The Transition from Planning to Markets in National Health Policy for Acute Care Hospitals: The Pittsburgh Experience

By Paschall, Stephen P. | Journal of Economic Issues, June 2007 | Go to article overview

The Transition from Planning to Markets in National Health Policy for Acute Care Hospitals: The Pittsburgh Experience


Paschall, Stephen P., Journal of Economic Issues


"I can finally lay to rest the Federal health planning authorities. I have sought their repeal since I assumed office. These authorities, while perhaps well-intentioned when enacted in the 1970's, have only served to insert the Federal government into a process that is best reserved to the marketplace" (U.S. Code, Congressional and Administrative News, 1986, 6410). Thus, President Reagan ended a 40-year national policy to make health care more accessible, to improve geographic distribution, to redirect resources to provide more "economical services and to reduce excess capacity. (1) The departure from long-standing national policy provides an opportunity to analyze the outcome under an institutionalist law and economics analysis based upon the work of John R. Commons. This analytical tool will be described and its application demonstrated with respect to acute care hospitals in Allegheny County, Pennsylvania.

Commons' Analysis of Law and Economics

Commons had a significant influence on the analysis of the interrelationship between law and economics (Gonce 1976; Hackney 1997; Hodgson 2003; Hovenkamp 1990; Kamp 1995; Kemp 2006; Liebhafsky 1976). Discussion of Commons' analysis has focused on the benefits of, and problems with, his conceptual framework (Hodgson 2003; Kemp 2006; Liebhafsky 1976). (2) The application of Commons' analysis to specific law and economic interrelationships has been infrequent, despite the fact that such application was Commons' express intention (Commons [1924] 1995, 122-25).

Commons described the interaction between law and parties to economic transactions as a mutually dependent evolution with economic decisions reflective of the "collective power" of the "going concern" as expressed in "working rules" (Commons [1924] 1995, 141; Kemp 2006, 46; Ostrom 1976, 846). This interdependency and the evolution of working rules challenges proponents of the neoclassical approach to law and economics who hypothesize an interrelationship between economics and law whereby law moves toward more efficient outcomes maximizing society's wealth (Hackney 1997, 316-17). Neoclassical analysis identifies law as the dependent factor developing over time to support more efficient market decisions (Coase 2005, 217; Rubin 1996, 1405). Commons ([19241 1995) analyzes laws as interpreted by officials whose actions create expectations that influence the behavior of parties to transactions. Changes in law change the behavior of officials and the expectations and decisions of parties (Commons [1924] 1995, 33-4). There is no preordained direction of change, only the interaction of institutions in the formation and enforcement of law and the effect on parties to transactions.

In Legal Foundations of Capitalism, Commons examines the conduct of parties in transactions undertaken within the context of legal authority. The transaction is the social unit for analysis where the parties are "doing something to each other within the limits of working rules laid down by those who determine how disputes shall be decided" (Commons [1924] 1995, 69). Working rules may change as the result of legislation or court decisions that limit or expand the choices of parties in transactions (Commons [1924] 1995, 365). Legislation and judicial decisions "proportion inducements, and individuals do the rest" (Commons [1924] 1995, 330). The working rules create the framework within which transactions are influenced by collective power.

Commons described working rules as a "social process," but has been criticized for shortcomings in explaining their development (Ostrom 1976, 849-51). Hodgson notes that Commons' analysis tends to neglect "powerful social structures that work through mechanisms other than (common or statute) law" (Hodgson 2003, 565). Commons may not fully explain the sources of working rules, but that does not affect the applicability of Commons' analysis to understanding the consequences of changes in particular working rules. …

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