All Commentary
Monday, March 1, 1999

The Bully that Acts Like a Hero

The Actual Purposes of Organizations Are Not Necessarily the Same as Their Stated Purposes

Harold Jones teaches at Mercer University’s Eugene W. Stetson School of Business and Economics in Macon, Georgia.

In 1995 President Clinton established what he called “Operation Restore Trust,” a Health and Human Services initiative aimed at wiping out fraud and abuse in the health-care industry. According to the administration, only terrorism surpassed health-care fraud as a criminal problem in this country. The initiative relied on the False Claims Act, a piece of legislation dating back to the Civil War and designed to frighten Army contractors into honest billing practices by threatening them with a substantial fine plus triple damages for every false claim.

An Operation Restore Trust demonstration project in five states supposedly identified $23 in overpayments for every dollar spent on the project, and the program was expanded. Eighty percent of American hospitals and nearly 100 percent of those participating in Medicare were targeted for investigation.

The program used demand letters that began with a reference to the False Claims Act and went on to tell hospital administrators that “It has been determined that your institution should be civilly prosecuted pursuant to that act.” A statement like that is a good attention-getter. It was, however, followed at a short distance by these words of comfort: “In order to expedite and simplify this matter, we are extending to all hospitals the opportunity to settle before litigation.”

One particular hospital received such a letter on November 21, 1996. The letter stated that in the 85-month period ending on December 31, 1994, the hospital had submitted 13,726 Medicare claims for a total of $140,648,474. Of these, the government said 36 were “false claims.” Of the amount that had been billed, $7,998 had been billed incorrectly. Under the terms of the False Claims Act, if the hospital had defended itself in court and lost, its penalty would have been $153,576.15, in addition, of course, to its legal expenses. It settled out of court for a fine of $12,257.

Abuse or Error?

Let’s look at this case a little more carefully. The total number of Medicare claims was 13,726. Thirty-six were supposedly false claims. That figures out to be a “false claims” rate of about one quarter of one percent. The false claim dollar amount was less than one percent of one percent. To state the matter precisely, we have here the case of a complex bureaucratic process that was accurate in 99.74 percent of the cases and for 99.99 percent of the dollars involved.

This raises some questions. The most obvious is about the government’s characterization of the hospital’s behavior as “fraud and abuse.” Could it not be more appropriately described as a simple billing error? What does this say about the honesty of our government? On the one hand, it goes to a hospital with a demand that is probably better described as extortion than regulatory oversight. On the other, it goes to the American people with a deliberate mischaracterization of the way private institutions have conducted themselves. It acts like a bully. It represents itself as a hero.

The government’s behavior in cases of this kind undoubtedly has something to do with the character of the current president, but it has even more to do with the fact that government is an organization. Organizations differ in many ways, but beneath that variety are certain common denominators of organizational behavior. Let’s examine the government’s regulatory activities in this light.

The Real and the Palatable

The student of organizations soon learns that there are at least two explanations for everything an organization does: an explanation that sounds good and the real explanation. (There could be several of each kind.) We learn the first by looking at the organization’s statements about its purposes. We learn about the second by studying its behavior.

In his wonderful book The Death of Common Sense, Philip Howard looks at issues through the eyes of an attorney. He gives examples of government’s stated objectives (the reasons that sound good), notes its complete failure to attain these objectives, and concludes that government is ineffective. It can be argued, however, that although it seldom attains its stated objectives, government is massively effective in reaching its real objectives. These objectives are never articulated, but they do exist, and they have been identified in the behavior of every organization ever studied. They are in fact the driving force in the life of an organization, and government is, if anything, more effective than other organizations in reaching them.

Consider the Food and Drug Administration and the Environmental Protection Agency as Howard describes them. The FDA set out in 1962 to examine the possibly harmful effects of some 200 food-color additives. The task was supposed to take 30 months. It actually took 28 years. In 1972, the newly created EPA was assigned the task of examining 600 pesticides and determining which should be removed from the market because they were hazardous. The Insecticide, Fungicide and Rodenticide Act gave the agency three years to carry out this project. More than 25 years have passed since then, and for most of this time over a thousand EPA employees have been hard at work on it. They have come to conclusions on the safety of about 30 pesticides. The rest, including those with regard to which the data indicate a significant risk, remain on the market.

