Light Backdraft of Competition Cost Containment and the Backdraft of Competition Policies

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Cost Containment and the Backdraft of Competition Policies

Donald W. Light

International Journal of Health Services 2001;31(4):681-708

Abstract: This paper offers an explanation of why governments and other purchasers found competition policies attractive, and it summarizes a set of new case studies. Faced with economic slowdown and the need to retrench social services, governments felt their legitimacy threatened and sought a new approach that would legitimize controlling costs. Starting in the 1980s, a group of pro-capitalist ‘moral entrepreneurs’ launched an international business movement focused on reducing waste in governmental and welfare services through competition and privatization. Political leaders in a number of first-world countries enthusiastically embraced “managed competition” as a way to control the costs of health care services and to make them more accountable. The dangers of implementation and the extensive market failures that are ever-present in medicine, however, led most governments to pull back. Most nations that implemented competition policies experienced a political backdraft of protest from patients and providers that swept them out of office.


For years, economists and sociologists have written about how economically unpromising and hazardous it is to subject clinical medicine to commercial markets and price competition (1-7). For competition to be beneficial, to raise all boats in a rising sea of prosperity, and even to help the poor, the pre-requisites of neoclassical markets must be met. Clinical medicine, however, usually meets few of them, and the result can be pernicious competition, in which competitors exploit the weaker parties and the special opportunities of market failure and harm the social fabric of communities. Among other problems, medical services are emergent, contingent, and uncertain (8). Any one of these attributes make beneficial competition impossible, because one cannot define what is being sold, its property rights, its quality or its price. Further, there are usually not many buyers and many sellers in a given health care market, and market information is both incomplete and

expensive – all violations of requirements for competition to benefit society. In addition, there is great information asymmetry, and the “seller” is both the buyer’s agent and the controller of the clinical record. To cast the act of a doctor advising a patient on what is best in such terms, indicates the contortions necessary to make economic thinking “fit” clinical transactions. In sum, the economic model presumes conditions, actors and behavior so different from what happens in good clinical work that imposing the model renders medical reality unrecognizable.
Given these problems, why did the cluster of policies known as “managed competition” become the prevailing international model for health care policy in the 1980s and 1990s? And why did many countries embrace it but then implement so little? Such questions call for rethinking the nature of the state, the challenges to governance, the proliferation of competition policies as a social movement and the transformation of doctoring from doing what is best for individual patients to attaining population-based performance standards of efficacy and efficiency. The resistance to implementing managed competition stemmed from cultural beliefs about illness and medicine (9), from the institutionally embedded character of practices, the political economy of health care, and technical as well as symbolic complexity of medicine. In addition, when government officials, economists and health service researchers treated managed competition uncritically as economic policy, they failed to recognize it as a constructed reality and a set of solutions that reflect the interests of certain parties that will benefit from it, or as an positivist ideology that presents as “rational” a political program that benefits some parties at the expense of others. As the costs to patients, their families, politicians or the state became more tanglible, a number of governments became very cautious.

Why have so many governments been attracted to managed competition as a policy for containing health care costs? To understand requires thinking of governments as a population of organizations or an “industry” that faced a basic change in their environment and looked desperately around for a new concept or model that would enable them to regain control. The nature and meaning of “government” and “control” here pertain to Foucault’s concept of “governmentality” as developed below.

The Crisis of Retrenchment

For thirty years after World War II, the economies of Western countries grew and with them grew both welfare and social programs (10). Expanding social welfare programs gained political credits, and the process seemed natural (11). Strong economies, experts claimed, produce strong welfare states (10). Or put more critically, rapacious capitalism leads governments to develop welfare programs as means to quell the ire of those damaged by its exploitations. O’Connor (12) concluded from observing economic growth in the 1960s that legitimating profitable capitalist accumulation requires the state to increase welfare programs and other expenses.

Over time, however, the gap widened between the private accumulation of wealth and the tax revenues of the state, putting the state in a double bind. Its strategies for encouraging private capital to maximize profits underfunded its programs to discourage social unrest. The oil crises and stagflation in the 1970s threw states into a crisis of no growth, decreasing purchasing power of its flat revenues, and increasing unrest and demand for social programs. Among those programs, health care expenditures kept growing the most rapidly, even as the rest of the economy did not. Governments, as overt democracies and covert agents of corporations seeking lower costs, faced a new set of circumstances in which their old habits of welfare politics did not work and in fact were bankrupting them. Now, it seemed, strong welfare states weakened economic performance. They needed to shrink, retrench in face of the “seemingly universal trade-off between equality and employment” (13:24).
But the politics of retrenchment are not the politics of expansion in reverse. As Pierson (14-15) shows, the political landscape fundamentally changes. Health care is probably the strongest example of the problems that Pierson identifies for states that feel they need to retrench. Investments in human capital and programs of social support are no longer seen to work. Moreover, the social and welfare programs themselves have created strong interest groups and dense networks among both clients and staff that make for concentrated opposition. By far the largest and most powerful group of recipients (reaching up through the working class and into middle and managerial classes) are patients of a national health care system, be it largely private in its details or more publicly run. And by far the most prestigious and powerful of interest groups are the associations, societies or colleges of physicians and nurses. Even – or perhaps especially – in national health care systems, they usually institutionalize themselves firmly into the rules, regulations, pay structures, and budgets. Voters also react more strongly to cuts than to new benefits, and the broader the program, the more voters are affected. Most government leaders, Pierson argues, want to avoid being blamed and losing the next election rather than gaining credit for fiscal frugality. But while “blame avoidance” characterizes Pierson’s analysis, it alone would be only a tactic within the old approach of governing through social benefits and would face steep odds against interest groups of clients and staff. What governments needed was a reconceptualization of people’s relationship to the state that could legitimate retrenchment.
The Professions as Instruments of Governmentality

A way of conceptualizing the dilemmas faced by the state in a period of retrenchment is to sharpen and extend Michel Foucault’s suggestive concept of “governmentality” (16-17). From traditional concepts of sovereignty which prevailed until the 18th century, he traced the gradual shift from ruling to governing, that is, to steering and controlling a constellation of institutions and parties that constitute the state. But the capacity of governments to steer became limited by some essential institutions and parties refusing to put public goals or policies ahead of their own interests. Excluding or trying to control those who resisted did not work well, created a democratic deficit and eroded the legitimacy of the state.

