3 Ways Regulation Makes Health Care Expensive

Heath care doesn't have to be this way.

Saying that America’s health care system is terrible isn't anything you haven't heard before. We spend more than any other developed country on health care and get less for it. In fact, many insured Americans don’t get anything at all. But because U.S. health care is not provided by a government monopoly, observers erroneously conclude that health insurance must be a purely capitalistic system and blame capitalism for the high costs and low benefits.

But American health care is more cartel than competition. It would serve the public’s interest to turn our attention to the corporatism and protectionism that constrain patient choice and inflate health care costs. I've provided you with three areas we can easily change the status quo. (For more on this topic, see "Government Makes Healthcare Worse and More Expensive.")

End CONs—Certificates of Need

Take a moment to imagine that opening a restaurant required you to demonstrate that your community “needs” another place to eat. Now, imagine in such a situation that, if regulators grant you permission, current restaurants—your future competitors—could challenge and ultimately block you from opening your restaurant.

As crazy as this sounds, this is how the health care industry works in the USA. It’s called a Certificate of Need, and one is required whenever someone wants to build or expand a medical facility. The argument is right out of a socialist playbook: competition is wasteful. By preventing a “duplication of services,” health care providers will feel less pressure to raise prices.

CON programs reduce access to health care services and cause an increase in health care spending.

This is utter nonsense. No consumer purchasing goods and services ever complains about too much competition. But they always complain about too little of it. And so they should! From sophisticated economic modeling to elementary logic—and in industries from restaurants to health care—monopolies cause higher prices while competition causes lower prices.

But the CON was already on. The National Health Planning and Resources Development Act of 1974 required all states to have some form of CON in place. Though Congress repealed this requirement in 1987, two-thirds of all states still have a CON program.

Research confirms CON’s distortionary effects on the marketplace. CON programs reduce access to health care services and cause an increase in health care spending. The potential savings from ending CON programs are massive, ranging from $187 per capita in Georgia to a staggering $459 per capita in D.C.

Relax Primary Care Licensing

I tell my students that when I get sick, I prefer going to see the second best doctor I can choose. When asked why, I reply, “Because the care will basically be the same but it’ll be a lot easier to get an appointment.” The additional value of the best over the second-best is tiny and waiting for better quality treatment isn’t always worth it.

American primary care requires that we see overqualified medical professionals. When you go to a health care facility for routine care, you typically see a physician and you typically don’t see one quickly. You wait in the waiting room and, when your name is finally called, you go to what Jerry Seinfeld calls the “second waiting room.” When they finally come, you exchange barely a few words before they’re off to their next patient. They sure seem busy—and they are.

Liberalizing licensing laws would save billions in health care costs every year.

Physicians have a lot of training and education. There are many, more important things they could be doing rather than handling basic care. It’s a huge cost with no added benefit. Why are some of our most skilled medical professionals still diagnosing the sniffles?

Thank the American Medical Association (AMA). They make sure that the supply of physicians is artificially low, that demand is artificially high, and that physician salaries remain sufficiently lucrative. The AMA controls how many medical schools, and thus how many doctors, there are. It lobbied Congress to limit the funding of residencies. And, worst of all, it convinces state governments to make sure only doctors can do most of the work—even when they're grossly overqualified.

Licensing laws are why you go to the second waiting room. They constrain entry, preventing someone with slightly less training—like nurse practitionersfrom being an option at all. Physician salaries thus rise.

Liberalizing licensing laws would save billions in health care costs every year. Doctors are some of the highest-paid professionals in the country. Requiring them to handle routine care is like requiring mechanical engineers to change a car’s oil.

Weaken the Drug Gatekeepers

Some of the most venomous criticisms of the U.S. health care system target pharmaceutical companies. It’s not unjustified. Prescription drug spending was 12 percent of health care spending in 2015, and drug prices are currently outpacing inflation. These increases are possible because of the patent system and the Food and Drug Administration (FDA).

Patents give inventors a chance to recoup their research and development costs by granting a temporary monopoly. But patents can be too strong. They can be applied to questionable inventions and gamed to artificially extend their life. Patent shenanigans explain the skyrocketing price of insulin, Humira, and, until recently, Sovaldi, a hepatitis C treatment.

The U.S. patent system should be dialed down. Reducing how long patents last, increasing the standards for accepting them, and undoing the 1982 law which created the pro-patent Court of Appeals for the Federal Circuit would go a long way towards introducing more competition and cutting prescription drug prices.

As drug approval gatekeepers, the FDA makes it difficult to enter the market.

The FDA is a similarly well-intentioned idea gone awry. Demonstrating that a drug is both safe and effective is expensive, even if all you’re showing is that the generic version is “bioequivalent” to a previously-approved drug. Incumbent firms leverage that difficulty by making it hard to obtain the original drug, something any potential competitor needs if they want to copy it.

Such monopolization should be illegal. One of the benefits of patents is that they require the applicant to disclose precisely how the invention works so others can copy it when the patent expires. That’s hardly the case when key information is kept secret long after the patent expires.

But the FDA enables this practice. One way drug companies keep such close control of their medicine is through an FDA program called REMS. It labels qualifying drugs as “high risk” and might only be administered in certain hospitals or to registered patients. When a rival tries to buy a dose to make the generic drug, the FDA gives the brand name firm a cover story: “Sorry, you’re not on the list.”

As drug approval gatekeepers, the FDA makes it difficult to enter the market. Making their approval an option rather than a requirement would lower barriers to entry and increase the level of competition in an increasingly monopolized market.

It Doesn’t Have to Be This Way

I could go on: legalizing organ sales, encouraging living wills, and allowing physician groups would all cut down unnecessary health care costs. The United States does not have a free market in health care. The only way to get the health care system we deserve is to fight entrenched interests and inject some much-needed healthy competition.

Further Reading

{{relArticle.title}}

{{relArticle.author}} - {{relArticle.pub_date | date : 'MMMM dd, yyyy'}} {{relArticle.author}} - {{relArticle.pub_date | date : 'MMMM dd, yyyy'}}
{{article.Topic.Topic}} {{article.Topic.Topic}}

{{article.Title}}

{{article.BodyText}}