The management of legitimacy and politics in public sector administration

The management of legitimacy and politics in public sector administration

The Management of Legitimacy and Politics in Public Sector Administration Mark A. Covaleski and Mark W. Dirsmith The role of accounting in legitimati...

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The Management of Legitimacy and Politics in Public Sector Administration Mark A. Covaleski and Mark W. Dirsmith

The role of accounting in legitimating decisions as being in conformity with accepted norms of social and organizational practice has been increasingly recognized by accounting researchers. Extending beyond this institutional perspective, accounting may also play a significant role in establishing and perpetuating-not just supporting-the very social structure of legitimacy. This role of establishing and perpetuating the social structure of legitimacy may, in turn, be conceived of as an interest-oriented activity. The purpose of this paper is to consider the role of accounting in the social construction of meanings and norms that serve to both legitimate and facilitate institutional arrangements by means of obfuscating the transfer of power between societal actors in public sector organizations. This paper develops and extends this perspective by examining the role of accounting in two settings, turn-of-the-century public administration and contemporary public sector health care administration, arguing that these settings are not disconnected, but rather, their similarities are defined by the manner in which accounting information facilitates the transfer of power between societal actors.

information in the public sector has been increasingly recognized as being influenced by a myriad of complementary, and sometimes conflicting, social forces (see Boland and Pondy, 1983, 1986; Covaleski and Dirsmith, 1983, 1988a, 1988b; Berry et al., 1985; Ansari and Euske, 1987). Rather than being seen as merely passive, in that accounting de facto represents an economic reality, accounting may be more robustly interpreted as being complicit in the social construction of this very reality. Consistent with this theme, Hopwood (1984, pp. 170-176) has argued that contemporary interest in public sector accounting is not solely a technical one, but also arises from much broader patterns of influence which need to be subjected to research scrutiny. More specifically, Hopwood observed that: The role of accounting

A rhetoric of “economy,” “efficiency,” and “value for money” is now being used to call for a detailed concern with the specific accounting innovations that can service these wider ends. (1984, p. 175)

Address reprint request to: Mark A. Covaleski, University of Wisconsin-Madison, Drive, Madison, WI 53706. Journal of Accountmg


1991 Elsemer

and Public Policy, IO, 135-156 Science Publishing Co., Inc.

1155 Observatory


(1991) 027g-4254/91




M. A. Covaleski and M. W. Dirsmith

also notes that:

. . . accounting is already centrally implicated in the institutional frameworks, language and patterns of power and influence that characterize the public sector. As a means of collecting and reporting selective patterns of information it has played a not insignificant role in the construction of public organizations and policies as we now know them. There are, however, yet further pressures for public sector accounting not only to change but also to expand its sphere of influence. (1984, p. 170) The accounting of organizational

research that has concerned itself with examining the impact and social forces has been criticized for its inadequate

development of power and politics as they relate to the development and use of accounting information (for an extensive development of this critique, see Hopper and Powell, 1985, pp. 431-445; Chua, 1986a, pp. 601-610; 1986b, pp. 585-591; Hopper, Storey and Willmott, 1987, pp. 439-445). For example, Hopper and Powell (1985, pp. 431-445) have argued that within this research tradition, competing interests among participants in organizations and society are depicted as primarily and merely a consequence of a shift in focus from economically rational decision makers to less rational, or subjectively rational, decision makers. Benson (1983, p. 41) referred to this shift in research focus as basically “a more sophisticated problematic” of March and Simon’s (1958) original concern for the boundedly rational structuring of organizations. Benson (1983, p. 41) further argued that this “more sophisticated problematic” does not accommodate the explicit concern for power and politics that “quite different sociological and organizational directions could give us.” Thus, the role of accounting information in the public sector has been identified in terms of documenting institutional compliance, i.e., seeking external legitimation or masking an underlying sociopolitical reality (Covaleski and Dirsmith, 1983; Covaleski et al., 1985; Ansari and Euske, 1987). More recently it has also been argued that powerful groups may use their power to covertly enforce institutional compliance with accounting prescriptions when their interests are at stake (Boland and Pondy, 1983, 1986; Berry et al., 1985; Covaleski and Dirsmith, 1988a, 1988b). However, it remains unclear whether this interrelationship between institutional conforming forces and political forces is seen as a necessary outcome, or merely a spurious relationship due to some sort of limited rationality in public sector decision-making. The major thrust of this paper is to identify the limitations of the accounting literature which has emerged from institutional theory-with these limitations largely revolving around a lack of explicit identification of the relationship between power and accounting information-and extend this theoretical orientation such that accounting researchers can better deal with the critical issues of power and politics. We will argue that interactions which invoke accounting


of Legitimacy

and Politics

information can dramatically basis of regulatory, managerial,


influence conceptualizations of the nature and and political authority within the public sector.

of this form of discourse lies in its depictions of the purposes of public sector organizations which lend themselves to the processes of expert management and rational public policy. The issues at stake are interpreted as transcending the technical aspects of accounting systems and taking into consideration the systemic effects of accounting both in defining and modifying what is considered to be the sphere of administrative responsibility in public sector organizations. The role of accounting in public sector administration is examined within two distinct historical settings. In the first, the constitutive aspects of accounting are considered by describing the establishment and legitimization of the social reality of turn-of-the-century public administration. In the second, the role of accounting as a form of now widely acceptable social discourse, is considered in terms of how such a social reality is being reproduced in the contemporary public sector health care system. These two systems are found to be quite closely interrelated despite a temporal separation of three quarters of a century. More specifically, the alleged novel and contemporary nature of the diagnostic related group based services (DRGs) and the allied case mix accounting systems, for supporting the prospective Federal payment of health care, are found to be presaged in the types of rational decision-making approaches which were developed and advocated in turn-of-the-century public policy reform efforts. We conclude that power and the institutionalized practices of accounting are closely intertwined, and that this intertwining contributes to the transferability of accounting rationality across both time and settings. In contrast with prior accounting and institutional theory research, the current analysis attempts to explain whether and how power and the use of accounting are necessarily interrelated across time and public sector settings.

