8Ethical Resource Allocation Cultura LimitedSuperStock.docx

8Ethical Resource Allocation
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Learning Objectives
After reading this chapter, you should be able to
1. Understand the need to make ethically defensible rationing
decisions in health care.
2. Analyze different methods of allocating health care
resources.
3. Describe the steps decision makers must take to achieve
moral authority through
procedural justice.
4. Identify the ethical basis for setting utilization limits.
5. Understand the concept of medical futility.
© 2019 Bridgepoint Education, Inc. All rights reserved. Not for
resale or redistribution.
Introduction
“How can a society or health plan meet population health care
needs fairly under resource
limitations?” (Daniels, 2008, p. vii). This compelling and

controversial question gives rise
both to health policy discussions and political debates. As
enactment and implementation
of the Affordable Care Act (ACA) has proceeded, public and
political discourse has become
heated whenever allocating scarce resources—negatively
labeled health care rationing—
is discussed. One common allegation early in the debates over
the ACA was that it would
severely impede Americans’ freedom of choice in health care by
empowering expert panels
(rather than treating clinicians) to make decisions about the care
individuals could receive. A
prominent political candidate went so far as to suggest that
“death panels” would be set up by
the government to determine “whether [the elderly and disabled]
are worthy of healthcare”
(Viebek, 2012, para. 9), a sentiment that severely influenced the
public’s view of the ACA.
Much has changed since these early debates, including the
repeal of the ACA’s Independent
Payment Advisory Board—the aforementioned “panel of
experts”—as well as Americans’
public opinion of the law (see Figure 8.1).
Figure 8.1: The public’s view on the ACA
“Given what you know about the health reform law, do you have
a generally favorable or generally
unfavorable opinion of it?” This was the question asked during
an April 2018 health tracking poll
collected by the Kaiser Family Foundation. Although the law
has been a divisive issue since its
enactment, its approval rating has increased since January 2017.
Source: The Kaiser Family Foundation. (2018). The public’s

views on the ACA. Licensed under CC BY-NC-ND 4.0.
Retrieved from
https://www.kff.org/interactive/kaiser-health-tracking-poll-the-
publics-views-on-the-aca/#?response=Favorable
--Unfavorable--Don’t%2520Know&total
The United States’ health system under the ACA does, in fact,
ration health care. However,
this phenomenon is not new or the result of a political agenda.
Health care rationing, or the
allocation of scarce resources, is an inevitable feature of
modern health care systems all over
the world. Whenever the need or demand for any product or
service outstrips its availability
or supply, some form of rationing will occur. In recent decades,
the most common rationing
mechanism in U.S. health care has been economic: Those with
the means or the third-party
coverage to afford care went to the front of the queue, while
poor and uninsured Americans
were less likely to receive needed care.
In areas other than health care, this aspect of modern
civilization is not usually morally trou-
bling or tragic. Consider the difference between someone
wanting a unique work of art and
someone who is an organ transplant candidate. Both are seeking
scarce and valuable “prod-
ucts” for which demand is greater than supply. Yet one is a

luxury, while the other may save
someone’s life.
The ethical allocation of health care resources is likely to
become even more important in the
near future because two phenomena will increase demand for
health care services. First, the
baby boomer generation, those born between 1946 and 1964,
will turn 65 at the rate of 10,000
per day for the next 11 years (Pew Research Center, 2010). This
enormous cohort, which now
constitutes about one fourth of the entire population, will suffer
from age-related health issues
in growing numbers. Because baby boomers will be eligible for
Medicare at age 65, they will
place additional stress on a health care–funding mechanism that
is often characterized by fis-
cal distress. (Figure 8.2 shows the projected population growth
of persons 65 and older.)
Figure 8.2: Elderly population growth in the United States, 1960
versus 2060
Baby boomers are aging, which means the population of senior
citizens in the United States is
growing exponentially. This means the health care needs for the
elderly will also increase
significantly. Is the United States prepared to handle a shift in
resources?
Source: United States Census Bureau. (2018). From pyramid to
pillar: A century of change, population of the U.S. Retrieved
from
https://www.census.gov/library/visualizations/2018/comm/centu
ry-of-change.html

Section 8.1The Moral Challenge of Resource Allocation
The second increase in demand for health care services stems
from changes introduced by the
ACA, which, from 2010 to 2016, increased third-party coverage
through Medicaid and com-
mercial health insurance by nearly 22 million individuals
(DeNavas-Walt, Proctor, & Smith,
2011; Barnett & Berchick, 2017). This expansion of coverage in
turn increases demand and
competition for services.
Health care resource allocation must meet ethical standards and
be perceived as equitable
in order to have both moral authority and public legitimacy.
Health care administrators, who
are increasingly called upon to justify their decisions, will
benefit from pausing to consider
the factors that meet both of these criteria as demand exceeds
both supply and the nation’s
willingness to dedicate additional resources to health care.
In this chapter we will take a close look at ethical questions in
resource management and allo-
cation. We will analyze some of the difficult decisions health
care administrators face, and we
will consider what tools or strategies are ethically and legally
required when setting priori-
ties. We will also look at lessons from history that might help
prevent some of the problems
that befall this aspect of health care management.

8.1 The Moral Challenge
of Resource Allocation
Resource allocation in health care has
been the subject of extensive research
and expertise. Resource allocation policy
analysis frequently investigates organ
transplants (Beauchamp & Childress,
2009). Although organ allocation deci-
sions and policies are logical and reason-
able and are not intended to discriminate
against any individuals in need of this
precious resource, American organ trans-
plantation guidelines have ethically prob-
lematic effects. For example, a patient
who lives within the allowable travel time
for two transplant centers may be wait-
listed at both as long as the individual ful-
fills the other requirements. A patient
who lives elsewhere, however, may only
have access to one waitlist (Beauchamp &
Childress, 2009). Conversely, someone who has access to a
private jet that is available at a
moment’s notice may qualify for the organ lists of numerous
transplant centers, as did bil-
lionaire Steve Jobs when he received a liver transplant in
Memphis, Tennessee, despite living
more than 2,000 miles away in Palo Alto, California (Grady &
Meier, 2009).
Apart from the potential consequences of not receiving scarce
health care resources, what
makes the prudent and equitable allocation of such resources a
moral imperative? The

Aphp-St Antoine-Garo/Phanie/SuperStock
Organ transplants can pose serious ethical
dilemmas for health care workers.
objectives of medicine, along with the special moral and human
importance of health and
health care, make the health care leader’s attention to ethical
stewardship of resources a fun-
damental priority, both for the good of patients and health care
employees (see Case Study: A
Difficult Choice).
Case Study: A Difficult Choice
In 2004, South Florida was hit with four major hurricanes in
five weeks. One particular area
was ground zero for two of those hurricanes, happening only
three weeks apart, and one
of its local hospitals suffered such major damage that it had to
be closed for two and a half
months. Unfortunately, this shutdown occurred during the end
of the hospital organiza-
tion’s fiscal year in September and the beginning of the next
fiscal year in October.
Many times when an organization creates departmental budgets,
they must make changes
to accommodate unforeseeable circumstances. In July of 2005,
the hospital had to deal with

the financial consequences of the unforeseen two-month
shutdown from the previous year;
every manager of every department was asked to make budget
cuts in order to ensure that
the overall budget did not suffer at the end of the fiscal year.
Although the cuts themselves
would not directly affect the hospital’s patients, if the hospital
was unable to meet its over-
all budget for the year, the hospital might have to halt
operations, leaving many patients
without access to care.
In most hospitals, there are departments that make money for
the hospital (called “reve-
nue-producing”) and departments that do not make money for
the hospital (called “non-
revenue-producing”). When budgets need adjusting, the
revenue-producing departments
are often able to apply more creative methods to increase
revenue, such as providing more
screenings to patients or negotiating vendor discounts for
products and services. However,
non-revenue-producing departments do not have this flexibility,
so it can be a more difficult
process to decide how to cut their budgets.
At this particular South Florida hospital, the manager of a non-
revenue-producing depart-
ment had a budget of $500,000 for the year. The manager was
asked to cut this budget by
$50,000 as part of the overall budget cuts. The problem was that
75% of the budget went
to paying the salaries of the manager and four other employees.
This left only $125,000 to
pay for any of the department’s other needs. Since it was
nearing the end of the fiscal year,

much of the budget had already been paid out, so the manager
tried cutting out supply
purchases for the year, equipment maintenance, and several of
the smaller items on the
budget. However, the cuts did not meet the $50,000
requirement. It was becoming painfully
obvious to the manager that she was going to have to consider
terminating one of her four
employees. The manager did not feel it was morally right to
terminate one the employees,
though, especially after they had all struggled financially
making house repairs after the
storms. Therefore, the manager recommended that her own
salary be removed from the
budget, effectively declaring her resignation, and suggested that
one of the four employees
become a supervisor so the department could remain intact in
order to perform its neces-
sary duties.
Before reading on, consider the following questions:
1. Can you think of anything else the manager could have done
instead of offering to
resign?
(continued on next page)
Fundamental Moral Questions in Resource Allocation

