Making plans, health care costs, and bureaucracies

With the Becker-Posner Blog’s observations on health care that I linked to this morning and the recent related posts from Coyote Blog and Different River both of which suggest that the rise in health care costs can be explained solely (or mostly) by excess demand, I can see it’s time to remind everybody about Gammon’s Law. I wrote about this back in September in my post The best laid plans (you might want to go back and read it—it’s one of my best):

Why do so many government programs fail? We’ve seen it time and time again. A need is identified, a program is formulated and put into place, everything starts out well enough, and then, perhaps over time, something happens. The program doesn’t achieve its goals. Or the amount of resources needed for it to achieve its goals are vastly more than expected.

We’ve seen this in Social Security, Medicare, the Great Society programs, and the public school system. Is it waste, fraud, and abuse (those favorite whipping-boys of legislators)? Welfare cheats? Incompetence? Just needs a little fine tuning? We’re not spending enough (no matter how much we seem to be spending)?

Back in the 1960’s a clever British physician named Dr. Max Gammon noticed that in health care although inputs were rising sharply (it was getting much more expensive) outputs (however they were measured) were actually falling. As an aside to those who are convinced that the problems in our health care system are due to patients demanding too much care that means that the health care system (as a whole) is getting paid a lot more for doing the same (or less) work.

Dr. Gammon has recently made additional comments about his findings:

The destructive process involves the progressive displacement of productive activity by non-productive and often counterproductive bureaucratic activity.

Before presenting my evidence I should like to correct a widespread and very damaging misconception: bureaucracy is not, I repeat is not synonymous with administration. By bureaucracy I mean a rigid system of human organisation governed by fixed rules and tending to exclude individual initiative. By administration I mean the guidance and facilitation of an enterprise. And this should be the very opposite of bureaucratic. The tragedy of the NHS is that it is an inherently bureaucratic organisation which imposes the bureaucratic mode of operation on all who work in it.

Two short stories will show what I mean by bureaucratic displacement. Some years ago I worked in a small hospital just outside London. The quality of the nursing on one particular ward was outstanding. I returned a few years later to find the ward in chaos. When I asked for the Sister who had previously run the ward so superbly I was told that she had been moved into administration. I found her in an office and she wept as she told me that she had been forced to leave her ward and become an administrator since her salary would have been reduced and fixed at a low level if she had remained in her clinical post. The focus of nursing had been changed from the ward and the patient to the office and the seminar room. The intimate care of patients had come to be regarded and rewarded as a menial task, a preliminary stage in a nursing career which was now seen to be essentially that of management as my second story shows.

Walking along a wide corridor in a London Teaching Hospital with which I was unfamiliar I asked a person in nursing uniform the way to a certain ward. “Oh, I don’t know where the wards are, I am in administration” she replied as though I had insulted her. She turned and walked through some glazed doors which opened on to what had been a long Nightingale ward. It was now divided into a multitude of open-plan offices. Meanwhile in the A&E Department on the floor below patients were lying on trolleys for up to 48 hours and others were having their operations postponed owing to shortage of beds, Two examples of bureaucratic displacement. Politicians dismiss such stories as ‘anecdotal’ – by that they mean that they relate to real people and real events rather than to statistics. So let us take a look at the statistics.

When the NHS was established in 1948 we had 480,000 hospital beds. By the year 2000 the number had fallen to 186,000. This represents a fall from 10 beds for every thousand of the population in 1948 to 3.7 in the year 2000. It means that we often now have insufficient hospital capacity for prompt investigation and treatment even of first class emergencies. According to the official statistics we have just under one million patients waiting for hospital admission. There is no margin for handling epidemics and admissions for elective surgery are frequently cancelled owing to lack of beds. In an attempt to deal with this state of constant crisis patients are now being sent to France and Germany for their operations. And still the number of NHS beds is falling.

As for staff, the number employed by the NHS has more than doubled from 350,000 in 1948 to 882,000 in 2002. The greatest percentage increase has been among designated administrative staff. Between 1997 and 2002 Senior Managers and Managers increased by no less than 47.6% compared to an overall increase in the workforce of 16% (nurses increased by 1.8%) But these figures reveal only the tip of the bureaucratic iceberg. For example large numbers of nurses are now wholly engaged in management but are still counted as nurses. Of even greater significance is the proliferation of bureaucratic procedures involving all staff, progressively displacing their productive activity. And now, here we come to the heart of the matter.

