The Emerging Role of Competition in Health Care

This essay, commissioned to serve as an introduction to the JEP symposium on current competition in health care, provides a historical perspective on the role of both competition and regulation in the financing and delivery of health services since the implementation of Medicare and Medicaid in the mid-1960s. At the beginning of this period, few could perceive a role for competition in healthcare given the key role played by physicians in providing and ordering care and concerns that lower prices might signal lower quality. Initial attempts to slow rapidly rising costs involved various regulatory tools, but over time, regulation increasingly incorporated incentives for providers, to control costs. Competitive approaches began to develop in the late 1970s, in part reflecting broad changes in the nation’s political culture. Competitive approaches are now are quite widespread, but regulation plays an important role in the structuring of competition and in addressing areas where competition is seen as having less potential.