How can leaders make ethically defensible resource allocation
decisions while honoring
moral obligations to patients, organizations, and communities?
To determine the underly-
ing obligations for just resource allocation, two ethical
questions must be considered when
deciding how to distribute services and benefits in health care
organizations:
1. Procedural justice: What do ethics require of the processes
and policies that help
determine resource allocation?
2. Distributive justice: When are health and health care
inequalities unjust and in need
of correction?
Both questions address the issue of setting priorities: How do
we align priorities with the
ultimate ends of medicine as well as democratic deliberation
about values? We will examine
each of these questions in the sections that follow.
Case Study: A Difficult Choice (continued)
2. Should the hospital accept the manager’s recommendation?
Why or why not?
3. Is it ethical for the revenue-producing departments to
recommend patients for
additional services in order to meet their budget?
Continue reading to find out what the hospital decided in this
case.
The manager’s proposal was considered unprecedented budget

reasoning, and the hospi-
tal’s CEO and the manager’s direct supervisor refused to accept
her resignation. Instead,
they made adjustments in other areas to ensure that this
department would stay intact for
the good of the organization.
Stop and Clarify: Rationing
The term rationing is often used to describe rules that unfairly
or unjustly limit access to a
resource that potential recipients deserve and to which they
would otherwise be entitled.
Technically, however, rationing will occur whenever there is a
product, benefit, or service
that is limited and for which demand outstrips supply. Even
simple methods for allocating
a scarce resource among those who want it—such as a first-
come, first-served policy—are
rationing processes, since they determine who will receive the
resource and who will not.
Ideally, system-wide rationing, also called macroallocation,
should be transparent and
explicit in order to avoid allegations of injustice or
capriciousness. Historically, however,
Americans have been reluctant to have explicit discussions of
“rationing,” particularly in
health care (Beauchamp & Childress, 2009). Health care
rationing typically occurs case by
case, based on the judgment of the treating physician; this type
of rationing is also called
microallocation.

Section 8.2Procedural Justice in Resource Allocation Decisions
8.2 Procedural Justice in Resource Allocation Decisions
While there is a clear moral obligation for
the leaders of health care organizations to
meet the health care needs of patients and
communities, this moral duty cannot, in
many instances, be met perfectly. It is
often impossible to meet all of a popula-
tion’s genuine health needs, because
resources are too scarce or too expensive.
The moral question then becomes “How
can we meet the health care needs of our
patients and communities fairly and justly
when we cannot meet them all?” (Daniels,
2008, p. 13).
Chapter 1 explained that for the justice
principle’s requirements to be met, any
formal procedures or mechanisms by
which a person attempts to resolve dilemmas must themselves
be fair and equitable. Thus,
health care administrators have a duty to craft resource
allocation policies and procedures
that maximize the chances of fair and equitable treatment. It is
important to note, however,
that neither procedural nor distributive justice necessarily
means that everyone must be
treated the same.
Modern conceptions of justice require peo-
ple in similar situations to be treated simi-
larly and people in different situations to
be treated differently. This means inequal-

ity is sometimes the fair and just outcome
of ethical resource allocation. For exam-
ple, the egalitarian moral philosopher
John Rawls (1971) argued that it would be
fair to construct a system that unequally
distributes goods, but only if by doing so
the least well-off (the poor, for example)
would benefit disproportionately.
Another reason just processes are funda-
mental to health care rationing is that
those who make such rules and impose
them on others are held accountable by
their community and patient population.
Next, we will examine methods for estab-
lishing fair processes and determining
who holds the moral authority.
Blend Images/SuperStock
Procedures must be in place to ensure the
most ethical distribution of limited health care
resources.
Stop and Clarify:
Triage
In clinical settings, triage refers to “a pro-
cess of developing and using criteria for
prioritization” (Beauchamp & Childress,
2009, p. 279). Medical triage weighs
clinical considerations, in contrast with
rationing, which addresses social issues.
For example, hospital emergency depart-
ments do not treat patients on a first-
come, first-served basis, but rather give
priority to those in greatest need of

immediate care. Another example of tri-
age occurs in battlefield medicine, where
resources are traditionally focused on
those who are likely to survive if they
receive timely care, rather than those
with the most serious wounds (Beau-
champ & Childress, 2009).
Crafting Fair Processes
The especially difficult health care resource allocation decisions
arise when we can meet one
person’s health care needs only if we do not meet the needs of
another person (Daniels, 2008).
Some will argue that health care resource rationing decisions
are best left to the expertise
of health care practitioners, policy experts, and economists.
Questions of medical necessity,
futility, and cost–benefit analysis are empirical and the province
of experts. However, while
enlisting health experts is necessary for a just and equitable
resource allocation policy, it may
not be sufficient. Relying solely on health care professionals
can lead to the development of
rules that are unresponsive to the needs and values of
communities that will be most directly
affected.
For these reasons, many commentators have agreed that any
health care rationing scheme

will need to earn its moral legitimacy from a democratic and
deliberative process in which
those affected by the limiting rules will have their voices heard
along with the experts.
Four approaches to resource allocation, including allocation by
expert panels, community
consensus, lottery, and court order, are presented in the feature
box Case Studies in Resource
Allocation. This list does not exhaust all the possibilities, but it
illustrates the wide variation
in approaches to procedural justice found in contemporary U.S.
health care.
Case Studies in Resource Allocation
A. Allocation by expert panels versus community consensus
Allocation by expert panels
In the 1980s, Oregon was among the many states where tax
revenue lagged behind
expenses. Increasing numbers of Oregonians sought the health
coverage provided by the
state through its Medicaid program, and there was a growing
public debate about how to
make the best use of limited state resources for health care
(Crawshaw, Garland, Hines,
& Lobitz, 1985). As in most states, Medicaid was the second
most expensive line item in
Oregon’s state budget (Zoloth, 1999). In early 1987, faced with
a large budget shortfall,
Oregon’s state legislature chose to reduce or eliminate coverage
for services that, in the
findings of an expert panel, were either too costly for the
amount of benefit received or had
very little benefit regardless of the cost.

One of the first benefits to be cut by the new plan was organ
and tissue transplants. Coby
Howard, the 7-year-old son of an unemployed Oregon woman,
was receiving the standard
treatment for his lymphocytic leukemia in 1987 when his illness
worsened. The only treat-
ment with any prospect of prolonging Coby’s life was a bone
marrow transplant. Since Coby
was enrolled in Medicaid, the new allocation policies meant that
the transplant was no
longer covered, and his family could not afford the $100,000
cost.
Media coverage brought the nation images of the adorable 7-
year-old asking for money on
a street corner to cover the operation, causing a public outcry
against what was character-
ized as a callous bureaucratic policy. The media attention
helped raise money for Coby’s
bone marrow transplant, but contributions only amounted to
$85,000 by the time Coby
died (Zoloth, 1999).
Case Studies in Resource Allocation (continued)
Press reports of other Medicaid patients who were denied
benefits raised more political
rancor. Although the state legislature attempted more expert and
professionally led Med-
icaid reforms to address the furor that the Coby Howard case
had stirred, there remained
enormous public distrust for policy makers’ apparent “elitism,
provider subjectivity, and

political exclusion,” and their “closed door decision-making”
(Zoloth, 1999, p. 34).
Allocation by community consensus
Oregon’s legislature decided to pay more attention to grassroots
public discourse in order
to articulate Oregonians’ health care values and benefit
priorities. The resulting democratic
deliberation articulated principles for resource allocation
(Oberlander, Marmot, & Jacobs,
2001).
Purpose of Health Services:
1. The responsibility of government in providing health care
resources is to improve
the overall quality of life of people by acting within the limits
of available financial
and other resources.
2. Overall quality of life is a result of many factors, health
being only one of these. Others
include economic, political, cultural, environmental, aesthetic,
and spiritual aspects of a
person’s existence.
3. Health-related quality of life includes physical, mental,
social, cognitive, and self-care
functions, as well as a perception of pain and sense of well-
being.
4. Allocations for health care have a claim on government
resources only to the extent that
no alternative use of these resources would produce a greater
increase in the overall
quality of life of people.

5. Health care activities should be undertaken to increase the
length of life, the health-
related quality of life, or both, during a lifespan.
6. Quality of life should be one of the ethical standards when
allocating health care
resources involving insurance or government funds.
Why Priorities Need to be Set
7. Every person is entitled to receive adequate health care.
8. It is necessary to set priorities in health care, so long as
health care demands and
needs exceed society’s capacity, or willingness, to pay for them.
Thus, an “adequate”
level of care may be something less than “optimal” care.
How to Set Health Priorities
9. Setting priorities and allocating resources in health care
should be done explicitly and
openly, taking careful account of the values of a broad spectrum
of the Oregon popu-
lace. Value judgments should be obtained in such a way that the
needs and concerns of
minority populations are not undervalued.
10. Both efficiency and equity should be considered in
allocating health care resources.
Efficiency means that the greatest amount of appropriate and
effective health benefits
for the greatest amount of persons are provided with a given
amount of money. Equity
means that all persons have an equal opportunity to receive

available health services.
Crafting Fair Processes
The especially difficult health care resource allocation decisions
arise when we can meet one
person’s health care needs only if we do not meet the needs of
another person (Daniels, 2008).
Some will argue that health care resource rationing decisions
are best left to the expertise
of health care practitioners, policy experts, and economists.
Questions of medical necessity,
futility, and cost–benefit analysis are empirical and the province
of experts. However, while
enlisting health experts is necessary for a just and equitable
resource allocation policy, it may
not be sufficient. Relying solely on health care professionals
can lead to the development of
rules that are unresponsive to the needs and values of
communities that will be most directly
affected.
For these reasons, many commentators have agreed that any
health care rationing scheme
will need to earn its moral legitimacy from a democratic and
deliberative process in which
those affected by the limiting rules will have their voices heard
along with the experts.