If we content ourselves with believing that the actual purposes of our government and its agencies are the same as their stated purposes, we will conclude simply that the FDA and the EPA are incredibly ineffective. Something needs to be done, we will say, and we will vote for the person who claims to have a plan for doing . . . well, something. If we want to understand what’s happening, though, we must recognize that the actual purposes of an organization are not necessarily the same as its stated purposes.

The Law of Self-Preservation

Every organization we know has sought to perpetuate its own existence. I won’t say there are no exceptions to this rule. Now and again one encounters exceptions to almost everything. The case of the organization that voluntarily ceases to exist is approximately as frequent as the case of the happy, healthy, and well-adjusted man who decides to drive his car off a cliff. It is not logically impossible, but it is extremely rare.

One of the best guarantees for an organization’s continued existence is a public perception that it is involved in something important. Even organizations with large endowments need public endorsement. This creates a strong incentive for organizations either to expand their missions or to draw them out. In spite of flowery statements about their purposes, organizations display mixed sentiments about actually completing whatever it is they are supposed to be doing.

The original purpose of the March of Dimes was the discovery of a cure for polio. Well, the cure was discovered. The March of Dimes should have disbanded. Its work was done. But you already know the rest of that story.

Spinoza said everything seeks to persist in its own being. When applied to government and its agencies, this helps to explain the existence of regulatory codes that Howard says are so complex as to guarantee noncompliance. The Occupational Health and Safety Administration has estimated that at least 80 percent of all workplaces are not in compliance with the law. The reason? It’s simple. Not even the most conscientious businessperson has time to keep up with four thousand detailed regulations.

Howard suggests that we need to develop more general laws that can be interpreted according to the demands of the situation and then hold people accountable. In the long history of governments on this planet, however, there have been very few changes of that kind. Almost without exception, legal systems become more detailed and complex over time.

Complexity Breeds Power

Complex legal systems increase a government’s power over its citizens. The Resources Conservation and Recovery Act (known as “Rickra”), for example, requires every company that receives hazardous materials to keep track of them and eventually dispose of them. RCRA also requires a ledger showing exactly where each container is located on the premises. Federal environmental agents go into large companies that could not possibly maintain minute-to-minute paperwork on the exact location of thousands of barrels and threaten criminal indictments unless the companies pay large fines. Once again, the government’s behavior is more like extortion than regulatory oversight. A complex rule has allowed a government agency to make unreasonable demands without fear of being challenged in the courts.

Organizations never represent themselves as striving for their own preservation, of course. They always appear to be seeking to advance the interests of outsiders. I don’t suppose too many people would challenge me if I said that Minute Maid is infinitely more concerned about selling orange juice than about customers’ health. But an ad campaign based on that truth wouldn’t get very far. To succeed in advancing its own interests, an organization must represent itself as seeking to advance the interests of outsiders. (As we’ll see, with private companies the two sets of interests coincide.)

This law of organizational behavior holds true across the wide spectrum of organizations and in no way depends on the personalities or ideologies of the individuals involved. Government always manifests this tendency. That has been evident in both Republican and Democratic administrations.

Antitrust Law

A good example is antitrust legislation, whose ostensible purpose is to protect consumers from monopolies that operate to restrain trade and therefore to raise prices. An examination of how the laws have been used, however, may raise some doubt. If the stated and real purposes were the same, the laws would provide a clear description of prohibited behaviors. A businessperson could use them to determine what was legal and what was not. As Ayn Rand pointed out, though, the antitrust laws are designed and have been interpreted in a way such that one cannot know whether they have been violated until after the fact. Numerous students of business ethics have pointed to this problem as characteristic of the regulatory laws in general. They are like a powerful trap with a defective trigger mechanism. Several people step over it without harm. Then all of a sudden and for no apparent reason, it takes off someone’s leg.