The significance



[The] ritual, symbolic, and affirmative components of decisions and decision processes are not unfortunate manifestations of an irrational culture. They are important aspects of the way organizations develop the common culture and vision that become primary mechanisms for effective action, control and innovation. As a result, information strategies are as much strategies for managing, interpreting and creating visions as they are strategies for clarifying decisions. And if this sometimes seems perverse, it may be well to remind ourselves that human life is, in many ways, less a collection of choices than a mosaic of interpretations. It involves both discovering reality and constructing it. (March 1987, p. 40)

March recognized that the use of symbolic for interest groups is not wholly dysfunctional,

displays and rituals to advocate but rather can usefully serve as


M. A. Covaleski and M. W. Dirsmith

the cultural foundation for innovative organizational action. It is overly reductionist to consider it as merely irrational. This distinction between the politics of an active agency versus irrationality is also embedded in the work of Wildavsky (1975, 1987) who has long argued that research concerning the formation of political preferences involves not only the study of how people try to get what they want through political advocacy, but also the study of why people want what they want. As Wildavsky (1987, p. 3) observed, “Preferences come from the most ubiquitous human activity: living with other people. ’ ’ Furthermore, Wildavsky (1987, pp. 7- 12) reasoned that shared living experiences serve to reinforce or legitimate social relations; be the source of individual preferences; and, most importantly, create values for the social milieu itself, which are then applied to interpreting objects and events. This reasoning lead to Wildavsky’s (1987, p. 4) conclusion that, “If preferences are formed through the organization of social relations, these preferences must come from inside, not from outside, our ways of life-from institutional arrangements. ’ ’ The critical tension or duality embedded in Wildavsky’s argument (1987, pp. 10-12) is that when individuals make important decisions, these choices are simultaneously choices of culture that entail shared values legitimating different patterns of social practice. Shared values and social relations thus interpenetrate one another. The major choice made by people, therefore, is the form of culture-the shared values legitimizing social practices-they adopt (Wildavsky, 1987, pp. 10-12). Individuals exert power over each other by institutionalizing their moral judgments, thereby justifying their interpersonal relationships. What varies is the form and extent of manipulation of power. The purposes institutions create are expressed by such social practices as accounting systems which serve as a way of constituting power. Ideological constraint among preferences, then, is not created by exogenous forces, but through social interaction, making the study of institutions central to understanding the role of accounting in public sector organizations. Wildavsky (1987, p. 17) summarized this view when he observed “that in political activity the end (telas) is not pursued but lies in the activity itself.” As Wildavsky argued: Put plainly, people decide for or against existing authority. They construct their culture in the process of decision-making. Their continuing reinforcement, modification and rejection of existing power relationships teaches them what to prefer. . Preferences in regard to political objects are not external to political life; quite the contrary, they constitute the very internal essence, the quintessence of politics: the construction and reconstruction of our lives together. (1987, p. 5)

In short, institutional practices in the public sector may involve not only legitimizing the actions of specific organizations, but also, and perhaps more


importantly, immediate

of Legitimacy

supporting self-interest


and Politics

a political


of powerful


that operates (Wildavsky,

so as to serve


1975, 1987; Schick,

1985; Schick et al., 1986). In like manner, Edelman’s (1977; see also Pfeffer, 1981; Bums, 1986) concern with probing the consent of the governed in American politics argued that power relationships are seen as being reflected in daily life through the use of language, myths, and symbolic displays directed at maintaining the status quo. Viewed as a form of language, quantitative data, or in the current case, accounting information, is selectively deployed by the state not to reflect underlying economic conditions, but to create public values, acquiescence, and support. More specifically, Edelman observed: Language is always an intrinsic part an independent instrument or simply as a tool, we mask its profound part the roles and the “selves” of those

of some particular social situation; it is never a tool for description. By naively perceiving it in creating social relationships and in evoking involved in the relationships. (1977, p. 58)