Four approaches to resource allocation, including allocation by
expert panels, community
consensus, lottery, and court order, are presented in the feature
box Case Studies in Resource
Allocation. This list does not exhaust all the possibilities, but it
illustrates the wide variation
in approaches to procedural justice found in contemporary U.S.
health care.
Case Studies in Resource Allocation
A. Allocation by expert panels versus community consensus
Allocation by expert panels
In the 1980s, Oregon was among the many states where tax
revenue lagged behind
expenses. Increasing numbers of Oregonians sought the health
coverage provided by the
state through its Medicaid program, and there was a growing
public debate about how to
make the best use of limited state resources for health care
(Crawshaw, Garland, Hines,
& Lobitz, 1985). As in most states, Medicaid was the second
most expensive line item in
Oregon’s state budget (Zoloth, 1999). In early 1987, faced with
a large budget shortfall,
Oregon’s state legislature chose to reduce or eliminate coverage
for services that, in the
findings of an expert panel, were either too costly for the
amount of benefit received or had
very little benefit regardless of the cost.
One of the first benefits to be cut by the new plan was organ
and tissue transplants. Coby
Howard, the 7-year-old son of an unemployed Oregon woman,

was receiving the standard
treatment for his lymphocytic leukemia in 1987 when his illness
worsened. The only treat-
ment with any prospect of prolonging Coby’s life was a bone
marrow transplant. Since Coby
was enrolled in Medicaid, the new allocation policies meant that
the transplant was no
longer covered, and his family could not afford the $100,000
cost.
Media coverage brought the nation images of the adorable 7-
year-old asking for money on
a street corner to cover the operation, causing a public outcry
against what was character-
ized as a callous bureaucratic policy. The media attention
helped raise money for Coby’s
bone marrow transplant, but contributions only amounted to
$85,000 by the time Coby
died (Zoloth, 1999).
Press reports of other Medicaid patients who were denied
benefits raised more political
rancor. Although the state legislature attempted more expert and
professionally led Med-
icaid reforms to address the furor that the Coby Howard case
had stirred, there remained
enormous public distrust for policy makers’ apparent “elitism,
provider subjectivity, and
political exclusion,” and their “closed door decision-making”
(Zoloth, 1999, p. 34).
Allocation by community consensus

Oregon’s legislature decided to pay more attention to grassroots
public discourse in order
to articulate Oregonians’ health care values and benefit
priorities. The resulting democratic
deliberation articulated principles for resource allocation
(Oberlander, Marmot, & Jacobs,
2001).
Purpose of Health Services:
1. The responsibility of government in providing health care
resources is to improve
the overall quality of life of people by acting within the limits
of available financial
and other resources.
2. Overall quality of life is a result of many factors, health
being only one of these. Others
include economic, political, cultural, environmental, aesthetic,
and spiritual aspects of a
person’s existence.
3. Health-related quality of life includes physical, mental,
social, cognitive, and self-care
functions, as well as a perception of pain and sense of well-
being.
4. Allocations for health care have a claim on government
resources only to the extent that
no alternative use of these resources would produce a greater
increase in the overall
quality of life of people.
5. Health care activities should be undertaken to increase the
length of life, the health-
related quality of life, or both, during a lifespan.

6. Quality of life should be one of the ethical standards when
allocating health care
resources involving insurance or government funds.
Why Priorities Need to be Set
7. Every person is entitled to receive adequate health care.
8. It is necessary to set priorities in health care, so long as
health care demands and
needs exceed society’s capacity, or willingness, to pay for them.
Thus, an “adequate”
level of care may be something less than “optimal” care.
How to Set Health Priorities
9. Setting priorities and allocating resources in health care
should be done explicitly and
openly, taking careful account of the values of a broad spectrum
of the Oregon popu-
lace. Value judgments should be obtained in such a way that the
needs and concerns of
minority populations are not undervalued.
10. Both efficiency and equity should be considered in
allocating health care resources.
Efficiency means that the greatest amount of appropriate and
effective health benefits
for the greatest amount of persons are provided with a given
amount of money. Equity
means that all persons have an equal opportunity to receive
available health services.

11. Allocation of health resources should be based, in part, on a
scale of public attitudes that
quantifies the tradeoff between length of life and quality of life.
12. In general, a high priority for health care activity is one
where the personal and social
health benefits:costs ratio is high.
13. The values of the general public should guide planning
decisions that affect the alloca-
tion of health care resources. As a rule, choices among available
alternative treatments
should be made by the patient, in consultation with health care
providers.
14. Planning or policy decisions in health care should rest on
value judgments made by the
general public and those who represent the public and on factual
judgments made by
appropriate experts.
15. Private decision makers, including third-party payers and
health care provid-
ers, have a responsibility to oversee the allocation of health
care resources to
assure their use is consistent with the values of the general
public. (Quinn, 2000,

p. 361–362)
After broad discussions that included detailed cost-benefit
analyses, a final list prioritizing
Medicaid benefits was given to the Oregon legislature in 1991.
The democratically derived
list included 709 different health care benefits ranked in order
of perceived value. The pro-
cess after that was relatively simple: Starting with number one
on the list, the projected
cost of each benefit was deducted from the state’s Medicaid
budget until funding ran out.
The first 567 priorities on the citizens’ list became the new
Oregon Medicaid benefit pack-
age, and the cut-off point in the list of services was adjusted to
fit the Medicaid budget
in each budget cycle (Oberlander et al., 2001). This unusual
combination of community
consensus and technical expertise stabilized the political
environment for Oregon’s health
system but did not achieve cost savings and proved difficult to
enforce.
Discussion Questions
1. What lessons does the Oregon Medicaid benefit struggle of
the 1980s and 1990s pro-
vide health care organization leaders today?
2. What ethical protections are provided by a public,
transparent, deliberative process for
health policy making?
3. On a spectrum between strictly utilitarian cost-benefit
analyses on the one hand
and population surveys of what people value and desire on the

other, where do you
think health administrators should make policy (See Figure
8.3)?
Elderly population growth in the United States, 1960 versus
2060
Section 8.3Distributive Justice in Resource Allocation
Decisions
8.3 Distributive Justice in Resource Allocation Decisions
The processes for developing resource allocation policies must
carry moral authority, but the
policies themselves are also assessed to determine whether they
follow the ethical principles
of distributive justice. The concept behind distributive justice is
that individuals receive the
appropriate type and quantity of goods and benefits (Beauchamp
& Childress, 2009; Rawls,
1971). This topic is among the most controversial in U.S. policy
and politics because of the
conflict between principles of free market capitalism and social
justice. In the 2012 presiden-
tial campaign, for example, candidates disagreed openly on
whether more affluent Americans
should provide financial support for fellow citizens in need
(Leonhardt, 2010).

B. Two other approaches: Allocation by lottery and by court
order
Allocation by lottery
Oregon continues to be an exception among U.S. states in its
willingness to make health care
allocation decisions explicit. In 2008, funds became available to
make Medicaid coverage
available to an additional 10,000 Oregonians, but 90,000 were
potentially eligible, so the
state again faced a wrenching decision (Baicker et al., 2013).
The Oregon Health Authority
decided to make Medicaid coverage available through a random
drawing that determined
who was eligible. The resulting natural experiment has garnered
great interest in the health
policy community (Baicker et al., 2013), but the extent to which
Oregonians feel that it rep-
resents a fair approach to the allocation of scarce resources is
far from clear.
Allocation by court order
A recent example of an allocation mechanism comes from the
2013 case of Sarah Mur-
naghan, a 10-year-old cystic fibrosis patient awaiting a lung
transplant. At the time of her
initial eligibility for the list of prospective transplant patients,
the national organization
responsible for transplant policy did not make children younger
than 12 eligible for the
much larger pool of potential transplants available to adults
(Goodnough, 2013). Her family,
along with that of an 11-year-old cystic fibrosis patient, brought
a suit against the Depart-
ment of Health and Human Services and were successful: On

June 10, 2013, a federal judge
ordered that the two children be placed on the adult waiting list
(Ladin & Hanto, 2013).
The national policy-making organization then voted to allow
expert review of children
under 12 who were waiting for lung transplants to determine
whether they might be eli-
gible for the adult waiting list. While clinical specialists voiced
concern that nonmedical
intervention was dictating policy, the expert review found Sarah
to be a candidate for the
adult waiting list, and she received a double lung transplant
(Ladin & Hanto, 2013).
Discussion Questions
1. What ethical principles support the use of a lottery to
determine access to scarce
health care resources? What principles would go against using a
lottery?
2. How would you evaluate the use of a court opinion to
determine health care resource
allocation? When do you think it would be appropriate?
Decisions
Beauchamp and Childress (2009) list six principles that could
serve as guidance for meeting

the criteria of distributive justice:
1. To each person an equal share;
2. To each person according to need;
3. To each person according to effort;
4. To each person according to contribution;
5. To each person according to merit;
6. To each person according to free-market exchanges. (p. 243)
While these principles seem radically incompatible, we can find
examples of each in relevant
sectors. Social welfare benefits are distributed on the basis of
need, employment options on
the basis of merit, and public education on an equal basis; many
medical goods are exchanged
in the free market, hourly wage employees are rewarded for
effort, and many retirement ben-
efits reflect employee contributions.
Setting Limits
To allocate health care resources in keeping with ethical
principles of distributive justice,
health care leaders must acknowledge the need to set limits. The
combination of high costs
and escalating demand means that neither government-funded
programs nor employer-
sponsored health care benefits can extend to every possible
treatment. Americans often resist
acknowledging these facts for reasons that include concern that
they will be denied essential,
lifesaving care.
In countries with strong traditions of social solidarity and
universal health care coverage, a
reasonable level of consensus mitigates the concern that one
person will be denied care that

