Regulatory failure

When we think of the issues of health and safety that exist in a modern complex economy, it is impossible to imagine that these social goods will be produced in sufficient quantity and quality by market forces alone. Safety and health hazards are typically regarded as “externalities” by private companies — if they can be “dumped” on the public without cost, this is good for the profitability of the company. And state regulation is the appropriate remedy for this tendency of a market-based economy to chronically produce hazards and harms, whether in the form of environmental pollution, unsafe foods and drugs, or unsafe industrial processes. David Moss and John Cisternino’s New Perspectives on Regulation provides some genuinely important perspectives on the role and effectiveness of government regulation in an epoch which has been shaped by virulent efforts to reduce or eliminate regulations on private activity. This volume is a report from the Tobin Project.

It is poignant to read the optimism that the editors and contributors have — in 2009 — about the resurgence of support for government regulation. The financial crisis of 2008 had stimulated a vigorous round of regulation of financial institutions, and most of the contributors took this as a harbinger of a fresh public support for regulation more generally. Of course events have shown this confidence to be sadly mistaken; the dismantling of Federal regulatory regimes by the Trump administration threatens to take the country back to the period described by Upton Sinclair in the early part of the prior century. But what this demonstrates is the great importance of the Tobin Project. We need to build a public understanding and consensus around the unavoidable necessity of effective and pervasive regulatory regimes in environment, health, product safety, and industrial safety.

Here is how Mitchell Weiss, Executive Director of the Tobin Project, describes the project culminating in this volume:

To this end, in the fall of 2008 the Tobin Project approached leading scholars in the social sciences with an unusual request: we asked them to think about the topic of economic regulation and share key insights from their fields in a manner that would be accessible to both policymakers and the public. Because we were concerned that a conventional literature survey might obscure as much as it revealed, we asked instead that the writers provide a broad sketch of the most promising research in their fields pertaining to regulation; that they identify guiding principles for policymakers wherever possible; that they animate these principles with concrete policy proposals; and, in general, that they keep academic language and footnotes to a minimum. (5)

The lead essay is provided by Joseph Stiglitz, who looks more closely than previous decades of economists had done at the real consequences of market failure. Stiglitz puts the point about market failure very crisply:

Only under certain ideal circumstances may individuals, acting on their own, obtain “pareto efficient” outcomes, that is, situations in which no one can be made better off without making another worse off. These individuals involved must be rational and well informed, and must operate in competitive market- places that encompass a full range of insurance and credit markets. In the absence of these ideal circumstances, there exist government interventions that can potentially increase societal efficiency and/or equity. (11)

And regulation is unpopular — with the businesses, landowners, and other powerful agents whose actions are constrained.

By its nature, a regulation restricts an individual or firm from doing what it otherwise would have done. Those whose behavior is so restricted may complain about, say, their loss of profits and potential adverse effects on innovation. But the purpose of government intervention is to address potential consequences that go beyond the parties directly involved, in situations in which private profit is not a good measure of social impact. Appropriate regulation may even advance welfare-enhancing innovations. (13)

Stiglitz pays attention to the pervasive problem of “regulatory capture”:

The current system has made regulatory capture too easy. The voices of those who have benefited from lax regulation are strong; the perspectives of the investment community have been well represented. Among those whose perspectives need to be better represented are the laborers whose jobs would be lost by macro-mismanagement, and the pension holders whose pension funds would be eviscerated by excessive risk taking.

One of the arguments for a financial products safety commission, which would assess the efficacy and risks of new products and ascertain appropriate usage, is that it would have a clear mandate, and be staffed by people whose only concern would be protecting the safety and efficacy of the products being sold. It would be focused on the interests of the ordinary consumer and investors, not the interests of the financial institutions selling the products. (18)

It is very interesting to read Stiglitz’s essay with attention to the economic focus he offers. His examples all come from the financial industry — the risk at hand in 2008-2009. But the arguments apply equally profoundly to manufacturing, the pharmaceutical and food industries, energy industries, farming and ranching, and the for-profit education sector. At the same time the institutional details are different, and an essay on this subject with a focus on nuclear or chemical plants would probably identify a different set of institutional barriers to effective regulation.

