Regulation

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Plastic Surgery in China

May 14, 2012 in International Health Care Systems, Regulation | 1 comment

China standard is living as funds from export industries eventually trickle down into the earnings of (some) ordinary Chinese. Where are the Chinese spending their newfound wealth?  In part, the answer is self-beautification procedures.  According to the Economist:

“China performs more cosmetic surgery than any country except America and Brazil. Almost 1.3m licensed procedures were carried out in 2010, according to the International Society of Aesthetic Plastic Surgery (as well as many more unlicensed ones). The market, which barely existed 15 years ago, is now worth some $2.4 billion. China’s growing wealth, and its obsession with celebrity culture, is fuelling the increase. Beauty is also deemed an advantage in the competitive white-collar workplace. People in search of a job submit a photograph with their application…The three most common procedures are double eyelid surgery, liposuction and nose jobs.”

Not all is well, however.

“…a leading plastic surgeon, called for higher standards after botched surgery complaints reached 20,000 a year. Her plea echoes that of Ma Xiaowei, a vice-minister of health, who said that during a random inspection of plastic surgery clinics in 2010, fewer than half met national standards.

…As many as 70% of China’s cosmetic procedures take place in unlicensed salons that offer simple procedures such as face-slimming injections.  Some doctors, badly paid in state-run hospitals, moonlight in illegal salons.“

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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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Holistic Regulation

November 29, 2011 in Economics - General | No comments

“We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components.”

  • Ben S. Bernanke, “Financial Reform to Address Systemic Risk” at the Council on Foreign Relations, Washington, D.C., March 10, 2009

 

In a 2010 short paper, Brunnermeier, Hansen, Kashyap, Krishnamurthy and Lo (2010) argue that the field of economics has not adequately examined the topic of systemic risk. One of the reasons for this is that systemic risk is difficult to observe and quantify.  The Office of Financial Research (OFR) is President Obama’s attempt to fill this gap in knowledge.

Even though systemic risk is poorly measured, that does not mean that economists haven’t thought of ideas to combat systemic risk. The Fed Chairman’s quotation citing the need for holistic regulation is one approach. Is a holistic approach to regulation a good thing? Today, I give my 2 cents.

Merits

Financial and economic market are complex entities. Creating multiple government bodies where each one only regulates a piece of a given market can often be suboptimal. An individual agency may be in charge of making a given financial instrument safer or more transparent. Even if they government body succeeds in their mission, their regulations may create unintended consequence. For instance, another, more volatile, less transparent, unregulated financial instrument is created. Or the regulation could have an adverse effect on real markets. Having a single entity regulate all financial markets in an integrated fashion seems like a promising idea.

Problems

However, regulation generally requires more specialized knowledge than any one agency can maintain. For instance, credit default swaps are complicated entities. Regulators must have specific knowledge in order to properly regulate these instruments. Having a single body regulate all financial markets may create an entity with a wide breadth of knowledge but little depth. Further, if the regulatory scheme created by the central planner is poorly constructed, investors may have no other markets from which they can seek more rational regulation. If regulation by some of the government bodies is successful, investors could migrate to investments in more rationally regulated sectors (although this shift from well-regulated to poorly-regulated markets is a distortion in and of itself).

Motivation

In addition, one has to question the Chairman’s motivation for expanded regulation. He may have the best interests of the country at heart; integrated regulation may be the best mechanism through which one can decrease systemic risk. However, Dr. Bernanke is not an unbiased observer. Centralizing regulatory control increases the power of the Fed, the and the prestige of Dr. Bernanke. Thus, the desire to centralize regulation may not be a completely unbiased opinion.

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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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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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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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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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