another person would receive, for example, because he or she
can afford it. In the United
States, there is no assurance that if one person agrees to do
without a health care service, the
savings will accrue to the benefit of someone in greater need.
The savings are, in fact, likely to
benefit the owners or executives of the health plan, particularly
in the case of publicly traded
companies.
Determining Medical Futility
The need to set limits in health care is not just a function of the
practical need to choose who
will receive access to resources when demand exceeds supply.
Limit setting is also complicated
by a fundamental tension between two competing ethical values
in medicine: “1) the desire to
achieve a valuable end, and 2) the desire not to waste time or
resources trying to accomplish
something that cannot be accomplished” (Trotter, 2007, p. 8).
These two values clash in cases
of what is sometimes referred to as “medical futility,” a term
that, as Beauchamp and Childress
(2009) note, has been used in such varying circumstances as to
become nearly meaningless.
They suggest, instead, the term “clinically nonbeneficial
treatment” (Beauchamp & Childress,
2009, p. 167), but even that term implies a determination of
clinical benefit that may not be
clear if the treatment has not been administered.
Some of the most widely discussed ethical and legal cases in
health care have revolved around
medical futility (the near certainty that an action taken in
pursuit of a health care goal will
fail)—particularly around how to interpret its basic concept:

“These debates generally hinge
Decisions
on one or both of the following: 1) parties
in the debate disagree about the goal or
goals that should serve as a standard for
determinations of futility; or 2) parties in
the debate disagree about what counts as
‘virtual certainty’ that an action will fail to
achieve a goal” (Trotter, 1999, p. 528). Ori-
enting the practice of health care leader-
ship to the goals of medicine can help to
clarify and resolve practical, ethical issues.
Determining the Legitimacy of
Treatment Goals
Difficult questions regarding the futility
of a clinical intervention may be clarified
with a consensus regarding the legitimate
goals of medicine. For example, a treat-
ment goal that is not aligned with the objectives of health care
may be illegitimate. Medical
futility cases can garner extensive media coverage and give rise
to heated political debate, as
in the case of Terri Schiavo. Whether to continue or cease
Schiavo’s artificial nutrition and
hydration following the determination that she was in a
persistent vegetative state raised
issues regarding principles such as reverence for life, the

credibility of medical diagnosis, and
patients’ wishes regarding life-prolonging treatment (Veatch,
2005).
Conflicts about medical futility may also arise in banal cases;
for example, those in which a
patient is seeking an excuse for a day away from work or a
clinician performs an unneces-
sary diagnostic procedure to help defray the cost of the
diagnostic equipment. Apart from the
question of futility, some care that is inconsistent with the
ethical goals of medical practice
can have grave consequences. Several instances of repeated
unnecessary heart surgeries, for
example, have come to light in recent years, imposing not only
illegitimate costs but seri-
ous risk of health consequences on the surgeons’ unfortunate
patients (Abelson & Cresswell,
2012). Other famous cases of health care interventions at odds
with the legitimate goals of
medicine include the notorious Tuskegee syphilis study, the
U.S. experiments on Guatemalans
(McNeil, 2010), and the universally condemned actions of Nazi
doctors during World War II
(Beauchamp & Childress, 2009).
Measuring the Likelihood of Treatment Success
In other instances, disagreement over a proposed treatment’s
medical futility is not related
to the legitimacy of the goal; rather, the disagreement centers
on how to measure virtual
certainty that the treatment will fail to achieve its (medically
appropriate) goal. If a proposed
treatment has a 50% chance of working, should it be
implemented? In such a case, many
people would feel uncertain about taking the action and would

want to know more about the
proposed treatment. What if the chances of a proposed
treatment’s success were 1 in 100?
Most would agree that a 99% probability of failure would more
than adequately fulfill the
certainty that an action will fail at achieving the intended goal
criterion for medical futility.
In such a case, would ethics require that medical treatment be
withheld? The sheer math-
ematical probability, while helpful in determining whether the
medical intervention should
Creatas/Jupiterimages/Getty/Thinkstock
Setting limits in health care is important to
prevent care from extending past the point of
effectiveness and to prevent unnecessary testing
and procedures.
Decisions
be undertaken, will not conclusively determine medical futility.
In fact, while a 99% risk of
failure in attaining the goal may be determinative in some cases,
in others it may be a risk a
person is willing to take.
Other Factors Affecting Medical Futility
In addition to statistical probability, two other factors help
medical practitioners make ethi-
cally prudent decisions about medical futility. One is the value

of the goal to be achieved.
Some goals are demonstrably weightier than others. For
example, while Coby Howard’s medi-
cal prospects were bleak whether or not he received the bone
marrow transplant, this last
chance for survival was widely viewed as medically necessary
despite the low chances for
its success. There may be instances, however, when a treatment
such as Coby’s is set aside in
favor of other important competing interests, including the
health and lives of other patients
who might benefit from treatments that Medicaid would be able
to cover if it refused a low-
chance transplant. Despite the priceless nature of potentially
lifesaving treatment, other fac-
tors come into play when making difficult health care–rationing
decisions.
A second factor relevant to decisions of medical futility is the
cost, time, and resources neces-
sary to undertake the action. While economics related to a
proposed treatment should not
determine whether the treatment is medically futile, neither
should they be irrelevant.
Resources dedicated to one intervention are not available for
another, so the effect is the same
whether the choice is financial or categorical (Beauchamp &
Childress, 2009).
Ethics in Focus: Medical Futility
According to Griffin Trotter, a physician and ethicist, treatment
is medically futile when-
ever there is certainty that it will fail to achieve its goal for the
patient (as cited in Kasman,
2004). Trotter states that the conditions necessary for there to

be medical futility are:
1. There is a goal;
2. There is an action or activity aimed at achieving this goal;
and
3. There is virtual certainty that the action will fail. (As cited in
Kasman, 2004)
Although the definition of medical futility is straightforward,
many of the most vehement
debates in medical ethics revolve around the interpretations of
this concept. According to
Trotter, this is for at least two reasons. First, there is a
disagreement about what the goal
or goals should be for certain controversial treatments. For
example, some will argue that
prolonging the life of someone in a permanent coma is not one
of the legitimate goals of
medicine and is perhaps even morally and professionally wrong.
For others however, this is
seen as perfectly within the legitimate ends of medical practice
and perhaps even the cor-
rect moral and professional action to take.
The second disagreement is about what counts as “virtual
certainty” for purposes of
determining futility. For example, those who tend to have a
“glass is half full” outlook will
always choose the 1% chance for success, and therefore there is
no “virtual certainty” that
treatment will fail. Meanwhile, for people who have a “glass is
half empty” outlook, a 99%
probability of failure is considered “virtually certain” and thus
is determined to be a futile
undertaking.

Ethics in Focus:
According to Griffin Trotter, a physician and ethicist, treatment
is medically futile when-
Chapter Highlights
Chapter Highlights
This chapter dealt with the often difficult and sometimes tragic
decisions that must be made
in health care administration due to limited resources for which
demand exceeds supply. Pol-
icy makers have been heavily criticized for making rationing
decisions behind closed doors
without accountability. Policies and decisions made without the
input of the population they
are intended to serve run the risk of being unresponsive to the
needs of the people and there-
fore illegitimate.
• How can health care administrators and policy makers enhance
the contribution of
democratic, deliberative processes for ethically defensible
health care rationing?
• How can health care leaders make ethically defensible
resource allocation decisions
while observing their moral obligations to patients, their
organizations, and their
communities?

• How do procedural justice, distributive justice, and priority
setting help answer the
fundamental question of moral stewardship in resource
allocation?
• How can limits be set for the use of scarce resources in
medicine, particularly with
regard to the thorny issue of medical futility?
Case Study: Resource Allocation in an Influenza Outbreak
Reports of influenza outbreaks in Asia have been increasing for
the past six weeks. It is
now late December. Influenza outbreaks have been reported
throughout the United States,
including states near yours. Anytown, where you are a health
system manager, is seeing
what may be the early effects of an outbreak. For the purposes
of this case study, we will
assume there are two types of drugs that are effective in treating
or preventing influenza:
vaccines, which provide immunity in most cases but must be
administered before the indi-
vidual is exposed to the disease, and antivirals, which reduce
the severity and duration of
flu symptoms when given to sick patients.
Your health system is reporting increases in emergency and
physician office visits for symp-
toms consistent with influenza. School and business absences
begin to rise. Health care, law
enforcement, and other emergency personnel are calling in sick.
Health system staff mem-
bers with duties in critical areas such as information
technology, direct patient care, and the
clinical laboratory are asking for time off to care for ill family

members.
The threat of an epidemic could not come at a worse time for
your health system. State
appropriations have been cut in response to a two-year revenue
shortfall, and a growing
immigrant population is placing new demands on your primary
care clinic. Medicaid man-
aged care organizations have approached you yet again with the
threat of reducing your
clinic reimbursement rates.
In response to media accounts of illness, there is a sharp
increase in local demand for vac-
cination, but it will not be available for at least another month.
Even then, the vaccine dis-
tribution protocol indicates that it will be given first to priority
groups until enough is avail-
able for the entire population. Several of your colleagues have
expressed concern about
being sued by those who are denied immediate access to
vaccines. Local pharmacies have
Chapter Highlights
Critical Thinking and Discussion Questions
1. The Affordable Care Act and the increase in Medicare
enrollment caused by the

aging baby boomer generation are likely to continue increasing
demand for health
care resources substantially in the near future. What procedures
for policy making
would you recommend to develop rules for access to health
care? Does one of the
four examples in this chapter (expert panels, community
consensus, lottery, or court
order) appear to be a good fit, or would you suggest something
else? Defend your
choice of policy-making procedure.
2. Having selected a procedure for policy making, what factors
would you recommend
taking into consideration to make decisions that are consistent
with distributive
justice? Should these factors be articulated explicitly to the
public so people know
what level of access to expect? Should they be shared only with
health care providers
so they can apply and discuss them with individual patients? Is
there another option
that balances the interests of the public with those of individual
patients?
3. How would you weigh the following factors when ethically
deciding how to fund
a type of treatment: (a) the cost benefit or cost effectiveness;
(b) the actual cost of
treatment (for example, a very effective treatment that is
extremely expensive);
(c) the likelihood that the treatment will succeed with most
patients; (d) the likeli-
hood it will succeed with a small group of patients; (e) the
needs of patients who

