory home-care chain, then a respiratory equipment manufacturer, and then a rehabilitation services corporation, in order to become ‘a major force in the rehabilitation marketplace …’ (Albrecht 1992: 142). Now the market has expanded to ‘preventive rehabilitation.’ ‘Rehabilitation organizations further widen their service lines by lobbying for expanded government and private insurance benefits … selling products irrespective of their benefits or risks to the consumer’ (Albrecht 1992: 234-9).

Contracting for Health Care

Close observation of market behavior has been largely missing in most research on health services, often leaving the analyst of a large data set on services with little idea as to why a given pattern exists or changes. A revealing example of field research involved interviews and observations on how contracts actually got negotiated in the National Health Service in the mid-1990s (Hughes et al. 1997). Although the regulations imposed on contracting will differ from country to country, studies in economic sociology show that such rules embody values, notions about risk, obligations, and institutional relations that can be used to portray concretely how countries differ in their conceptualization of how the uncertainty, variability, and risk of health services should be addressed. This is an exciting area for future research. Such research can take inspiration from Zelizer’s studies (1979, 1985, 1994) of how even babies get commodified and priced, and of how people construct special worlds around different kinds of money. Budgeting and the handling of monies reflect the changing dynamics of social ties, of attempts to control others, of inequalities, of dealing with risk, of managing group identities, of marking rites of passage, of managing conflicts of interest, and of managing clandestine or inadmissible relations (Zelizer 1994: 26).

Hughes and his team found, by sitting in on contract negotiations and interviewing participants in the context of the NHS, that ‘prices’ were calculated by mechanically dividing total activity in an area by historical cost, and that more than three-quarters of the contracts simply rolled the old pre-market budget forward, with adjustments for inflation and other changes. Thus, the ‘market’ and ‘contracting’ largely meant recasting historic administrative budgets in the language and rituals of the market.

Concerning risk, a good deal of contracting work went into bending the official rules about how competitive contracting should be done so that health-care institutions would not be disrupted by the major shifts in historic funding patterns that the rules implied, and so that costs would not go up (Hughes et al. 1997: 266-7; Hughes 1998, personal communication). Does this mean that the parties were betraying the government policy to compete and violating the basic purpose to transform the NHS from a welfare state to competing parties? On the contrary, it would seem, for the government wanted no political embarrassment or disruptions of service, even though its policy of competition pushed the system towards such moments. Thus, the contracting parties were saving the champions of competition from the consequences of their own policies.

Research on contracting in the NHS reveals other gaps between official language and reality. For example, district health authorities (DHAs) were required by the payer (the government) to show they were ‘tough’ about penalties for hospitals whose waiting lists got too long, and to show they were implementing centrally imposed targets on maximum waiting times, but hospital executives, knowing how little they could control waiting lists without a politically bruising confrontation with surgeons, refused to accept such penalties. Therefore, in five of the nine health authorities in which the research team carried out detailed field studies, the authorities agreed that the sidebar agreements would not in fact be imposed. With these assurances secured, hospital executives signed the official document that included a statement about imposing penalties if waiting list targets were exceeded. Likewise, lists of excluded treatments were written into contracts, but then the monthly statistics on procedures included no detailed breakdown of which treatments were being done by each specialty group, so that no one would know if excluded treatments were in fact performed. The significance of exclusion lists appeared to lie more in their presentational value as a public statement of DHA priorities than in the economic savings achieved (Hughes et al. 1997: 270).

This analysis that the sociological reality of competitive contracting focused on how competitors tried to get along within a very tight budget is supported by the case of a health authority chair from the private sector who played hardball, competitive contracting by the rules. He used incentives, sanctions, and penalties, and built strict monitoring into his contracts. By the third year, the penalties imposed by this neoclassical paragon had become very high, acrimony prevailed, and the senior government office intervened. By the fourth year, ‘none of the former executive directors remained in post,’ including the chair. The authors concluded that contracting is more sociological and political than economic, like a Rorschach test onto which the various parties project their values, expectations, self-images, and relationships.

Contracting for Community Health Care

Other sociological dimensions of health-care markets are illuminated by a detailed field study of community health services (Flynn and Williams 1997). In further research on NHS contracting, Flynn et al. (1996) found that the heterogeneity, local boundedness, and indeterminacy of community health care ‘presented fundamental problems for commissioning and contracting… significantly influenced by their willingness to trust the other party in a whole range of circumstances’ (Flynn et al. 1996: 136). The variability and uncertainty of services made them difficult to assess and thus required ‘substantial amounts of trust in the professional discretion of providers,’ but although contracting requires trust, competition and the process of contracting it entails and produces distrust that was not there in pre-market days when community health workers simply set about treating patients. Purchasers asked such questions as how were they to know if providers would do what they said they would? What evidence is there that their services make a difference? The more purchasers asked, the researchers found, the more it undermined the coordination and networking that community health services require. This leads to inefficiencies (because trust is very efficient) even if costs are lowered. A summary of European strategies observes, ‘It is entirely possible for cost-containment initiatives to lower total costs while at the same time giving rise to greater inefficiency’ (Saltman and Figueras 1996: 15).

Competitive contracting, the researchers found, is exacerbated by other problems as well. Some of the problems stem from the segmented budgets and organization of the NHS and could be overcome through integrated contracting and services (Light 1998a). Many stem from professional rivalries and cultures involved in community or mental health services. While such services may be among the more variable and vague kinds of health care, they highlight practical problems and the negotiated nature of defining products, setting prices, and dealing with risk in all health-care markets.

To conclude, these kinds of study provide valuable evidence of the sociological character of health care that is needed to complement the abstract and often misleading models of neoclassical economic theory. The profound changes in professional power and behavior involved mean that much of the classic research in medical sociology needs to be redone. At both the micro- and macrolevels, market behavior in health care is a fertile area for research and theoretical insight for economic sociology that can particularly benefit from comparative studies.