In response, governance has evolved towards governmentality, towards the shaping, guiding and directing of people so they are motivated to do what is best for themselves and for society as a whole (18). This has involved incentive-oriented strategies that mobilize the interests of resistant parties to the goals of the state, crafting a common discourse between the state and different parties, and creating common funding streams (19:57). This more process-oriented and incentivized approach has gradually moved the state toward being “an ensemble of institutions, procedures, tactics, calculations, knowledges and technologies, which together comprise the particular form that government has taken: the outcome of governing” (20). Thus, government and the state 1 are constantly redefining themselves as they govern. This is the case in health care, where governments everywhere are struggling with the question of how to get citizens and clinicians to behave with restraint and forethought so that their health care costs are restrained as well.

Central to the techniques of modern governmentality is the harnessing and institutionalization of expertise, such as medicine and other professional fields. If set up prudently, experts in criminal or judicial matters, in public health or treatment of the ill, in accountancy, in civil engineering and construction, and in other realms of expertise, can handle myriad problems and dangers with dispatch, thereby contributing to the order, effectiveness and legitimacy of the state. As Terrance Johnson implied in an important essay (19), although we commonly think of the medical profession as having used the state to establish its own autonomy and powers, the state uses professions as instruments of governmentality in a number of realms. Real autonomy does not exist anyway (20), because autonomy requires state intervention to create and sustain it. In response to Larson’s (21) emphasis on how the medical profession uses state powers to standardize and monopolize health care, Johnson contended that Foucault would say the state also needs to standardize and steer health care. The rise of the professions, then, can be seen as part of developing modern governmentality and the state as “the outcome of governing”.

Although Johnson carried his argument to its logical conclusion that ”The duality, profession/state, is eliminated,” this is unlikely, because governmentality, by its very nature, is made up of multiple parties, institutions, and professions, each with its own sense of value and way of doing things and bound to clash or at least grate. Governmentality is far more complex to exercise than sovereignty and must deal with four persistent challenges: (1) how powerful vested interests are to be overcome, (2) how to co-ordinate them, (3) how to enhance their capacities to be partners of the state, and (4) how to avoid inertia and log-jams. Market strategies seemed to offer a simple self-regulating solution to all four.
Among the professions, the medical profession in most countries is the most important potential partner; yet in the past it had negotiated strong measures of self-protection, self-determination and dominance over its domains (22). For decades, political leaders let it carry out a number of social functions as is wished. Medicine advanced rapidly and a growing number of social problems, such as unruly children, alcoholics, political dissidents, and others, became “medicalised” and treated with drugs, surgery, or other procedures. But during the 1970s, as states increased hospital beds and physicians to keep up with growing demand, politicians began to learn about studies by Wennberg and others, showing there were large variations in rates of surgery and hospitalization by physician after controlling for clinical and non-clinical variables. Why were the same doctors spending so many more resources treating the same problems as others? At the same time, these rates varied by the number of surgeons and hospital beds per thousand. Was medicine a case where supply was creating its own demand, rather than the other way around? Politicians began to question their longstanding trust in the medical profession to carry out its vital functions as it thought best. High proportions of tests, procedures, hospital admissions, and prescriptions were also found by specialty teams to be unnecessary. Once again, the question was how to legitimate retrenchment, especially in the well-entrenched yet highly charged area of medical and hospital services?


Competition policies from the “new right” offered a new conception of the state and of control over its destiny under adverse economic circumstances that threatened its legitimacy. The conservative revolt that gained dominance in the 80s against the welfare state in the 1970s turned existing expectations and relationships on their head. Its leaders asserted that:

-- Welfare and social programs are not the fruits or necessary accompaniments of economic growth; they impede it.

-- Those who use them are not so much needy as lazy and dependent.

-- Welfare programs are handouts, a sign of moral weakness by the state and the recipient.

-- Patients should pay user fees; welfare recipients should work; university students should pay their own way.

-- Government-run services are inefficient, bureaucratic and unresponsive; they need the challenge of competitors to wake them up and shed their wastefulness.

-- More broadly, the state is inefficient, incompetent, and inflexible; competition, deregulation, and privatization should replace state functions (23-25).
The new concept of governmentality advocated by Thatcher, Reagan and other conservative leaders, in short, went well beyond Pierson’s tactic of blame avoidance. It aimed to get people to change their worldview not only of themselves, but also of others and of the state. This new governmentality transformed retrenchment into a moral crusade for self-sufficiency, a smaller state, and economic vitality.
This fundamental change in nature of the state and how to govern paralleled what Neil Fligstein has called a “conception of control” (26-27). Fligstein’s research concerns fundamental shifts in whole industries, but his theory can be instructively extended to governments as well. They too are a population of organizations, very much in the business of selling themselves, thriving, opening “new markets” (broadly speaking), and being as entrepreneurial as are large businesses. Like an industry, the ‘governance industry’ experiences fundamental changes from time to time that render current ways of doing business ineffective and that threaten the ability of governments to control their fate. At such moments, political leaders, much like business leaders, search for a new vision, a new concept of what they are doing that will enable them to regain the control they had. The New Right provided that vision by pushing the core notion of governmentality farther than before. If government is, as Foucault puts it, the ‘conduct of conduct’, then governmentality should consist of techniques that put people on their own, put them at risk, and reward those who succeed. Like all good conceptions of control, this one provided both a diagnosis of the crisis itself and how past mistakes had led to it, and a vision of a bright future with specific recommendations about how to assure it. Competition policies also legitimated the privatization of public and social services.
During the 1980s, governments throughout the industrialized world began to privatize entire governmental functions by selling them off or exposing them to competitive bids for the services they did. National railroads, airlines, gas, water and telephone services were put up for sale and often brought windfall revenues to governments. Opinions vary on how successful these ventures were, and the facts vary from case to case. At the same time “the new managerialism” brought similar ideas to government programs by emphasizing recipients as “customers” and performance-based results. Consumer-based results meant decentralizing decision-making and responsibility down as close to the customer as possible. Mandatory competitive tendering and the establishment of internal markets (among the providers within a public service domain) put recipients at risk for adverse selection and skimping on services unless good performance could be measured and assured.
By the end of the 1980s, however, evidence indicated that the new managerialism had been less transformative than envisioned initially. Some competitive tendering and devolved responsibility proved to be more cost-effective, but others seemed to have done little more than to relocate the workers and the service (e.g. cleaning or food preparation) down the street in companies. In addition, Ling (28) concluded that internal resistance, organizational limitations and difficulties in measuring either quality or performance impeded implementation of the Thatcher reforms across many sectors of the British government. Further, the “new managerialism” implied that government should shake itself free of both itself and the professionals on whom it relied; yet specialized areas like health care are inherently intertwined with the professionals, who define the ends and expertise of the programs. Were the new mandarins to shake themselves free, what would they do? In short, this new kind of governmentality privileged new incentives and structure over strategy, means over ends.
Managed Competition as a Conception of State Control

