Statement of Regina E. Herzlinger, Ph.D., Nancy R. McPherson Professor of Business Administration, Harvard Business School, Boston, Massachusetts

Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means

July 18, 2006

Summary

Every day consumers use information to decrease costs, improve quality, and increase the range of choices even for complex financial services and high-tech products.  They could achieve the same results in health care if price and other information about specific providers were more widely available.  The SEC, which transformed the transparency of the world-class U.S. capital markets, provides a good model of how to make it happen.  But the transformation will not be an easy one.   Just as FDR bucked substantial business interests to create the SEC, the current government faces powerful, well-financed opposition by providers to transparency.

How the Absence of Price Transparency in Health Care Hurts Consumers

Currently, many consumers are injured by the absence of price transparency in health care.   Although there is substantial variation in hospital and physician prices, within geographic regions,[1] those who pay for their own health care expenses lack the price information they need to obtain the best value for the money.

The consumers injured by the absence of information include the more than 40 million uninsured.  Hospitals have raised their charges—their prices for self-paying customers—substantially: in 2003, as the number of hospitalizations by the uninsured remained the same, hospital charges to them increased by 55%, since 2000.[2]  While denying wrongdoing, Catholic Healthcare West agreed to pay estimated hundreds of million of dollars to settle a lawsuit about overcharges to the uninsured.[3]  Small wonder that medical debt is the second-leading cause of personal bankruptcy.  The growth in high deductible health insurance policies further increases the need for price information.

Even those who are fully insured are injured by the absence of price transparency and the improvement in efficiency that transparency typically causes. Insured employees are increasingly paid in health insurance benefits, rather than wages, because the growth in health care costs outstrips that of the economy.  For example, "In 2003, a major union group in the Milwaukee area needed additional money to cover the cost of the health benefits.  The trustees of the benefit plan were forced to take 50 cents an hour out of . . . employee pay to cover those costs.  In June, a $1.50 an hour raise was entirely dedicated to the health benefits.  With that amount, each employee saw over $4,000 a year go to the health benefits instead of the pay envelope.  These employees are purchasing fewer clothes, smaller cars and less expensive homes. . . ."[4]

Is Health Care Information Good for Your Health?

Consumers who have access to good information and the freedom to choose health care plans and providers, have optimized in classic Economics 101 fashion.  For example, the price and satisfaction disclosure of the Twin Cities’ employer coalition, the Buyers Health Care Action Group, helped to cause a nearly 20% drop in high-cost/low-satisfaction plans, each composed of a unique set of providers, and a 50% increase in low-cost/high-satisfaction plans.[5]  Even in 2006, early in the program's history, Medicare Part D has already illustrated the power of price transparency: enrollees have chosen plans with premiums of $24, rather than the $37 initially expected.[6]

But, even in the absence of consumer choice and control, the compilation and dissemination of information exerts powerful effects on suppliers.[7] In the accounting literature, this phenomenon is well-known as the audit effect:[8] firms improve their management in anticipation of an accounting audit.  In health care, many of the reviews of the impact of published data on physicians, hospitals, and insurers have concluded that they resulted in improved outcomes and/or processes.[9]

New York State’s experience illustrates the results when government requires meaningful health care information.  Three years afterNew York State’s commissioner of public health requested data about the risk-adjusted death rates of open-heart surgeries performed by different surgeons and hospitals, the state achieved the lowest risk-adjusted mortality rates in the country.[10]  Physicians and hospital executives with low-performance scores typically revamped their protocols in response to these data.[11]  Most studies found that the fears that surgeons would abandon sick patients to improve their performance ratings to be unfounded:  To the contrary, the severity of illness among New York patients having coronary artery bypass graft (CABG) surgery increased.[12]  (Although one study concluded that the ratings led to “a decline in the severity of illness” of CABG patients, it cautioned:  “Our results do not imply that report cards are harmful in general. . . . [R]eport cards could be constructive if designed in a way to minimize the incentives and opportunities for provider selection.”[13])

Public performance disclosure is important. When Minnesota’s state government required all insurers who served state employees to be evaluated by their enrollees in a report card, some plans restructured significantly to improve their quality ratings.[14]  Similarly, the Pennsylvania hospitals whose performance data were measured and disseminated by a public agency used the results to change their patient care and governance to a greater extent than neighboring New Jersey hospitals whose performance data were not released.  The important changes included Board reviews of the data and reworkings of the patient care procedures.[15] A study of obstetrics performance found that hospitals whose results were disclosed publicly had significantly greater improvement than those with private reports, while an equal percentage of those with no reports improved and declined significantly.[16]

The Impact of Information on How Markets Work

How do consumers cause products to be better and cheaper?

Paradoxically, although average buyers are not experts about most of their purchases, consumers can reshape entire industries, even those with complex, technical products, such as financial services, cars, or computers. The reason is that markets are guided not by average consumers but by the marginal, or last, customers who drive the toughest bargain. They are the show-me crowd, bloodlessly depicted on the bottom of the Economics 101 downward sloping demand curve.  This relatively small group of demanding consumers reward suppliers who reduce price and improve quality.  For example, a McKinsey study showed that only 100 investors “significantly affect the share prices of most large companies.”[17]

Below I will illustrate how relatively few consumers, when they were armed with information, transformed the complex goods and services in the automobile and finance sectors.

