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No. 527

October 4, 2004

Routing

Health Care Regulation

A $169 Billion Hidden Tax

by Christopher J. Conover

Executive Summary

considerable, amounting to $169.1 billion annu-

Students of regulation have known for

ally. In other words, the costs of health services

decades that the burden of regulation on the U.S.

regulation outweigh benefits by two-to-one and

economy is sizable, with the latest figures sug-

cost the average household over $1,500 per year.

gesting this cost may approach $1 trillion in

The high cost of health services regulation is

2004. Surprisingly, given that the health indus-

responsible for more than seven million

try is often viewed as among the most heavily

Americans lacking health insurance, or one in six

regulated sectors of the U.S. economy, previous

of the average daily uninsured. Moreover, 4,000

estimates generally have ignored the cost of reg-

more Americans die every year from costs associ-

ulating health care services.

ated with health services regulation (22,000) than

Using a "top-down" approach, one can arrive

from lack of health insurance (18,000). The annu-

at a "back-of-the-envelope" estimate that health

al net cost of health services regulation dwarfs

services regulation imposes an annual cost of

other costs imposed by government intervention

$256 billion per year (with a range of $28 billion

in the health care sector. This cost exceeds annu-

to $657 billion), suggesting that health services

al consumer expenditures on gasoline and oil in

regulations could increase estimates of overall

the United States and is twice the size of the

regulatory costs by more than 25 percent.

annual output of the motion picture and sound

A far more accurate "bottom-up" approach

recording industries.

suggests that the total cost of health services reg-

Finding ways to reduce or eliminate this excess

ulation exceeds $339.2 billion. This figure takes

cost should be an urgent priority for policymak-

into account regulation of health facilities, health

ers. It would appear from this preliminary assess-

professionals, health insurance, drugs and med-

ment that medical tort reform offers the most

ical devices, and the medical tort system, includ-

promising target for regulatory cost savings, fol-

ing the costs of defensive medicine. Moreover,

lowed by FDA reform, selected access-oriented

this approach allows for a calculation of some

health insurance regulations (e.g., mandated

important tangible benefits of regulation. Yet

health benefits), and quality-oriented health facil-

even after subtracting $170.1 billion in benefits,

ities regulations (e.g., accreditation and licensure).

the net burden of health services regulation is

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Christopher J. Conover is an assistant research professor with the Center for Health Policy, Law and Management

in the Terry Sanford Institute of Public Policy at Duke University.