Consent of the governed, then, comes about not from the conscious acceptance of rules of procedure, but as acquiescence to and taking for granted an accepted language, thus at once creating and supporting a hierarchical relationship between the governed and the state (Edelman, 1977, pp. 52-72). Although cloaked in the appearance of objectivity and neutrality, this language is ultimately directed toward establishing and maintaining hierarchies of authority and status (Edelman, 1977, pp. 52-72). Edelman (1977, pp. 72-105) concluded that organizations survive by conforming to those vested interests that are hierarchically superior, such as the state, in part by conforming to sanctioned language forms in communicating with both external and internal constituents. It follows that information is emphasized which at once creates and reinforces widely held beliefs about acceptable practice, while information that challenges them is actively suppressed and forgotten. Here Edelman (1977, pp. 56-62) emphasized that the potential for active coercion always lies behind extant norms of acceptable discourse and behavior. This acceptable discourse, such as accounting information, is always an intrinsic part of some particular social situation; it is never an independent instrument or simply a tool to be assessed for such attributes as its representational faithfulness. Wildavsky and others recognize the importance of politics and active agency and have extended the themes of institutional theory in terms of the role of such quantifiable, rational-appearing information as accounting. The general theme of the institutional perspective is that an organization’s survival requires it to conform to social norms of acceptable behavior as much as possible to achieve high levels of production efficiency. Thus, many aspects of an organizatiop’s formal structure, policies, and procedures conform with institutionalized rules, thereby legitimizing it to assist in gaining society’s continued support (Meyer and Rowan, 1977; Scott, 1987). The institutional perspective


M. A. Covaleski and M. W. Dirsmith

is particularly relevant for understanding public sector organizations where concerted effort must be directed at developing, maintaining, and managing legitimacy in the eyes of such important constituents as the legislature in order to receive their continued support (Weick, 1976, 1979; Meyer and Rowan, 1977; Rowan, 1982; Ritti and Silver, 1986). Externally legitimated, formal assessment criteria such as accounting information play a particularly heightened though ritualistic role in the poorly structured settings found in the public sector (Meyer, 1986, pp. 27-29). These organizations are characterized by their efforts to find, conform to, and then demonstrate for their constituents some form of rationality in order to gain legitimacy. As Meyer (1986, pp. 15-17, 27-29) argued, the nature of public sector organizations is suggested by their continuous and critical efforts at managing legitimacy to the extent that the economic welfare of these organizations is primarily an issue of legitimacy, and only secondarily a problem of organizational functioning. Viewed from this perspective, accounting may be defined as an important component of the formal structure with which public sector service organizations attempt to justify and legitimize themselves to key environmental constituents (Boland and Pondy, 1983, 1986; Covaleski and Dirsmith, 1983, 1988a, 1988b; Ansari and Euske, 1987; see also Hopwood, 1984). Despite a growing appreciation of institutional theory as an important component to understanding contemporary organizations (Scott, 1987; Zucker, 1988), as well as a growing body of empirical research support (e.g., Rowan, 1982; Ritti and Silver, 1986; Tolbert, 1988; Eisenhardt, 1988; Meyer et al., 1987), a number of criticisms have been made of it; chief among these are questions concerning decoupling, and power and group interests. Concerning decoupling, Powell (1985, p. 565) saw an acute problem in the distinction between internal operations and the need to conform to institutionalized expectations as to acceptable organizational practice. He (1985, p. 565) argued that the central research question that arises concerning the institutional perspective is whether or not formal, structured, institutionalized practices do, in fact, penetrate and alter internal operating processes. Regarding power and group interests, DiMaggio (1988, especially p. 11; see also Perrow, 1985, pp. 154-155) has observed that institutional and interest-based explanations of organizational practices are not necessarily antagonistic to one another, but combined, may yield a more comprehensive theoretical apparatus for gaining insight into the social dynamics of organizations. He concluded that allusions to power and group interests tend to be “smuggled” into the institutional perspective but remain obiter dicta-not the focus of sustained theoretical analysis (1988, p. 9). Herein arises a contentious issue between the positions of DiMaggio (1988) and Zucker (1988). On one hand, DiMaggio (1988, p. 8) concluded that the major problem in institutionalized settings is finding some mechanism that can be mobilized by interested social actors to change an overly stable social system. In contrast, Zucker (1988, p. xv) saw institutional-

Management of Legitimacy and Politics


ized organizations as constantly eroding, and concluded that the major problem is finding some process wherein social order is produced. Both authors see institutionalization as an unfinished process wherein the active agency of individual actors should be subjected to continued research scrutiny. It is also important to note that although the development of institutional theory has frequently abutted literature dealing with the sociology of the professions (e.g., DiMaggio and Powell, 1983), the two have largely escaped integration despite the presence of a number of shared areas of interest. For example, Abbott (1988) has observed both that the professions seek to legitimize themselves to society by attaching their expertise to the widely held values of rationality, efficiency, and science (p. 16) and that a key characteristic lies in the use of power both externally to preserve an abstract system of knowledge and, more importantly for purposes of the current analysis, internally in terms of hierarchical stratification and differentiation (pp. 117-142). Joining Abbott in recognizing the importance of power, Freidson (1986, especially pp. xiii and 211) also alluded to a decoupling between the administrative or formalized and structurally oriented component of professional bureaucracies and the practitioner component comprised of those possessing and using internalized values and norms (especially pp. 2 13-266). Both authors pointed to the necessity of conducting research at the microlevel of everyday practitioner experience, where self-interest may come into play, in order to understand professional endeavor (Abbott, 1988, pp. 9-20; Freidson, 1986, p. xi). Abbott lamented that insufficient attention has been directed at studying professionals, not as freestanding autonomous agents, but as members of organizations, particularly for professions arising out of a commercial enterprise such as accounting (1988, p. 5). An extended interpretation of the institutional perspective is that not only must organizations conform to the structural expectations of a wider social context, but also that these structural forms, such as accounting, may play an active role in establishing these very expectations, which, in turn, may be considered an interest-oriented activity. Struggles for power and control often underlie initial activities in an institutionalization process (DiMaggio, 1988, pp. 8- 16), as well as the diffusion and reproduction of successfully institutionalized organizational forms and practices (Rowan, 1982, pp. 270-279). Similarly, the maintenance of already established institutionalized patterns is likely to have substantive effects on the balance of power in social relations. As a consequence, such patterns are apt to be less stable and more vulnerable to change than is usually acknowledged. Viewed as an unfinished process (as opposed to an achieved state), a robust research agenda of this extended perspective includes examining where institutional patterns come from, why some organizational innovations diffuse while others do not, why innovations vary in their rate and ultimate extent of diffusion, and how and why institutionalized forms and practices fall into disuse (Tolbert, 1988, pp. 105-109). The following two sections view institutionalization as an unfinished process by


