Public management theories and health care are the two subjects that have been interconnected from the start, with the rise and fall of particular paradigms mirroring across both spheres of academic discourse in equal measure. For the majority of the 20th century, health care in the US was considered to be a public domain, with the welfare state providing access to public goods for the majority of American citizens (Arnaboldi et al. 6).
This centralized government-driven system was established under the Classical Public Management (CPM) paradigm, which is centered around the division of labor, unity of a single command structure, hierarchical levels of responsibility, and social atomism (Chandler 43). The classic universal care system adopted in many Western countries, such as Sweden, UK, and Canada, adheres to the principles of CPM (Chandler 44). However, such a type of system has its flaws, some of which include bureaucratic lag, poor levels of economic efficiency, and a disconnect between supply and demand.
New Public Management theory (NPM) appeared with the rise of neo-liberal tendencies in all areas of the American economy, popularized by works of Friedrich Hayek, James M. Buchan, and Milton Friedman during the 1980s (Baum 27).
This theory empathizes decentralization, deregulation, and delegation of public services to private and public-private entities. It allows the laws of the free market to moderate the relationship between doctors and patients, ensuring the best possible solutions for an optimal price. Despite offering promises of revolutionizing public health care, NPM proved to cause greater issues due to the inherent shortcomings of applying market laws to the private sector, resulting in increased inefficiency, corruption, and a gradual decline in standards of care.
Health Care – A Unique Public Sector
Health care is different from other areas of public services, such as road construction, the provision of utilities, education, mail, and other types of services acknowledged as public goods (Pollitt et al. 30). All theories and frameworks of health care place primary value in the health and life of an individual. While other services can estimate the economic value of constructing a road or providing the industry with an effective workforce, health care does not provide an immediate benefit to the economy.
In addition, it is increasingly hard to determine the success or failure rate of certain treatments. This is because many diagnoses are chronic or lethal to the patient, resulting in health care being a zero-sum at best and a negative effort at worst, from an economic perspective. Health care is based on humanitarian aspects of conventional morality, where rights and values ethics have greater emphasis over utilitarian concerns widely accepted in most public and private industries (Chandler 104). Lastly, health care is one of the largest public sectors that operate on insurances rather than direct payments, adding a layer of complexity to the situation.
Why Privatization and Deregulation Do Not Work in Health Care?
One of the major staples of NPM theory is privatization and deregulation, which is supposed to engage the population by providing health care on a contractual basis (Chandler 110). Deregulation, on the other hand, is expected to help promote different types of health care operations, with differences in expenditures and quality allowing for patients to choose their treatment options based on their economic capabilities.
Although these ideas sound good on paper, there are several critical flaws in them. The first issue lies in privatization. According to the neo-liberal economic principles, which NPM is based upon, quality and price in the free market are driven by customers making rational choices. In theory, this approach should root out unreliable health service providers and promote competition, which would result in improved quality and efficiency at a better price.
However, this approach does not translate well into the realities of public health care due to the very nature of medical emergencies. Unlike stores and shops, medical facilities require space, expensive equipment, and skilled personnel to be efficient in the services they provide (Chandler 74). Thus, it is unlikely for many different health care providers to be located in the immediate vicinity, effectively landlocking customers to health care services close to them. This situation is further exacerbated in remote localities. Lastly, a sick patient, depending on the severity of the issue, is rarely in the capacity to visit different health service providers, compare them, and make a rational choice. This undermines the very core of the free market theory, upon which the NPM theory is based.
Deregulation also had a disastrous effect on the state of health care in countries where NPM has been widely implemented as a national health care strategy (Chandler 120). The issue with deregulation in medicine is that the standards of care have to be very high at all times to protect the lives of the patients. Unlike with other products and services, where poor quality and a lack of standards do not affect the customer’s life and safety, a lack of unified quality control in health care results in increased death and rehospitalization rates among the patients. Thus, the issue of economic inefficiency is further exacerbated by the fact that customers have to pay twice to deal with increased risks of making the situation worse.
Insurance and Health Care
New Public Management theory uses marketization as one of the primary tools to shape the health care industry (Pollitt et al. 90). The current reimbursement system utilized in the US health care services was built on the NPM concept of money following patients, with hospitals and insurers receiving support on pay-for-performance and incentive-based payments. However, this system proved to have significant flaws due to the anti-market nature of insurances. Insurance companies are largely for-profit entities that rely on healthy customers paying for the health care of sick customers (Pollitt et al. 92).
The problem with this business model is that it incentivizes selling insurance to rich and healthy customers, who need it the least while denying insurance to the poor, sick, and elderly patients, who are far more likely to use it. Thus, to remain profitable, insurance companies have to operate on reverse supply and demand. This does not work well with the pay-for-performance model, under which health care organizations are reimbursed.
Lastly, the NPM model disincentivizes the long-term efficiency of the provided care. Due to the pay-for-performance model, the hospitals would require their patients to return every once in a while, to remain economically sustainable (Pollitt et al. 89). This contradicts the very nature of medicine, the purpose of which is to ensure that customers are healed and do not return a year or two later with a repeated diagnosis.
Although the classical public management theory proved to have several flaws, the NPM model did not deliver the results its proponents have promised. Health care is a specific area of public service that contradicts the laws of economics and the free market by being a semi-natural monopoly. Replacing the public sector with private practitioners and promoting decentralization along with deregulation caused significant drawbacks in the quality and availability of health care in nearly all countries that adopted NPM as their primary management model.
Arnaboldi, Michela, et al. “Performance Management in the Public Sector: The Ultimate Challenge.” Financial Accountability & Management, vol. 31, no. 1, 2015, pp. 1-22.
Baum, Frances. The new public health. Oxford University Press, 2016.
Chandler, John. Questioning the new public management. Routledge, 2017.
Pollitt, Christopher, et al. Decentralising public service management. Macmillan International Higher Education, 2016.