Is Execessive Health Care Regulation Hurting Uninsured?
Health economist Chris Conover makes a cost-benefit analysis of health care regulation
Monday, February 9, 2004
How big a role does health services regulation play in explaining the extraordinarily high level of health costs in the U.S.? And how many uninsured might be covered were we to somehow find a way to reduce this regulatory burden? My brief remarks will provide some tentative answers to both questions based on the preliminary results of more than two years of research conducted in part under contract to the Department of Health and Human Services.
There are two ways to answer the first question. First, we looked at the costs of regulation in other industries such as airlines, railroads, telecommunications and other sectors that have long been studied and calculate the percent of gross economic activity in those industries that is attributable to regulatory costs.
By applying these percentages to the health sector, we arrive at very rough back-of-the-envelope estimates of upper and lower bounds on the plausible magnitude of the burden. As shown in Fig. 1, this so-called "top-down" approach suggests that in 2002, health regulation could have imposed an annual cost of at least $28 billion to as much as $657 billion. (See Figure 1).
A 30-fold difference between the minimum and maximum cost estimate is no more gratifying to me as a researcher than it is to you as policymakers. Moreover, it is easily possible that the regulatory burden in health care is even higher than a simple extrapolation from other industries might suggest.
According to University of Rochester health economist Charles Phelps, "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."
So we also answered this question using a much more fine-grained "bottoms up" approach. We examined the literature for nearly 50 different kinds of federal and state health services regulations, including regulation of health facilities, health professionals, health insurance, pharmaceuticals and medical devices and the medical tort system. These various regulations covered the gamut from mandated health benefits to state certificate of need requirements for hospitals and nursing homes.
We systematically tallied both the benefits and costs associated with such regulations and found that the expected costs of regulation in health care amounted to nearly $335 billion in 2002. As shown at the bottom of Fig. 2, our estimate of benefits was about $207 billion, leaving a net cost of $128 billion.
Three areas account for the lion's share of this net burden: the medical tort system, including litigation costs, court expenses and defensive medicine, totals $81 billion, FDA regulation adds another $42 billion, and health facilities regulation adds $29 billion. Thus, the states and federal government both have roles to play in findings way to trim regulatory excess.
How does this relate to the uninsured? Our "bottoms up" look allowed us to determine that the net cost of regulation borne by the health industry itself is 6.4 percent, meaning that health expenditures (and health insurance premiums) are at least that much higher than they would be absent regulation.
Based on consensus estimates about the impact of higher prices on how many would likely drop health insurance, this increased cost implies a 2.2 percent reduction in the demand for coverage. This translates into nearly 5 million uninsured whose plight might be attributed to excess regulatory costs.
But of course, there's a different way to look at this burden as well. In light of the $35 billion in subsidized care already being provided to uninsured patients, researchers have recently estimated that it would cost only $34 to $69 billion in added health spending to cover the all of the nation's uninsured.
In light of these figures, the potential opportunity costs of this regulatory burden become very clear: the average estimates from both our "topdown" and "bottoms up" look at this problem suggests we could cover this cost several times over. Admittedly, our estimates are still preliminary and we now are engaged in a process of careful review of them. But it seems unlikely that the adjustments yet to come would alter this central conclusion: the net burden of health services regulation likely exceeds the annual cost of covering all 44 million uninsured.
So a legitimate policy question is whether the benefits of regulation outweigh the benefits of coverage for all Americans. For example, in the context of the IOM finding that 18,000 uninsured die every year due to lack of coverage, is maintaining our current regime of health regulation worth letting that continue?