Health Care, Gammon’s Law and Bureaucracy

In a previous post I brought up something that my fellow blogger, Dave Schuler, has pointed to as a problem with health care: Gammon’s Law.

The basic idea of Gammon’s Law is that even though expenditures in a bureaucratic system increase even though output (however you measure it) is decreasing. One thing this immediately brought to mind was William Niskanen’s Theory of Bureaucracy. Niskanen’s theory, in a nutshell, is as follows,

  • Bureaucracies (or more accurately those who run a bureaucracy) know their costs.
  • The legislators don’t.
  • Bureaucracies want bigger budgets (one refinement is for bigger discretionary budgets).
  • Since bureaucracies can’t levy taxes directly and legislators can, the bureaucrats lie to legistors to get bigger budgets.

Thus, the trend is for bigger and bigger budgets. Seems to me that this theory of bureaucracy and Gammon’s Law might fit fairly well. The bureaucracy wants a larger budget and how to go about getting it? Decrease output then claim more money is needed since the current budget is not sufficient to meet “demand”.

One problem is that Niskanen’s theory has bureaucracies that are large and over-supplying whatever good they are supposed to supply. However, Migue and Belanger[1] argue that bureaucracies are more interested in increasing their discretionary budgets (defined as any budgeted funds over the minimum necessary to cover the costs of production). Subsequent research looked at the role of oversight committees in a legislature and modeled the interaction between the two (bureaucracies and oversight committees) as a game, and noted that under-production was a definite possibility.

Still, the possibility of under-production doesn’t strike me as particularly strong. Of course, perhaps some bureaucracies are different than others. For example with national defense perhaps over-supply is the problem due to the nature of national defense. With health care we do have limitations on the number of doctors that graduate from medical school Right there, we’d limit output. Add on licensing for nurses and you have additional layer of rent-seeking that limits output.

Further, I think that the biggest problem is going to be the government bureaucracies. While private firms also have bureaucracies as well, there are, in my view, stronger checks on the size of a firm’s bureaucracy. If the firm’s profits start to take too big a hit due to the size of bureaucracy then people might get fired, the firm could shut down and sell of its assets. When was the last time we saw a government bureaucracy shutting down? Never? As such, the best starting place when it comes to addressing the problem of Gammon’s Law is most likely the government bureaucracies. Like Dave, I think this will require a significant re-thinking of how health care works in this country. The idea of having every little medical expenditure covered is one problem. Getting health insurance back to actually being insurance would be one step. And I’m not opposed to the government being involved at some level. I just think that involvement should be extremely limited at least in terms of bureaucracy and regulation. A voucher program could have very limited bureaucracy and yet still help ensure that most if not all people have health insurance of some kind. The idea though of having the government provide health care via a system like we see in countries where health care is socialized is exactly the wrong solution.
[1]Belanger, G., and Migue, J., 1974. “Toward A General Theory Of Managerial Discretion”, Public Choice, 17, 27-43.

FILED UNDER: Bureaucracy, Economics and Business, Health, US Politics, ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. jeff b says:

    Why do all these theories of bureaucracy ignore actual examples of bureaucracy? The VHA delivers more health care per dollar spent than any other agency on Earth, public or private. The VHA outranks every major research hospital (Johns Hopkins, Mayo Clinic, etc) in terms of quality of care. Unlike Medicare, the VHA can and does negotiate deep discounts for pharmaceuticals.

    VHA’s number of patients under care increased by 71% while their budget increased by only 41% and quality remained constant. VHA’s management layer is much, much smaller than a comparable HMO.

    In short, reality strongly counters your theory.

  2. Steve Verdon says:

    No Jeff, you have one counter example. And while that is problematic for any theory, it doesn’t mean that the theory is completely wrong. Remember theories are simplifications of reality and also generalizations, especially ones dealing with social phenomena.

  3. jeff b,

    Are you currently receiving care through the VHA? My father is for somethings. He is lucky enough to be able to take advantage of the VHA while having the resources to go outside of it at will. But if it was the only option, it would be a very poor choice. One of the complaints from countries that have introduced national health care and for the VHA is the waiting time to see a doctor. If it’s an annual thing and you have the time management skills to remember to request an appointment 3 months in advance, not a problem. But when he got prostate cancer, the VHA wasn’t even a blip on the radar screen as an option given that time mattered.

    I agree with Steve that insurance vs insulation change would be a good step.

    I think portability of insurance coverage is another major step. I would also look for a liability law change that would let doctors have two tiers of charges. One tier if you forgo your right to sue (though you could still complain to the medical board to have the doctor’s license yanked for negligence) and the other tier for the current system. I know doctors who are good doctors but have to pay six digit insurance premiums. They have to charge a lot just to make the fixed overhead costs. The change in liability would let them move the cost of liability coverage to those who want to be able to sue.

  4. Steve Verdon says:

    I’d also point out that the VHA wasn’t always the statistical outlier it is today, and that is another problem with Jeff B’s comment. He wants to model our health care industry off of a statistical outlier. Now maybe it would work, but frankly that sounds rather…uhmmm risky to me.

    In reading the article that Jeff got most of his facts from (over at Washington Monthly, sorry too lazy for a link right now), there are little tidbits in the article that make me wonder if the VHAs success will be long lived or short lived. One comment in the article was about how a charismatic person took charge at the VHA. Maybe a charismatic leader can do the same thing with the entire health care industry, but do we want to be dependent on charismatic leaders? How do you pick them?

    Another comment that one could easily miss is that the VHA is currently underfunded. Whoops. Could we see Gammon’s Law taking hold in a few years? I don’t know. I’m not familiar with various cases (e.g. England, Canada, Medicare, etc.) to know if there is a possible pattern here.

    In short, Jeff’s comment sounds good, but I think a healthy bit of skepticism is a good idea here.

  5. jeff b says:

    There’s no doubt that the VHA has a patient backlog. They are severely supply constraint at this time. But what does that have to do with the theory of ever-growing bureaucracies?

  6. Steve Verdon says:

    The basic idea of Gammon’s Law is that even though expenditures in a bureaucratic system increase even though output (however you measure it) is decreasing.

    Right there. If funding is increased will it go to patients or will it go towards administration? Right now you have one exception and several cases that fit the pattern. Will the VHA remain an outlier or will it succumb as well?

  7. Dr Dan says:

    In my state (MN) there was an unfortunate case recently involving a recently returned Iraq war vet who was depressed and suffering from PTSD symptoms. He presented himself to the local VA hospital and mentioned among other things that he was feeling suicidal. He was 26th on thelist to be admitted to a mental health ward. A few days later he killed himself. I mention this not to bad-mouth the VA, but to point out that they have budget and manpower limits and we should not be quick to assume that because they may score well on treating those vets who enter the system, there is a rationing of care. Just like in the the non-VA world.