Controlling the Costs of Medical Care: A Dose of Deregulation

Abstract:     
In Beyond Learned Helplessness, Professor Gregg Bloche surveys the wreckage of past attempts at health care cost containment, and responds to the evident social ills with a typical inside-the-Beltway solution: an expert independent agency. The agency will “set a national agenda for clinical outcomes research, support this research in dependable fashion, develop cost-benefit trade-off principles for medical coverage, and formulate coverage protocols based on these principles.” The resultant scheme would place “binding limits on covered services for Medicare and other federally-funded insurance programs, including extension of coverage to the uninsured. . . [and] a model for the private sector, state Medicaid programs, and state efforts to reduce the numbers of the uninsured.” There are, moreover, shades of these expert panels in virtually every current proposal of the Obama administration for the regulation of health care, often with greater powers than Bloche himself envisions.

Count us doubtful. The history of expert independent agencies does not inspire optimism. Industrial policy has not succeeded in any other area in which it has been tried; price and wage controls, telecommunications, airlines, ground transportation, and agriculture all count as notable failures. If the history of administrative agencies has taught us anything, it is that expertise offers no shield against the corrosive effects of bias – particularly when government regulation is beset by the same problems with information and coordination that make markets difficult to operate.

Decentralized market actors are often better able to identify and use relevant information than a single sclerotic government agency that is beset with administrative and political problems of its own. There is little to be gained by attacking the intractable problems of modern health care policy with process-oriented solutions, or with other regulatory schemes that seek to convert private providers of health care in to public utilities subject to direct government regulation. A direct attack on the substantive issues is necessary.

In section I, we offer a brief critique of the system of positive rights and merit goods that underlie the case for most forms of universal health care coverage. In section II, we identify three practical problems that no working politician can wish away in the effort to implement universal health care coverage: the fundamental principle of diminishing marginal utility; the destabilizing impact of heavily subsidized government-provided coverage on the private market; and the treatment of the full range of existing regulations affecting the delivery of health care services as an exogenous given. We address each of these deficiencies in turn. In section III, we examine briefly six areas where we think massive deregulation is in order: medical malpractice, HIPAA, federal tax law, fraud and abuse, health insurance regulation, and certificate of need/scope of practice limitations. Part IV provides a brief update of our analysis, as of mid-September, 2009 to take into account some of the health reform proposals now under consideration in Congress. Part V concludes.

We anticipate that our proposals will be met by howls of protest from those who benefit from the status quo or who stand to gain from the expansion of federal regulatory authority. The complaints of these apologists for expanded state power should be seen for what they are – a defense of rent-seeking by new political players, incumbent providers, or both. The whole point of deregulation is to limit the opportunity and rewards of rent-seeking, thereby increasing consumer surplus. No administrative agency or committee of experts, no matter how well intentioned and knowledgeable, will be able to do a better job of meeting consumer demands than the private market. To think otherwise is to repeat the mistakes of the past, instead of learning from them.

Working Paper Series