Regulating Health Care: From Self-Regulation to Self-Regulation?

Debates over the role of government in the private economy date back to the emergence of the U.S. market economy in the early nineteenth century. At that time, the Federalists, led by Alexander Hamilton, argued that a governmental presence was needed to guarantee property rights, enforce contracts, and encourage the nascent entrepreneurial ethos (Sellers 1991). In contrast, the Jeffersonians argued against intrusive government and in favor of self-reliance. That dynamic intersection between economics and political theory continues today regarding the proper regulatory oversight of health care delivery.

Arrow's Theory

The health care incarnation of this debate emerged when Kenneth Arrow (1963) identified key market failures in health care, namely "the existence of uncertainty in the incidence of disease and in the efficacy of treatment" (941). Underlying these failures were the "nonmarketability of the bearing of suitable risks and the imperfect marketability of information" (947) (i.e., information asymmetries between patient and physician), making it nearly impossible for patients to verify the quality of medical care. Arrow's analysis presumes that health care markets will not reach a competitive equilibrium without nonmarket intervention but does not specify how the market might self-correct or how nonmarket institutions would correct the optimality gap.

In a subsequent essay, Arrow (1972) depicted government regulation, tax policy, tort liability, and professional ethical codes as the most likely candidates to fill the gap. To the extent that Arrow articulates what might be thought of as a theory of regulation, this revolves around the development of professional ethical codes as essentially a market-based strategy. Arrow postulated that if such codes were widely accepted and established as norms, they would self-correct for information asymmetries and restore general equilibrium.

In 1972, this was a reasonable expectation because physicians still dominated health care delivery and relied heavily on self-regulation through ethical codes. But it soon became apparent that this alone could not redress market failures. In this essay, I will outline the market and nonmarket responses that have arisen since 1963 to fill the optimality gap that Arrow identified. My thesis is that there is an identifiable regulatory trajectory that begins with physician self-regulation and is now dominated by health care system self-regulation through private sector accreditation.

The Shape of Health Care Regulation

Forms of Regulation

I use the term regulation to encompass both legislative and regulatory oversight of the health care system. For health care, regulation encompasses two domains: health professionals and the health care system. Historically, physicians have been regulated differently than health care as a system. Physicians have been largely self-regulated, while government has played a more traditional regulatory role in monitoring the health care system. Regulation in general may also be viewed along a continuum from those that facilitate market forces to those that displace the market. Market-facilitating strategies, such as private accreditation or professional ethical codes, are designed to enable the market to function more effectively. ¹ Market-displacing approaches, such as health planning or national health insurance, are designed to substitute for market forces. While Arrow does not clearly specify whether professional norms are market-facilitating or market displacing, reliance on self-regulation (including professional norms) to fill the gap is essentially a market facilitating strategy because professional self-regulation operates to obviate market-displacing approaches.

In deciding what type of regulatory system to develop, one might ask three questions. First, what are the specific issues (i.e., market failures) to be regulated? Over the past twenty years, reducing health care costs, improving quality, and increasing access have been the most often cited justifications for regulatory intervention. Second, what is the regulatory structure (i.e., the source of regulatory authority) that should be devised? The possibilities include: government regulation only (state and/or federal), industry or professional self-regulation (a voluntary market...