Regulation

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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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Why are coffins cheaper in California

November 16, 2010 in Regulation | 2 comments

How occupational licensing affects the cost of goods and services:

“After Hurricane Katrina leveled the pine forest that had been their sole source of income, Benedictine monks in Louisiana  wanted to support themselves by making and selling coffins. Unfortunately for the monks, in Louisiana only a licensed undertaker can sell coffins. It’s the law, enforced by the State Board of Embalmers and Funeral Directors, which is dominated by funeral industry members who no doubt benefit from the lack of competition.

In California, there is no such law and no regulatory board for the funeral industry to dominate. Instead, it is regulated by the State Department of Consumer Affairs. Coffins are available here through retailers, even online, moderating their prices.”

From KQED’s Perspectives Series, Marsha Cohen, UC Hastings Law School Professor

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User Fees: A solution to decrease wait times for FDA approval of generic drugs?

October 21, 2010 in Pharmaceuticals, Regulation | 3 comments

The Consumer’s Union used Medicare.gov to show that many people could save $3,500-$5,000 by switching to generics.  Why don’t more people do so?  One reason is the long delays for FDA approval of generics.  The FDA’s Office of Generic Drugs is understaffed and thus generic drug approvals takes much longer than it should.

Brand name pharmaceuticals pay user fees to the FDA to speed up approval time.  Is this a good idea to apply for generics as well?

A Consumer Reports (Nov 2010) editorial states the following:

“In general, we oppose user fees that allow a regulated industry to fund the regulators.  A government agency can become dependent on the companies it’s supposed to objectively regulate , which can influence decision. In a 2006 survey…many FDA employees said they felt pressured to hastily and perhaps improperly approve user-fee drugs.  And at least one felt the agency viewed industry, not the American public, as its client.“

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Patents, Regulation, and Fake Drugs

September 13, 2010 in Pharmaceuticals, Regulation | No comments

The Economist notes that counterfeit drugs are a growing problem.

“Counterfeit drugs can kill. Many are shoddily made, containing the wrong dose of the active ingredient. Taking them instead of the real thing can turn a treatable disease into a fatal one. It can also foster drug resistance among germs.”

Do patents cause and increase or decrease in the provision of unsafe, fake drugs?  Most people will say that patents help protect drug safety.  Drugs sold under patent require FDA approval and are generally safe.  However, these drugs are expensive and many people–especially those without insurance–cannot afford them.  Thus, these individuals may turn to less reliable vendors who promise to provide the same drugs at a lower price.

With shorter patent lengths, reliable companies can begin to produce affordable generics.  Companies can build a reputation for high quality generics, while still selling customers through low prices.  Eventually, these “generic” companies could build a brand name as worthwhile as Pfizer.

Just decreasing patent lengths is not a cure all, however.  People have been selling, drugs, tonics and potions which falsely purport to cure all types of ailments since the beginning of mankind (e.g., snake oil salesmen).

Additional drug safety regulation could improve the safety of marketed drugs, but it would also likely drive up prices, thus forcing more individuals to buy medicines on the black market.  Additional regulation also stymies new treatment innovation due to the extra costs regulation imposes.

Fake drugs are a serious problem; a problem without a simple answer.

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Marketing Cocaine

July 19, 2010 in Regulation | No comments

An energy drink called Cocaine has received a lot of press.  Texas has barred the sale of the drink in the state. The FDA made the manufacturers of Cocaine change the label so it looked less like white powder.  To comply with FDA directives, the cans now declare “This product is not intended to be an alternative to an illicit street drug, and anyone who thinks otherwise is an idiot.”

Peru has also banned the sale of Cocaine.  To market the drink in Peru, the manufacturer would need to add extract of coca leaf.

Source: Wilson Quarterly, “Marketing Cocaine” Summer 2010, p. 15.

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California Health Benefits Review Program

June 10, 2010 in Public Policy, Regulation | No comments

If California were to enact a mandate for insurance companies to cover certain services, how much would this cost?  How would it affect public health?  Would utilization change?

To answer these questions, the California legislature charged the California Health Benefits Review Program (CHBRP) to estimate the medical effectiveness, public health and cost implications of proposed health benefit mandates.  A paper in Health Services Research discusses the methods used to evaluate these potential mandates.  In particular, legislators want the following two questions answered:

  1. the present baseline coverage for the benefit and baseline per unit costs, utilization, and total per-member, per-month (PMPM) health care expenditures, and
  2. projected changes in coverage, per-unit costs, utilization, and PMPM expenditures following the implementation of the mandate.

