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.