This problem of dependence on professionals for vital social services was most acute in health care, where technological complexity and diagnostic subtlety prevail. Politicians and ministers in many states tried during the 1970s and 1980s to rein in health care costs, largely through budgetary measures, price controls and restraints on supply. From an international point of view, they largely succeeded, as evidenced by their halting the percentage of GDP going to health care that had been rising up to the mid-1970s.2 But within each country, pressures to spend more on health care seemed relentless, and a number of efforts to confront the profession with new evidence that it was wasting large sums of money ran into the institutional protections the profession had established decades earlier. Thus, when the American economist, Alain Enthoven, declared that the problem lay in the inefficiencies of administered services and the solution lay in re-conceiving governmentality in terms of competition between comprehensive health care plans, the response was enthusiastic (29-31).

Enthoven’s solution, managed competition, begins with a recognition of how extensively health care fails to meet the criteria for beneficial competition to take place (31). Competition, as Adam Smith and those after him realized, is the opposite of solidarity. It rewards people for maximizing their self-interest, and paradoxically it can benefit everyone by increasing prosperity if markets are structured so that several conditions are met. Among these, there must be many buyers and sellers so that none can affect the market overall, and they must not have relations with each other that would affect their economic behavior. In health care, there may be many buyers (i.e. patients) or a few (like insurers or other collective buyers), but often there are not many sub-specialists or hospitals to choose from as ‘sellers’, especially if a country has done a reasonable job planning its facilities and designing its training programs. Another cluster of requirements is that buyers and sellers can easily go into and out of the market, obtain full information cheaply, and have the market ‘clear’ their choices quickly. But in health care, it takes a long time and great expense for sellers (providers) to be qualified or set up, and it is nearly impossible to make them exit (close down) once they are established. Buyers (patients) find entering most medical markets difficult, information scarce and costly to obtain, choices very complex and hard to interpret, and they usually cannot exit a treatment for any substantial problem easily once it has started. Patients do the last thing that a proper buyer should do; they turn to the ‘seller’ (their trusted physician of choice) to advise them or even to choose for them what they should have. On top of all these problems, the services or ‘products’ of serious medical problems cannot be clearly defined (and therefore one cannot define what is being bought or sold), because they are uncertain, emergent and contingent (7-8).

Although Enthoven has often presented variants of his model to suit the audience and politics of the moment, at its most complete (31) his model calls for consumers to choose among comprehensive, large-volume prepaid health care plans (like American HMOs3) within a market that would be protected from cherry-picking, cost-shifting and other anti-social practices. Safeguards include requiring universal access, a common benefits package, community rating, open enrolment, a strong system of quality assurance and excellent information on price and quality. Even then, Enthoven was so impressed by the proven ability of American hospitals and providers in the 1970s and 1980s to exploit any set of regulations that he also stipulated there must be an oversight body to manage this highly regulated market actively. 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” (31:11). Thus, Enthoven called his plan, not regulated competition, but managed competition.

Enthoven’s theory carries a strong message, namely that competition requires very extensive regulation as well as a watchdog organization with a smart, well paid staff to be sure that health care providers do not circumvent or manipulate the regulations so that they can win without really competing. Otherwise, the stakes are too high to attempt competition, because the providers (sellers) have all the advantages. They have intimate ties with and extensive control over patients; they decide the diagnoses and treatment plans; and they control the clinical records. Thus price competition in health care entails not deregulation but more regulation. All markets are framed by the values, mores, rules and laws of society; there is no ‘free market’ as some people customarily say, not even for street vendors selling sausages.
This model of managed competition, however, appears to surmount the obstacles to beneficial markets in health care, and it has been widely acclaimed as the key to making health care services more efficient and responsive. Competition was a radical new weapon for the government as a countervailing power (32) in its efforts to provide affordable health care, a weapon that would replace years of fighting well-entrenched professional and institutional powers using administrative orders with market forces that would make providers compete to make health care more affordable. The government could step aside and let competitors do its work for them.
Managed competition seems an ideal model for governments facing retrenchment. It shifts the blame for escalating costs to the providers. Its advocates emphasize the ways in which the existing system has perverse incentives to raise costs and lock in budgets or formulas that perpetuate costly forms of care (31). They note the variable quality, fragmented services, and inefficiencies that result from professional dominance and autonomy (33). Managed competition also suits well the three strategies that Pierson (15) identified -- obfuscation, division and compensation. Some tactics of obfuscation identified by Pierson are particularly germane to market-based policies in health care:

(a) making negative effects harder to detect,

(b) obscuring the links between the negative effect and the policy that causes it,

(c) increasing complexity,

(d) shifting the burden,

(e) dividing the opposition,

(f) changing measures so that reforms are difficult to evaluate,

(g) delaying the implementation so that opposition fizzles out,

(h) diffusing the targets of opposition groups and

(i) blaming the victim (34).