The Impact of Information on the Automobile Sector

Consider the purchase of a car.   Most consumers have only the dimmest notion of how a car functions.  After all, a car is a high-tech device, studded with microchips. When I see someone in an automobile showroom peering under the hood of a car, I think to myself, “What the heck are you looking at?”

My own notions of the mechanical compression and ignition of gasoline that lead to an explosion whose energy ultimately rotates the wheels of a car are as dated as my first car, the 1957 Dodge that I purchased in 1966.   It got seven miles to the gallon, rivaled a stretch limo in length, and belched pollutants.  Nevertheless, I can readily find the kind of car I want at a price I am willing to pay.  My quality choices have increased substantially since 1966, while the cost of a car has decreased as a proportion of income:[18]  As a result, 48% of the poor own cars, and 14% own more than one.[19]

How can an average consumer easily find cars that are better and cheaper?

And, as only one person in a vast sea, why is she not pillaged in the automobile market?

The answer to these questions illuminate how markets work so that even ignorant, weak, solo participant, are offered better and cheaper products.  Two ingredients are crucial: 

One is information.  It enables me to be an intelligent car shopper, despite my ignorance. 

I review the rating literature for a car that embodies the attributes I value:  safety, reliability, environmental friendliness, and price.  Objective, trustworthy information about these attributes is easily available to me.  Thus, when I studied Consumer Reports for cars with these attributes, two brands caught my eye:  Volvo and Buick.  I skipped the earnest reviews of how the engines work, fuel-efficiency, comfort, handling, styling, etc.  Safety, environmental quality, reliability, and price——these are what interests me. 

I opted for the Buick. Although it was not as reliable as the Volvo, it was cheaper and had more of the heft that I associate with safety.

But many who shared my views of a car’s desired characteristics opted for the Volvo.  It grew from an obscure Swedish brand to sales of456,000 cars in 2004.[20]  Volvo’s rivals saw that a meaningful number of customers were interested in safety and reliability and introduced these qualities into their cars.  In the quest for safety, Ford, for example, acquired Volvo[21] while other automobile manufacturers improved their reliability.  By 2005,U.S. cars exceeded European ones in reliability and the Japanese cars had only a small edge.[22]  Quite a change from 1980 when U.S. cars were three times as unreliable as Japanese ones and twice as unreliable as European vehicles.[23]

So that is how cars became better even when the consumer is not expert.  Information makes them smart.

But what stops the car manufacturers from refusing to cut their prices for only one person?

The critical second ingredient to an effective market is a small group of tough-minded buyers.  At a high price, there are only a few buyers who are more-or-less price insensitive.  To attract more customers, suppliers reduce their prices.  The increased volume of customers more than compensates for the reduction.  Suppliers continue to cut prices until they hit a brick wall:  the last picky, tough-minded customers who clear the market.  At this price, the incremental revenue that providers generate from the hard-nosed bargain shoppers is roughly equal to their marginal cost.  The rest of us benefit from the assertiveness of the last-to-buy crowd.

The car market illustrates their impact.  Currently, automobile prices are the lowest in two decades.  In 1991, for example, the average family required 30 weeks of income for the purchase of a new vehicle; but by 2005, a new vehicle required only 26.2 weeks of their income——a 14% decline.[24]  Simultaneously, automobile quality is at an all-time high.[25]  The range of choices is better too, as the quality differences between the best and worst manufacturers have declined.[26]

“Efficient” Capital Markets

The securities markets are fabled for their efficiency.[27] But how can security prices reflect the impact of all the complex publicly available information about the performance of each listed firm?  As an old accounting teacher, I know that many individuals cannot fully comprehend this complex information. 

There are at least two possible explanations.  A group’s consensus estimate is generally better than that of individuals; as one example, one group of 47 correctly predicted most of the 2006 Oscar winners, including those in obscure categories such as Art Direction, but only one of them matched the consensus for accuracy.[28]  Further, expert analysts help investors to evaluate prices, through information freely available in the mass media, on the web, and to clients of brokerage houses.  The experts themselves are rated, as in The Wall Street Journal “All-Star Analysts’” list.  Investors in mutual fund can evaluate their performance in publications such as Forbes, Money, and Consumer Reports, or the Morningstar and Value Line newsletters. 

Investors use these assessments to reward recent good performers, by allocating more money to them.[29] For example, Morningstar’s ratings of mutual funds are well correlated with their performance.[30] The growth in information retrieval services——especially in their electronic component——supports the market’s continued efficiency.

Competition among sellers of securities also increases the fairness of market prices.[31] For example, when E*Trade first established its own Web site for on-line stock trading, its low commission quickly attracted millions of trades. But, E*Trade's on-line competitors continually bettered its prices, leading to intense competition. As the profit margins of traditional market makers plunged, investors saved billions.[32] Such competition is spurred by comprehensive, easily available evaluations of transaction costs through sites such as SmartMoney.