M. A. Covaleski and M. W. Dirsmith

examining the manner in which the underpinnings of turn-of-the-century public sector administration are carried forward and diffused within contemporary health care administration.

Accounting and Turn-of-the-Century Public Administration President Woodrow Wilson provided perhaps the most concise description of the turn-of-the-century ideal for public administration with respect to his reform good government program. Within the reform good government approach, alternatively termed the “monocentric approach” (Wilson, 1956, p. 169), the federal government is viewed as a unified, centralized entity with the executive branch being accountable to the legislative branch. This approach to accountability embodies five assumptions: 1) a single influence of power will tend to dominate in any government; 2) the more power is unified and centrally directed, the more responsible it becomes; 3) democratic governments tend to place the legislative branch in a position of sovereignty; 4) the administration of economic resources is separate from politics; and 5) a bureaucratic ordering of professionally trained technical staff provide the necessary structural condition for effectively administering public resources, and will maximize efficiency as specifically measured by cost-benefit analysis (Wilson, 1956, pp. 168- 179). The period of roughly 1900 to 1916, which included the Roosevelt, Taft, and Wilson administrations has been labeled the “progressive” era by historians. Progressivism is a generic name for a variety of political and intellectual responses to the waning of a community-centered society and to the inadequacy of old explanations of social cohesion and social changes (Larson, 1977, pp. 137- 158). Progressivism was so labeled because of the enlightened, scientifically based, rational approach that was ostensibly being applied to the administration of public resources. The progressive philosophy envisioned the use of the state as an instrument of reform, and many activities that had once been the concern only of those directly involved, such as local governments, now would come under the supervision of broader governmental levels (Larson, 1977, pp. 137- 158). In particular, it was felt that salvation from the sinister forces of industrialism and entrenched business interests could be achieved if the power reason, and the ideology of scientific of the state, guided by intelligence, management expertise, was the basis for social and political decision-making (Larson, 1977, pp. 137-158). More recently, however, the label of “progressive” has been increasingly questioned and this era has been reinterpreted as actually being a triumph of conservatism (for a lengthy discussion, see for example, Kolko, 1963). This era was seen as conservative in the sense that there was pervasive penetration by the business community into government affairs, especially in the area of supporting and controlling the regulation of business practice in order to consciously and actively preserve the basic social, political, and economic

Management of Legitimacy and Politics


relations essential to a capitalist society. Consistent with this view, “progressivism” may be seen as involving a concerted effort to preserve the status quo of the existing power and social relationships, in which the general welfare of the American society was best served by satisfying the concrete needs of business (Kolko, 1963, pp. l-9). More specifically, Kolko (1963, p. 3) referred to this material relationship between government and business as a relationship predicated upon rationalization in the “political capitalism,” economy. As Kolko argued: I do not give to rationalization its frequent definition as the improvement of efficiency, output, or internal organization of a company; I mean by the term, rather, the organization of the economy and the larger political and social spheres in a manner that will allow corporations to function in a predictable and secure environment ours)



profits over the long run. (1963, p. 3, emphasis

Reflected in this view is a merging and priorization of the economic and the political, in which stability and predictability are engendered by applying the realm of calculation to economic as well as political endeavor. Furthermore, Kolko (1963, pp. l-24) suggested that the merging of legitimization as a form of economic decision making with politics-an ideological shift symbolized by rationality-involved making political centralization concomitant to the centralization and stabilization of economic production. For Kolko (1963, pp. l-24), organizational control over politics was indeed embedded in and facilitated by the rationality exported to government and its subsequent, institutionally mandated use to legitimate the administration of public resources. Political rationalization vis-a-vis economic rationalization became the means of attaining both order in the economic sphere and security in the political arena. Therefore institutional practices in the public sector evolved more than just to legitimize actions, but also to preserve the status quo vis-a-vis power of specific business and political actors. As Kolko (1963, pp. l-24) argued, rationalized administrative policies and practices did not emerge as a consequence of widespread concern for operational efficiency, but as an artifact of the power nexus linking economic and political spheres of influence. On this point, Hays (1959, pp. 17-22; see also Wiebe, 1962, pp. 1-5) further suggested that the progressive movement sheds light not so much on the content of public policy, but rather on the nature of the resulting political structure, the types of human interactions peculiar to that political structure. Progressivism shifted the locus of decision-making away from the grass roots-the smaller contexts of political and social life-to the larger networks of human interaction, therefore representing more than just the legitimization of a form of decision-making, but representing a transfer of power toward a monocentric base (e.g., Wilson’s, (1956, pp. 168-179) second assumption).


