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The Health Care Financing Administration (HCFA) was created in 1977 by then Secretary of Health, Education and Welfare Joseph Califano. This Paper applies organizational theory to this event and its consequences. Califano's action was largely motivated and defended on the basis of rational concepts of efficient structure and clear lines of authority. However, the rational model of organizational behavior has been attacked by exponents of the natural model for over 50 years. Why does the rational model continue to influence governmental executives, and do rational reorganizations, such as the creation of HCFA, advance the achievement of policy objectives? This Paper has three sections. The first section reviews the creation of HCFA and subsequent events. The second section reviews relevant literature on organizational theory. The third section applies the concepts discussed in section 2 to the events recounted in section 1. The paper concludes that the creation of HCFA cost Secretary Califano political capital, but this action succeeded in institutional terms. The continued survival of HCFA shows how rational reforms can be congruent with informal structures and external pressures that shape government organizations and their programs.

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