Commentary

To Expand Health Coverage, Deregulate Health Care

By Christopher J. Conover
This article was published in Investor’s Business Daily, October 7, 2004.

The soaring cost of health care has become one of this nation’s most pressing public issues. Politicians and pundits regularly talk of new programs and changes in law that could address this problem, and some have even discussed the implementation of a socialized health care system. Unfortunately, there is little discussion of one policy response that would significantly lower health care costs: doing away with outmoded and questionable health care regulations that raise prices but produce little if any benefit.

As one health economics textbook puts it, “the U.S. health care system, while among the most `market oriented’ in the industrialized world, remains the most intensively regulated sector of the U.S. economy.” Regulation is taxation by another name. Instead of taxing private resources to fund government spending, regulation directs how private individuals use those resources. The costs of regulation are the benefits we would derive from alternative uses of those resources.

To determine the costs of health care regulation and ascertain whether those costs are offset by benefits, my colleagues at Duke University and I have spent several years evaluating the economic literature to estimate the net burden that health care regulations place on the U.S. economy. Our preliminary results are published today (10/4) by the Cato Institute.

We examined five areas of government regulation that apply solely to the health care sector: regulation of health facilities (hospitals, nursing homes, etc.), health professionals (doctors, nurses and many other providers), health insurance (pricing restrictions, benefit mandates, portability requirements, etc.), pharmaceuticals and medical devices, as well as the medical liability system.

Our review of the literature on 47 different types of health care regulation suggests their total cost was roughly $339.1 billion in 2002. After subtracting the $170.1 billion in benefits that we calculate those regulations provide, we find that health care regulation places a net burden on society of $169.1 billion annually.

Broken down by component, the medical liability system appears to impose the greatest net cost, at $80.6 billion per year. We arrive at that estimate after accounting for the medical liability system’s benefits: averted mortality and disability, plus the compensation paid to injured patients.

We estimate that Food and Drug Administration regulation of pharmaceuticals and medical devices imposes a net annual cost of $41.8 billion. The lion’s share of that cost represents the value society places on the net number of lives that are lost while waiting for better pharmaceuticals to be approved, after subtracting the number of lives saved by FDA regulation.

In 2002, regulation of hospitals and other health facilities cost an estimated $25.1 billion. The two greatest costs in this category are hospital accreditation and licensure requirements (net cost $8.6 billion), and laws that tax hospitals and redistribute the revenues to those providing above-average amounts of uncompensated care (net cost $5.2 billion). Health insurance regulations cost Americans $14.4 billion annually, while regulation of doctors and other health professionals cost $7.1 billion annually.

This leads to some troubling realizations. Over the next 10 years, the net cost of health care regulations will be some three times more than the $534 billion cost of the new Medicare prescription drug benefit. By increasing the cost of medical care, regulation increases the cost of health insurance. We estimate health care regulation makes coverage unaffordable for approximately 7.5 million Americans.

Though one might suppose this added burden ensures better medical care, it is likely that it costs lives instead.

Several studies have established a tradeoff between income and mortality: As income rises, mortality falls because people are able to purchase more health and safety. We estimate that by making Americans $169.1 billion poorer each year, health care regulations induce approximately 22,205 deaths annually. That is over 4,000 more deaths than the Institutes of Medicine attribute to uninsurance.

If we are to get the most out of our health care sector, policymakers must address the high cost of health care regulation. In terms of priorities, it would appear that medical liability reform offers the most promising target for regulatory cost savings, followed by deregulation of the FDA, health insurance (e.g., mandated health benefits) and health facilities (e.g., accreditation and licensure).

What should be clear from even this rough picture of the health care regulatory landscape is that the potential savings from deregulation are far too large to be ignored.

Christopher J. Conover is an assistant research professor at Duke University and author of the Cato Policy Analysis “Health Care Regulation: A $169 Billion Hidden Tax.”