M. A. Covaleski and M. W. Dirsmith

The significance of this form of rational decision-making and the related role of quantifiable information, such as accounting, becomes more apparent when examining the inception of the progressive movement as reflected in the nature of political capitalism promoted and established by Senator Robert M. LaFollette in the state of Wisconsin. Doan (1947, pp. 35-52) observed that in the late 19th century individual voices could be heard challenging the social role of industrial monopolies. As Doan noted (1947, pp. 35-52), these voices included Eugene Debs who confronted industrial power by advocating socialism, as well as William Jennings Bryan who challenged the banking powers of the nation by his denunciation of gold (Doan, 1947, pp. 35-52). In this context, Robert M. LaFollette offered the most striking example of the reforms and innovations that characterized progressivism (Doan, 1947, pp. 35-52). Although its proposals were neither the first nor the most radical, Wisconsin inaugurated a comprehensive program of political, economic, and social reforms that affected the life of virtually every person in the state. These reforms, in turn, served as a model that was copied, in whole or in part, by many other states and by the federal government. As Maxwell argued: The program developed in Wisconsin was distinguished from the reforms of other states chiefly in that it was more comprehensive and far-reaching rather than more radical. As elsewhere, progressivism in Wisconsin was neither left-wing agrarian nor socialistic. It was moderate, pragmatic, and non-doctrinaire in approach, including agriculture, industrial, and intellectual elements in its appeal. (1956, PP. 8, 9)

Larson (1977, pp. 137-158) supported this point when she argued that the exacerbation of class conflict in the 1880s and the depression of the early 1890s showed to the most advanced sector of business that regulation and coordination of economic activity depended largely on political capitalism-that is, what Kolko called “the utilization of political outlets to attain conditions of stability, predictability, and security-to attain rationalization in the. economy ” (Kolko, 1963, p. 3). Social concepts such as workmen’s compensation, Social Security, utility and industrial regulation, and unemployment insurance were initiated under LaFollette’s leadership, and soon, Wisconsin became known as a place where social experimentation took place (Maxwell, 1956, pp. 195-226). The central concerns were to have the government’s role change in accordance with changing conditions and to increase the efficiency of the American political economy. The progressives pointed to Germany as a prime example of what could be done through the union of intelligence and state power (Maxwell, 1956, pp. 355-370). For example, LaFollette felt that the tax reforms and the regulation of railroads presented technical problems in mathematics and economics rather than politics (Maxwell, 1956, pp. 355-370). As Maxwell (1956,

Management of Legitimacy and Politics


pp. 355-370) argued, perhaps to a greater degree than any contemporary leader, it was LaFollette who adopted the cult of expertise, science, and rationality. This philosophy is reflected in the following comment by McCarthy (1912, p. 178) relating to “commission government”: Indications are that legislation for the future on great economic questions will be based upon a broad determination of policies by a legislative body, the carrying out of which will be entrusted to eficient servants and experts, responsible in every manner to the representatives of the people and the people in general. (McCarthy 1912, p. 178 emphasis added)

The progressive philosophy of Wisconsin envisioned the use of the state as an instrument of reform and many activities that had once been the concern only of those directly involved, such as local governments, now would come under the supervision of the state. In particular, it was felt that salvation from the forces of industrialism could be achieved if the power of the state, guided by intelligence, reason, and the ideology of scientific management expertise, was the basis for social and political decision-making. Experts serving the state would deal with the critical social and public issues of the time, while wielding considerable power. This is revealed by McCarthy in the following: We cannot attempt to regulate railroads on great public utilities unless our public services is in itself so organized that it has a thorough understanding of the intricate systems of cost accounting and efficiency use by these great economic units. . . . Now if rules and regulations are to take the place of miscellaneous law, they must be made by trained workers; . . they must be made upon tests, measurements and close observation. (1912, p. 192, emphasis added)




the question of regulation resolves itself into [a number of ] vital elements -the accountant, the statistician, the actuary, the chemist, . . and a big stick. (1912, p. 193, emphasis added) In summary, Doan (1947, pp. 35-52) concluded that Wisconsin pointed the way for other states to follow in their efforts to identify the ways and means for meeting and solving the contentious problems of the period. The effects of the initiatives in Wisconsin were eventually felt even at the national level. Several “experiments” of the progressive Wisconsin administration were adopted and put into law. The phrase “the Wisconsin idea” (e.g., Doan, 1947, pp. 35-52) was coined to describe all new techniques applied to public administration. Theodore Roosevelt (as noted in McCarthy, 1912, p. vii) described the nature of scientific public administration in Wisconsin as a democratic effort aimed at social and political experimentation. Thus the progressive era can be character-


M. A. Covaleski and M. W. Dirsmith

ized as being more than an assemblage of rational techniques. This era was concerned with the development of a culture whose values lie in the scientific practice of public administration as supported by a cadre of experts or professionals whose own legitimacy, in turn, is gained by attaching their expertise to the societal values of rationality, efficiency, and science.

