Field hospital in NY during COVID-19 pandemic.

Systemic Failures Need Systemic Solutions: COVID-19 and Macromedical Regulation

By Barak D. Richman and Steven L. Schwarcz

Among the many failures to mitigate the harm from COVID-19 in the U.S. has been the failure to meet surging demand for inpatient care. Hospital bed shortages, overwhelmed intensive care nurses, and scarcities of needed medical equipment have been embarrassing but constant features of the American health care landscape. A nation that spends nearly one out of every six dollars on health care should get much, much more for its money.

Though there is much blame to go around — and many insightful commentators have already allocated culpability — we observe that a significant regulatory deficiency has contributed to the nation’s failure to meet population health needs. This is the failure to regulate our hospitals holistically, as part of a comprehensive health care system.

Existing health care regulation focuses almost exclusively on regulating individual components of the health care industry. This existing regulation lacks the capacity to address how those components work together as a system — a system in which deficiencies in one component adversely impact the performance of the other components. We should not view hospitals as individual providers that treat individual patients. Instead, they are part of a larger safety net that needs to expand capacity when emergencies arise. Today’s pandemic destabilized hospital care because hospitals were neither coordinated nor managed systemically in order to meet population demands.

In Macromedical Regulation, 82 Ohio State Law Journal 727 (2021), we address the nation’s systemic failure to contain an infectious contagion, and we offer solutions by deriving lessons from the 2008 financial contagion. We contend that health care regulation must also include what we call “macromedical” regulation: regulation that focuses on protecting the stability of the health care sector as a system of interconnected parts.

Our analysis includes some useful analogies to the Dodd-Frank Act and other regulation enacted in response to the 2008 global financial crisis. Much of that regulation was designed to expand pre-crisis “microprudential” regulation, which focused almost exclusively on protecting banks as individual components of the financial system, to so-called “macroprudential” regulation that could protect the financial system as a system. American banks are now governed by a reformed regulatory framework that enables, and sometimes requires, them to cooperate and coordinate appropriate systemic responses.

A similar macro-focused regulatory regime, we contend, could redress the American hospitals’ glaring failures to mobilize against a common health disaster; a wholesale transition to nationalized health care is not required. In our article, we posit that not only can we apply the lessons from 2008 to pandemics, but that the specific regulatory solutions developed in response to that financial crisis also offer targeted lessons on how to improve health sector regulation without sacrificing the benefits of private ownership and market competition.

To illustrate the needed reforms to current health care regulation, we first observe that although the current health sector is heavily regulated, the existing regulatory regime suffers from some of the same limitations that hindered financial regulation prior to the 2008 financial crisis: it focuses almost exclusively on individual components of a system. In the case of financial regulation, that pre-crisis microprudential focus was on banks in their individual capacity while neglecting the interconnections and interdependencies among banks and other financial system components. In the case of health care regulation, the existing regulatory focus is similarly micro-focused — on hospitals and other health care providers in their individual capacity, while neglecting the interconnections and interdependencies among those entities.

Next, we show that, like the financial system, the health care system (and specifically the nation’s hospital system) is in fact a “system” whose components are better understood as interlinking than as separate. Therefore, just like governments have reformed financial regulation to include a macroprudential focus to protect the stability of the financial system as a system, health care regulation should be reformed to include a macromedical focus on protecting the stability of the health care system — a system that pandemics can destabilize.

We recognize there already is significant investment in the control and containment of infectious disease, primarily through the Centers for Disease Control and Prevention, the National Institutes for Health, and assorted local public health departments. We also recognize that policymakers, specifically the U.S. president and state governors, enjoy emergency powers to contain behavior that otherwise would cause infections to spread.

However, none of the primary actors in the national health system — hospitals, physicians, health insurers, or pharmaceutical and device manufacturers — are directly responsible for combatting contagious disease, beyond their individualized responsibility to care for the individuals who come through their doors. As the ultimate caretakers to those suffering from a contagious illness, these private actors need to be organized to respond to a systemic threat to the health care sector. Among other things, that will require coordinated reallocations of resources and collective priorities, with health care providers offering support to each other collectively as a system and with regulators offering more centralized support.

Furthermore, because regulation cannot completely prevent systemic shocks from being triggered in a complex system, such as the health care system, ex ante preventative regulation should be supplemented by ex post mitigative regulation, devised to break the transmission of inevitable shocks and limit their impact. Accordingly, we recommend that health care regulation additionally focus on ensuring that hospitals and other health care providers are better prepared to handle demand surges and to reinforce each other as a sector under stress.

We harbor no illusions that the financial sector achieved an optimal regulatory regime after the 2008 financial crisis, nor do we suggest that the health sector’s manifold problems will all be solved by implementing some of the financial sector’s lessons. We also do not presume that any smartly-designed regulatory regime can overcome the incompetence of its leaders. We do believe, however, that this century’s two most severe threats to date to the nation’s wellbeing have similar features, that lessons learned from one can apply to the other, and that the nation can and should garner the collective wisdom from these painful crises.

Barak D. Richman is Katharine T. Bartlett Professor of Law and Business Administration, Duke University; Visiting Scholar, Department of Medicine, Stanford University.

Steven L. Schwarcz is Stanley A. Star Distinguished Professor of Law & Business, Duke University School of Law; Senior Fellow, the Centre for International Governance Innovation (CIGI); Liberty Fellow, University of Leeds School of Law.

The Petrie-Flom Center Staff

The Petrie-Flom Center staff often posts updates, announcements, and guests posts on behalf of others.

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