The vast amount of public information about the security markets enables the intensive scrutiny that also improves their efficiency.  For example, a critical academic analysis of the bid-ask price spread on the NASDAQ prompted an SEC investigation and ultimately findings of price rigging. In response, the NASDAQ agreed to spend $100 million to improve its regulation[33] and investors are likely to reap more than $1 billion in settlement of a class-action suit.[34]

The information helps Congress to monitor the markets.  But the best, and most important, monitor is the public. As the New York Times noted, ". . . It is the rising power of [average amateur American investors pouring their money into mutual funds and retirement accounts that have made] the fairness of stock trading systems a populist political issue. . . . Advances in technology have made it far easier for regulators, professional investors, and even amateurs to figure out who is getting a fair shake."[35]

The impact of information on these favorable market characteristics is highlighted by security markets in developing countries: in early stages of market development, improvements in information convinced creditors to lend more; as the markets matures, firms substituted equity for debt financing. Overall, information lowers the cost of both debt and equity capital.[36]

Health Care Consumers of Information

When it comes to health care, some worry that average consumers will be stymied by the process of selecting relevant information.[37] 

Although these analysts fail to appreciate the impact of marginal consumers on a market, they, nevertheless, raise a question:  Does a marginal group of tough-nosed, market-clearing consumer not exist in health care?

To explore this, consider the characteristics of American consumers. Current generations are much better educated:  In 2004, 27.7% of the population had attained a college education or more and 85.2% were high school graduates.[38]  In 1960, in contrast, fewer than half the people were high school graduates and only 7% had a college education.[39] 

The former Federal Reserve’s chairman, Alan Greenspan, attributed the surge in the U.S. economy’s productivity to Americans’ interest in education:  “The average age of undergraduates in school full time has gone up several years.  Community colleges have burgeoned in size and on-the-job training has gone up very substantially. They are pressing very hard for higher levels of education and capacity and ability.  (Education) has induced a significant increase in their real incomes.”[40]

Higher levels of educational attainment increase not only income and ability but also self-confidence (referred to as “self-efficacy” in the health policy literature[41]).   Affluent web surfers embody these characteristics—they spend more time than others searching for information on the net before making a purchase and are much more likely to buy, once they have found a good value for the money.[42] Those who focus on their affluence miss the point:  Affluent or not, they eat the same bread, buy the same appliances, and wear the same jeans. The same Toyota is sold in poor inner city areas and affluent suburbs. Their activism improves these products for the rest of us. 

Consumers surf the web for health care information too.  A 2005report found that 95 million people used the Internet for health information,[43] 6 million of them daily.[44] Some even study medical information, such as the 1.8 million people who spent an average of 20 minutes at the government’s National Institute of Health web site, studded with arcane medical journal articles.[45]  A few even express their activism directly by mastering medical skills, such as CPR and the use of external defibrillators.[46] 

The assertiveness and self-confidence that typify marginal consumers are evident in these health care Internet users.  They agree more than average U.S. adults with the following statements:  “I like to investigate all options, rather than just ask for a doctor’s advice” and “people should take primary responsibility and not rely so much on doctors.”[47]  Their pragmatism is apparent too.  They do not search idly.  More than 70% want online evaluations of physicians,[48] and when they obtain the information, they use it.[49]  Consumers are also willing to change hospitals in response to information.[50] 

How to Make Health Care Transparency Happen - - The SEC

Many knowledgeable observers contend the U.S. Securities and Exchange Commission (SEC) is a critical element of the efficiency of the securities markets.[51]  The SEC was created in 1934, during the administration of U.S. President Franklin Delano Roosevelt (FDR), to correct the woeful abuses of small investors in the markets: insider trading, stock watering, nonexistent or misleading information, and outright fraud.[52]  FDR had to buck substantial opposition from businesses and state regulators to enact the SEC legislation.  His hope was that the SEC would restore public confidence in the markets and succeed where lax, inconsistent, inadequately funded state "blue sky" regulations—meant to check promoters who would sell "building lots in the blue sky"—had failed.[53]

Regulation of securities was not a new idea. As early as 1285, England's King Edward I required licensure of London brokers.[54] Much of this early regulation relied on authorities to evaluate the worthiness of a security before permitting its public sale.[55] But, from its inception, the SEC, unlike its predecessors, was not a "merit" agency. As Roosevelt noted: "The Federal Government cannot and should not take any action that might be construed as approving or guaranteeing that . . . securities are sound. . . ." Rather, the SEC was to insure full disclosure of all material facts about the securities. In Roosevelt's words, "It puts the burden of telling the truth on the seller."[56]

There was plenty of truth waiting to be told. At the time of the SEC's creation, there were minimal requirements for listing of securities on the stock exchange and no source of generally accepted accounting principles. Information disclosure was limited and not subject to oversight.  In 1923, only 25% of the New York Stock Exchange firms provided reports to their shareholders.

Sound familiar?

To put teeth in its mission, the SEC was given the power to enforce "truth in securities" (the Securities Act of 1933) and to regulate the trading of securities in markets through brokers and exchanges (the Securities Exchange Act of 1934). Firms that trade their securities in inter-state markets must register with the SEC and file regular information reports. Exchanges and inter-state brokers must also be registered. The SEC also reviews the rules for market operations and requires that brokers meet minimum capital requirements and submit information about their transactions. The 1934 act also protects investors against deceptive practices.[57]

The SEC's powers to regulate information and the functioning of the securities markets are key elements of the efficient U.S. markets.