The data sources used to answer these questions include:

These reviews estimate not only the short term impact of a mandate, but also the long term impact.  For instance, if a certain mandate increased utilization in the short run, costs likely will rise.  If the increased utilization improves patient health in the long run, however, costs may decrease over a longer time horizon due to decreased hospitalization rates.

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Rand Paul and the oil spill

May 24, 2010 in Current Events, Regulation | 2 comments

Rand Paul is the the son of libertarian Senator Ron Paul and is currently running for Senate in the state of Kentucky.  Although Dr. Paul (an ophthalmologist) recently won the primary in his state, he’s gotten in some hot water for some comments he made.  For instance, he’s stated opposition to some parts of the civil rights act.

Today, however, I’d like to discuss his comment that the government’s treatment of BP–the oil company whose rig spilled millions of gallons of oil into the ocean–was “un-American.”  Referring to President Obama, Dr. Paul stated:

“I think that sounds really un-American in his criticism of business. I’ve heard nothing from BP about not paying for the spill. And I think it’s part of this sort of blame-game society in the sense that it’s always got to be someone’s fault instead of the fact that sometimes accidents happen.”

I think Dr. Paul’s comments have a lot of truth.  BP did not want the oil spill to occur.  Although oil companies are often seen as greedy and corrupt, no oil company would want to lose millions of gallons of its most important asset: oil.  The popular media seems to demonize BP as if this were an intentional act.

Let me be clear, BP is at fault here and must pay the damages.  However, the fault was careless, but not intentional.  At your own job, however, I doubt you perform every task perfectly so no one should expect BP to do the same.

In an ideal libertarian world, there would be no regulation of the oil companies.  However, when a spill like this occurs, those affected could sue BP and be compensated for their losses.  BP is willing to pay our large settlement sums.

As we know, however, this is not a perfect world.  BP is a large company with significant resources to pay for lawyers.  The people hurt by the oil spill include the tourism industry, fisherman, and others.  Brining these all these smaller, disparate individuals and firms together may be difficult.  Further, the poorest people affected by the oil spill may not have the time or resources to participate in the lawsuit.  Thus, there may be a need for some regulation.  However, will government regulators know about oil rig safety more than BP engineers?  I doubt it.

The point of this fairly rambling post is that Dr. Paul’s comments do not align with conventional wisdom, but they are far from unreasonable.

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Do Economists Support FDA Pre-approval of Drugs?

May 9, 2010 in Pharmaceuticals, Public Health, Regulation | No comments

Conventional wisdom holds that economists advocate for reducing regulation on most policy arenas.  Regulation imposes costs and businesses and is often ineffective.  Further, as technology and market conditions change, regulations which were originally welfare enhancing can now become archane.

The public generally views the FDA’s pre-approval as a worthwhile endeavor.  The goal of FDA pre-approval is to protect consumers against unsafe and/or ineffective drugs.  In the world of neo-classical economics, agents have perfect information about drug quality and the role for the FDA disappears.  Even if information is not perfectly observed, the FDA’s ability to restrict the entry of potentially useful drugs into the market can be welfare destroying.  Certifying drugs as safe rather than prohibiting them through regulations may be a preferable form of spreading information.

In a recent survey of 44 leading economists, 23 support or strongly support pre-market approval of new pharmaceuticals and devices while 15 where opposed or strongly opposed (6 were neutral).  The key rationale behind the support of pre-market approval was the problem of imperfect information and also the public goods aspect of knowledge.  Fewer economists supported the notion that the government has superior ability to assure safety and  efficacy.

The majority of economists also believe:

  • the effect of pre-market approval in suppressing would-have-been benefits is often or typically overstated in public discourse.
  • doctors do not systematically error when prescribing medicines.
  • replacing the current FDA system with a simple physician prescription requirement for new drugs and devices is a bad idea
  • The current FDA system increase the amount of knowledge available on new drugs.

Economists were split as to whether drugs approved by European, Japanese, and Canadian authorities should automatically be approved for use in the U.S.

This survey shows that economists do not have a clear consensus answer to the question of whether there is “a sound market-failure rationale for the banned-till-permitted policy for drugs and devices.“

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