The Role of Accounting Care System

in Administering

the Contemporary


Health care organizations must conform to externally imposed accounting rules and regulations if they are to receive continued societal support and legitimacy. These organizations are institutional in nature; that is, they are ceremonial as well as instrumental systems that create and affirm order and meaning, that must execute procedures in sanctioned ways, and that must provide accounts of activities in terms that seem reasonable and acceptable to external constituents (Meyer and Rowan, 1977, pp. 315-329). One such externally imposed system with which health care organizations must contend is the federal government’s use of the diagnostic related groupings (DRGs) system to pay for the health service of Medicare patients. DRGs represent a multivariate system (principal diagnosis, operating room procedures, comorbidities and complications or secondary diagnoses, age, and discharge status) for classifying hospital patients into mutually exclusive and exhaustive groups or types of cases having similar expected patterns of resource consumption. DRGs are espoused to provide an operational definition of the hospital’s products in terms of classes of patients receiving similar sets and levels of services (Fetter and Freeman, 1986, pp. 41-43). In this approach, it is assumed that the DRG framework is seeking to faithfully represent the underlying medical task technology of health care delivery in terms of isolating the services rendered. In turn, case-mix accounting systems developed by the health care industry (but whose use the federal government does not require for prospective payment) seeks to identify costs of rendering the various DRG category services.’ In essence, DRG-based, case-mix accounting systems merge epidemiological and management science approaches to health care administration by directly linking the costs with the outcomes of providing health services, as well as providing incentives for cost control and efficiency (see Borden, 1988, pp. 82-87). DRG-based, case-mix accounting systems have been developed with the goal of faithfully representing the economic reality that underlies a hospital’s various product lines, thereby facilitating rational decision-making regarding resource acquisition, deployment, and use (Fetter and Freeman, 1986, pp. 41-43). If one were to accept this presumption, an agenda for future action for

‘Case-mix accounting systems represent hospitals’ efforts to measure costs of the federally imposed price categories (DRGs) to determine cost/price relationships for each of these categories.

Management of Legitimacy and Politics


both practitioners and researchers would include developing and refining DRG as well as case-mix accounting systems to better reflect the medical and economic reality that underlies a hospital’s various product lines (for an elaboration of this theme on the need for accounting research agendas to reflect the economic realities of organizational product lines see Kaplan, 1983, 1984, 1986; Johnson and Kaplan, 1987). For example, it would be important to develop cost accounting systems that facilitate the measurement of costs of delivering each specific DRG in a given hospital. In addition, effort would be expended to extend the applicability of DRG and case-mix accounting systems to administrating health care delivery systems, better management of hospitals and their various subunits, as well as in assisting individual physicians to allocate their own efforts (see, for example, Cook et al., 1983, 1985; Meyer, 1984; Smith and Mick, 1985). Such an orthodox perspective is closely consonant with the rhetoric of turn-of-the-century progressivism which espoused a rational, objective, apolitical approach to the administration of public resources. But, as one departs from this orthodox stance and embraces an extended institutional perspective, a markedly different research agenda emerges which suggests an enriched, albeit problematized, understanding of the DRG and case-mix accounting phenomena. The institutional perspective suggests that such elements of organizational structure as DRG and case-mix accounting systems are driven not so much by a sense of an objective reality as by societal expectations of what constitutes acceptable organizational practice consistent with the theme of Meyer and Rowan (1977, pp. 357-363). Indeed, elements of “coercive isomorphism” (DiMaggio and Powell, 1983, p. 147) are readily apparent in such federal laws as Public Law (PL) 98-21 (the Social Security Act of 1983), which mandates the use of DRG-based, prospective payment systems for Medicare patients. Similarly, “ normative isomorphic ’ ’ forces (DiMaggio and Powell, 1983, p. 147) are to be found in the academic literature which suggests that it should be useful in a variety of activities such as planning and controlling health care systems by their directors, providing specific DRG services more efficiently as monitored by department heads, and enabling individual physicians to make more efficient use of their time by admitting only patients that will consume fewer hospital services and be discharged sooner (Thompson et al., 1979; Cook et al., 1983, 1985; Fetter and Freeman, 1986; Smith and Mick, 1985; Thompson, 1978, 1981). The role of “mimetic isomorphism” (DiMaggio and Powell, 1983, p. 147; Scott, 1987, pp. 495-504) is already being felt as hospitals begin to think in terms of delivering DRGs rather than treating patients, and applying case-mix accounting to all patients and not just Medicare patients. Comparisons are encouraged across hospitals with respect to the efficiency and effectiveness with which various product lines are offered, as well as comparing the profitability of varidus departments within a particular hospital (Borden, 1988; Fetter and Freeman, 1986; Shortell and Hughes, 1988).


