Regulation

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Why are there so few vaccine suppliers?

February 7, 2012 in Contagious Disease, Pharmaceuticals, Regulation, Supply of Medical Services, Vaccinations | No comments

In many cases, only a handful of suppliers produce vaccines for a given disease.  In fact, for several vaccine types the U.S. has fewer suppliers than countries with a smaller market and a higher level of government purchase.

One reason for this finding could be strict government regulation.  All vaccines must be approved by the FDA.  Further, the CDC provides guidelines to physicians regarding who should get which vaccines.  The CDC also is a large purchaser of vaccines.  Thus, at first glance, it seems that government regulation may be causing industry consolidation in the vaccine market.

A paper by Danzon and Pereira, however, finds this not to be the case.  They find that the likelihood a supplier exits from a particular vaccine market is not effected by whether the CDC is a purchaser of the vaccine, the amount of vaccine the CDC purchases, or the CDC price at the time the firm exits.

The authors propose that the large economies of scale in vaccine production are the cause of the lack of competition in the vaccine market.

“The vaccine industry is characterized by large fixed costs of initial vaccine development as well as substantial ‘semifixed’ costs of producing an individual batch (a process that may take 6 to 18 months) but low marginal costs of producing an additional dose, up to the batch limit, and low storability. If there are multiple competing suppliers with large sunk costs and low marginal costs, competition may drive the price low enough that it is relatively unattractive for multiple firms to remain in the market and for new firms to enter.”

Further, the demand for vaccines is price sensitive.  Insurers (public and private) typically pay physicians and hospitals a fixed payment per vaccine administered.  Increases in vaccine costs come directly from the provider’s bottom line.

Some observers may point to the 2004-2005 influenza vaccine shortage and claim that government regulation had to cause this shortage.  The authors note that although several suppliers did exit the market before the shortage years, “…this cannot be blamed on government purchase and price controls, as less than 20 percent of the flu vaccine is publicly purchased.”

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The Demand for Policy Interventions

November 4, 2011 in Quotation, Regulation | No comments

“Authors of economics books, essays, articles, and political platforms demand interventionist measures before they are taken, but once they have been imposed no one likes them. Then everyone—usually even the authorities responsible for them—call them insufficient and unsatisfactory. Generally the demand then arises for the replacement of unsatisfactory interventions by other, more suitable measures. And once the new demands have been met, the same scenario begins all over again.”

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Does the U.S. Really Have a Free Market for Health Insurance?

October 25, 2011 in Health Insurance, Regulation | 6 comments

Conventional wisdom holds that the U.S. has a free market for health insurance and Europe relies on a state-run, socialist health care system.  The U.S. ‘free market’ for health insurance, however, is in fact strictly regulated.  States exert significant authority over what benefits plans can offer and what premiums they charge.  Consider the following evidence compiled by the GAO regarding the State regulatory environment in 2010.

  • The McCarran-Ferguson Act provides states with the authority to regulate the business of insurance, without interference from federal regulation, unless federal law specifically provides otherwise.
  • Nearly all—48 out of 50—of the state officials who responded to the GAO survey reported that they reviewed rate filings.
  • Insurance departments in 19 states were authorized by their state to approve or disapprove proposed premium rates in all markets before they went into effect—known as prior approval authority
  • Insurance departments in another 10 states were authorized to disapprove rate filings in all markets, but not to approve rate filings before a carrier could begin using the premium rate or rates proposed in the filing. [In 9 of these states, carriers were required to submit rate filings prior to the effective date of the proposed rate—known as file and use authority. In one state, carriers could begin using a new premium rate and then file it with the state—known as use and file authority.]
  • In 6 states, insurance departments were not authorized to approve or disapprove rate filings in any market.
  • In 1 state, carriers were not required to file rates for approval or disapproval each time the carrier proposed to change premium rates.
  • In the remaining 15 states, authority to approve or disapprove rate filings varied by market. For example, a state insurance department may have prior approval authority in the individual market, but have information only authority in the small-group and large group markets subject to their regulation.

With health insurance premiums rising by 20 percent in 2010, the call for even more regulation is growing.

More information on State regulations is provided below:
Read the rest of this entry »

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Predicting a Religious Revival in 2014

August 12, 2011 in Health Reform, Regulation | 2 comments

The Healthcare Economist predicts a religious revival in 2014.  Let me be more specific, in January 2014.  How do I know this?  Am I a religious man?  Has God spoken to me?

Let’s just say I have a certain insight.  In 2014, the individual mandate goes into effect.  All individuals must buy health insurance or else they will pay a tax penalty to the federal government.  Well…not all individuals.  Certain people with religious objections would not have to get health insurance. [American Indians, illegal immigrants, or people in prison would also not have to buy insurance].

The Amish and Old Order Mennonites, for instance, do not have to buy insurance through a ‘religious conscience’ exception.  Will health reform lead to an increase in the number of Amish Americans in 2014?

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“…every single patent is nothing but crap.”