Case Study: Resource Allocation in an Influenza Outbreak
(continued)
run out of antiviral medications, and stories are circulating that
physicians have been pre-
scribing antiviral medications more broadly. Anytown has
received a small allocation of
antivirals from a Centers for Disease Control and Prevention
stockpile distributed by the
state Department for Public Health, and public concern over the
way in which the antiviral
medications will be used is increasing. (Based in part on
California Department of Health
Services, Pandemic Influenza and Public Health Law Training,
version 1.2 [June 26, 2006].)
How would you use ethical principles to identify issues that you
as a health system manager
must address? For example:
1. How would you respond to someone who thought the only
fair way to allocate anti-
viral medications was to give them out to the people who
requested them on a first-
come, first-served basis?
2. Of the four ways of allocating medical resources that are
discussed in this chapter
(expert, consensus, lottery, and judicial), which do you think is
best suited to the type of
emergency described in the case study, and why?
3. What ethical principles would support a decision to share all
available information with
the media as soon as possible? What principles would suggest
withholding some infor-

mation, at least in the short term?
4. Think of another kind of emergency where the supply of
resources is greater
than the demand, such as a natural disaster. What do you know
about how those
resources are allocated and who is making the relevant
decisions?
Chapter Highlights
have experienced significant social or economic disadvantage;
and (f) the political
popularity of the treatment?
4. Your health system serves a community in which there is a
high rate of diabetes
among the low-income population. If you increase services for
diabetes education,
you will generate a net financial loss because such services are
not reimbursed ade-
quately. What ethical factors would enter into your
recommendation about increas-
ing diabetes education?
5. Should Americans who have the resources to enroll in
multiple organ transplant
waiting lists (which means they can get to the site very quickly)
be allowed to do
so? Does it matter whether there is a shortage of suitable
transplant candidates in a

region? What ethical principles would you apply to this
analysis?
6. The neurosurgery clinic that you manage has a long waiting
list for nonurgent
appointments. The husband of your hospital’s CEO has been
having back pain, and
the CEO’s administrative assistant calls to ask whether you can
schedule him to be
seen the next morning. If you do so, the patients scheduled for
the afternoon will
all have to wait at least 30 minutes longer than they otherwise
would. Recalling the
basic ethical principles of health care, how would you handle
this decision?
7. Back in the clinic that you manage, you discover there is a
shortage of a critical
medical item that is needed in nearly every neurosurgical
procedure. Your patients
represent a broad range of health conditions, races, ethnicities,
educational and pro-
fessional accomplishments, lifestyles, immigration statuses, and
criminal records.
Describe and defend your preferred way of allocating the item
that is in short supply,
assuming that no law or institutional policy governs the matter.
Key Terms
macroallocation The processes performed
and decisions made to determine how
limited resources are distributed in large
groups or populations.
medical futility The near certainty that an
action taken in pursuit of a health care goal

will fail.
microallocation The processes performed
and decisions made to determine how lim-
ited resources are distributed in individual
cases or small groups.
rationing Allocation of scarce resources;
rationing is necessary and unavoidable
whenever the need or demand for any prod-
uct or service outstrips the supply.
triage A system that indicates which
patients have priority for treatment. Prior-
ity setting varies depending on the type of
health care setting and the circumstances
(such as routine versus disaster).
7Expenditures, Cost Containment, and Quality
of Care
iStockphoto/Thinkstock
Learning Objectives

After reading this chapter, you should be able to
1. Discuss the relationship between expenditures and quality of
care.
2. Explore the causes of inefficiency, waste, and cost overruns
in American health care.
3. Outline the legal methods used to control, monitor, and
remedy cost and quality problems in
American health care today.
4. Examine process improvement methods used by health care
facilities that are designed to
eliminate redundancy and waste.
Section 7.1The Current State of Affairs
Introduction
During the past century or so, medical care in the United States
has shifted from individual
doctor–patient interactions, typically within an office setting, to
interactions in health care
facilities that continue to grow larger and more complex.
Modern American health care has
become more highly specialized, technology centered, and
fragmented—a phenomenon that
has been anticipated since the mid-19th century. The English
sociologist Herbert Spencer
(2004) observed that as society increases in complexity, so do

its social institutions. The
bureaucratic explosion within health care, therefore, seems less
a symptom of inefficiency
and institutionalized excess and more a part of the necessary,
long-term development of spe-
cialized sectors within advanced industrialized society
(Toulmin, 1990).
Today, early 20th-century forecasts seem to aptly describe the
current state of affairs. Physi-
cians increasingly work in large, complex medical centers and
practice settings and tend to
see their scope of professional discretion minimized and finitely
defined. The fear of going
beyond those clear limits frequently causes physicians to
practice medicine defensively,
sometimes forgoing the ends of patient care to do so. Practicing
under such constraints has its
advantages but can also distract physicians from their
professional duties. For many patients,
medical care has become akin to conveyer-belt production.
Continuity of care once meant
having the same health care professionals in a lifelong
relationship with the patient. In the
new era of medicine, care is more likely to involve patients
being scuttled between sometimes
dozens of different caregivers, very few of whom will even
remember the patient’s name or,
in some cases, even meet with the patient one on one. As a
result, patients may become suspi-
cious of their caretakers, sometimes even assuming an
adversarial stance where once there
would have been warm acceptance (Phillips & Benner, 1994).
Most health care administrators and managers enter the
profession with clear priorities on

patient care but soon feel incessant economic and regulatory
pressures to protect their insti-
tution’s finances and public image. This is certainly part of any
good health care administra-
tor’s job description, but too often the loyalty to this side of the
job wins out over the ultimate
aim of health care—caring for patients. “No margin, no
mission” has become a popular refrain
among modern health care leaders, and the statement is
certainly true. However, what often
gets misunderstood in this pithy slogan is that margin should
exist only to further the mis-
sion. No mission, no health care organization.
In this chapter we will look at how modern American health
care has succumbed to bureau-
cracy and how the resulting, unsustainable costs have not
translated into proportionately
improved quality of care. The chapter will also show how the
constraints of institutionalization
upon the moral practice of medicine should be a major concern
for health care professionals.
Finally, we will examine what American society has done to
address this major ethical issue.
7.1 The Current State of Affairs
American health care continues to be at the leading edge of
discovery and innovation. How-
ever, in order to get a realistic picture of the current state of
affairs, its performance must be
examined in comparison to that of other health care systems.
That is where the paradoxical
success–failure story of American health care comes to light. In
this section we will investi-
gate how American health care compares to that of other
countries and consider the impact

of expenditures on quality of care.
Do Expenditures Equate to Quality
of Care?
In 2016, the United States spent 17.2% of its annual
gross domestic product on health care (see Fig-
ure 7.1), almost one-and-a-half times as much as
Switzerland, which at 12.4% was the next biggest
spender that same year (Organisation for Eco-
nomic Co-operation and Development [OECD],
2018). However, despite this large expenditure, the
United States is the only high-income country that
does not guarantee health care coverage for all its
citizens (Schneider, Sarnak, Squires, Shah, & Doty,
2017). Combined with other indicators, it becomes
apparent that American health care dollars are not
well spent, nor do these dollars afford individuals a
greater benefit for this massive investment. When
compared to ten other high-income nations (Aus-
tralia, Canada, France, Germany, the Netherlands,
New Zealand, Norway, Sweden, Switzerland, and
the United Kingdom), the United States comes in
first in health care dollars spent per capita, but last
on nearly every other criterion, including access,
administrative efficiency, equity, and health care
outcomes (Schneider et al., 2017).
Figure 7.1: Health care expenditures as percentage of GDP,
selected countries,