The other two strategies, division and compensation, complement each other. They involve benefiting some groups while cutting back benefits for others, and compensating the losers in some way. Division and obfuscation work together when indirect changes in eligibility are used, or cuts are made for future unknown persons while current beneficiaries are grandfathered in.
Through this analysis, Pierson illuminates the dark side of governmentality that Foucault did not address or even hint at. But just as Machiavelli, in The Prince, with which he opens his analysis, impartially discusses defensive and covert tactics as well as positive and overt ones, governmentality should be understood to involve all kinds and shades of tactics. Besides shifting blame and responsibility to providers, managed competition decentralizes responsibility, creates division and makes the system more complex and fragmented. These features suit the politics of retrenchment while still leaving the state in control of the overall budgets. The negative effects of meeting tight budgets become diffused and harder to detect in thousands of local decisions. Its effects also take time to work themselves out. Competition rewards some (the winners) but not others (the losers, who are presumed to be less competent). In these ways, managed competition enables governments to use all nine of the tactics Pierson identified.

Hazards of Governmentality through Competition

The worldwide policy movement of managed competition and its variants as the new way for governments to get providers to rein in costs took off, with no small proselytizing effort by Enthoven himself, when Ronald Reagan and Margaret Thatcher, as world leaders of state, embraced its explanation of health cost problems and their solution. The World Bank (35), chief funder to developing nations, extolled the virtues of managed competition in 1987 and made it the centerpiece of a 1993 world report (36). The U.S. AID (Agency for International Development) and the International Monetary Fund also converted to the new paradigm. All three pressed or required developing nations and those in the ex-Soviet block to restructure their health care systems into managed competition models as part of receiving large loans for economic or national development. Yet competitive models are more expensive to construct and run than any other organizational model of health care, and these countries have only $50-300 per person per year to spend on health care (37). Still, by the early 1990s, managed competition had become the leading new conceptualization of state control over health care waste and costs, not only in advanced wealthy nations but by fiat in poor nations, where market structures alone could consume much of the health care budget for treating the seriously ill. Most of the international consulting firms, seeing an opportunity for costly, long-term projects in setting up health care markets and institutions, joined the managed competition movement and promoted it as part of modern scientific management. It became difficult for nations struggling to make their health care systems more cost-effective to find anyone to give them advice outside the managed care paradigm.

A careful analysis, however, reveals that even in its ideal form, managed competition has flaws that the World Bank, the IMF and U.S. AID do not address or even mention. This review will highlight just four of ten flaws identified (38). First, managed competition does not solve the fundamental sources of market failure -- the uncertainty, contingency and information asymmetry of medical practice, but has them managed behind closed doors inside the managed care organization. There, Enthoven assumes that managers will resolve all these problems better than professionals did in traditional health care. As research on HMOs indicates, many of them get resolved in disturbing ways (39-42). Thus market forms of governance can become like a fire out of control, with backdrafts that can threaten the legitimacy of the state.
Second, managed competition assumes that providers cannot be trusted but managers can. This is the puzzling premise on which the model rests. While doctors and everyone else are assumed to maximize their interests as homo economicus, managers seem to come from another genetic strain, perhaps homo honorabili, selflessly dedicated to keeping the market balanced and fair (38). Third, managed competition leads to oligopolies forming in each market (43). As hospital and physician groups merge and payers consolidate, they minimize the stated objectives of competition policy. Finally, managed competition undermines public health and area-wide programs by dividing an area amongst competing proprietary interests.
When it comes to using competition as a new conceptualization of governmentality, the stakes are even higher. Managed competition requires a very significant reorganization of typical health services and has a strong implicit agenda to reduce substantially the use of hospitals as the citadels of most health care systems. This constitutes a major change in balance between countervailing powers, and those two goals alone step on so many powerful ties that most political leaders would hesitate to implement cometition policies.
As has been evident in the United States for some time, the radical implications of the competition paradigm, with or without Enthoven’s safeguards in place, are that purchasers will come to widely differing conclusions about how their budgets should be spent, so that variability and inequity will increase. Clinicians or hospitals or other provider organizations will also take concerted actions to defend themselves or to expand. Thus the issues of quality, priority and value are intensified as the state’s ability to exercise control gets dissipated. Provider groups may also use undesirable tactics. These can include professional and organizational forms of collusion, forming market niches, cornering markets, locking in vital supplies (including subspecialists), gaining market dominance, hiding true costs and declaring false losses or charging high prices, using direct or indirect paybacks, shifting costs and costly patients to someone else’s budget (including the patient’s personal savings), and firing or burying inside critics.4 These all threaten the legitimacy of the state, even as it tries to govern skillfully.

Competition involves not only decentralized implementation but also decentralized mistakes, bad luck and poor judgement that lead to failures and large sums lost. Just as the parent HMO in the United States, like “Kaiser” or “Health Net” gets blamed for such mistakes by one of thousands of providers in the system, so in national systems the government gets blamed for something a manager or doctor does in some part of the system. Further, competition may increase (and often has) inequalities, transaction costs, and service dislocations. In short, far from taking the blame and the “heat” off the state, competition policies tend to put the state in the hot seat, in a decentralized competitive system over which they would have much less control than in their traditionally administered health care system.

The irony of managed competition as the ‘ideal strategy” for the politics of retrenchment in theory, then, is that it can turn out to be a nightmare strategy in fact. Far from de-politicizing health care, the state needs to be more active and capable than before. Just as the theory of global markets predicted the “eclipse of the state” when actually such markets need capable states (44), so states that delegate to health care markets significant responsibilities of governance find themselves more involved than ever. The transformation of state control of health care costs to a competition paradigm may lead to less control and more costs. These are some of the reasons why many states, after an initial burst of enthusiasm, shrank back from changing the institutional structure of health services to a competitive one.
Institutional Responses to Governmentality through Competition

Because it is much easier to make money by skimping on equity, quality and service than to become truly more efficient, managed competition threatens societal goals. Yet these goals are heightened by the transformation of governmentality from administrative to competitive approaches. Thus the very forces which are put into play both highlight equality, quality and service, and seek to weaken them in pursuit of short-term gains. When governments start to implement it, they find themselves confronted by several sources of resistance such as the organized medical and nursing professions, the hospital as a technically and culturally unique institution, deep-seated lay convictions about what good medicine should be like, and self-protective maneuvers by governmental departments themselves. Thus government leaders find they have adopted a concept of governmentality that threatens existing institutional domains, transgresses boundaries and disrupts network relationships. What happens next depends on the type of welfare state in each country (45), the kind of governance structure (46), the professional culture of services, the nature of the health care system (22,47) and pressures from large corporations facing global competition..

