Unbiased Analysis of Today's Healthcare Issues

Physician licensure and quality: Part III

Written By: Jason Shafrin - Nov• 27•06

What is the purpose for licensing physicians?  For the general public, the answer seems obvious: society must prevent individuals from consuming low-quality health care.  From the economist’s point of view, this reasoning is not very compelling.  If individuals are looking out for their own best interests, it would be illogical for them to consume low-quality medical care if this is this is not in their best interests.  A seminal paper by Thomas Moore (1961) claims that there are three major classes of justifications for licensing. 

I. Lack of information or misinformation.  

One possibility for why licensing is needed is that individuals do not have complete information of the quality of their doctor.  From my experience, this seems entirely reasonable.  Did my health improve because of my doctor’s adroitness or did my body heal itself?  Am I getting since because I am getting old or because my physician is not caring for my health adequately?  The question remains, however, whether licensure is the proper means through which to cure this informational problem. 

I agree with Moore who claims that licensure is sub-optimal.  Licensure only “establishes minimum qualifications for entrants” and does not “give any information concerning the difference between practitioners above the minimum entrance requirements.  Further, licensure restricts the supply of medical care, thus increasing the price.  Certification would allow the consumers to see which doctors are high and low quality, without restricting the individual’s choice of physician.  On the positive side, in modern medicine certification may be more of a de facto quality control than licensure.  A family practice doctor is not legally prohibited from performing cardiac surgery, but most consumers and insurance companies will only pay for cardiac surgery performed by a board-certified cardiologist. 

Moore claims that certification should be used in industries with the following characteristics: 1) greater variation in service quality, 2) greater possibility of harm from poor service, 3) more training needed to evaluate the quality of the service rendered, and 4) fewer frequency of contact between the consumer and the provider.

II. Paternalism

Moore divides the paternalistic argument into two groups.  The first claims that “the individual, if he had perfect knowledge…would know what is best for himself” but the individual does not have perfect foresight; the second claims that even if the individual had perfect information they “would still not be the best judge of his own welfare.”  One can make a compelling case for licensure based on the first scenario.  If I believe that alternative medicine gives me the best chance of improving my health, but in reality traditional medicine offers me the greatest likelihood of health gains, it may be welfare improving for the government to outlaw alternative medicine (i.e.: license medical providers only of the traditional variety).  This is of course predicated on the fact that the government actually know best and acts altruistically.  If alternative medicine provides a superior quality of care to traditional medicine, however, outlawing alternative medicine would be welfare destroying.  The argument Moore makes in his paper is similar to mine, but he claims that “individuals are overly optimistic in evaluating the expected results of their actions” and thus may not be acting optimally.  By licensing, the government may eliminate choices which short-sighted individuals may elect, but which are not welfare maximizing.  [For an example how to model myopic behavior, see the hyperbolic preferences model developed by Laibson]

I would reject the second class of paternalistic arguments (‘big brother knows best always’) as coercive.  As Moore states, “If the individual is not the best judge of what is best for him, then what is best and who is to decide?”

III. Externalities

One common reasoning cited for the imposition of licensure is externalities.  In particular, many people claim that if an individual receives poor medical care and they become very sick, the state may begin to pay for this person’s medical treatment.  This is a fiscal externality which could have been avoided had the individual received higher quality care in the first place. 

Two issues would make a careful observer tentative to accept this reasoning.  First, if one assumes an individual wants to improve their health, than they would have an incentive to seek better quality care; it would be perverse to purposefully seek low-quality care in the effort to later receive government assistance.  More compelling is the author’s argument that “it is therefore necessary to argue as well that the harm done through purchasing from ‘incompetent’ practitioners is greater than the possible harm done through not purchasing the service at all.”  In a more contemporary setting, this is analogous to requiring a such a high level of care that insurance becomes unaffordable to many people. 

A true externality argument could be made in the case of contagious diseases, but in the West treating these diseases make up a relatively small portion of total healthcare spending. 

  • Moore, Thomas (1961) “The Purpose of Licensing” Journal of Law and Economics, vol 4, pp. 93-117.


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  1. Jason Shafrin says:

    I need to correct a statement I made regarding cardiac surgery. Cardiologists do not generally perform cardiac surgery. Please see below.

    “A cardiologist does not perform heart surgery. They are only board certified to do minimally invasive procedures (stents, etc…) and for many procedures must have present, as required by law, a cardiothorasic surgeon available on call. There is a medical side to heart care management (medicines) and a surgical side to heart care (open heart surgery). To you, this sounds like babble, but to those who are actually in the medical field and are accountable for all patient care outcomes, it is the equivalent of switching the terminology of a commercial airline pilot and a fighter jet pilot. They are not the same. “