The Private Sector Sources of Information

The information that lies at the heart of the efficiency of the markets wells from the delicately balanced interaction among three private sector groups: the firms, the FASB (Financial Accounting Standards Board), the accounting information standards promulgator, and the accounting profession.

The presence of three different groups provides checks and balances and fuller consideration of diverse points of view. Unlike a government agency, this troika does not sing out of one hymnal. And their private-sector nature requires political and financial support for their continued existence. If they hit a sour note with their diverse supporters, they can, and have been, forced to change their ways.  (For more, see Appendix A.)

The firms that prepare information disclosures are subject to many checks and balances. On the one hand, they must prepare financial statements and other information disclosures that reflect their distinctive economic circumstances. Although they must use FASB standards, these are typically not straitjackets: Similar firms may account for similar circumstances in substantially different ways.[58] On the other hand, corporate executives face substantial legal liabilities and the wrath of the SEC for failure to disclose material events. And if their auditor decides to resign or they decide to switch auditing firms, the SEC requires a public filing and explanation of the reason for the change.[59]  The SEC is not perfect.  Lax enforcement exacerbated the financial scandals of the 1990's.  But our financial markets are widely viewed as world-class in transparency.

Two characteristics are central to its success of the process.[60] First, all the private sector organizations involved must satisfy their constituencies or, like the FASB's predecessors, they will cease to exist. Second, the many participants in the process serve to promote the perspectives of diverse interest groups that are essential for fair and complete information disclosure.

A Health Care SEC

Societal Consequence of SEC-like Health Care Regulation

The U.S. securities markets contain the characteristics desired for the health care:

• Prices are fair in the sense that they reflect all publicly available information, despite the inability or unwillingness of many buyers to avail themselves of this information.
• Buyers use this information to redirect capital so that it rewards productive firms and penalizes unproductive ones.
• Information and competition continually reduce transaction costs.

The presence of these characteristics in health care would achieve two important social goals:

First, they would help the uninsured and the underinsured.

Second, they would divert money from health providers that offer a bad buy to those that offer a good one. The bad buy providers would shrink or improve. The good buy providers would flourish.

How to Make it Happen

The key to achieving these desirable characteristics in health care is legislation for a health care SEC that replicates these essential elements of the SEC model.

1. An Independent Agency with Singular Focus.  The SEC is an independent agency charged solely with overseeing the integrity of securities and the markets in which they are purchased.  Because of these organizational characteristics, the SEC’s mission is not muddied--it is squarely lined up with the consumer--and it can be held clearly accountable for is performance.
2. Penalties.   The SEC is armed with powerful penalties for undercapitalized and unethical market participants, including imprisonment, civil money penalties, and the disgorgement of illegal profits.  A corresponding health care agency would oversee the integrity and require public disclosure of information for health care.
3. Private Sector Disclosure and Auditing.   The SEC relies heavily on private sector organizations, which contain no governmental representation.  The new health care agency should similarly delegate the powers to derive the principles used to measure health care performance to an independent, private, nonprofit organization that, like the FASB, represents a broad nongovernmental constituency.  The agency would require auditing of the information by independent professionals, who would render an opinion of the information and bear legal liability for failure to disclose fairly and fully.
4. Private Sector Analysis.  The evaluation process is primarily conducted by private sector analysts, who disseminate their frequently divergent ratings.  To encourage similar private sector health care analysts, the new agency should require public dissemination of all outcomes for providers, including clinical measures of quality, and related transaction costs.
5. Focus on Outcomes, Not Processes.  The SEC and FASB focus on measuring the financial performance of organizations. FDR firmly rejected dictating business processes or rating businesses as appropriate roles for the SEC.

The SEC is essentially a profit center, generating a substantial surplus from its filing and penalty fees, which offset its billion dollar budget.

How Not to Make It Happen

Unfortunately, some of the well-intended proposals to achieve transparency in health care undermine one or more of these essential characteristics.  All too often, they request that the health care regulator(s) evaluate and micromanage health providers and the markets in which they operate. They would grant the government regulator substantially greater powers than those exercised by the SEC.

• Government-Controlled Disclosure: Disclosure requirements would be prepared by governments, not the private sector.

The open FASB process that incorporates professional criteria and the perspectives of many different interest groups would likely be compromised with government promulgation of the measurement yardsticks. After all, while the FASB's private sector status requires the respect and financial support of many constituencies for its continued survival, these are much weaker motivational forces for a monopolisitic agency.

• Government-Controlled Analysis:  Many proposals require a government agency to prepare benchmarks or standards of achievement, sometimes even a report card.

When health providers are thus required to sing out of the same hymnal, innovations in health care may not be recognized and may well be discouraged.  Peer reviewers have delayed the introduction of many important innovations including Barry Marshall's identification of the role of bacteria in ulcers and Judah Falkman's angiogensis theories of tumor growth, by suppressing publication in journals and research funds.

      Further, the important role that analysts now play by delineating their many different opinions will be eliminated.

• Government Micro-management: Many proposals require health care providers to comply with enormously detailed managerial process requirements.

The likely result? Lack of innovation.  Government should disclose prices and outcome, not micro-manage providers.