July 28, 2011 in Regulation | No comments

Planet Money has a very interesting article about software patents and companies who exist for the sole purpose of buying these assets and suing other companies.  Computer programmers themselves don’t even like their own patents.  In previous posts, I’ve made arguments for limiting patents for pharmaceuticals and the cases for software patents is even stronger. An excerpt from the article:

 

For a long time, the patent office would have agreed with Rick Mc Leod. For a long time, the patent office was very reluctant to grant patents for software at all.

For decades, the patent office considered software to be like language. A piece of software was more like a book or an article. You could copyright the code, but you couldn’t patent the whole idea.

In the 1990s, the Federal courts stepped in and started chipping away at this interpretation. There was a couple big decisions, one in 1994 and another in 1998, which overturned the patent office completely.

A flood of software patents followed. A lot of people in Silicon valley wish that had never happened, including a very surprising group: computer programmers.

“I worked on a whole bunch of patents in my career over the years and I have to say that every single patent is nothing but crap,” says Stephan Brunner, a programmer.

Brunner says software patents on his own work don’t even make sense to him.

I can’t tell you for the hell of it what they’re actually supposed to do. The company said we have to do a patent on this. … Personally, when I look at them, I’m not proud at all. It’s just like mungo mumbo jumbo that nobody understands and makes no sense from an engineering standpoint whatsoever.

These patents cause problems for innovative companies, particularly those in Silicon Valley.

“We’re at a point in the state of intellectual property where existing patents probably cover every behavior that’s happening on the Internet or our mobile phones today,” says Chris Sacca, the venture capitalist. “[T]he average Silicon Valley start-up or even medium sized company, no matter how truly innovative they are, I have no doubt that aspects of what they’re doing violate patents right now. And that’s what’s fundamentally broken about this system right now.”

How important are patents? Well, look how much big tech firms are paying for them.

In early July, the bankrupt tech company Nortel put its 6,000 patents up for auction as part of a liquidation. A bidding war broke out among Silicon Valley powerhouses…The portfolio eventually sold to Apple and a consortium of other tech companies including Microsoft and Ericsson. The price tag: $4.5 billion dollars….

That’s $4.5 billion on patents that these companies almost certainly don’t want for their technical secrets. That $4.5 billion won’t build anything new, won’t bring new products to the shelves, won’t open up new factories that can hire people who need jobs. That’s $4.5 billion dollars that adds to the price of every product these companies sell you. That’s $4.5 billion dollars buying arms for an ongoing patent war.

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Setting FDA Standards

July 5, 2011 in CER, Pharmaceuticals, Regulation | 1 comment

To what standard should the FDA hold new drugs?  The FDA has a number of choices.  Drugs companies could be required to prove that the drugs they make:

  • Do no harm.
  • Are more effective than placebos
  • Are more effective than existing drugs
  • Are more cost-effective than existing drugs, or
  • Are both more effective and more cost effective than existing drugs.

For my money, I believe the standard should be the first and second ones.  The drug company should simply have to show that the drug does no harm and is more effective than placebos.

Due to asymmetric information, however, the FDA could require the drug companies to compare their drug’s effectiveness against existing treatments or gauge the cost-effectiveness of the treatment.  Although these effectiveness and cost-effectiveness tests need not affect drug approval, insurance plans could use this information to determine if they should cover the drugs.

GoozNews has some interesting commentary regarding calls for the FDA to perform Stage III CER testing.

“I do not support the position of advocates like former New England Journal of Medicine editor Marcia Angell who think new drugs should have to be proven better than what exists before they are approved. If companies want to bring comparable therapies to market, that’s their business. It may even be the case that some me-too drugs work in some sub-populations, but not in others. So if one drug fails to achieve lower cholesterol, or offer arthritis pain relief, for instance, the doctor can switch her patient to the newer drug. But if the new drug is not proven to be better than what exists in a large Phase III trial, then physicians, patients and payers will have the information they need to insist that people start on the cheapest, comparably effective medicine that is available. For most drug classes, that will mean a generic.“

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Egypt: Six Months Later

June 21, 2011 in Current Events, Regulation | 1 comment

A lot has changed since I last visited Egypt in early January and since the protests in Midan Tahrir in mid-January.  According to Marketplace, one thing that hasn’t changed is the incredible amount of bureaucracy which still exists in the country.

So here’s the crux, according to Ragui Assaad, a fellow at the Economic Research Forum in Cairo: Too many business-minded Egyptians look at the hassle, the heartache, and sheer waste of time involved and decide not to register their business.

RAGUI ASSAAD: Many people simply cannot afford to do these things and so avoid them altogether and remain under the radar.

Assaad says you can call it the “black market” or you can call it the “informal” economy.

ASSAAD: This is the issue of informality. Informality is not that people don’t want to pay taxes. Informality is that people cannot afford the very high transaction costs that it takes to deal with the bureaucracy in any way.

As I recommended in an earlier post, a funny, heart-wrenching read which details how the common Egyptian cab driver deals with many challenges–including government bureaucracy–is the book Taxi by Khaled Al Khamissi.  In addition to increasing the level of freedom Egyptians have available to them, reducing these high transaction costs is one of the keys to improving the quality of life in Cairo and the rest of Egypt.