Devolving services, decisions and money to actors in public service markets also has a paradoxical effect on governmentality. The further governmental services are transformed or devolved to market-based actors, the more deeply involved the government must become in assuring that services are of good quality, good value and equitable. The arms-length roles as purchaser and manager of fair markets make these issues more visible than when services were just administered, yet more difficult to attain under the new mechanisms of governmentality. For the contractees are more motivated to cut corners, select easy cases, or “cook the books.” The government is thus doubly pressured to become more involved in setting standards and clinical guidelines, and in monitoring services. A new era of performance and outcomes arises, with a rethinking of what services are needed: a reconstruction of services, and the development of consumer rights, national standards and systems of accountability. These are organizational effects of the competition theory.
Ruggie (48) has called these effects ‘the paradox of liberal intervention’ though what she is describing is governmental delegation of its functions to the market and thus might be called the paradox of market delegation. It may or may not start with an intervention and may occur more often under a conservative regime than a liberal one. In a subsequent book, Ruggie (49) developed models of three welfare state regimes: the segmented regime based on market rationality, the interventionist regime based on technical rationality, and the integrative regime based on substantive rationality. The model for the segmented regime implies that the “paradox of market delegation” usually occurs because costs are too high or there are concerns about poor quality, bad service, waste, profiteering, or corruption. Subsequent interventions over time may lead to the integrative regime in which the government and its vendors negotiate goals and terms in a mutually supportive relationship that leads to what might be called partnership rationality. Thus Ruggie’s three types help to articulate the ways in which states alter their conception of control in their efforts to govern social and welfare services.
Managed Competition as Rhetoric and Ideology

Other sociological effects of economic theory involve institutions using the theoretical model as a rhetoric for their own ends. They take the features they like and leave the rest behind, even though, as explained above, the model at its flawed best requires that all its safeguards be put in place. For some politicians and investors, it is a model they can use to capture parts of the public-sector economy. For some governments, market strategies keep all parties so busy dealing with the complexities and misfits between competition and medical services that parts of the health care system can be quietly privatized so that the government pays less, and patients and their families pay more. Or coverage of services can be reduced through increased user fees, treatment limits, or through stricter eligibility criteria. One must always look for such backstage cost-shifting or service reduction when governments declare that frontstage competition has succeeded in saving them money, and several cases have been described by Hsiao (50).

Market forces are supposed to shake providers up and make them accountable to a commodified agenda. But the shift from a service ethos to a commercial ethos, in which it is “smart” to get what you can and “dumb” to keep working hard to help the needy, can unleash thousands of private schemes that may disrupt services and raise costs. It is for these reasons that, paradoxically, shrinking the state by letting the market take over some of its services leads quickly to intense government involvement and a new raft of regulations. Understandably, a number of governments have held back or been very cautious about implementing competition policies.
A commercial ethos has a deeper effect; for as Ruth Malone (51:19) observes in an eloquent essay, it “leaves little space for the kinds of actions that embody different values – for example, generosity, mercy, or solidarity”. Selling “products” is not a relationship and creates divisions based on ownership, but ownership is ill-suited to public deliberation of policies. The market as metaphor constructs moral silences, Malone writes. Even to define the problem as “cost containment” defines the issue in a way that contains the answer. These deeper issues of values and political philosophy are highlighted by proposals to implement competition policies and often lead to deciding that competition will compromise the basic goals of the health care system.
We have now explained why competition policy became attractive to states as it was promoted during the 1980s, especially in those countries where the state was under pressure to reduce welfare costs and debts. Elaborating on Foucault’s concept of governmentality, we have drawn on Fligstein’s historical theory of how changes in the institutional environment of governments that run health care services perpetrated a crisis of control and a search for a new conception of control that would enable them to reaffirm their legitimacy and power. Our analysis of managed competition as that conception explains both its strengths and flaws that can create powerful backdrafts as its forces are unleashed on the highly vulnerable markets of health care. This contrast with the belief and conviction that competition is a Law of Nature that is artificially stiffled by state interventions. Rather, both states and markets are deliberate constructions of each society, with rules, boundaries and structures, and competition can be used as a rhetoric to disguise other, sometimes illegitimate, goals. Now it is instructive to look briefly at several new case studies of interaction between key stakeholders, to see what happened when competition policies were introduced.
The United Kingdom

The first leading nation to embrace managed competition, and to become an exemplar for other nations, was the United Kingdom. With a swiftness and completeness that was not possible in the United States, the Prime Minister assembled a small group and issued a White Paper that effectively commanded everyone in the entire health care system to reorganize themselves into a version of managed competition (52). She was the world’s champion of markets and the new tools of governmentality to increase accountability, consumer responsiveness, innovation, quality, efficiency and productivity. She had refrained from addressing the health service as she sold off or reformed many other parts of the state she inherited, but pressures of costs, demands, and the press spurred her to announce sweeping reforms at the end of the 1980s.

