MAKE THE RULES ENFORCE THE RULES And Let ‘Em Play

MARKET LEVEL Market efficiency is a useful touchstone. The profit motive is a powerful force for innovation, cost cutting, etc. With sufficient competition, this motive—to capture value—will generate a powerful engine for creating value. There may be circumstances where the rule maker has better information than the players—then efficiency demands that information be used. Other times the players’ incentives may not be fully aligned with society’s: in this case it can be good to alter to rules appropriately, respecting the private information the players may have.

MARKET LEVEL cont. Government may not easily achieve these objectives, because there is so much decentralized information it does not have, and because government agents may not have incentives to maximize efficiency. The free market has limitations too, especially in the health care sector. Competition—the machine that harnesses self-interested behavior for the good of society—requires many competitors, good information, and ease of comparison shopping. These features are hard to assure in HC markets.

MARKET LEVEL, cont. LET’S NOT FORGET THOSE LEFT BEHIND In HC Markets, we are also concerned about distribution: an obligation to foster the health of everyone in our society. Efficiency says nothing about distribution: an efficient action may be fair or unfair. Distribution concerns need not mean detailed government involvement in the health economy— just detailed government funding!! It turns out (it’s complicated) that redistribution of health resources to the poor lessens efficiency.

FIRM/INSTITUTION LEVEL When markets are competitive, the best way to make more money is to create more value. Considering interactions between two departments in the same firm, all value created accrues to the firm. Therefore maximizing value added is still appropriate objective. Individual departments will have information you/others do not have. But they may need incentives to use that information to the best interests of the firm.

DEPARTMENT LEVEL Employees are powerful sources of value creation: innovation, cost cutting, quality. Employees often have private information that can be harnessed for the good of the institution, with the appropriate incentives. Employees won’t create much value if they don’t capture some of it. Competition places constraints on what firms can expect from employees in the long term. Appreciate that constraint!

NOTICE ANY SIMILARITIES? (MARKET, FIRM, DEPARTMENT LEVEL) We have moved toward a “philosophy of management”— of departments, of firms, of the whole economy—that helps us think about what we are trying to do and how we should do it. The value creation perspective gives us that “big picture” that helps us, as managers, set the rules. Our discussion of incentives, information, and competition helps us better understand our obligations and limitations in setting the rules. As managers, we are obligated to set rules that align employee /department interests with those of the firm. In doing so, we must respect the constraints that competition places on us, and recognize the existence of private information we don’t have.