M. A. Covaleski and M. W. Dirsmith

As one considers the criticism of the institutional perspective, the understanding held of the DRG and case-mix accounting phenomena may be further enriched. The institutional perspective would hold that PL 98-21 may be seen as an artifact of a socially, politically, and historically created set of values and expectations that, in turn, channel and constrain subsequent organizational action. For example, in recognizing that the introduction and use of organizational practices is done in order to conform to societal expectations, Meyer and Rowan (1977, pp. 357-363; see also Meyer and Scott, 1983, pp. 1-17) suggested that such external legitimation practices as DRG systems amount to symbolic gestures. In contrast, it has been claimed that such conformity may indeed encourage an expanded notion of rationality wherein external constituents seek to and do, in fact, influence the operating processes of organizations (Perrow, 1985, pp. 153-155; Powell, 1985, pp. 564-565). By implication the contemporary institutional perspective of viewing organizational practices as symbolic gestures may be overly reductionist in that one may interpret organizational practices differently depending on one’s position (Meyer, 1984, pp. 15-17). Health care delivery costs are rising dramatically and politicians desire to contain costs regardless of whether their motivation is to be more efficient in serving a broader populace or to contain costs via the least regulation as an end in itself (Sapolsky, 1987, pp. 68-73). The cost containment drive may be both instrumentally and economically rational. In addition, accounting discourse has long been taken for granted as appropriate and necessary, even trivial and dull in fiscal decision-making (see Edelman, 1977, pp. 57-72; Hopwood, 1984, pp. 170-176). Accounting is dichotomous in that it is political in an apolitical way. Thus, in the guise of being a socially negotiated phenomenon, PL 98-21 may possibly be used politically as a means of channeling social discourse to mask an underlying rational economic decision such as reducing the cost of health services to Medicare patients, even at the expense of reducing the level and quality of services offered (see Edelman, 1977, pp. 57-72; Meyer, 1984, pp. 15- 17). The DRG framework, however, does give politicians a convenient way to demonstrate to the electorate that they are doing something about managing health care costs in a scientifically based manner. Thus the DRG phenomenon may serve as a means of both social discourse and political exchange for politicians at the federal level. Hospital administrators, in turn, have no choice but to conform to PL 98-21 for Medicare patients. The motivation lying behind this conformity is, quite understandably, to maximize third-party payments. Thus, the deployment of a DRG-based system to help generate, as opposed to internally allocate, resources is to be expected, and this focus on obtaining economic resources is instrumentally rational (see, for example, Perrow, 1985, pp. 153- 155). However, the process behind this generation, that seeks to ritualistically demonstrate PL 98-21 conformity, is political advocacy (see, for example, Meyer, 1984, pp. 12-16; Wildavsky, 1975, 1987). At issue here is whether hospital administrators will turn the DRG-based system inwardly to allocate resources

Management of Legitimacy and Politics


thereby coupling external imagery and internal process (see, for example, Powell, 1985, pp. 564-565). Given that case-mix accounting is a generally accepted if not taken for granted process for making resource allocation decisions, that it has the appearance of being objective and verifiable and the implication of being trivial and dull (see, for example, Edelman, 1977, pp. 57-72), it serves as a convenient and autoregulatory means for allocating resources internally. It can be argued that the discretion for its application, after all, does not rest with the hospital administrator (see, for example, Meyer and Rowan, 1977, pp. 320-342); to the extent that DRGs and case-mix accounting are linked, the accounting information may be viewed as almost mandated by federal law. Once more, it may be used as a political device, this time for legitimating resource allocation decisions to internal constituents. Thus, the existence of federally mandated DRG framework and resulting case-mix accounting systems offer the distinct possibility of penetrating backstage operating processes in terms of which departments of product lines get what financial resources for which purposes (see, for example, Powell, 1985). Seeking to formulate an overall interpretation of the events shaping health care, Starr (1982, pp. 78- 186) implicated the significance of the DRG framework and resulting case-mix accounting system in his discussion of the cultural authority with which the health care system is consciously modified and directed. Corresponding to these structural changes is a concomitant shift in ideology toward new forms of modifying and legitimizing power relations. If a profession’s work and performance outcomes have little relationship to the knowledge and values of its society, it may have difficulty surviving (Larson, 1977, pp. 137- 158; Abbott, 1988, pp. 28-103; Freidson, 1986, pp. l- 110). On this point, Starr (1982, pp. 78- 186) argued that the social reality of health care delivery is actively constructed by a process of defining that which has factual value. This authority resides in socially accepted and valued cultural objects, such as recognized standards which, in the health sector, have historically come from the medical profession. Increasingly, however, these cultural objects have involved the use of business symbols and modes of thought, as is evident in the DRG framework which speaks in such terms as product lines (Starr, 1982, pp. 78-186). The rise of a corporate ethos in medical care is already one of the most significant consequences of the changing capital structure of medical care. The language and presuppositions of accounting systems function as vocabularies which link the health care industry to the changing capital markets, and which set the terms of dialogue and limit any challenge by the medical profession (Starr, 1982, pp. 152- 193). Consequently, accountants may be seen working from a preexisting position of power relative to the changing capital markets (Armstrong, 1985, pp. 143-148), thus contributing to the proliferation of accounting controls in health care organizations. In summary, Marmor et al. (1986, pp. 325-340; see also Freidson, 1986, pp. l- 110 for a more general line of argument) reasoned that the radical transformation of American medicine represents a shift in its inherent charac-


M. A. Covaleski and M. W. Dirsmith

ter, revealed by a rise of commercialism accompanied by depersonalization and a decline of a professional ethos, which cuts across organizational forms. The environment facing decision makers in medical institutions, and the accounting and regulatory conventions to which they must conform, contribute to a fundamental tension within the medical system over whose interests should predominate-the federal government, other third-party payors, hospital administrators, physicians, or even, almost as a last thought, patients (Marmor et al., 1986, pp. 325-340). The steady pressure of rising costs, combined with the opportunities to earn high returns in medical care have caused this tension to surface with increasing vigor. Marmor et al. (1986, pp. 325-340) predict that the social context of American medical care, already entrepreneurial and commercial by international comparison, will probably grow more so. One significant result may lie in the subordination of medical decision making to financial considerations, observed by Shortell and Hughes: There is growing concern that, as hospitals are increasingly buffeted by external pressures to reduce costs, they may be forced to allocate resources in ways that could adversely affect patients’ care. Under the Medicare prospective payment system, for instance, hospitals have incentives to discourage the admission of beneficiaries with high costs, to reduce the diagnostic and therapeutic resources used for these beneficiaries, and to discharge them sooner. Any one of these responses could result in adverse outcomes. Anecdotal evidence suggests that such adverse outcomes may already be occurring (1988, p. 1101).