Role of the Government

This is not to say that government action is not required. To the contrary, the much-abused U.S. health care consumer needs, and wants, government protection.  Powerful provider interests oppose transparency, however, and they have powerful political allies.  The American Hospital Association, for example, moved its headquarters to Washington, DC, and vastly increased the political contributions of the sector because, as its recently retired head noted, "Of course, the common denominator is money.  You're always fighting to protect payment . . ."[61]

But overly zealous governmental intrusion into health care transparency is unlikely to fully achieve the results in care health that the SEC legislation achieved in the securities markets. Indeed, it may inadvertently cause government protection to cross the line from providing helpful information and oversight to causing paralyzing evaluation and micromanagement.[62]

Appendix A

The Three Private Sector Legs

of the Financial Transparency Stool

The Firms

Much of the information emanates from the firm itself: Organizations registered with the SEC must disclose both financial and nonfinancial information in routine reports, including the firm's financial statements; management's discussion and analysis of performance; disclosure of the top executives' compensation; and evaluation of the firm's various lines of business.

Although the firm's managers prepare this information, they must use the methods promulgated by the FASB and its predecessors to measure some financial statement items. (The SEC had legal authority to specify these accounting standards but, with active oversight, it generally relies on the FASB to do so.)[63] The managers hire an independent accounting firm to audit whether the financial statements have been prepared in accordance with the generally accepted accounting principles (GAAP) as defined by the FASB and others. The generally accepted auditing standards that guide the process have been defined by the American Institute of Certified Public Accountants' Auditing Standards Board.[64] The auditors render a formal opinion of the firm's financial statements. If the information deviates from GAAP, or if the auditor cannot issue a clean opinion for other reasons, the SEC may well suspend trading in the stock and thus bar the firm from access to the capital markets.

The FASB

Because the FASB is a private, nonprofit organization, it lacks the stability of tax-financed government organizations. To survive, it must earn sufficient revenues to cover its expenses and the respect of its constituency. These results are not so easily achieved: Two predecessor organizations to the FASB folded in part because they could not reach a politically acceptable consensus on specific accounting standards.[65]

The FASB was designed to remedy some of the structural problems of its predecessors.[66] Unlike them, it was an independent, well-funded organization, sponsored by a nonprofit foundation whose board represents auditors, businesses, users, and the public.[67]  To provide independence, the FASB's board members serve a full-time, five-year term at handsome rates of pay.[68] Although they are all well-versed in accounting, they come from diverse backgrounds, including partners in large and small accounting firms, financial analysts, accounting academics, and industry.[69]

In recognition of the political, consensus-building nature of its mandate, the FASB's process for issuing an accounting standard elicits widespread, thoughtful responses. The process is completely public.  Repeated rounds of exposure drafts encourage wide participation.

As a result of the open, elaborate standard-setting process, FASB's standards incorporate diverse points of view in an acceptable political consensus. This process is crucial to the FASB's success. Although accounting techniques were codified in 1494 by the mathematician Luca Pacioli,[70] as in health care, a conceptual foundation that can clearly adjudicate all measurement disputes still does not exist.[71] As a FASB chairman noted, "Accounting, like law, is an art whose rules are not susceptible to. . .tests of validity. . . Accounting is rather a convention supported by general acceptance, consensus."[72]

The Accounting Profession

The independent accountants who audit the financial statements represent yet another important check and balance in the process of providing information.

Certified accountants are professionals who must fulfill stringent examinations and educational requirements.[73] They frequently work in one of the Big Four accounting firms.  Accounting firms can be held legally liable for negligence, fraud, and breach of contract.[74] Accountants have been found criminally liable for misstatements in cases even where they did not directly benefit from them.[75]

Accountants are thus subject to three powerful pressures: Their profession's standards of ethics,[76] the marketplace (accountants must satisfy their clients, the corporations that hire them), and their legal liability.

Endnotes

[1] Government Accounting Office (GAO), Federal Employees Health Benefits Program, GAO Highlights, August 2005.

[2] "Hospital Stays of Uninsured Stable: AHRQ," Modern Healthcare (June 5, 2006).

[3] "Catholic Healthcare West Agrees to Refund Uninsured Patients," San Francisco Chronicle (June 15, 2006): B2

[4] Competition in the FEHB Program.  Hearing, Committee on Ways and Means, December 2, 2005.  Testimony of Richard L. Blomquist, President, Blomquist Benefits Consulting, Milwaukee, WI.

[5] A.L. Robinow, “The Buyers Health Care Action Group:  Creating Incentives to Seek the Sick,” in R.E. Herzlinger, Consumer-Driven Health Care (San Francisco:  Jossey Bass, 2004), pp. 309–316.

[6] CMS, "Medicare Part D Spending Projections Down Again," CMS Office of Public Affairs (July 11, 2006).

[7] M.R. Chassin et al., “The Urgent Need to Improve Health Care Quality,” Journal of the American Medical Association, 280:11 (September 16, 1998): 1003; D. Mukamel and A. I. Mushlin, “Quality of Care Information Makes a Difference,” Medical Care 36, 7 (July 1998): 945-954; J. H. Hibbard, J. Stockard, and M. Tusler, “Hospital Performance Reports:  Impact On Quality, Market Share, and Reputation,” Health Affairs, 24:4 (July/August 2005): 1150–1160; and J. K. Barr, C. E. Boni, K. A. Kochurka, P. Nolan, M. Petrillo, S. Sofaer, and W. Waters, “Public reporting of hospital patient satisfaction: the Rhode Island experience,” Health Care Financr Review, 23:4 (Summer 2002): 51–70.