As adaptations go, British managed competition was as close to the complete model as anyone is likely to see (53). The NHS was already like a giant group-model HMO, with universal, community-rated and comprehensive coverage, capitated primary care for everyone, referral specialty services at system-owned hospitals and decentralized health authorities overseeing services for their populations. Every health authority was transformed from being an administrative office of a public service to its purchaser, and every hospital and community service unit became a seller who had to make ends meet by obtaining contracts from purchasers. In fact, a trial year was mandated. Dangers of bankruptcies and inequalities quickly led the government in 1991 to limit open competition severely (54-55). Even so, there were considerable dislocations, especially as outer-London authorities decided to use their new purchasing to shift their inpatient cases to local hospitals by shifting their budgets from the great London hospitals.
Over the next few years, the number of managers rose sharply. The extra costs of creating a health care market, (strangely missing from the economic theory of managed competition), were considerable, and the costs of contracting and managing increased greatly. Transaction costs were high, because health care is so complex, and it is so difficult to measure whether value for money has increased or worsened, or whether providers have taken a number of much easier routes to reducing their costs. The NHS budget jumped. Colleagues became competitors; morale declined (56). Within a few years, upper-level managers concluded that the competitive form of governmentality was keeping them from working together to provide good care at low cost. Soon the competition strategy was largely dropped by the conservatives in favor of managed cooperation (53).
The most interesting part of the reforms was an afterthought that did not fit the main model of a purchaser-provider split, namely GP fundholding. Space does not allow a detailed account (57, 58), but the idea of giving GPs the funds and power to purchase selective specialty services gained a great deal of attention, because GPs knew their patients and knew all about clinical medicine, when lay purchasers did not. The best proved clever and successful in wresting discounts and better service from specialists, but these were the exception, and the Audit Commission study concluded that 90 percent of GP fundholders lacked the time, interest or skill to do much with their budgets (59). Fundholding created two-tier access and of course a conflict of interest between GPs doing their best for their patients and maximizing income. GPs who objected developed “GP commissioning”, in which they used their know-how to advise health authorities on how to purchase more effectively for the entire population, rather than just for their own panel of patients. When Tony Blair swept into office on the promise to end two-tier competition in health care, he universalized commissioning or fundholding (depending on one’s point of view) and is now rapidly moving towards giving large GP groups responsibility for purchasing all health care services (60).
The Netherlands

In the Netherlands, an elite policy circle representing major employers perceived during the 1980s that health care costs were rising too rapidly, that referrals and overuse of specialty care was excessive, that the services were inefficient and inflexible, and that there was little freedom of choice (61). In fact, the health care system already had a successful system of primary care and gatekeeping, and it used budgetary controls at various levels effectively to hold down health care costs. Nevertheless, a commission was formed and issued a major report in 1987 that recommended integrating current insurance arrangements into a single system that would provide coverage for about 85 percent of services, so that funds could compete over the rates for the remaining 15 percent that citizens would purchase. This was a distinctly Enthoven design for managed competition. The ensuing years witnessed sustained debate that articulated basic concerns. First, providers were probably more powerful than insurers, so that competition would create a sellers’ market rather than the envisioned buyers’ market. Second, risk adjusters did not exist anywhere that would prevent adverse effects, such as providers avoiding treatment of seriously ill patients. Third, competition would probably lead to consolidation on both sides of the market so that competition would be minimized and the whole exercise would simply transform the health care system into a more costly bilateral monopoly. In the end, little of the plan was implemented. Nevertheless, the government is supporting competition over new and extra services, which will naturally grow over time, and more broadly the entire health care culture has shifted towards the language and rhetoric of commerce. There are grave concerns about the long-term impact of both of these trends.


In Sweden too there was a perceived crisis in cost during the 1980s, though by international standards Swedish costs were reasonable and steady (62). Managed competition was seriously considered, and the debates led eventually to eight changes, five of which are not competition-oriented but do reflect the central role of the strong buyer in the competition model or what is called public competition in planned markets (25). Setting priorities for treatments, dismantling dental insurance, and integrating services for older persons are examples of strong buyer actions that do not per se foster competition. Cautious, small experiments in economic competition have been tried by some purchasers, followed by restrictions to safeguard the innocent. Swedes found they were inexperienced in using “market behavior” in health care and found it difficult to establish realistic market conditions in health care. Meantime, the Swedes took measures to reduce use of acute inpatient services and supply of personnel, to increase user fees for patients with a resulting reduction of use by lower income patients, to charge more for nursing home and home-care services, to decentralize responsibilities to the county councils, and in general to reduce the cost of health care. This has in part been accomplished by shifting costs either to municipalities or to individuals.


Before a debt crisis threatened the legitimacy of the government in the early 1990s, Italy had converted its health insurance system to a national health service and its financing from a mixed to a tax basis. This, of course, reflects a paradigm of health care that fundamentally differs from the commodity approach taken in countries like the United States. Facing the need to find new forms of governmentality that would bring down its debt and costs, the government turned, like others, to the competition policies and reforms taking place in the U.K. and Sweden (63). Using market ideas of governance, local health units were re-named “enterprises” and patients were encouraged to choose among providers selected by the enterprises – a kind of PPO arrangement. Public hospitals were rebadged “enterprises” too, but all within a universal coverage and population-based budgets – an internal market as the British called it. Although little price competition is taking place, the language of performance and accountability has an enduring impact on how services were traditionally done autonomously by the profession.


Spain also converted its health insurance system to a tax-based national health service and also devolved management of services before it too experienced significant debt problems in the early 1990s. The 1991 white paper advocated managed competition, inspired by initiatives in the U.K. and Sweden, as the best way to control costs and services. Implementation was often hushed and covert. When the conservative government attempted to convert public hospitals into private enterprises, intense public protest erupted and it quickly retracted its reforms. But the new conception of governmentality has led to budget simulation exercises, performance-based pay, and greater accountability (63).


Although Portugal passed a law establishing a national health service in 1979, problems of implementation have resulted in a minimal and sparse public system that is hard to access for many, a thriving private sector, and public insurance schemes in between. To make up for gaps in public services, nearly a third of public expenditures are spent purchasing private care. Personal medical expenses and premiums became tax-deductible in 1989, another incentive to expand private services. Overall expenditures rose sharply, and in the early 1990s, competition policies were introduced to improve public services by fostering more private care, where high fees and incomes make it still more difficult for the public to recruit clinicians (63). Thus policies to make the public system more “competitive” were actually designed to fund more private care, with handsome rewards for public doctors to divert frustrated patients into private care, not unlike the incentives underlying the British NHS waiting lists (64, 65). A socialist government came to power in 1995 and has emphasized aaccountability, transparency, and limited experiments with performance incentives.