1970–2016
Over the past 50 years, the amount of money countries spend on
health care for their citizens has
consistently risen. However, the increase is exceptionally high
in the United States. What do you think
has caused the country to spend so much of its GDP on health
care?
Source: Organisation for Economic Co-operation and
Development (OECD). (2018). Health expenditure and
financing. Retrieved
from http://stats.oecd.org/Index.aspx?DataSetCode=SHA#
Cusp/SuperStock
The United States spends four times
what the average high-income country
spends on health care. However,
studies have shown that this extra
spending is not leading to superior
care.
Although more than 20 million Americans gained insurance
coverage under the Affordable
Care Act, many still lack access even to basic health care, and
those with coverage “often face
far higher deductibles and out-of-pocket costs than citizens of
other countries” (Schneider et
al., 2017, p. 8). (See Figure 7.2 for a breakdown of the number

of Americans without health
insurance.) Rampant expenditures continually threaten to wreak
economic havoc, and exor-
bitant administrative costs further emphasize the
unsustainability of the current system.
Consumer satisfaction continues to dwindle as trust erodes
amidst constant news reports of
health care professionals and organizations committing
malfeasance. Meanwhile, health care
professionals have resorted to practicing medicine behind a
defensive barricade, guarding
against malpractice lawsuits from one side and economic
pressures from the other.
Figure 7.2: Americans under age 65 without health insurance
coverage, 2016
A significant number of Americans are currently without health
insurance, with the largest group
being men between the ages of 25 and 34. This chart shows the
percentage of persons in the United
States under age 65 without health insurance coverage at the
time of interview, broken down by age
group and gender.
Source: Clarke, T. C., Norris, T., Schiller, J. S. (2017). Early
release of selected estimates based on data form the 2016
national health
interview survey. Retrieved from
https://www.cdc.gov/nchs/data/nhis/earlyrelease/earlyrelease20
1705.pdf
Do Standards Ensure Quality?
One of the ways that health care has attempted to identify and
resolve areas of low per-
formance and compromised quality is to develop and promote

practice guidelines. Profes-
sional organizations review the medical literature, undertake
empirical surveys of current
standards of care, and debate among their members and the
public what minimal standards
of acceptable care and professional performance should be
expected from their field. These
standards of acceptable care can be influential as public
assurances of minimal competencies
and thresholds of quality. They also can be used to help
determine when negligence has taken
place. Because standards of care are important for everyday
clinical practice, practitioners
must keep up-to-date about them. Why then do some ethicists
and health care practitioners
question the morality of using professional standards?
When managed care organizations (MCOs), including health
maintenance organizations
(HMOs) and preferred provider organizations (PPOs), first
gained prominence in the Ameri-
can health care system, many felt that the guidelines proposed
by various medical entities for
clinical care amounted to little more than an institutionalized
means to limit treatment and
maximize profit for providers and insurers (La Puma, 1995). In
some instances, compliance
with specific practice guidelines influenced physician

compensation, thereby creating finan-
cial incentives and disincentives for physicians’ clinical
decisions. For example, physicians
participating in a specific MCO might receive a bonus at the
end of the year if reduced patient
use of expensive medical services contributed to a positive
financial bottom line for the MCO
(Miles, 2005). (See Figure 7.3 for a breakdown of medical care
participants by plan type.)
Figure 7.3: Percentage of medical care participants by plan
type, private
industry, 2017
Sixty-eight percent of medical care participants receive
insurance through preferred provider
organizations (PPOs). Health maintenance organizations were
the second most popular plan. What
do you think creates the interest in PPOs?
Source: U.S. Bureau of Labor Statistics (BLS). (2017). NCS:
Health and retirement plan provisions in private industry in the
United
States, 2017. Retrieved from
https://www.bls.gov/ncs/ebs/detailedprovisions/2017/ownership/
private/table01a.pdf
Another potential problem with practice guidelines is that they
may be applied inflexibly.

There is no guarantee that strict adherence will always result in
better care. For example, a
physician following earlier guidelines that recommended annual
mammography screening
for older women might subject patients to radiation and the risk
of false positive results, lead-
ing to unnecessary and even harmful anxiety, follow-up testing,
or even aggressive surgical
intervention—all without a meaningful corresponding benefit
for the patient in terms of lon-
ger and enhanced quality of life.
Stop and Clarify: Managed Care Organizations
Managed care organizations take many different forms. The
common characteristic of all
MCOs, however, is that they combine the insurer and provider
functions into the same cor-
porate (for-profit or nonprofit) structure. This combination of
functions creates a financial
incentive for the MCO and its participating physicians to
deliver care as efficiently and cost-
effectively as possible. MCOs have been developed in reaction
to the traditional third-party
payment system, in which the health insurer, the patient, and the
provider all had their
own, often inconsistent, incentives—an inconsistency that
inevitably resulted in escalating
health care costs.
One type of MCO is the HMO. In return for the prepayment of a
prospectively set monthly
or annual premium, a closed-panel HMO provides
comprehensive health services to an
enrolled patient through physicians who are either employees of
the HMO (staff model)

or employees of a private physician group that contracts with
the HMO (group model). In a
closed-panel HMO, the patient must receive care from the
HMO’s employed or contracted
physicians; otherwise they must pay a non-HMO physician
directly out of pocket. In an
open-panel HMO (independent practice association), medical
care is provided by privately
practicing physicians who, in addition to treating their other
patients and billing insurance
companies for that treatment, also participate in the HMO’s
network. When a network phy-
sician treats a patient who is enrolled in the independent
practice association, the associa-
tion pays that physician for the treatment according to a
predetermined methodology that
varies considerably among independent practice associations.
The other main type of MCO is the PPO. Like the HMO, a PPO
promises comprehensive
coverage to enrolled patients in return for a monthly or annual
prepaid premium. The PPO
contracts with a network of physicians and other providers
(such as hospitals) to serve its
patients; to participate in the PPO, the provider must agree in
advance to accept an amount
of payment for specific services that the PPO is willing to pay.
In return for receiving the
provider’s best price, the PPO makes the provider “preferred”
by informing patients that
the full cost of their care will only be covered if the patient uses
one of the preferred provid-
ers. Otherwise, the patient will have to pay all or part of the
provider’s fee directly out of
pocket.

In a point of service plan, the patient gets to choose at the time
of service whether to use a
provider inside or outside the patient’s MCO. The patient then
accepts the financial conse-
quences of that choice.
Medical practice requires careful discernment and
discrimination; it takes many years for a
practitioner to develop genuine expertise. Professionals in any
field know the value of guide-
lines but also realize that true experts know when to judiciously
disregard them. On the other
hand, when standards of practice were vague and totally
individualistic, physicians often
tended to provide costly and unnecessary care either under the
guise of “thoughtful, careful
medical practice” (La Puma, 1995, p. 51) or in accordance with
the ethical principle of respect
for autonomy (since patients requested it). This total discretion
in treatment resulted in soar-
ing health care costs, waste, and often less than optimal health
care outcomes. It was not long
before the public began asking for a different kind of
accountability to be sought through
MCOs and for a way to distinguish good health care from bad.
What Defines Quality?
Though many would agree that quality is not mere compliance
with practice guidelines, it is

much more difficult to come up with a positive definition of the
term. Furthermore, quality is
inherently difficult to measure.
To help answer the question of what constitutes quality, the
Rand Corporation conducted its
“Medical Outcomes Study” in the 1990s (La Puma, 1995).
Health outcomes are defined as
“a change in the health status of an individual, group, or
population that is attributable to a
planned intervention or series of interventions, regardless of
whether such an intervention
was intended to change health status” (World Health
Organization, 1998). In this study, Rand
researchers came up with seven different components: financial
accessibility, organizational
accessibility, continuity, comprehensiveness, coordination,
intrapersonal accountability, and
technical accountability (Rand Corporation, 1990). This
enumeration of factors constituting
health outcomes is useful because it conforms to the common
belief that health care assess-
ments should focus on both the technical as well as the
interpersonal dimensions of care.
The Rand project built upon the seminal work of Avedis
Donabedian, a leader in the theory
of health care assessment. Donabedian proposed that technical
care is “the application of the
science and technology of medicine, and of the other health
sciences, to the management of
a personal health problem” (1982, p. 4). He added that
managing the social and psychologi-
cal relationships between patients and practitioners is also a
part of technical care, although
it makes up the art of medicine facet of the term. According to
Donabedian (1980), quality

in technical care pertains to applying medical science and
technology in such a way so as to
increase health benefits without increasing health risks.
For Donabedian, quality in health care’s interpersonal
dimensions were more difficult to
define. Yet together with excellence in the medical-technical
aspects, quality of care is the
maximization of a patient’s overall well-being given the
attendant risks and benefits typically
present in the process of care (Donabedian, 1980). In other
words, measuring quality of care
must ultimately focus on the impact of care on patients’ quality
of life.
Donabedian’s definition of quality remains one of the earliest
and most influential holistic
attempts to clarify what is now more commonly referred to as
health outcomes—that is, the
actual impact of care on patients’ quality of life. Later
definitions—such as the IOM’s “degree
to which health services for individuals and populations
increase the likelihood of desired
Section 7.2Causes of Overspending
health outcomes and are consistent with current professional
knowledge” (Lohr, 1990, para.
11)—offer a clearer focus on desired results but also
incorporate the idea that professional
standards should still play a role in deciding what constitutes

quality care. This is because
achieving a desired result may not be indicative of the quality
of the care received. It may
be a coincidence that things turned out the way the patient or
health care provider wanted;
the result may have been good despite a poor quality of care, or
the result, while desired or
even good, may still pale in comparison to the result that might
have occurred had better-
quality care been rendered. The IOM definition also judges care
that does not conform to cur-
rent professional knowledge to be of poor quality, despite the
health outcomes obtained. For
instance, while unnecessary care that causes harm is obviously
of low quality, it is not clear
that unnecessary or even futile care will be considered low
quality if the patient or clinician
are pleased with the results. However, under the IOM
definition, these types of wasteful and
potentially harmful therapies are excluded from the definition
of quality care, regardless of
their outcome.
As the foregoing discussion indicates, the concepts of quality of
care and quality of life are
related but not synonymous. The former is concerned primarily
with professionally deter-
mined measures of the process of providing health care
services. Quality of life, by contrast,
is concerned, from the patient’s perspective, with the impact of
the process of care on the
patient’s functioning and enjoyment. So, for instance, a surgery
performed according to state-
of-the-art standards and techniques might be judged by
professionals to constitute excellent
quality of care, but the quality of life evaluation would be poor

