Health Care Anal (2007) 15:169177 DOI 10.

1007/s10728-006-0040-6 ORIGINAL ARTICLE

The Rise of Independent Regulation in Health Care

Rui Nunes Guilhermina Rego Cristina Brand o a

Published online: 13 February 2007 C Springer Science+Business Media, LLC 2007

Abstract In all countries where health care access is considered a social right, regulation is both a tool of performance improvement as well as an instrument of social justice. Both social (equity in access) and economical (promoting competition) regulation are at stake due to the nature of the good itself. Different modalities of regulation do exist and usually new regulatory cycles include the creation of stronger regulatory agencies. Indeed, health care regulation is rising steadily in most developed countries as a consequence of the introduction of the New Public Management perspective to provide essential public goods. Health care is delivered by different organisations with very different cultural backgroundspublic and private (prot and non-prot)that should be accountable for their decisions. Control by regulatory agencies is instrumental to accomplish this goal. However, there is some dispute with regards the degree of regulatory autonomy. The objective of this paper is to determine if independent regulatory agencies (IRAs) are effective in carrying out health care regulation. The authors apply Walshes analytical framework to the Regulatory Authority of Health (Portugal) to answer the question if independent regulation works. In conclusion, the two year experience of the Regulatory Authority of Health is important not only because the primary goals of independent regulation were achieved but also because this authority is now a full partner in the health care sector. However, independent agencies need to develop strong mechanisms of accountability because good regulatory governance is the paradigm of this institutional innovation. Keywords Economic regulation . Governance . Health care regulation . Independent regulatory agencies . Social regulation

R. Nunes G. Rego C. Brand o a Faculty of Medicine of the University of Porto, Portugal, EU R. Nunes Former President of the Regulatory Authority of Health, Portugal, EU R. Nunes ( ) Estrada da Circunvalacao, n. 9925, 4250-150 Porto, Portugal, EU e-mail: ruinunes@med.up.pt Springer

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Introduction In European countries health care is usually considered as a social right and different systems of health care delivery have been implemented in accordance with this perspective. It follows that equity in access has been the paradigm of health care systems in most liberal democracies. Equity means that the principle of justice involved in distribution of health is mainly based on personal need. The pursuit of equity usually implies a reduction of unjust disparities between individual citizens or social groups [7]. Nevertheless, the increasing costs of health caremainly due to scientic and technologic developments, medical malpractice, the increasing age of the population and consumerism make the establishment of priorities an economic and even social imperative [17]. In this vein, the steady debate between equity and efciency led to the introduction of the rules and principles of the New Public Management in the provision of health care. But, the search for efciency led also to the rise of health care regulation in most developed countries in order to monitor and enforce rules and guidelines. Indeed, in many countries regulation is both a tool of performance improvement as well as an instrument of social justice. Both social (equity in access) and economic regulation (promoting competition) are at stake due to the nature of the good itself [2]. Different modalities of health care regulation do exist, namely with regards to the degree of political and nancial autonomy.

Objectives and Methods In most developed countries the government intervenes directly in the structures rendering health care services. Moreover, it is instrumental in the planning, regulation and evaluation of the system [19]. Most health care systems have different functions: investment, nancing of services, and delivery of health care.1 All of them try to guarantee the tools for increasing health outcomes. Some countries, however, are engaging in market approaches in health care based on the assumption that if competition is promoted efciency in resource allocation is maximised. A clear-cut distinction between the nancing and the delivery of health care is the paradigm of this entrepreneurial culture because evidence shows that integrated models (nancing and provision of health care) are usually inefcient. As this argument goes the role of the government is to guarantee access to health care services and to regulate this kind of activity. In this vein competing models of hospital management have been proposed in the public sector through the introduction of private rules in its core administrative framework. The main goal is to obtain a exible structure in accordance with demand and supply and economic rationality and, therefore, to improve health outcomes. Indeed, the introduction of new management modalities in the public system seems to promote competition and the best solution is largely dependent on social, economic and political constraints. Changes
1 Portuguese health system, for instance, intends to be a global model of rationalised care, centred on the general practitioner placing high emphasis on early intervention and guaranteeing the integration and continuity of care. The Portuguese health system represents 10% of the Gross Domestic Product and has two main components: a) the National Health Service (NHS), universally accessible, and publicly nanced through the social solidarity (taxes) of citizens (the public expenditure in health care represents 65% of the overall health budget and is processed directly from the global budget), b) subsystems and private practice (including commercial insurance schemes and out-of-pocket payments) account for 35% of the overall health budget.