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Certificate of Need Stringency

June 15, 2011 in Economics - General, Regulation | No comments

Many states have certificate of need (CON) laws which restrict providers supply for certain procedures.  A paper presented by Vivan Ho at AcademyHealth claimed that there were 37 states with a CON law for at least one procedure.  Following up earlier research which found that CON laws decreased quality, Dr. Ho found that dropping CON laws also reduced cost.

An important point was made by an audience member, however.  CON law stringency is highly variable across states.  According to the commenter, most providers who make applications to receive a certificate of need receive one in states like Massachusetts.  In other states, however, CON laws are much more stringent.

Thus, in any empirical analysis, using an dummy variable to indicate the presence of CON law indicates the effect of CON on average.  Policymakers may care more about this variable if they feel they cannot pre-determine the level of stringency upon passing a law.  The true causal effect of CON, however, may of course vary depending on how severely States restrict providers supply of services.

This issue provides a valuable teaching point: any research into CON or other regulations must explicitly interpret what their findings do and do not say about the regulation under consideration.

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How to stop health premium increases?

June 6, 2011 in Health Insurance, Regulation | 1 comment

California think they have found the answer.

“The bill in question is AB 52, introduced by Assemblyman Mike Feuer (D-Los Angeles). It would prevent health insurance premium increases from going into effect without the prior approval of the commissioner of insurance or the director of the Department of Managed Health Care, who share jurisdiction over health insurers.

The bill would give insurance regulators the same prior-approval authority they were given over auto and homeowner policies by Proposition 103 in 1988. Under current law, California health insurance regulators can’t reject a rate increase even if they think it’s unreasonable — they can only try to jawbone the insurance company or shame it with a public objection.”

Small business support this measure.  That is likely because small business care more about cost control than the quality of health care.

If the state forces insurance companies to cut premiums, however, something has to give.  Likely there will be more rationing, physician and hospital payments will be cut, and the quality of care will decrease.  Although there is much waste in healthcare, cutting spending with such a blunt tool as AB52 will decrease the quality of health care.  At this point, however, reducing (or simply holding constant) health plan premiums may be a more important goal than improving quality.

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Price Competition for UK Hospitals?

January 13, 2011 in Hospitals, International Health Care Systems, Regulation, Supply of Medical Services | 6 comments

Is health reform coming to the UK?  Since the middle of the decade, the NHS has used a tariff system which pays a fixed price per procedure. Now, however, the Financial Times, reports that the UK plans for “public and private hospitals to compete on price for the treatment of NHS patients.”  The reform calls for quality monitoring to ensure that quality does not slip.

What do British health economists think of the reforms?

  • Zack Cooper, a health economist at the London School of Economics, said introducing price competition “would be a hugely retro­grade step”. In ordinary markets, he said, people can see the trade-off between price and quality. “But in healthcare, it is difficult to measure quality, partly because the process is complex and partly because it may take days, weeks or even years for the outcome of treatment to become evident.” [In the U.S.], the use of fixed prices in the federally funded Medicare programme for the elderly has helped raise quality. “I’m very pro-competition in healthcare,” he said. “But price competition is not the right way to do it.”
  • Anita Charlesworth, chief economist at the Nuffield Trust health think-tank, said the evidence from the 1990s, when family doctors could negotiate on price, was that a huge amount of time and money went in to pricing rather than the appropriateness or quality of care
  • Nick Bosanquet, professor of health economics at Imperial College, London, argues in favour of price competition. “If you want a more flexible system it is illogical to have fixed prices, and after years of fixed prices in the NHS there is still a big variation in the quality of care.”

In my opinion, the value of price competition depends on your perception of how well patients and government can judge quality.  In a world without asymmetric information, it is clear that price competition is optimal.  The government could buy medical services by optimizing along a continuum of quality and price.  Even in the presence of asymmetric information, price competition can be a good thing especially if there are some observable–although imperfect–signals of quality.

If quality is completely unobservable, then providers would have an incentive to minimize quality and drive down price.   Unless of course, patients take price as a signal for quality.  In this case, higher priced providers could gain market share because of a false perception of quality.

In the case where the consumer would pay for medical services, one justification for fixed pricing would occur if the government is better able to measure quality than individuals.  For instance, individuals may be better at judging quality in terms of office amenities and the physician’s bedside manner, but policymakers can better judge whether providers follow best practices and have superior outcomes on average.  If society can agree that outcomes matter more than office amenities, than the government could regulate quality and counteract provider’s incentivize to drive down their costs to maximize profits.

It is not a foregone conclusion that the experts inside or outside the government can measure quality better than can patients. For instance, in the same FT article, Ms. Charlesworth, states that it “was  ’particularly worrying’ that GPs will set local prices for mental health services where quality is even harder to measure than in acute care.”  If quality is so difficult to measure, how can policymakers measure that quality has decreased after the implementation of price competition?

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