Healthy Competition?

Healthy Competition?

I thank Carlos Fuentes for taking my letter (September/October 2017) seriously enough to respond. His article, “A Rigged Game?” (July/August 2017) addresses the question “What is the problem with the U.S. health care system?” There is much to commend in his analytical approach, particularly as regards to how people behave in the face of incentives. However, he does not address how health care regulation works in the “real world” (to echo a phrase from his letter [November/December 2017]).

Regulations and laws (generically, “policies”), are not good or bad per se. There are good policies and bad policies; surely we can agree on that. My point is that any thorough discussion of the problems of the U.S. health care system needs to address the impact—good and bad—of government policies as well. Anything less is at best incomplete.

As virtually every reader of this magazine knows, the employer-sponsored health insurance system that dominates coverage in the United States arose as a workaround to World War II-era government wage controls. Absent that massive violation of the right to contract (and an ongoing tax advantage), it seems unlikely that the system would have evolved as it did. This is a classic example of what public choice theorists call the “invisible foot” of government intervention.

Any policy that increases demand for a service or reduces its supply will, ceteris paribus, tend to increase its price. The demand-increasing effects of expansionary policies such as Medicare, Medicaid, and the Affordable Care Act—and the disconnect between consumer and payer—are well known. Less discussed are policies that restrict supply.

Here are a few examples of anti-competitive effects of regulation:

“Certificate of need” laws in most states require government permission before a facility can expand, offer a new service, or purchase certain pieces of equipment. In practice, they encourage and enable incumbent providers to prevent the emergence of new competitors. University of Chicago economist John Cochrane reports that in Washington state, the idea of building an “unneeded” facility simply because you can do it better and cheaper than an incumbent is explicitly prohibited.

Physicians face an exponentially growing burden of paperwork, much of it attributable to the Health Information Technology for Economic and Clinical Health Act of 2009. There are now 2.2 people doing medical billing for every doctor who actually sees patients.

The American Medical Association, with power devolved from the government, has controlled the supply of physicians for over a century. Today the United States ranks around No. 50 in physicians per capita among the nearly 200 countries tracked by the World Health Organization.

Prescription drug monopolies got a big boost in 1984 from the Drug Price Competition and Patent Term Restoration Act, which permitted the extension of drug patents beyond 20 years.

No doubt there are arguments in favor of these policies. In his letter, Mr. Fuentes lists a number of commonly cited reasons that health care is a naturally “very imperfect” market in need of extensive regulation. I refer readers to the aforementioned Cochrane paper to rebut these misconceptions.

What the U.S. health care system really needs is competition—disruptive, new-player, kick-in-the-pants incumbent-threatening, out-of-the-box innovative competition. In the current regulatory regime, we are simply not going to get it. Mr. Fuentes concludes that “even with shackles [the invisible hand] has managed to produce by far the worst health care system in the industrialized world.” I would amend this to strike the words “even with” and replace them with “because of.”

(Disclaimer: views and statements are mine, not my employer’s.)

John A. Major, MAAA, ASA

Hartford, Conn.

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