Entry and Regulation - Evidence from Health Care Professions

Abstract

The health care professions in Europe have been subject to substantial entry and conduct regulation. Most notably, pharmacies have frequently received high regulated markups over wholesale costs, and have been protected from additional competition through geographic entry restrictions. We develop an entry model to study the direct impact of the regulations on the pharmacies, and the indirect impact on the physicians who provide related services. We study the case of Belgium, which is representative for many other countries with geographic entry restrictions. We find that the entry decisions of pharmacies and physicians are strategic complements. Furthermore, the entry restrictions have directly reduced the number of pharmacies by more than 50%, and indirectly reduced the number of physicians by about 7%. A policy analysis shows that a removal of the entry restrictions, combined with a large reduction in the regulated markups (by between 10-18%, down from the current 28%) would lead to a large shift in rent to consumers, without reducing the geographic coverage of pharmacies throughout the country. These findings show that the public interest motivation for the current regime has no empirical support. Our findings are also relevant in light of the renewed attention by competition authorities to liberalize professional regulation.

Keywords: Entry, regulation, professional services

JEL Classification: I11, K21, L10, L43