During the 1930s, Alcoa had become an aluminum monopoly in the sense of being the only producer in its industry. But it was not a monopoly that constituted a restraint of trade. It had kept the price of primary aluminum at a level compatible with the maximum expansion of its market. At that price, profits were possible only by means of cost-cutting efficiency.

Alcoa had not entered into collusive arrangements with any other producer or with any of its customers or suppliers. It had done nothing to dominate the aluminum industry or forcibly prevent the entry of new competitors. It had done nothing to violate the law. All it had done was attempt to maximize its profits in exactly the way that economic theory says they can be maximized, by setting its marginal revenues equal to its marginal costs. Other companies did not enter the market because at the going price it was not profitable to do so. If Alcoa had raised its prices, though, or if a cost-cutting technology had been discovered, competitors would have appeared almost immediately. Given the opportunities of a free market, innovation would have happened sooner or later.

Under the antitrust laws, a monopoly, as such, was not illegal. What was illegal was “the intent to monopolize.” Under those laws, Alcoa should never have been found guilty unless there was evidence that it had tried to maintain an artificially high price by taking aggressive action to exclude competitors from the market. No such evidence was ever presented. Judge Learned Hand, however, in United States v. Aluminum Company of America (1945), argued that the mere fact of being so productive that competitors had no incentive to enter the market was in itself sufficient evidence of monopolistic activities. Alcoa was penalized, Ayn Rand said, not for breaking the law, but for being a well-run business. The net effect was a higher price for consumers.

Five years later, the Cellar-Kefauver Act would sprinkle holy water on this injustice by declaring that market share could be used as evidence of intent to monopolize. It was nothing but an after-the-fact justification of something that had already happened. Behavior of this kind is what the great organizational theorist Karl Weick has described as retrospective sense making. The federal government was in effect looking back at its previous actions and reinterpreting them in such a way as to make itself look good. Instead of correcting the injustice, legislators re-defined the situation in such a way as to make Judge Hand’s decision seem reasonable. The legislation was not described in these terms, but that was its effect. It explained away the Alcoa case, set the Justice Department free to initiate more cases of the same kind, and provided justification for the expansion of the antitrust division through the hiring of more lawyers. The government said it was protecting the public. It was in fact expanding the area under its own control.

The laws of organizational behavior apply quite as much to businesses as to the government and its agencies. Businesses, too, offer both real reasons and reasons that sound good. Businesses, too, seek to advance their own interests and represent themselves as seeking to advance the interests of outsiders. Businesses, however, come with a safety device called competition. A business operates under the hard necessity of providing something of value to its customers because if it doesn’t, they will find another place to spend their money. If Ford doesn’t provide me with a good car in exchange for my dollars, there are plenty of other companies that will. Competition puts constraints on the degree to which the actual performance of a private enterprise can vary from its stated purpose.

Governments, as monopolies, do not operate under this constraint. The only thing that can constrain the behavior of a government is an informed and active citizenry.

We need to start looking at the difference between the government’s stated purposes and what it actually does. It claims to be protecting us. What it is actually doing is gradually taking away our liberty. Businesses are easy targets. Ever since 1902, when Theodore Roosevelt initiated the trust-busting era with his attack on the Northern Securities Company, the government has portrayed private institutions as offenders and itself as the defender of the public interest. It does not take much thinking to see that this is a misrepresentation. We need to remember that the government’s freedom to harass a business is the freedom also to harass the individual. Ayn Rand would remind us that when one citizen’s rights can be legally violated, no one’s rights are safe.

  • Harold Jones did his Ph.D. for a mid-life crisis. He served before that as a chaplain on active duty with the United States Army, as a pastor, and as a branch office manager for Investment Management & Research, Inc. (now Raymond, James & Associates). More than a dozen of his articles were written for the Foundation for Economic Education, and he is the author of a book, Personal Character and National Destiny (Paragon House, 2002).