[8]N. C. Churchill and V. Govindarajan, “Effects of Audits on the Behavior of Medical Professionals under the Bennett Amendment,” Auditing 1 (Winter 1982): 69–90; and S. E. Kaplan, K. Menon, and D. D. Williams, “The Effect of Audit Structure on the Audit Market,” Journal of Accounting and Public Policy, 9:3 (Fall 1990): 197–201.

[9]P. S. Romano, J. A. Rainwater, and D. Antonius, “Grading the Graders,” Medical Care, 37:3 (March 1999): 295–305; J. M. Bentley and D. B. Nash, “How Pennsylvania Hospitals Have Responded to Publicly Released Report on CABG,” Joint Commission Journal on Quality Improvement, 24:1 (1998): 40–49; California Institute for Health Systems Performance and the California Health Care Foundation:  Results from the Patients’ Evaluation of Performance (PEO-C) Survey:  What Patients Think of California Hospitals, 2001; D. R. Longo, G. Land, W. Schramm, et al., “Consumer Reports in Health Care:  Do They Make a Difference in Patient Care?” Journal of the American Medical Association, 278:19 (Fall 1997): 1579–1584; J. A. Rainwater, P. S. Romano, and D. M. Antonius, “The California Hospital Project:  How Useful is California’s Report Card for Quality Improvement?” Joint Commission Journal on Quality Improvement, 24:1 (1998): 31–39; G. E. Rosenthal, P. J. Hammar, L. E. Way, et al., “Using Hospital Performance Data in Quality Improvement: The Cleveland Health Quality Choice Experience,” Joint Commission Journal on Quality Improvement, 24:7 (1998): 347–359; and D. P. Smith, G. Rogers, A. Dreyfus, et al., “Balancing Accountability and Improvement:  A Case Study from Massachusetts,” Joint Commission Journal on Quality Improvement, 26:5 (2000), 299–312.

[10] E. L. Hannan, A. L. Siu, D. Kumar, and M. R. Chassin, “The Decline in Coronary Artery Bypass Graft Surgery Mortality in New York State,” Journal of the American Medical Association, 273:3 (1995): 209–213; S. W. Dziuban, “How a New York Cardiac Surgery Program Uses Outcome Data,”Annals of Thoracic Surgery, 58:6 (1994): 1871–1876.

[11]M. R. Chassin, “Achieving and Sustaining Improved Quality:  Lessons from New York State and Cardiac Surgery,” Health Affairs, 21:4 (July/August 2002): 40–51.

[12]E. D. Peterson, E. R. DeLong, J. G. Jollis, L. H. Mulbaier, and D. B. Mark, “The Effect of New York’s Bypass Surgery Provider Profiling on Access to Care and Patient Outcomes in the Elderly,” Journal of the American College of Cardiology, 32:8 (October 1998): 993–999.

[13]D. Dranove, D. Kessler, M. McClellan, and M. Satterthwaite, “Is More Information Better?  The Effects of ‘Report Cards’ on Health Care Providers,” Journal of Political Economy, 111: 3 (June 2003): 555–588.

[14]“Health Plan Report Cards May Influence Insurers More than Consumers,” Findings Brief, Health Care Financing & Organization, 3:3 (April 2000).

[15]J. M. Bentley and D. B. Nash, “How Pennsylvania Hospitals Have Responded to Publicly Released Report on CABG,” Joint Commission Journal on Quality Improvement, 24:1 (1998): 40–49.

[16] J. H. Hibbard, J. Stockard, and M. Tusler, “Hospital Performance Reports:  Impact On Quality, Market Share, and Reputation,” Health Affairs, 24:4 (November/December 2005): 1156–1166.

[17]K. P. Coyne and J. W. Witter, “What Makes Your Stock Prices Go Up and Down,” The McKinsey Quarterly, 2 (2002): 29-39.

[18] U.S. Census Bureau, Statistical Abstract of the United States: 2006, Washington, D.C. (2005): 637, Table 962.

[19] Auto Affordability Index, http://www.Comerica.com, accessed 17 January 2006.

[20] Ward’s Automotive Yearbook (Detroit, MI:  Ward’s Reports, 2002), 2002.

[21]K. Kerwin, “At Ford, the More Brands, the Merrier,” BusinessWeek, no. 3675 (3 April 2000): 58.

[22] C. Tierney, “Asian Auto Brands’ Reliability Uneven; Chevy Monte Carlo, Mercury Mariner SUV Rank Among Most Dependable in Consumer Reports Survey,” The Detroit News (October 27, 2005): 1C; and S. Silke Carty, “Japanese Brands Show ‘Nicks,’” USA Today (October 27, 2005): 5B.

[23]“Twenty Years of Consumer Reports Surveys Show Astounding Gains,” Consumer Reports (April 2000): 12.