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in the traditional structure of public administration are consistently proposed, especially in the management of hospitals belonging to the public service (New Public Management). The introduction of the private nance initiative (PFI) perspectivein which a private group delivers health services (including sometimes clinical services) on a contractual basis [22]is sometimes thought to be another way to increase value for money. Although there are important cultural differences between the United States and European countries, and although the national origins of different managerial and regulative techniques do inuence the provision of care, most health care systems face the problem of nancial sustainability. However, if it is true that in a regulatory state health care is delivered by different organisations with very different cultural backgrounds (public and private, prot and nonprot) it is also true that all of them should be accountable for their decisions. Control by regulatory agencies is instrumental to accomplish this goal. In this paper we adopt Selznicks denition of regulation [21], that is sustained and focused control exercised by a public agency over activities which are valued by a community (p. 363). In many countries regulators are at arms length from the government. The National Institute for Health and Clinical Excellence (NICE) and the Commission for Health Improvement are good examples of this modality of regulation (NICE, [18, 23]). The rationale behind direct (or indirect) government regulation is easily understandable. As stated by Richard Saltman and Reinhard Busse [20] the strength of entrepreneurial incentives makes it essential to have in place adequate regulation to steer-and-channel what would otherwise be only self-interested private decisions . . . . Regulation, as a central instrument of stewardship, must from this perspective similarly satisfy these two basic requirements calling for ethical and efcient state behaviour (p. 6). In short, health care regulation is rising steadily in most developed countries and competing regulatory modalities should be evaluated [3]. Usually each new regulatory cycle involves the creation of stronger (ratchet effect) and different (independent) agencies. Policy makers must therefore take into consideration that regulation of the health care system involves different providers (not only public providers in a strict sense) and the co-operation between different health care agents intends to deliver high quality health care at the lowest possible cost. The objective of this paper is to determine if independent regulatory agencies (IRAs) are an alternative in carrying out social and economical regulation in health care. Indeed, a distinctive feature of the regulatory state is the rise of independent authorities as suggested by Majone [14]. As non-majoritarian institutions IRAs are dened by Gilardi [10] as public organisations with regulatory powers that are neither directly elected by people, nor directly managed by elected ofcials (p. 67). The authors apply Walshes analytical framework to the Regulatory Authority of Health (Portugal) to determine to what extent does this particular model of regulation achieves its objectives and also what impact it has on the performance of health care organisations [24]. This agency is an IRA (politically and nancially) created in late 2003, with legal powers to enforce compliance in health care both horizontally (all health care organisations) and vertically (all functions and activities with the exception of pharmaceuticals).

Results and Discussion For several different reasons, health care regulation has grown all over the western world as an instrument of performance improvement [5]. Different regulatory systems try to accomplish
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172 Table 1 Characteristics of independent health care regulation

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1. Public Interest: The main goal of health care regulation is performance improvement having as background the public interest in protecting a major social good (health care access is a social and political right in most European countries). Promoting competition through market approaches is an important although secondary objective; 2. Authority: The regulator is recognised as such by all stakeholders and there is a specic legal framework for its activity; 3. Centralisation: Control, supervision, and monitoring of the health care system is centralised to assure the best regulatory outcome; 4. Independence: To produce the best regulatory outcome the regulator is nancially, organically and functionally independent from the government and regulated organisations; 5. Regulatory Governance: The regulator is an exterior entity with regards market activities and should be accountable to society in a fair and transparent way. Namely to the Parliament Select Committee on Health or other democratic institutions.