Israel is one of the most revealing cases of how historical and institutional forces shaped behavior when competition policy was adopted for the entire system, and in important ways it parallels the British case (66). During the late 1980s, a perceived crisis in financing and service delivery led to a national commission being formed. Influenced by the British and Dutch efforts to create managed competition, the commission proposed in 1990 regulated competition between the nation’s four non-profit sickness funds and between hospitals as well. After intense political debate, the National Health Insurance Law was passed in 1994 and took effect in 1995. The funds began to compete by using aggressive but illegitimate marketing techniques to sign up healthier citizens and by reducing their costs by restricting services, the two easiest ways to minimize costs and maximize surpluses. The government, like the British government, quickly imposed restrictions to prevent such competitive behaviors, and in general the rhetoric of managed competition was used by the central government to strengthen its control and reduce expenditures.

New Zealand

New Zealand, which for historical and cultural reasons follows development in Great Britain closely, elected a conservative government in 1991 that faced an acute fiscal crisis (67). Over the previous years, health care funding had tightened on the claim that provider capture had made the health boards and services inefficient. Taking the British reforms of managed competition a step further, it issued a radical restructuring of its universal health care system by creating Health Funding Authorities that would be at arm’s length from providers and by devolving a risk-adjusted population-based budget to them. It transformed public hospitals into “Crown Health Enterprises” that, like Mrs. Thatcher’s “Acute Trusts”, would make hospitals into competing units. Thus, through managed competition internal to the publicly funded system, cost-effective Authorities would compete for patients, and cost-effective hospitals would compete for contracts. But the plan also provided for private plans to compete with the regional authorities, and anyone who did not like the public services could transfer their share to the private plan. Since the hospitals had a monopoly on specialty services in their areas, true competition would put power and prices in their control or produce a standoff between a single purchaser and a single provider. Acute specialty services for the seriously ill had the political upper hand, as ever. The result was a series of ad hoc, special appropriations, and overall expenditures rose rapidly.

Public response was immediate and hostile, suspecting that this was not a plan to make health care services more efficient, as declared, but to privatize both services and funding. The New Zealand system would be “Americanized” into a wasteful, two-tier, unjust system. The government’s popularity plummeted and it quickly withdrew the offensive features of its plan. A raft of problems arose that were similar to those seen in the U.K., where by 1996 much of the competitive model was dismantled or toned down. In response to the widespread backdraft of opposition, “competition” was replaced by “cooperation” as the political watchword and other mollifying changes in language were made, but not in time. Even a coalition government could not quell the distrust and opposition to health care based on competitive contracting, and in 1999 the conservative government fell. Increasing objections to the reforms by patients and professionals alike helped elect a new government opposed to competition as a tool of governmentality.
Labour’s new vision centers on health and health gain, rather than on provider efficiency, and it strongly affirms a model of local democracy, the opposite of competitive markets (68). The Health Funding Authorities have been dismantled and replaced with locally elected District Health Boards, which are responsible for meeting goals of health for their populations.
Latin America

In Latin America, many nations also faced a fiscal crisis in the 1980s, but one much more profound than in the other countries mentioned here (69). The degree of indebtedness, of inflation, and of unemployment was much greater. These developments have made countries much more dependent on international lending agents and global companies, which regard the state as a major cause of these problems through inefficient social services and poor management of national industries. Public institutions (such as hospitals and public health facilities) are regarded as inefficient, unresponsive and sinecures for political appointees. Exposing them to market forces that reward responsiveness to consumers and efficiency seems just what they need. But much depends on the motives of the change agents. In health care, managed competition is regarded by the international lending agencies, such as the World Bank and the Interamerican Development Bank, and the International Monetary Fund, as the key to holding down health care costs.

Reflecting a tradition of elite and sometime dictatorial governance, policies have been developed behind closed doors with international funders and by executive degree, bypassing legislative or public debate. Reforms have been carried out sector by sector so that their impacts on other sectors are difficult for those involved to recognize. In policy papers and legal discourse, health care has been recast from a universal right to a commodity. Logically, providers who provide better services at lower costs will win contracts. This new paradigm coincides with meetings and pressure from U.S. multinational corporations, as their initial profits and growth from selecting high-priced markets and low-risk customers, have come to an end, to start managed competition again in new markets where selective strategies can boost their profits once more(70). They are purchasing public services and national companies in several countries, merging them, and then contracting to run or provide deregulated social and health services.
Some medical associations and unions have organized campaigns against the entry of managed care organizations entering and running public health services. The higher administrative and marketing costs, plus profits, reduce the funds available for treating patients, especially patients who cannot afford to pay for services. Public providers then seek more private patients. The private companies direct their marketing towards younger, healthy workers. In these ways, managed competition serves as a rhetoric and rationale for institutional changes that redefine public-private boundaries in favor of healthy and wealthy clientele.
Other Cases

Actual experiences with competition in health care have been disappointing. U.S. experiences are difficult to use (though quite mixed), because different forms of competition have been used selectively in markets that have few of the conditions that Enthoven identified as necessary for competition to reward greater efficiency and better service rather than avoiding sicker patients, providing inferior services or cost-shifting. Apparent successes are easy to achieve in a system with costs and prices are 50-100 percent higher than in other affluent countries. A more representative, whole-system and sophisticated application of managed competition has been developed in Singapore. A detailed set of mechanisms and rules of governmentality were set up by the government, and celebrated by health reform consultants and competition advocates. But when William Hsiao, a professor of health economics at Harvard, investigated, he found that the increasing role of private financing caused more rapid cost escalation, duplicate facilities that were then underutilized and a rapid increase in physicians’ incomes (71). Hospitals, he found, did not compete on price but on technology, to attract the doctors with paying patients. By 1993, the Singapore government concluded that “the health care system is an example of market failure. The government has to intervene…” (71:263).