Closing Discussion The historical section of this paper examined the development of public sector administration practice and the role of accounting in a broader social context where struggles for power and control were often underlying initial activities in the institutionalized process. Mutual references to rationality and efficiency by both political reformers and business leaders had a legitimate appeal to the public. Furthermore, these expressions of legitimacy served as a seemingly apolitical means for controlling society without specific reference to political motives, morality, or interest groups: they were objective and the value of their use self-evident. However, the importance of probing accounting as a social practice developing within a society with inherent conflicts has been suggested by DR Scott in the following: Economic interpretation of history . . . implies a unity of culture. development or evolution is assumed, the theory becomes one technique of that process. It runs to the effect that methods of distribution are continually in the process of development, whereas superstructure of society tends to be conservative and to perpetuate

If a process of relative to the production and the institutional itself. (1931, p.

Management of Legitimacy and Politics

26) . . . [T]he social sciences

. . have been concerned with abstractions with a different aspect of a unified cultural organization (1931, p. 27).



Among the problems DR Scott (1931, p. 27) saw was that the methods of economic production are themselves “a cultural matter and not an outside cultural determinant. ” Scott (1931, p. 27) went on to suggest that the development of accounting “must be provided for within the process of cultural change,” thereby emphasizing the importance of such issues as the social creation of accounting, alternative sets of meaning attributed to it, and the presence and influence of competing interest groups within organizations and society. More specifically, this paper has suggested that the imperatives of accounting information in the public sector are often intertwined with political ideology and social preference. Accounting calculations can, in turn, be seen as a means for not only legitimizing the management of public sector organizations, but also as a means for influencing policy and public sector decisionmaking by subtly influencing the “normative and cognitive facets of the political process” (Scott, 1987, p. 509) that must be attended to. It is such a vocabulary which gives form and content to management in both tum-of-thecentury public administration and contemporary health care administration, lifting it from the level of a series of pragmatic acts within the enterprise to a systemic and formalized body of knowledge deemed to be “true” (Miller and O’Leary, 1987, p. 5). Accounting systems may consequently be seen as simultaneously serving as a means for providing an instrumental solution to a technical problem, and perhaps foremost in the public sector, a means of political exchange by apparently de-politicizing public sector administration. The implications of such an interpretation and the manner in which these legitimizing actions support a political structure operating within the immediate interests of powerful groups, was poignantly suggested by Searle in his analysis of turn-of-the-century public policy in Great Britain: A variant on the cult of the ‘scientific expert’ was the cult of the ‘business man.’ The distinction between commercial and political activity was blurred in much of this propaganda, and vague calls for more ‘business men’ in government often leave one uncertain whether the writer actually wanted to introduce industrialists into the public service, or merely ensure that capable, efficient businesslike politicians, rather than rhetoricians, controlled the destinies of the nation. . . . In either case, the ethics and methods of business were being put forward as an ideal by which the conduct of public policy should be guided. (1971, p. 86)

In short, the blurred distinction between commercial and political activity within government appears at once facilitated and supported by the multiple functions served by accounting information in public administration.


M. A. Covaleski and M. W. Dirsmith

We generally conclude that the institutional perspective may be used to gain insight into the development and use of accounting in public policy, as suggested in the parallels drawn between turn-of-the-century public administration and the role of the federal government in the contemporary health system. In turn, such inquiry may be used to extend the institutional perspective. The seeds of turn-of-the-century progressivism in which business interests penetrated the public sector and during which the forms of business practice were adopted to objectify, rationalize, and make predictable the administration of public resources, are readily apparent in the contemporary health care sector. More specifically, because of the parallels between the role of accounting in historical and contemporary public administration arenas, these multifaceted roles of accounting may be seen as part of an unfinished institutional process that is infused with power rather than an outcome that is beyond reach of influence and politics (DiMaggio, 1988, pp. 8-15). The formal structural mechanisms of decision-making in part developed by the respective industries themselves, could be deployed to indirectly reflect the federal government’s interest without meeting active resistance (see Kolko, 1963; Scott, 1987). The exercise of power is indirect and in so being is effective (see Bums, 1986; Pfeffer, 1981; Edelman, 1977). Similarly, at a microorganizational level, the institutionalization of expert decision-making (Larson, 1977, pp. 137- 158) or, in current terms, DRGs, is an ongoing process that appears to be similarly political in a seemingly apolitical way. The role of accounting in the establishment and legitimation of social reality in turn-of-the-century public administration is similar to its role in reproducing this very reality in contemporary health care system administration. The authors wish to gratefully acknowledge partial research funding support from the University of Wisconsin Industrial Research Program and the Price Waterhouse Foundation. We also wish to thank the two anonymous reviewers and the editors for their useful suggestions.

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