this goal. The Regulatory Authority of Health was created in Portugal in late 20032 and may be characterised as a genuine Independent Regulatory Agency. As previously stated the authors intend to apply Walshes framework for analysing independent agencies. This analytical framework has different issues to be evaluated: regulating organisation, regulatory goals/objectives, scope of regulation, regulatory model, direction, detection and enforcement [24]. The main objective is to evaluate regulatory experiences and to facilitate comparisons between different approaches to regulation (p. 32). The rst four areas of the framework (regulating organisation, goals/objectives, scope and model) intend to analyse the context or environment of regulation. Direction, detection and enforcement are concerned with the process of regulation itself. This framework can be used to compare regulatory systems in different countries as well as regulation in different sectors. Also, as stated by Walshe, this framework can be used to describe the use of healthcare regulation. . . and to draw out from the available evidence some lessons about what may constitute effective regulation (p. 159). Walshes perspective is a valid framework whatever the health care system considered because it analyses a specic regulatory authority in a particular social, economic and political environment that is itself also evaluated. In Table 1 the core issues of independent regulation are presented. The regulating organisation analysed in this paper (Regulatory Authority of Health) is a public agency with an independent nature (politically, economically and nancially3 with legal powers of supervision and control both horizontally (all health care organisations) and vertically (all functions

2 The Portuguese health care reform is described by the OECD (Organisation for Economic Co-operation and Development) [11] as follows: An ambitious reform to increase efciency of the Portuguese health care system was launched in 2002. In contrast to previous attempts of gradual reforms, which were never fully implemented, the strategy has been to create a big bang in the health sector, making changes essentially irreversible. The reform has two main aims: to deliver better-quality public health services than at present but at no higher cost; and to reduce the underlying growth rate of public health care spending over the medium term. New legislation approved includes the separation of functions of regulation, nancing and provision of health care services; setting up new models of nancing for providers, which impose harder budget constraints; the introduction of incentives towards productivity, management and quality improvement; the possibility for the private sector to play a larger role in service provision; and the promotion of generic drugs. (p. 2). 3 The nancing of this independent agency is through taxes charged directly to all health care providers in proportion to the number of professionals working at the regulated organisation.

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and activities with the exception of pharmaceuticals). It was created by a government act and has full administrative authority in the health care sector. The specic goals (that is the purpose of regulation and how explicitly it is stated), the horizontal scope (the forms or types of organisations that are subject to regulation) and the vertical scope of regulation (the range of functions or activities within those organisations that are regulated) of the Regulatory Authority of Health are common to other European regulatory agencies and therefore these are not essential characteristics of independent regulation. Indeed, different modalities and arrangements are possible in the health care setting. The legal act that creates the Regulatory Authority of Health determines that the purpose of this agency is to carry out the supervision of the health care system insofar as performance improvement is concerned. Also, another goal is to promote health care quality in accordance with international standards. But, again, this is not a core issue of independent regulation. This agency has direct intervention on all health care organisations including public and private hospitals (prot and non-prot) and other facilities including private practice and insurance companies. Its administrative authority includes every domain of health care activity with the exception of pharmaceutical policy. Different strategies of regulation do exist, namely deterrence, compliance [12] and responsive regulation. As stated by Kieran Walshe the deterrence model presupposes that organizations are amoral calculators dominated by their own self-interests. The only way to control these organizations is through the extensive use of formal standards and inspections, and routinely resort to sanctions or penalties ([24]: 35). On the other hand, compliance regulators focus on providing guidance, support and advice to regulated organizations ([24]: 36). By responsive regulation is meant a global approach that takes into consideration both compliance and deterrence strategies [1], that is, both command-and-control and steer-and-channel modalities of regulation. The best regulatory outcome is accomplished by matching regulatory instruments to the specics of the regulated organisations and the circumstances in which regulation is carried out. As an example, the Regulatory Authority of Health is enabled by law to elaborate guidelines of proper conduct, recommendations and opinions over health services activities, and it is expected that regulated organisations comply with these rules and norms. The philosophy, strategy and methods of this agency are then oriented both towards deterrence and compliance. Also, with regards to enforcement strategies (methods used to persuade, inuence, or force regulated organisations to make changes to comply with regulatory requirements or directions), sanctions are a valuable tool of this independent agency (ne, suspension of activity) to deter practices that are legally or ethically condemned. Although this authority has full capacity of inspection over health care facilities (including all data with the exception of clinical records), its main task is to supervise the system and to regulate deviations from accepted standards. The extended legal powers of supervision and inspection are instrumental to guarantee the compliance of the regulated organisations with the regulatory requirements. The methods used to communicate regulatory requirements or directions to regulated organisations (direction) and to measure and monitor the performance of regulated organisations (detection) are overtly simplied due to the legal imperative of communication through the internet. Indeed, in a compliance perspective, information is currently exchanged at the web site of this agency namely with regards the mandatory registry of all health care providers. At the end of 2006 it will be possible for any European citizen to search in the internet for any particular Portuguese health care facility including its core characteristics. The critical issue, however, is the independent nature of this agency, namely with regards to the lack of democratic legitimacy to regulate. Therefore, issues like governance and
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174 Table 2 Principles of regulatory governance of IRAs