Also particularly interesting is the contribution by Michael Barr, Eldar Shafir, and Sendhil Mullainathan on how behavioral perspectives on “rational action” can lead to more effective regulatory regimes. This essay pays close attention to the findings of experimental economics and behavioral economics, and the deviations from “pure economic rationality” that are pervasive in ordinary economic decision making. These features of decision-making are likely to be relevant to the effectiveness of a regulatory regime as well. Further, it suggests important areas of consumer behavior that are particularly subject to exploitative practices by financial companies — creating a new need for regulation of these kinds of practices. Here is how they summarize their approach:

We propose a different approach to regulation. Whereas the classical perspective assumes that people generally know what is important and knowable, plan with insight and patience, and carry out their plans with wisdom and self-control, the central gist of the behavioral perspective is that people often fail to know and understand things that matter; that they misperceive, misallocate, and fail to carry out their intended plans; and that the context in which people function has great impact on their behavior, and, consequently, merits careful attention and constructive work. In our framework, successful regulation requires integrating this richer view of human behavior with our understanding of markets. Firms will operate on the contour de ned by this psychology and will respond strategically to regulations. As we describe above, because firms have a great deal of latitude in issue framing, product design, and so on, they have the capacity to a affect behavior and circumvent or pervert regulatory constraints. Ironically, firms’ capacity to do so is enhanced by their interaction with “behavioral” consumers (as opposed to the hypothetically rational actors of neoclassical economic theory), since so many of the things a regulator would find very hard to control (for example, frames, design, complexity, etc.) can greatly influence consumers’ behavior. e challenge of behaviorally informed regulation, therefore, is to be well designed and insightful both about human behavior and about the behaviors that firms are likely to exhibit in response to both consumer behavior and regulation. (55)

The contributions to this volume are very suggestive with regard to the issues of product safety, manufacturing safety, food and drug safety, and the like which constitute the larger core of the need for regulatory regimes. And the challenges faced in the areas of financial regulation discussed here are likely to be found to be illuminating in other sectors as well.

 

Patient safety — Canada and France


Patient safety is a key issue in managing and assessing a regional or national health system. There are very sizable variations in patient safety statistics across hospitals, with significantly higher rates of infection and mortality in some institutions than others. Why is this? And what can be done in order to improve the safety performance of low-safety institutions, and to improve the overall safety performance of the hospital environment nationally?

Previous posts have made the point that safety is the net effect of a complex system within a hospital or chemical plant, including institutions, rules, practices, training, supervision, and day-to-day behavior by staff and supervisors (post, post). And experts on hospital safety agree that improvements in safety require careful analysis of patient processes in order to redesign processes so as to make infections, falls, improper medications, and unnecessary mortality less likely. Institutional design and workplace culture have to change if safety performance is to improve consistently and sustainably. (Here is a posting providing a bit more discussion of the institutions of a hospital; post.)

But here is an important question: what are the features of the social and legal environment that will make it most likely that hospital administrators will commit themselves to a thorough-going culture and management of safety? What incentives or constraints need to exist to offset the impulses of cost-cutting and status quo management that threaten to undermine patient safety? What will drive the institutional change in a health system that improving patient safety requires?

Several measures seem clear. One is state regulation of hospitals. This exists in every state; but the effectiveness of regulatory regimes varies widely across context. So understanding the dynamics of regulation and enforcement is a crucial step to improving hospital quality and patient safety. The oversight of rigorous hospital accreditation agencies is another important factor for improvement. For example, the Joint Commission accredits thousands of hospitals in the United States (web page) through dozens of accreditation and certification programs. Patient safety is the highest priority underlying Joint Commission standards of accreditation. So regulation and the formulation of standards are part of the answer. But a particularly important policy tool for improving safety performance is the mandatory collection and publication of safety statistics, so that potential patients can decide between hospitals on the basis of their safety performance. Publicity and transparency are crucial parts of good management behavior; and secrecy is a refuge of poor performance in areas of public concern such as safety, corruption, or rule-setting. (See an earlier post on the relationship between publicity and corruption.)

But here we have a little bit of a conundrum: achieving mandatory publication of safety statistics is politically difficult, because hospitals have a business interest in keeping these data private. So there was a lot of resistance to mandatory reporting of basic patient safety data in the US over the past twenty years. Fortunately, the public interest in having these data readily available has largely prevailed, and hospitals are now required to publish a broader and broader range of data on patient safety, including hospital-induced infection rates, ventilator-induced pneumonias, patient falls, and mortality rates. Here is a useful tool from USA Today that lets the public and the patient gather information about his/her hospital options and how these compare with other hospitals regionally and nationally. This is an effective accountability mechanism that inevitably drives hospitals towards better performance.