[24] Auto Affordability Index, , accessed August 21, 2003.

[25] J. D. Power, “Initial Quality Study,” 2005. http:/consumercenter.jdpower.com/cc/rd/cc/global/content/ratingsguide.asp, accessed 27 January 2006..

[26] J. D. Power, “Initial Quality Study,” 2005. © 2005 J.D. Power and Associates.  All rights reserved.

[27] Eugene Fama first proposed three definitions or standards to test the efficient market hypothesis:  weak, semi-strong, and strong.  The strongest form of the efficient markets hypothesis asserts that all information known by market participants is fully reflected in market prices so it is impossible for insiders who trade on private information to earn abnormal profits.  (M. A. Joy, “Hunting the Stock Market Snarks,” Sloan Management Review, 3:28 (Spring 1987): 22.)  While it is not impossible for insiders to profit from information, for the most part, the stock market comes very close to meeting the strongest standard for efficiency (Joy, op. cit.  See also, for example, M. Jensen, “Risk, the Pricing of Capital Assets, and the Evaluation of Investment Portfolios,” Journal of Business, 42:2 (April 1969): 167-247).

[28] “Here’s How Our Staff Picks ‘em,” Chicago Daily News (November 25 1996): 43. 

[29] R. A. Ippolito, “Consumer Reactions to Measures of Poor Quality:  Evidence from the Mutual Fund Industry,” Journal of Law and Economics, 35:1 (April 1972): 45-70.  B. G. Malkiel, A Random Walk Down Wall Street (New York:  W.W. Norton & Company, 1996), 443-444.

[30] M. Hulbert, “Positive Ratings for a Ratings Makeover,” The New York Times (January 15, 2006): 6.

[31] Rebecca Buckman, "Cyber-Sleuths," Wall Street Journal (August 4, 1998): C1.

[32] Matthew Schifrin with Scott McCormack, "Free Enterprise Comes to Wall Street," Forbes (April 6, 1998): 114-119. Gretchen Morgenstern, "Surrender," Forbes (April 6, 1998): 120. Matthew Schifrin, op. cit., p. 116.

[33] Laura Holson and Diana Henriques, op. cit., p. A1.

[34] "Collusion in the Stock Market," The Economist (January 17, 1998): 71.

[35] Leslie Eaton, op. cit.

[36] Asli Demirquc-Kunt and Vojislav Maksimovic, "Stock Market Development and Corporate Finance Decisions," Finance & Development, 33:2 (June 1996): 47-49. 

[37] J. M. Lambrew, “Choice in Health Care: What do People Really Want,” Issue Brief, The Commonwealth Fund, New York, September 2005. Of course, excessive choice may not be helpful. See, for example, B. Schwartz, The Paradox of Choice: Why More Is Less (New York, NY:  ECCO, 2004). But markets typically solve this problem:  suppliers narrow down choices to those that generate the best consumer response.

[38] U.S. Census Bureau, Statistical Abstract of the United States: 2006 (Washington, DC:  Government Printing Office, 2006): 147.

[39] U.S. Census Bureau, Statistical Abstract of the United States:  2001 (Washington, DC:  Government Printing Office, 2002): 139, Table No. 215.

[40]“State of the Economy,” Federal News Service (January 20, 1999).

[41] J. H. Hibbard, E. M. Peters, P. Slovic, and M. Tusler, “Can Patients Be Part of the Solution? Views on Their Role in Preventing Medical Errors,” Medical Care Research and Review, 62:5 (October 2005): 601–616.

[42]Forrester Research, “The Millionaire Online” (Cambridge, MA: Forrester Research, May 2000): 11.

[43] Health Information Online, Pew/Internet and American Life Project (May 2005): ii.

[44]S. Fox and L. Rainie, How Internet Users Decide What Information to Trust, www.perInternet.org/reports/pdfs (May 2002).

[45] PricewaterhouseCoopers, HealthCast 2010 (New York, NY:  PricewaterhouseCoopers, November 2000), 22; S. Reents, Impact of the Internet on the Doctor-Patient Relationship: The Rise of the Internet Health Consumer (New York, NY:  Cyber Dialogue, 1999): 4,  http://www.cyberdialogue.com/ pdfs/wp/wp-cch-1999-doctors.pdf.

[46]“Just Another Day at the Office,” USA Today (April 16, 2001): 1–2b.

[47]S. Reents, Impact of the Internet on the Doctor-Patient Relationship, op. cit., p. 4.

[48] Ibid., p. 2.

[49]T.E. Miller and Scott Reents, The Health Care Industry in Transition: The Online Mandate to Change (New York:  Cyber Dialogue, 1998), www.cyberdialogue.com.

[50] S. Sofaer, C. Crofton, E. Goldstein, E. Hoy, and J. Crabb, “What Do Consumers Want to Know about the Quality of Care in Hospitals?” Health Serv Res., 40:6 (Pt 2) (December 2005): 2018–2036.

[51] See, for example, Joel Seligman, The Transformation of Wall Street (Boston, MA: Northeastern University Press, 1995): 561-568.

[52] Fred Skousen, An Introduction to the SEC (Cincinnati, Ohio: South-Western Publishing, 1991): 118. U.S. Securities and Exchange Commission, "Good People, Important Problems and Workable Laws: 50 Years of the Securities and Exchange Commission" (Washington, D.C.: The Commission, 1984).

