The Business of Health: The Role of Competition, Markets, and Regulation

There is ongoing controversy over how to improve the American health care system, expand coverage to the uninsured, and slow the growth of wasteful spending. Proponents of sweeping reforms argue that the fragmented nature of the health system is a weakness, and suggest that the more centralized systems used in other developed nations are models to be emulated. But many of those systems have important shortcomings, including unsustainable growth in spending and intolerable waiting times for essential health services. It is not at all clear whether the benefits of centralized control would offset the costs. The balance of evidence suggests that markets have more to offer than centralized health care systems.

Competition in health care spurs innovation, induces efficiency, and enhances quality, just as it does in other industries. The Business of Health examines the influence of market competition and government regulation on hospitals, health insurance, managed care plans, and prescription drug advertising. Reformers must determine which components of the system are suitable for market competition and which would benefit from more direct government control. While some hybrid of the two approaches has strong political appeal, two things are clear: the current U.S. system fails to take full advantage of the benefits of market forces, and the alleged benefits of government regulation may be greatly exaggerated.

Some areas of potential improvement include: (1) the reduction, revision, or elimination of laws and regulations that inhibit the functioning of markets; (2) the development of a more coherent strategy to evaluate new medical technologies and services; (3) the infusion of transparency into the making of contracts between health plans and enrollees; (4) redesigning health insurance to imbue a greater degree of price sensitivity within health services transactions, and (5) improved marketing and coordination among existing public insurance programs.

The key to improving health care delivery lies

Robert L. Ohsfeldt is a professor in the Department of Health Policy and Management at the School of Rural Public Health, Texas A&M Health Science Center. He has been the principal investigator for research grants funded by the Agency for Healthcare Research and Quality, National Cancer Institute, Centers for Disease Control, and the Robert Wood Johnson Foundation.