Canada has been very active in this area. Here is a website published by the Ontario Ministry of Health and Long-Term Care. The province requires hospitals to report a number of factors that are good indicators of patient safety: several kinds of hospital-born infections; central-line primary bloodstream infection and ventilator-associated pneumonia; surgical-site infection prevention activity; and hospital-standardized mortality ratio. The user can explore the site and find that there are in fact wide variations across hospitals in the province. This is likely to change patient choice; but it also serves as an instant guide for regulatory agencies and local hospital administrators as they attempt to focus attention on poor management practices and institutional arrangements. (It would be helpful for the purpose of comparison if the data could be easily downloaded into a spreadsheet.)

On first principles, it seems likely that any country that has a hospital system in which the safety performance of each hospital is kept secret will also show a wide distribution of patient safety outcomes across institutions, and will have an overall safety record that is much lower than it could be. This is because secrecy gives hospital administrators the ability to conceal the risks their institutions impose on patients through bad practices. So publicity and regular publication of patient safety information seems to be a necessary precondition to maintaining a high-safety hospital system.

But here is the crucial point: many countries continue to permit secrecy when it comes to hospital safety. In particular, this seems to be true in France. It seems that the French medical and hospital system continues to display a very high degree of secrecy and opacity when it comes to patient safety. In fact, anecdotal information about French hospitals suggests a wide range of levels of hospital-born infections in different hospitals. Hospital-born infections (infections nosocomiales) are an important and rising cause of patient illness and morbidity. And there are well-known practices and technologies that substantially reduce the incidence of these infections. But the implementation of these practices requires strong commitment and dedication at the unit level; and this degree of commitment is unlikely to occur in an environment of secrecy.

In fact, I have not been able to discover any of the tools that are now available for measuring patient safety in hospitals in North America in application to hospitals in France. But without this regular reporting, there is no mechanism through which institutions with bad safety performance can be “ratcheted” up into better practices and better safety outcomes. The impression that is given in the French medical system is that the doctors and the medical authorities are sacrosanct; patients are not expected to question their judgment, and the state appears not to require institutions to report and publish fundamental safety information. Patients have very little power and the media so far seem to have paid little attention to the issues of patient safety in French hospitals. This 2007 article in LePoint seems to be a first for France in that it provides quantitative rankings of a large number of hospitals in their treatment of a number of diseases. But it does not provide the kinds of safety information — infections, falls, pneumonias — that are core measures of patient safety.

There is a French state agency, OFFICE NATIONAL D’INDEMNISATION DES ACCIDENTS MÉDICAUX (ONIAM), that provides compensation to patients who can demonstrate that their injuries are the result of hospital-induced causes, including especially hospital-associated infections. But it appears that this agency is restricted to after-the-fact recognition of hospital errors rather than pro-active programs designed to reduce hospital errors. And here is a French government web site devoted to the issue of hospital infections. It announces a multi-pronged strategy for controlling the problem of infections nosocomiales, including the establishment of a national program of surveillance of the rates of these infections. So far, however, I have not been able to locate web resources that would provide hospital-level data about infection rates.

So I am offering a hypothesis that I would be very happy to find to be refuted: that the French medical establishment continues to be bureaucratically administered with very little public exposure of actual performance when it comes to patient safety. And without this system of publicity, it seems very likely that there are wide and tragic variations across French hospitals with regard to patient safety.

Are there French medical sociologists and public health researchers who are working on the issue of patient safety in French hospitals? Can good contemporary French sociologists like Céline Béraud, Baptiste Coulmont, and Philippe Masson offer some guidance on this topic (post)? If readers are aware of databases and patient safety research programs in France that are relevant to these topics, I would be very happy to hear about them.

Update: Baptiste Coulmont (blog) passes on this link to Réseau d’alerte d’investigations et de surveillance des infections nosocomia (RAISIN) within the Institut de veille sanitaire. The site provides research reports and regional assessments of nosocomia incidence. It does not appear to provide data at the level of the specific hospitals and medical centers. Baptiste refers also to work by Jean Peneff, a French medical sociologist and author of La France malade de ses médecins. Here is a link to a subsequent research report by Peneff. Thanks, Baptiste.

