Arnold Kling  

Cost of Health Care Regulation

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Christopher J. Conover has attempted to estimate the total cost imposed by legal and regulatory distortions of health care, by synthesizing previous studies of individual issues. The analysis

suggests that the total cost of health services regulation exceeds $339.2 billion. This figure takes into account regulation of health facilities, health professionals, health insurance, drugs and medical devices, and the medical tort system, including the costs of defensive medicine. Moreover, this approach allows for a calculation of some important tangible benefits of regulation. Yet even after subtracting $170.1 billion in benefits, considerable, amounting to $169.1 billion annually. In other words, the costs of health services regulation outweigh benefits by two-to-one and cost the average household over $1,500 per year.

More specific papers are linked to here. Looking at those papers, my guess is that the authors have under-estimated the cost of regulation. For example, I do not think that the work on professional accreditation and licensure captures the rigidities in the system imposed by regulation (prohibiting substitution), or the cost of rent-seeking as professional associations lobby for special favors.

Above all, I can see what a Herculean task it would be to try to estimate the costs of health care regulation. But the study suggests to me that there is some real potential for savings by considering some of the "reputation system" ideas that I discussed here.

Thanks to the Heritage Policy Blog for the pointer.

For Discussion. The authors point out that because every state imposes professional regulations for physicians, there are no "natural experiments" to facilitate estimating costs. Are there "natural experiments" in allied health professions?

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COMMENTS (6 to date)
Lawrance George Lux writes:

The regulation costs are obvious, but other elements play an even greater part. Standardization of fees charged for health care procedures could save (my guess-estimate) some five times the amount which deregulation would save. Standardization of Fees would also cut Paperwork costs to an estimated 30% of current cost.

A second consideration is the administration of dangerous drugs. Much more intrusive regulation would be enacted to curtail abuse. One alternative could be an immediate online Review board, which would pass on the diagnosis, suggested treatment, and use of drugs prior to their administration to Patients. The Review Board could be mandated to use the cheapest Drugs and medical treatments appliable to said illness, cutting Malpractice insurance costs as well as Doctor-purchase by Drug companies. Such a Program, while not Libertarian, might cut total health care costs in this Country in half. lgl

shamus writes:

The only real "natural experiments" available are comparisons between different countries. This is complicated by other factors, such as cultural or political differences, but still holds interest.

spencer writes:

LUX -- to a great extent we already have standardation of fees through the insurance companies. But one reason it does not work is that doctors figure out how to get around it. If the insurance company decided to pay too low a fee for a procedures they quickly figure out how to split the procedure into two parts and charge two fees for what had been one procedure.

The studies you cite are interesting. But I do not know enough about the material to make a judgement on possible bias in them. I would feel a lot better about accepting their conclusions if they were published in refereed journals. I do not have a great deal of trust in the sources.

Lawrance George Lux writes:

I did not cite Studies in the area, just suggested criterea for consideration. It is interesting that hard Studies in this area are absent.

The Insurance company standardization of fees is a joke. They pursue split components, which allows for greater delays in payment, and high premiums to Insured. Insurance companies could reduce effective payment down to a standard fee per day of hospitalization without further payment, and negiotiate with national hospital associations for the largesse of such fees: Hospitals and staff would allocate resources efficiently at a Profit. The same could be done for Clinic and Doctor visits. Do not say it would be more expensive, or less Profitable for medical providers; there would be more efficient allocation of medical resources. lgl

Randall Parker writes:

Standardization of fees would reduce price competition.

We need more market forces, not less.

Jim Jinkins writes:

I am convinced by other commenters and personal experience that standardized fees cannot be effectively defined or enforced.

Suppose they could be? The remaining area of competition would be quality of service.

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