Hsiao also investigated systemwide competition strategies in South Korea, Chile, and the Philippines (50). In South Korea, strong demand-side techniques to control rising costs resulted in a rapid growth of unregulated private care and costs, at a compound rate in real terms of over 15 percent per annum. In Chile, market forces were introduced to enhance efficiency and contain costs, but they led to a large private market that selects healthy risks and the well-paid workers, a deprivation of the national public system, and worse care for the seriously ill. The Philippines required employers to offer HMOs and offered loans to help HMOs develop, so that they would reduce illness through prevention and hold down the use and costs of hospital and specialty care. Most of the HMOs that developed were for profit, and after a decade the Filipinos found that they charged higher premiums than old-fashioned cost-reimbursement insurance plans at the same time as they selected the healthy workers and subscribers, spent only 55 percent of total revenues on clinical services, and used the rest for sales commissions, managers, executive compensation, and profits. (This compares to large commercial insurers spending 75-85 percent of total revenues for clinical services and government agencies spending 90-95 percent on clinical services.) The underlying dynamic in these cases is analyzed by Evans (72). He concludes that managed competition produces higher prices and incomes for providers, suppliers, and insurers, and they enable the wealthy to buy excellent care without having to support it for everyone else. One should add that they also handsomely reward international consulting firms, who have been playing a critical role as moral and commercial entrepreneurs in promoting managed competition as a worldwide social movement.
From these comparative case studies, one can see the economic myths and sociological realities of managed competition. First, economic competition is a strange choice for containing costs, because it is the principal engine of economic expansion and growth in modern times. Granted, it rewards greater efficiency and value in the short run, if market failures do not allow easier ways to make money quickly. But in the mid-term and long-run, it rewards market expansion and economic growth through new products and generating new “needs.” The “need” for cell phones is no different from the “need” for many new prescription drugs. The principal ways to make money with a cost containment agenda in the short term are to reduce payments and funds for clinical services and to minimize treatments to or for chronically or seriously ill patients. After that, one can profit principally by driving up needs and costs. Thus as an instrument of governmentality, competition not only rewards those who can find ways to treat people inequitably, but it also means a government puts into play the driving forces of growth in health care costs – all in the name of cost containment and efficiency, of course. The usual rhetoric is, “Unfortunately costs are rising, but if it weren’t for us, they would be rising even faster.” It’s a rhetoric you can literally bank on.
Second, “managed competition” is not taken up in its full, coherent version that enables beneficial competition to take place in health care. Rather, its rhetorical themes are taken up as an ideology to legitimate in varying degrees privatization, budget cuts, user fees, two-tier access, a commercial ethos, and the rationalization of services. After trumpeting competition in health care as the key to cost-effective services in 1993, the World Bank commissioned a series of papers by leading skeptics of competition in health care in 1995, who detailed the dangers involved (73). By 1998, two leaders of WHO-Europe reported that “Several CEE/CIS (ex-Communist Bloc and Soviet Union) countries have belatedly sought to develop a state regulatory apparatus to reduce the negative consequences of giving market forces free rein” (74). Thus competition endangers its sponsor and can create a crisis in legitimation, which ironically what it was supposed to avoid in the first place.
Third, all countries emphasize the “purchaser-provider split” as the radical change from administered services that is the key to implementing managed competition policies. But in fact, such a split between the state or its agents as purchasers and provider groups or organisations is not sustainable, because the purchaser must become intimately involved with the fine points of provision in order to negotiate successfully new organizational forms and successful instruments of governmentality. The radical core is not a split but rather a shift from professional dominance to buyer dominance that was identified some time ago (75). This shift is not easy, because the health authority or other agency was and is embedded in networks of providers. Yet within these relations, power shifts from the hospitals as the nodes in provider-based networks to purchasers as the nodes in emergent payment-based networks (65). Such a shift threatens hospitals, which usually have strong political ties, and thus the purchasing strategy can produce unexpected backdrafts of political heat.
Fourth, “managed competition” becomes political rhetoric for what is actually the revolt of the payers and the transformation of institutional culture. Something deeper and more permanent happens in the process of politicians and government leaders debating seriously the merits and dangers of the competition paradigm. They transform themselves from being payers to being purchasers and then even commissioners, that is, payers who rethink what kind of health care system they want. Many have come to realize that strong purchasing can reap many of the benefits of competition without suffering most of its liabilities (65). They begin to question long-standing organizational arrangements and learn new ways of thinking like purchasers, or commissioners. This transformation entails several axes of change:

  • from administrating services, to purchasing health outcomes;

  • from treating individual ill patients, to maximizing the functioning, well-being and health of populations;

  • from trusting professional judgement, to evidence-based protocols and evaluation;

  • from professional autonomy and variation, to professional accountability and standards;

  • from historic provider-based budgets, to population-based, risk-adjusted budgets;

  • from centralized administration, to devolved decision-making.

These changes would not be possible without the computer and its capacity to gather and analyze large data sets. For decades, “health care” has not been about health but about treating the sick. Now health status and health gain are taking center stage. Evidence-based medicine, guidelines, accountability, and budgeting were not possible before. Now they are, and David Kindig has provided a masterly synopsis of the paradigm shift to purchasing for population health (76). The unanticipated consequence of purchasing, which is the valuable element of managed competition, is to reconceptualize the state’s relations with its residents, from providing certain services, to maximizing the health and functioning of a population. This can, of course, have a dark side, of dropping services that do not improve health such as long-term and palliative care; and it can lead to a blame-the-victim approach to citizens lured by the (state-approved) massive advertising for cigarettes, alcohol or rich foods.

Finally, as purchasers, governments or insurers reconceptualize their relationship with the medical profession. Building up health services research and evidence-based medicine or outcomes research, they develop a ‘science of doctoring’ that identifies and objectifies elements of clinical work analogous to what Foucault (77) described the science of medicine did to patients. As David Frankford observed, “…both objectify the subjects they study, abstract those subjects from context, and thereby ignore the cultural dimensions of the problems at hand” (78, p. 773). This is governance by numbers (79), reflecting the “technocratic wish” for a rational, objective way to allocate scarce resources and manage services without politics, or rather, with politics built into what is measured and how (80). Since the organized profession has failed to manage large variations in quality and expense (see above), the purchasers will. But the ability to apply statistically based performance measures to cases is limited (81). In the case of the United Kingdom one has the technocratic wish combined with the democratic wish (82), that is, a government’s vision of a health care system that has far more local democratic involvement than ever before, together with national, population-based measures of clinical excellence based on outcomes. In between, the physicians and clinical teams try to reconcile local needs and demands with national performance measures that attempt to apply probabilities to individual patients.

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