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1. Goals of Regulatory Governance (adapted from [9]): to increase the performance of the regulatory agency, to assure its social responsibility namely concerning the search for the common good, and to promote conformance with regards accountability arrangements in a fair and transparent way; 2. External Controls: a) Public Accountability: Explicit, public detailed procedures for evaluating the regulator with full public report (use reports, performance reports, compliance reports, consultants), global budgeting, fair grievance procedures (legal, non-legal), and adequate privacy protection (adapted from [6]); b) Democratic Accountability: Auditing by political representatives such as the Parliament Select Committee on Health; c) Other External Controls: External mechanisms of reporting, public disclosure of the processes and rationale adopted in regulation, external audit, nancial account and annual report (published at internet); 3. Internal Controls: a) Self-regulation: Internal audits, ethical codes and disclosure of directors performance and remuneration; b) Board: Unitary versus dual board, mechanisms of appointment to the board, performance evaluation (adapted from [15]).

accountability are deemed critical for independent regulation to succeed. Indeed, the rise of IRAs in the health care sector should go with the creation of new mechanisms of control over these non-majoritarian institutions. On the other hand, the similarities between direct and independent regulation are, essentially, the existence of a legal framework for regulatory activity, a centralised activity all over the health care system (if that should be the case) and the pursuit of the public good (health care access, appropriate referral mechanisms, technological development and quality of health services). Quality assurance [8] and clinical governance [16] are amongst the main tasks of both direct and independent regulation in health care. The main difference is that full independence from the government and from regulated organisations implies a clear mechanism of accountability to avoid the regulators capture and the use of discretionary authority. This mechanism is usually referred to as regulatory governance. Whichever the agencies involved, the rules of corporate governance are a social, economic and political imperative, so that regulation is accepted as a valid tool in health care reform.4 It is commonly accepted that corporate governance is the system by which organisations are directed and controlled dealing both with internal aspects of a corporation (internal control, shareholders interests) as well as its external aspects (relation with the others stakeholders) [15]. In health care regulation, governance seems to be of relevance notwithstanding the fact that regulation is undertaken either by government agencies or by non-governmental independent organisations, with different strategies and practices. Independent regulators, however, due to the lack of democratic support should develop governance arrangements so that the public perception over its importance and strength is maintained [13]. In this vein, the rise of different regulatory authorities in health care should also promote new mechanisms of control of their activities. In Table 2 the principles of good governance in regulation are presented. Regulatory governance seems to be paramount notwithstanding the fact that health care

4 In principle there is no reason why well-known theories of corporate governanceagency, stakeholder and transaction cost economics theoriesshould not be used in the regulatory context. Indeed, they should provide a theoretical framework for regulatory governance [4]. The distinctive feature of corporate governance is the promotion of an adequate system of control. Dealing with the relations between the management of an organisation with its managers, shareholders and other stakeholders, corporate governance guarantees that an organisation is managed in accordance with the best interests of all stakeholders. It also aims to encourage transparency and accountability in its management and performance.

