On this post by Kevin Corcoran, frequent commentator Steve writes:
“Are there any health systems in the world where health care is not highly regulated and are considered among the best in the world? Is it just a coincidence that health care is generally poorer in countries where health care is not highly regulated?”
Some may want to dismiss Steve’s comments as falling prey to the bandwagon fallacy. However, such dismissal is inappropriate for two reasons.
First, just because an argument has a logical fallacy does not mean it is wrong. Indeed, such a dismissal is wrong in itself. It is called the fallacy of fallacy.
Second, Steve’s comment reflects a comment that economists often make: if there is a better way to do something, people will do it. This is a common joke about the “20 dollar bill on the sidewalk.” In this joke, two economists are walking down the street. One person found a $20 bill on the sidewalk. As he bent down to pick it up, a friend called out to him. “There’s no way there’s a $20 bill on the sidewalk,” the friend said. “If there was, someone would have already picked it up.” The economist nodded sagely and they continued on their way.
Of course, this is a joke. This highlights the absurdity of taking the model literally, but there is truth in it. If there is an opportunity for profit and it is obvious, it is quickly snatched away. Real profit opportunities are hard to find. That’s one of the reasons many businesses fail. This argument is important but subtle (Kevin does a great job of explaining the subtleties of the argument in another post). This is a rule of thumb and is not always literally true. Opportunities for profit do exist, and some of them are quite large. Additionally, there are failures that prevent a mutually beneficial transaction from being completed (more on this later). However, it is a useful starting point.
I read Steve’s comment and he makes a similar claim. If strict healthcare regulation is such a bad thing, why do the richest countries regulate it so harshly? If governments want to improve healthcare, wouldn’t they choose the optimal combination of regulations? These are good questions.
When I think about things from an economic perspective, I start with the assumption (or should I say null hypothesis) that the current situation is efficient. In other words, we start from the assumption that all revenue opportunities have been consumed and that there are no market failures, at least for now. Next, consider how likely it is that such an assumption is an approximate representation of reality. This is where methodological individualism and economic thinking come into play.
One of David Henderson’s ten pillars of economic knowledge is that incentives matter. Of course, incentives are not mind control, but they do shape people’s behavior. One of the key premises behind the $20 bill story is that the market provides incentives for people to find those bills. In a market system where profits are (mainly) sustained by those who create value, people are incentivized to seek those profits. In other words, when profits are allowed to remain, profit-seeking behavior is encouraged.
Lawmakers and regulators do not face the same economic incentives. No matter how well-intentioned their actions may be, they will not reap all (or even most) of the increased value created by a properly regulated health care system. Cutting costs does not increase revenue. Efficiency is only useful if it improves personal care. Even ignoring knowledge issues, there is no economic incentive for regulators to choose the combination of regulations that optimizes health outcomes. Therefore, even if everyone regulates, the current set of regulations may not be optimal.
In fact, regulators and legislators often have incentives to maintain inadequate regulations even when they are aware that the regulations are failing to achieve their objectives. Regulation created jobs to solve problems. In other words, if regulation fails to solve the problem, there are benefits to responding with more regulation. They are rarely replaced, but rather new regulations are superimposed on top of old ones, often creating conflicts (which are then corrected by further regulations). After all, the regulatory system lacks any coherence. This is especially true in the U.S. healthcare industry, which has many mutually contradictory rules and regulations. It is more like a chimera than a body of regulation.
There is another issue that can be called the diminishing marginal benefits of regulation. The law of diminishing marginal returns is a scientific law in economics that, all else being equal, each additional unit of input (or consumption) produces less output (or profit) at the marginal than the previous unit.
The late, great Ronald Coase pointed to a similar pattern when it comes to regulation. In a 1997 interview with Reason Magazine, Coase said:
“When I was editor of the Journal of Law and Economics, we published a series of studies on regulation and its effects. Almost every study, perhaps all studies, suggested that the consequences of regulation were worse, that prices were higher, that products were less suited to consumer needs than they otherwise would have been. I accept the view that all regulation must produce these outcomes. So what’s my explanation for the results we got? I argued that the most likely explanation is that the government is now operating so large that it has reached a point where economists say it has negative marginal returns and anything more would disrupt it, but that doesn’t mean that if we significantly reduce the size of government, the activities that work will cease to exist.
Perhaps we have passed the stage of diminishing marginal returns in healthcare regulation. The optimal level of regulation in healthcare is probably not zero, but it is also likely to be less than the approximately 50,000 federal regulations (as of 2018). Initially, medical regulation appears to have had a large positive effect on outcomes (i.e., the benefits of regulation outweighed the costs). However, given the incentive discussion above, it is reasonable to argue that we (and indeed all major countries face similar incentives) are overregulated. Because regulators do not face the costs of regulation and enjoy the benefits, they face an incentive to continue adding even if the net cost is negative. There may be regulations that can be removed to improve healthcare outcomes.
