Health Care Regulation: A $169 Billion Hidden Tax

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Students of regulation have known fordecades that the burden of regulation on the U.S.economy is sizable, with the latest figures suggestingthis cost may approach $1 trillion in2004. Surprisingly, given that the health industryis often viewed as among the most heavilyregulated sectors of the U.S. economy, previousestimates generally have ignored the cost of regulatinghealth care services.

Using a “top-down” approach, one can arriveat a “back-of-the-envelope” estimate that healthservices regulation imposes an annual cost of$256 billion per year (with a range of $28 billionto $657 billion), suggesting that health servicesregulations could increase estimates of overallregulatory costs by more than 25 percent.

A far more accurate “bottom-up” approachsuggests that the total cost of health services regulationexceeds $339.2 billion. This figure takesinto account regulation of health facilities, healthprofessionals, health insurance, drugs and medicaldevices, and the medical tort system, includingthe costs of defensive medicine. Moreover,this approach allows for a calculation of someimportant tangible benefits of regulation. Yeteven after subtracting $170.1 billion in benefits,the net burden of health services regulation isconsiderable, amounting to $169.1 billion annually.In other words, the costs of health servicesregulation outweigh benefits by two-to-one andcost the average household over $1,500 per year.

The high cost of health services regulation isresponsible for more than seven millionAmericans lacking health insurance, or one in sixof the average daily uninsured. Moreover, 4,000more Americans die every year from costs associatedwith health services regulation (22,000) thanfrom lack of health insurance (18,000). The annualnet cost of health services regulation dwarfsother costs imposed by government interventionin the health care sector. This cost exceeds annualconsumer expenditures on gasoline and oil inthe United States and is twice the size of theannual output of the motion picture and soundrecording industries.

Finding ways to reduce or eliminate this excesscost should be an urgent priority for policymakers.It would appear from this preliminary assessmentthat medical tort reform offers the mostpromising target for regulatory cost savings, followedby FDA reform, selected access-orientedhealth insurance regulations (e.g., mandatedhealth benefits), and quality-oriented health facilitiesregulations (e.g., accreditation and licensure).

Christopher J. Conover

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.