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regulation is undertaken either by government agencies or non-governmental organisations (independent regulatory agencies), with different goals and objectives. Good governance is, then, the paradigm of independent supervision and tries to avoid common problems of regulation such as regulatory capture [25]. In this way regulation can be more easily accepted by society as a valid tool to promote stakeholders accountability. Although a two year experience is insufcient to determine the impact of the Regulatory Authority of Health in the Portuguese health care system, independence seems to be an important feature to accomplish many regulatory goals, in a system where public providers are directly (or indirectly) run by the government. For competition to succeed the health care market must be regulated and independent agencies seem to be a good tool to promote competition between public and private organisations. In this way, assuming that some health care providers will always be public, independent regulators should control health care delivery, increase performance and prevent market failures.

Conclusion Whatever the institutional nature of the agencies carrying out regulation and its regulatory paradigm (compliance, deterrence, or responsive regulation) the effectiveness of the system might be related to the way tools are put into practice. Also, every new regulatory cycle should take into consideration the evidence gathered in the analysis of the previous one. More than an institutional innovation IRAs are a distinctive feature of the regulatory state all over Europe. The Portuguese Regulatory Authority of Health is a good example of an IRA. From a normative approach its creation led to the registration of all health care providers and facilities (public, private for prot and private not for prot). Indeed, the legal status of all providers as well as other relevant data for regulatory control and public information it is now available on-line. From an economical perspective this check-list of the main characteristics of health care providers had an immediate impact on the Portuguese health care system, namely providing better knowledge of the agents operating in the market, ensuring supply, and planning development rationally. It should be reminded that this is crucial for sound investment decisions (public or private) and may even reduce information asymmetry and service scarcity. It has been empirically conrmed that independent supervision of the system is correcting some important market failures, namely information asymmetry, externalities, service scarcity, market uncertainty and monopoly creation. As an example, independent regulation in Portugal led to a different scheme of price setting in private practice in which fee-forservice depends now on market pressures and not anymore on maximum and minimum levels determined by the medical association. It has been argued that in this way prices would be lower and the access to health care services would increase. Another good example of the success of independent regulation is pharmaceutical distribution that was a perfect monopoly in Portugal. Although concentration in this sector has been very difcult to overcome in the past, important steps towards liberalisation were given due to the independent intervention of regulators. Also, justice and democracy are optimised because one of the goals of independent regulation is to realise social goals, namely equity and fairness, meaning that everyone should have access to health care according to clinical need. Indeed, the Regulatory Authority of Health had a signicant impact in health care access namely with regards to the implementation of policies of non-discrimination of patients and preventing adverse selection in private
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and public facilities. The expected practice of adverse selection by public hospitals with a managerial culture did not occur, mainly due to the regulatory overseeing of the system. However, in the health care setting governance arrangements are instrumental in the implementation of independent regulation at least for two different reasons. First, because the rise of regulation is closely associated to the New Public Management in which politicians try to avoid controversial social decisions. Indeed, in a changing political environment regulation is a key factor in many areas such as health care. Second, because independent regulators, that are not at arms length from the government, must be accountable for their decisions in a transparent way. This public accountability legitimates the activity of IRAs and makes them more acceptable in a democratic society. In Portugal, the Regulatory Authority of Health is accountable through very different ways listed in Table 2, but public scrutiny through the Parliament Select Committee on Health with direct television broadcast is a guarantee of its governance and social responsibility. Due to the complexity of regulatory systems a strategic analysis regarding the introduction of new agenciesinsofar as strengths, weaknesses, opportunities and threats are concernedseems to be paramount. In this way, it will be possible to determine if independent agencies, following the rules of regulatory governance, are a valuable tool in health care reform. Such an evaluation is now taking place in Portugal. As stated by Walshe ([24]: 160) it should be determined what impact regulation does have on the performance of health care organisations and to what extent does achieve regulation its objectives. Another concern is the monetary cost of regulation. It should also be emphasised that analysing health care regulationnamely to determine if regulatory goals are accomplishedis a continuous process, because a static evaluation is only temporarily accurate. Indeed, monitoring dynamically the health care system is the goal of any regulatory agency. In conclusion, the two year experience of the Portuguese Regulatory Authority of Health is important not only because the primary goals of independent regulation were achieved but also because this authority is now a full partner in the health care sector. It is expected that other European countries follow this example to gather further knowledge about the place of independent regulatory agencies in complex health care systems.

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