if, despite the excellent process,
the surgery resulted in pain, other side effects, and poor
function on the part of the patient.
The quality of care/quality of life distinction is illustrated by
the old saying, “The operation
was a success, but the patient died.”
7.2 Causes of Overspending
The value of health care is a function of comparing the quality
of life outcomes for patients
with the costs of achieving those outcomes. Value can be
enhanced by improving outcomes—
that is, the impact of care on patients’ quality of life. Value may
also be enhanced by control-
ling the costs incurred in pursuing desired outcomes. Hence, we
must consider the question
of health care costs.
Overspending on health care threatens Americans’ and health
care organizations’ financial
well-being as well as the sustainability of any health care
delivery and payment model. Apart
from these very important economic concerns, overspending is a
moral issue, due to the cen-
tral importance of health care to human well-being. The fact
that the United States currently
does not possess the resources to meet the demand for
beneficial health care means that
some people do not receive the care they need and want. This
constitutes an ethical tragedy
that wasteful spending, greed, inefficiencies, and fraud
exacerbate by making it less likely that
the United States can maximize the health benefits and
minimize the harms for its people.
In this section, we will analyze the most prevalent and
important causes of overspending in

our health care system and investigate the different legal
avenues developed to keep costs at
acceptable levels. (See Figure 7.4 for a breakdown of U.S.
health care expenditures.)
Figure 7.4: Percentage of United States health care expenditures
by
source, 2016
In 2016, the majority of the health care expenditures in the
United States came from a combination of
Medicare and Medicaid (37%). Private insurance alone
comprised 34% of the nation’s health care
expenditures. The remaining came from out-of-pocket
payments.
Source: CMS. (2017). National health expenditures 2016
highlights. Retrieved from https://www.cms.gov/Research-
Statistics-
Data-and-Systems/Statistics-Trends-and-
Reports/NationalHealthExpendData/downloads/highlights.pdf
Differing Regional Practices and Medical Cultures
In his 2009 New Yorker essay, “The Cost
Conundrum: What a Texas Town Can
Teach Us About Health Care,” Dr. Atul
Gawande told a story of two similar coun-
ties in Texas. Both counties rest on the
border with Mexico and have very simi-

lar patient demographics and socioeco-
nomic characteristics. In Hidalgo County,
where the city of McAllen sits nestled
between the rugged deserts of Mexico and
Texas vacation destinations on the Gulf of
Mexico, Medicare spending per capita is
greater than nearly anywhere else in the
country—about $15,000 per enrollee in
2006 (Gawande, 2009b; Dartmouth Insti-
tute for Health Policy & Clinical Practice &
Commonwealth Fund, 2010).
Fuse/Thinkstock
Studying two border cities in Texas, researchers
found that overspending on health care was
due to a culture of overtreatment and lack of
effective caregiver assessments.
There is nothing particular about El Paso County, which lies
farther up the Rio Grande, that
would lead observers to expect Medicare spending there to be
much different than in McAl-
len. However, while Medicare enrollee patient outcomes were
virtually the same in El Paso as
they were in McAllen, Medicare spending in El Paso was only
half of what was being spent in
McAllen (Gawande, 2009b).
Wondering what might account for such a poor return on

investment in McAllen versus other
parts of the country, Gawande went to Texas to investigate. He
did not find health care execu-
tives, professionals, and organizations willfully defrauding
Medicare. He did not find large-
scale unscrupulous behavior or collusion to run up costs or
other nefarious conduct. What
he found was a culture in health care organizations and among
professionals to test, treat,
and spend at a demonstrably higher rate than elsewhere.
Without comparative effectiveness
assessments to keep them in check, relatively insular systems
like McAllen tend to overtreat
patients and hence waste scarce health care resources and tax
dollars.
It is unclear whether communities such as McAllen outspend
other communities in an effort
to provide the best possible patient care or if its clinicians have
succumbed to the financial
incentives that overtreatment and waste provide in fee-for-
service health care. What is clear
is that the unnecessary care rendered in places such as McAllen
means there is less to spend
on necessary care everywhere. Besides overtreating some people
at the expense of providing
the basic minimum of care to others, unnecessary treatment can
also present unnecessary
risks to patients.
Web Field Trip: Statistical Comparisons
The purpose of this exercise is to demonstrate and emphasize
the wide variations among
different parts of the United States in health care practices and
therefore in health expendi-

tures. As you work through this activity, you will be asked to
think about potential explana-
tions for these wide variations.
1. Locate a reputable online source for comparative statistical
data related to health
care costs or health outcomes (see Table 7.1 for sample sources
to help get you
started).
2. Choose one index of health care cost or quality represented in
the data sets you choose.
This can be anything for which data is available (try to find data
collected no more than
six years ago) and need not be from the United States. Some
possible indices include:
• Median Medicare costs per enrollee for specific regions in the
United States
• What percentage of the total population accounts for 50% of
federal health care
reimbursements?
• Infant death rate by populations
• Rate of emergency department use as primary and preventive
care outlets
• Patient perceptions of quality care
3. Compare the measurement rates of total, average, and median
incidence outcomes
with the same figures from a different geographic location,
patient population, or

Web Field Trip: Statistical Comparisons
(continued)
time period. If you cannot find a valid comparison group, then
look at different sta-
tistics for comparison.
4. Are the statistics noticeably different between the two
groups? Do they, for instance, dif-
fer by more than you would have expected?
5. If the statistics do not differ appreciably, look for a starker
contrast in health care costs
or quality measures elsewhere.
6. If the statistics differ by an amount that surprises you,
attempt to find plausible expla-
nations that would account for these differences by
investigating the statistical reports
and articles that accompany the results. If these do not account
for the difference, do an
Internet search (on PubMed, for example) for journal articles
that attempt to explain
the statistical variation you found (or an explanation of a
variation that is close enough
to the phenomenon you have witnessed that its findings might
be generalizable to your
findings).
7. Write a short (less than one page) paper that explains the
variation you found.

Write your essay with an eye toward identifying possible ethical
issues. For exam-
ple, does the variation amount to a justice issue? If it is found
that the statistical
variation cannot be explained by observed differences between
the two groups, can
it be explained by differential access, disparate treatment, or
illegitimate discrimi-
nation? Use the ethics framework from Chapter 1 to help you
organize your essay
and spot the potential ethical issues.
Table 7.1: Sample online sources for comparative statistical
data related to
health care cost and quality
Publication title Source
“Data, Statistics & Tools” Agency for Health Care Research and
Quality
http://www.ahrq.gov
“Health-Care Costs: A State-by-State
Comparison”
Wall Street Journal
http://www.wsj.com
“Snapshots: Health Care Spending in the
United States & Selected OECD Countries”
Kaiser Family Foundation http://www.kff
.org
“Interactive Map: Health Care Costs Vary
Widely Across U.S.”

NBC News http://www.nbcnews.com
“Why American Health-Care Costs So Much” Washington Post
http://www.washingtonpost.com
“The Dartmouth Atlas of Health Care” Dartmouth, the
Commonwealth Fund
http://www.dartmouthatlas.org
Fraud and Abuse
In addition to regional differences in how
health care professionals manage particu-
lar patient cases, another reason for the
exorbitant cost of health care in the United
States is inappropriate billing conduct by
health care organizations and practitio-
ners. In any health care financing system,
competing financial incentives and disin-
centives will always create a potential for
fraud and abuse. In some of the more pub-
lic and egregious cases, major health care
organizations have engaged in broad, sys-
tematic fraud. For example, some hospital
corporations have billed Medicare and
Medicaid for patient services that were
never provided, and a few notorious nurs-
ing homes have billed those government programs for the care
of patients long after those

patients had died.
Such conduct removes finite financial resources (more than $80
billion per year, according
to Federal Bureau of Investigation estimates [FBI, n.d.]) from a
system that could put those
resources to much better use purchasing care for individuals
otherwise lacking access to
health services. To counter this sort of fraudulent and abusive
provider conduct, the United
States has compiled an array of statutes, regulations, and case
decisions. The three main legal
avenues for combating health care fraud and abuse, Stark law,
false claims statutes, and anti-
kickback provisions, are discussed in the sections that follow.
Stark Law on Physician Self-Referral
The Ethics in Patient Referrals Act, or Stark law, governs
physician referrals for Medicare-
and Medicaid-reimbursed services in which the physician (or
close family member) has a
financial conflict of interest. Faced with increasing evidence
that health care practitioners
were referring patients to other businesses owned or co-owned
by the referring physician
or a close family member, Representative Fortney Stark
introduced a bill that would make
these “self-referrals” illegal. Self-dealing by physicians had
become common and was a major
source of unnecessary testing and treatment, as well as an added
risk for patients. The law
covers the following 11 designated health services: laboratory
tests, physical or occupational
therapy, imaging services, radiation treatment, home health
care, pharmaceuticals, medical
devices and supplies, and hospital services. The Stark law

provides a nearly complete ban on
any Medicare or Medicaid payments for services falling under
the statute in which the refer-
ring physician has a close, personal financial stake.
While some of the other fraud and abuse laws require that the
offending conduct be knowing
and willful, the Stark law does not require knowledge,
unlawfulness, or intent to defraud. To
LM Otero/AP Images
W. Rick Copeland, director of the Medicaid Fraud
Control Unit of the Office of the Texas Attorney
General, outlines a medical fraud scheme. The
FBI estimates that medical fraud costs upward of
$80 billion per year.
help providers distinguish prospectively between illegal and
permissible conduct, the Cen-
ters for Medicare and Medicaid Services has published a
nonexhaustive list of “safe harbors”
illustrating permissible conduct.
Additionally, there are several exceptions to Stark Law based
on by whom and under what
circumstances certain services are rendered. An exhaustive list
of these exceptions can be
found at http://www.starklaw.org/PDF/Stark411.355.pdf.