Nearly thirty years ago I discovered a close correlation between the increase in the numbers of NHS administrative staff and the fall in numbers of NHS hospital beds that had occurred over the preceding nine years. For statisticians: linear regression analysis showed a correlation coefficient of -0.99. For non-statisticians I should explain that this figure represents an almost perfect correlation between the growth in numbers of administrators and the fall in numbers of beds.

A statistical correlation, no matter how close, is not necessarily significant. However I suggested that this correlation could have an important explanatory value if the number of designated NHS administrators was proportional to the bureaucratic activity of the NHS workforce as a whole. The correlation of the growth in numbers of administrators with the fall in the number of beds would then follow from a progressive displacement of productive activity of all NHS staff by the proliferation of useless and often counterproductive bureaucratic activities throughout the whole organisation. In this way, an expanding workforce and increased spending would be matched by a fall in production; the more that was put into the system the less would come out of it, a process I likened to the implosion of a black hole.

So bureaucracy itself is the culprit. And, as I wrote in The best laid plans:

There are only two known organizing principles in modern societies: bureaucracy and the unpredictable large scale group behaviors of complex systems known as emergent phenomena. Reliance on emergent phenomena to solve the great problems requires an enormous amount of faith and hope.

Government is not the only source of bureaucracy in our health care system in the United States. Actually, there are three:

1. The government
2. Insurance companies
3. Private medical bureaucracies including hospitals and HMO’s.

If Gammon’s Law is false, there’s a simple way for advocates of the demand theory for rising health care costs to disprove it: show that outputs are rising (and that inputs per output are falling).

But if, as Dr. Friedman suggests, Gammon’s Law is true, neither a reduction in consumer demand nor an increase in producer supply (doctors, hospitals, etc.) , nor the combination of reduced demand and increased supply will stem the rise in costs per output. So, what do we do about the ailing health care system? As I see it there are several alternatives: going on as we are now, a pure market system and a ban on large-scale medical bureaucracies at all levels, and a single-payer system (and attendant elimination of private large-scale medical bureaucracies)

If we maintain the status quo, health care experts are predicting a melt-down of the system in the next 3 to 5 years, see here and here. That’s not much time to plan and execute the next step but I’d suggest we’d better start doing that or the system that will emerge from the wreckage could be much, much worse.

The pure market and attendant ban on large-scale medical bureaucracies approach would include the following:

1. Eliminate all federal and state government health care programs including Medicare, Medicaid, and the Veteran’s Administration health care system (which is itself the size of British Public Health).
2. Eliminate all private insurance plans.
3. Eliminate national and regional HMO’s and hospital chains.

For those who advocate such a plan I have a number of questions:

1. How do you plan to pass such a plan through the Congress?
2. What Constitutional changes will be required for such a plan? How
   will you pass the necessary changes through the state legislatures?
3. How do you manage the transition in a humane and ethical manner that’s sound from a public health standpoint?
4. Will this create the necessary market environment or will we need to abolish the FDA, the Patent Office, and medical licensing as well?

The final option is a single-payer system. The challenge here is to implement a plan that has the low administrative overhead of the Social Security sytem rather than the high overhead of the current system. As the old Magic 8-Ball might say “Prospects doubtful”.

It’s not surprising that this whole situation is a nettle that no one has been willing or able to grasp for a long time now. But remember: we simply cannot solve the problem and leave the bureaucracies in place. I’ll give Dr. Gammon the last word:

Sensitivity to external stimuli transmitted throughout the system, rather than centrally prescribed rules and directives, is what ultimately drives and governs individual performance in the non-bureaucratic organisation. By contrast labyrinthine systems of ‘monitoring’ and the setting of targets – with penalties and rewards – is characteristic of bureaucratic organisations attempting to improve performance. As was notoriously demonstrated in the Soviet Union and as we are now finding in the NHS, centrally imposed targets cause systemic distortions and rigidities that further impair performance and also, inevitably, lead to falsified statistics and the coercion of those tempted to reveal the truth. My friends, the National Health Service is an experiment which has failed. The cost of this failure to patients, to the medical profession, to the nursing profession and the to profession of Hospital Administration is beyond calculation. But the experiment will not have been in vain if others learn from its example not to repeat it.