Trust and corruption

The recent collapse of a major skyscraper crane in New York City last month led to a surprising result: the arrest of the city’s chief crane inspector on charges of bribery. (See the New York Times story here.) (The story indicates that the facts surrounding the charges are unrelated to this particular crane collapse.) Several weeks earlier, a Congressional committee heard testimony from three F.A.A. inspectors to the effect that the agency had permitted Southwest Airlines to fly uninspected planes (story), and some attributed this lapse to too cozy a relationship between the F.A.A. and the airline industry:

The F.A.A.’s watchdog role, to many Democrats in Congress who now oversee airline regulators, grew toothless. “We had drifted a little bit too much toward the over-closeness and coziness between regulator and regulated,” said H. Clayton Foushee Jr., a former F.A.A. official who led a recent inquiry by Mr. Oberstar’s committee. (story)

The basic systems of a complex society depend upon the good-faith commitment of providers to give top priority to safety, health, and quality, but they also depend upon regulation, inspection, and certification. Caveat emptor doesn’t work when it comes to airline travel or working in a skyscraper; we simply have to trust that the airliner or the building is built and maintained to a high level of safety standards. The food we eat, the restaurants we patronize, the airlines and railroads we travel on, and the buildings we live and work in (and send our children to) provide complex products for our use that we can’t independently evaluate. Instead, we are obliged to trust the providers — the builders, the airline companies and their pilots and mechanics, the restaurant operators — and the regulatory and inspection regimes that are intended to provide an assurance of quality, safety, and health.

And yet there are two imperatives that work against public health and safety in most modern societies: the private incentive that the provider has to cut corners, and the perennial temptation of corruption that is inherent within a regulatory process. On the providers’ side, there is a constant business incentive to lower costs by substituting inferior ingredients or materials, to tolerate less-than-sanitary conditions in the back-of-restaurant areas, or to skimp on necessary maintenance of inherently dangerous systems. And on the regulatory side, there is the omnipresent possibility of collusion between inspectors and providers. Inspectors have it in their power to impose costs or savings on providers; so the provider has an economic interest in making payments to inspectors to save themselves these costs. (See Robert Klitgaard’s fascinating book, Controlling Corruption, for a political scientist’s analysis of this problem.)

In a purely laissez-faire environment we would expect there to be recurring instances of health and safety disasters in food production, building construction, transportation, and the healthcare system; this seems to be the logical result of a purely cost- and profit-driven system of production. (This seems to be what lies at the heart of the Chinese pet food and toy product scandals of several months ago, and it was at the heart of the food industries chronicled by Upton Sinclair a century ago in this country.)

But an inadequate system of regulation and enforcement seems equally likely to lead to health and safety crises for society, if inspection regimes are inadequate or if inspectors are corrupt. The two stories about inspection mentioned above point to different ways in which a regulatory system can go wrong: individual inspectors can be corrupted, or honest inspectors can be improperly managed by their regulatory organization. And, of course, there is a third possibility as well: the regulatory system may be fully honest and well-managed but wholly insufficient to the task presented to it in terms of the resources and personnel devoted to the regulatory task.

These two tendencies appear to be resulting in major social problems in China today. There is little confidence in the Chinese public in building standards in even the major civil engineering projects that the country has undertaken in the past ten years (CNN story, BBC story), there is widespread concern about corruption in many aspects of ordinary life, and there is growing concern among consumers about the safety of the system of food production, public water sources, and pharmaceuticals (story). (The anger and anguish expressed by parents whose children were lost in collapsed schools in Sichuan appear to derive from these kinds of mistrust.) So one of China’s major challenges for the coming years is to create credible, effective, and trusted regulatory regimes for the areas of public life that most directly affect health and safety.

But the stories mentioned above don’t have to do with China, or India, or Brazil; they have to do with the United States. We have lived through a period of determined deregulation since 1980, and have been subjected to a political ideology that minimized and demeaned the role of government in protecting the health and safety of the public — in banking no less than air safety. It seems very pressing for us now to ask ourselves: how effective are the systems of regulation and inspection that we have in our key industries — food, pharmaceuticals, hospitals, transportation, and construction? How much confidence can we have in the basis health and safety features of these fundamental social goods? And what sorts of institutional reforms do we need to undertake?

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