Case Study: A Violation of Stark Law
While conducting routine audits of hospital-owned physician
practices, a compliance offi-
cer noticed that the staff, including the physician, at one of the
busier practices was having
vendor-funded lunches brought into the office every day. The
compliance officer noted that
vendors were not in the office providing services that would
allow for these lunches, such
as presenting new products or providing educational training to
the staff. It appeared that
vendors were simply funding the delivery of free daily lunches.
The compliance officer asked the practice’s office manager
about receiving the lunches
and she stated that it happens every weekday of the year and
that the staff loves it, espe-
cially since they do not need to bring or go out for lunch
anymore. The compliance officer
informed the office manager that this practice could no longer
take place as it violated the
Stark law. The compliance officer explained that, without the
vendors providing any train-
ing or education each time lunch was brought in, it looked as
though they were buying the
lunches as a way to entice the physicians to purchase supplies
from them. The compliance
officer further explained that, although there is a $300-per-
physician annual limit on what
physicians can receive from vendors, free lunches Monday
through Friday for an entire year
far exceeds that limit, even with three physicians in the office.
One of the head physicians was furious when he was informed
that there would no longer

be free lunches on a daily basis. However, after the compliance
officer explained the Stark
law, as well as the consequences of violating it, to all of the
physicians and staff in the office,
they acquiesced.
However, three months later, while the compliance officer was
visiting the same physician’s
office as a patient, a vendor walked in with free lunches. He
dropped off the lunches and left
while the compliance officer was still in the waiting room.
Before reading on, consider the following questions as if you
were the compliance officer
in this case:
1. Since you were in the office as a patient, and not on official
business, would you do
anything about what you observed?
a. If so, what would you do?
b. If not, why?
Continue reading to find out how the compliance officer
handled this situation.
Even though the compliance officer was not in the office on
official business, she had a
responsibility to report this issue. After the compliance officer
saw her physician that day,
she again met with the office manager and asked why vendors
were still delivering free

False Claims Statutes
Estimates from fiscal year 2017 by the Centers for Medicare and
Medicaid Services put the
bill for improper payments of false claims at $36.21 billion.
False claims are claims submit-
ted to the government for payment that is not really deserved by
the provider submitting the
claim, usually because the service for which the claim was made
was not actually provided to
an eligible beneficiary.
Several federal and state false claim statutes make the knowing
and willful submission of
a false claim or statement to Medicare or a state Medicaid
program a felony (Medicare and
Medicaid Antifraud and Abuse Act, 1977). Submission of
multiple false claims by a business
(a health care organization or an independent contractor)
engaged in interstate commerce
may additionally be prosecuted under the Racketeer Influenced
and Corrupt Organizations
statute commonly used against organized crime families (RICO,
1970). Violation of the Civil
False Claims Act carries a penalty from between $5,500 to
$11,000 per claim plus damages
Case Study: A Violation of Stark Law (continued)
lunches. The office manager told her that the head physician
said they did not have to listen
to the administrative people and to allow vendors to continue

providing daily lunches. The
compliance officer asked why this had not been reported to her,
and the office manager
stated that she was afraid she would get in trouble with the
physician. The compliance
officer determined the incident needed to be dealt with at a
higher level, so she lodged a
formal report to the medical staff board and the hospital’s board
of directors. The physician
was written up by the hospital’s medical ethics committee for
not complying with Stark law
and the office manager was fired for not reporting the issue
once she was informed of the
consequences of violating Stark law.
Stop and Clarify: Reporting Fraud and Abuse
There are several ways to report fraud and abuse.
Medicare Fraud
Call Medicare at 1-800-633-4227 or search for “reporting fraud”
at https://www
.medicare.gov.
Stark Law Violations
Report a Stark violation to the Office of the Inspector General
(OIG). Go to the OIG website
(https://oig.hhs.gov) and select “report fraud” to report a Stark
violation online. Or call the
OIG hotline at 1-800-447-8477. The OIG accepts any tips on
Stark violations.

Section 7.3Cost Containment
equaling three times the amount of the false claim or claims
(Civil False Claims Act, 1863).
Further, the Medicare and Medicaid Anti-fraud and Abuse
statute, in addition to prohibiting
false claims and representations, forbids knowing and willful
solicitation or receipt of any
illegal remunerations, including kickbacks, bribes, unlawful
rebates, or self-referrals (Medi-
care and Medicaid Antifraud and Abuse Act, 1977).
States have adopted their own versions of the federal Civil
False Claims Act. The Civil False
Claims Act allows states to recover damages plus a bonus in a
federal fraud case involving
Medicaid claims if the state’s law facilitates the bringing of qui
tam actions by the public. Qui
tam actions allow private citizen whistleblowers, suing either
individually or through the
state, to bring legal actions against entities and individuals who
break a federal law. The qui
tam initiators (“relators”) are allowed to keep a portion of the
damages, with the rest going
to the state. Qui tam legal actions are meant to facilitate the
policing of false claims by provid-
ing financial incentives for those citizens who witness the
illegal conduct to blow the whistle.
While overpayments by Medicare and Medicaid for false claims
result from federal and state
crimes that can be seen as outright theft, a few well-meaning
health care professionals char-

acterize their intentional overbilling or falsified claims as
motivated by their devotion to the
moral practice of medicine (Jost, Davies, & Gosfield, 2007).
Given that standardized rates
of reimbursement by Medicare and Medicaid often fail to cover
the treatment expenses of
enrollees and claims for rendered care are sometimes denied by
Medicare fiscal intermediar-
ies and state Medicaid agencies, some health care professionals
knowingly falsify reimburse-
ment claims in order to receive the reimbursements to which
these physicians feel they are
otherwise entitled. It is difficult to say what percentage of false
claims are motivated by greed,
and amount to theft, and what percentage amounts to a health
care practitioner trying to
maximize reimbursement to make ends meet and provide
continuing service to Medicare and
Medicaid patients who could not otherwise afford their services.
Anti-Kickback Provisions
A third approach to trying to prevent fraud and abuse is found
in the Medicare anti-kick-
back statute (AKS), 42 United States Code section 1320a–
1327b(b). According to the Medical
Learning Network (2017), “[t]he AKS makes it a crime to
knowingly and willfully offer, pay,
solicit, or receive any remuneration directly or indirectly to
induce or reward referrals of
items or services reimbursable by a Federal health care
program” (p. 6). Certain “safe har-
bors” of permissible activity are defined in 42 Code of Federal
Regulations section 1001.952.
Violation of this law subjects the payer or recipient of the illicit
kickback to criminal penalties
consisting of fines or imprisonment.

7.3 Cost Containment
Escalating health care expenditures pose a variety of ethical and
legal challenges when they
are the result of legitimate services, but especially when they
are the product of fraudulent or
abusive conduct by providers. Thus, it is a social imperative to
contain those escalating costs
so that finite resources can be used more efficiently and
equitably.
Section 7.3Cost Containment
Modern American biomedicine, like every other major segment
of the economy, is very much
concerned with keeping costs at manageable levels, providing
reasonable returns on invest-
ment, and maintaining a financially sustainable business model.
However, the successes of
some of the other major sectors of the economy in keeping costs
within acceptable param-
eters have thus far proved unattainable in health care. Excessive
spending on services, drugs,
and technologies that provide little or no additional benefit over
less-expensive treatments;
unnecessary care; and lavish compensation in some health care
professional sectors all con-
tribute to the runaway costs in medicine.
Each of these factors provides tremendous financial rewards for
various parties who then have

enormous incentives to continue the status quo. For example,
physicians are often rewarded
financially for the quantity of medical services they render. The
typically high incomes earned
by physicians also make possible one of the most powerful and
well-organized special-inter-
est lobbies in American history (Starr, 1982). While American
physicians and health care
executives are generally highly motivated to have a well-
functioning and sustainable health
care system that provides the best quality care, these groups can
also find it difficult to rally
behind cost-control reforms when doing so would likely mean
cutting their incomes.
Medical practices are also often immune to the factors found in
most markets that keep prices
for services and salaries in check. Although private commercial
sectors are usually good at
self- controlling their costs, the American health care system is
by no means a typical mar-
ket system. American medicine is set up so that the costs of
medical services and products
are often hidden from consumers and the health care staff that
render them. Consumers are
typically removed from purchasing decisions, although it is
reasonable to expect the cost of a
proposed treatment to be discussed with the patient as part of
the informed consent process.
That rarely happens, however—due at least in part to the
pervasive myth that when the direct
payment comes from an insurer or other third-party payer the
service is somehow “free of
charge” to patients.
American employers, who often end up paying for increasing

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