MAKE THE RULES ENFORCE THE RULES

1
MAKE THE RULESENFORCE THE RULES

• And Let Em Play

2
MARKET LEVEL

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

3
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. Competitionthe
  machine that harnesses self-interested behavior
  for the good of societyrequires many
  competitors, good information, and ease of
  comparison shopping. These features are hard to
  assure in HC markets.

4
MARKET LEVEL, cont.LETS 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 economyjust
  detailed government funding!!
• It turns out (its complicated) that
  redistribution of health resources to the poor
  lessens efficiency.

5
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.

6
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 wont
  create much value if they dont capture some of
  it.
• Competition places constraints on what firms can
  expect from employees in the long term.
  Appreciate that constraint!

7
NOTICE ANY SIMILARITIES?(MARKET, FIRM,
DEPARTMENT LEVEL)

• We have moved toward a philosophy of
  managementof departments, of firms, of the
  whole economythat 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
  dont have.