[53] Joel Seligman, op. cit., pp. 44-46.

[54] Fred Skousen, op. cit., p. 2.

[55] Arguably the most famous, or notorious, of this kind of regulation was the 1720 Bubble Act that required the personal approval of the English monarch for all corporate charters. The act resulted from the financial panic induced by the pricking of a speculative bubble that had buoyed the stocks of many newly incorporated English firms. In 1720, the South Sea Company's stock, for example, rose from ₤130 to more than ₤1,000, only to collapse when the company's directors began to sell their shares (Burton G. Malkiel, op. cit., pp.40 44).

[56] Joel Seligman, op. cit., pp. 54-55.

[57] Fred Skousen, op. cit. pp. 22-28.

[58] See, for example, "The Firm's Selection of Alternative Accounting Principles," in Clyde P. Stickney, Roman L. Weil, and Sidney Davidson, Financial Accounting (Orlando, Florida: Harcourt Brace Jovanovich, 1991): 800- 802.

[59] GAO, op. cit., pp. 44-45.

[60] To the contrary, critics abound. Some complain about the excessive amount of information disclosed and urge adoption of the more Spartan disclosure policies used abroad (See, for example, Ray J. Groves, "Financial Disclosure: When More Is Not Better," Financial Executive, 10:3, (May 1994): 11). Others note the paucity of disclosure abroad and complain that, even in the United States, disclosure is hobbled. They contend that the SEC's choice to focus on preventing misleading financial statements, rather than informative disclosure, has created a "climate of conformity" that inhibits experiments in financial accounting (Stephen A. Zeff, "A Perspective on the U.S. Public/Private Sector Approach to the Regulation of Financial Reporting," Accounting Horizons, 9:1 (March 1995): 52- 70).

[61] "Davidson set AHA on New Path: Association Became Focused on Lobbying Congress," Modern Healthcare (April 17, 2006): 7.

[62] This testimony is partially based on“Protection of the Health Care Consumer: The ‘Truth’ Agency.” (Washington, D.C.: Progressive Policy Institute, March 1999), and U.S. Congress, House Committee on Ways and Means, Oversight Subcommittee, Hearing on Pricing Practices of Hospitals, Testimony, June 22, 2004.

[63] Paul W. Miller, Rodney J. Redding, and Paul R. Bahnson, The FASB: The People, the Process, and the Politics (Burr Ridge, Ill.: Richard D. Irwin, 1994): 20-21.

[64] Coopers & Lybrand, "Independence Standards Board," Audit Committee Update 1998 (Jersey City: Coopers & Lybrand, 1998): 20-21.

[65] The Accounting Principles Board (APB), the FASB's immediate predecessor, collapsed in 1973, in some measure because of disagreement with its proposed accounting treatment for business combinations and an earlier opinion on tax credits. In the latter case, the APB proposed to defer recognition of some of the benefits of the credit. Although the APB's standard conformed with accounting theory, three accounting firms announced they would not comply with the opinion. Even the SEC decided that its registrants need not follow it. Absent the support of business, the accounting community, and the SEC, the APB found its authority to set accounting standards severely eroded (Gary John Previts and Barbara Dubis Marino, A History of Accounting in America (New York: John Wiley, 1979): 290-291). Some also worried about the APB's excessively close ties to the accounting institute; its sponsors; its large, 17-member board; and the continued allegiance of its part-time board members to their employers or clients (Paul W. Miller, Rodney J. Redding, and Paul R. Bahnson, The FASB (Burr Ridge, Ill.: Richard D. Irwin, 1994): 56. Marshall S. Armstrong, "The Politics of Establishing Accounting Standards," The Government Accountants Journal, 25:2 (Summer 1976): 8-13.

[66] Paul W. Miller et. al., op. cit., pp. 30-58.

[67] Paul W. Miller et al., op. cit., p. 35.

[68] Financial Accounting Foundation, op. cit., p. 24.

[69] Stephen Barr, op. cit.

[70] Gary John Previts and Barbara Dubis Merino, A History of Accounting in America: An Historical Interpretation of the Cultural Significance of Accounting (New York: Wiley, 1979): 6.

[71] Although such a conceptual foundation theoretically exists—currently, it takes the form of six concept statements that cover issues such as the Elements of Financial Statements (Cheri L. Reither, "How the FASB Approaches a Standard-Setting Issue," Accounting Horizons , 11:4 (December 1997): 91-104) in practice, debates about fundamental accounting issues—such as current vs. historical costs value or capitalization vs. expensing—continue to roil the profession (Miller, op. cit., "Some Recurring Accounting Controversies," pp. 114-127).

[72] Marshall Armstrong, op. cit., p. 10.

[73] U.S. General Accounting Office (GAO), The Accounting Profession (Washington, D.C.: Government Printing Office, September 1996): 89-90.

[74] Gary Previts and Barbara Marino, op. cit., p. 204.

[75] Fred Skousen, An Introduction to the SEC (Cincinnati, OH: South-Western Publishing, 1991): 128.

[76] Gary

[76]  Previts and Barbara Marino, op. cit., pp. 314-315.