Chapter 17 Regulation Copyright 2015 Health Administration Press

After mastering this material, students will be able to  describe the importance of regulation,  explain the interest group model of regulation,  analyze the effects of regulation, and  discuss alternatives to it. Copyright 2015 Health Administration Press2

THE RATIONALE FOR REGULATION Copyright 2015 Health Administration Press3

Equity and Market Failure  Equity – Incidence of ill health is highly skewed. – A few people bear all the burden and quickly exhaust their resources.  Market failure – Better results are possible for some without worse results for others. Copyright 2015 Health Administration Press4

Market Failure  Externalities: Protecting you protects me. – Immunizations – Water and sewer systems – Infection control  Public goods: Some things benefit everyone. – Research – Information dissemination – Standards Copyright 2015 Health Administration Press5

Market Failure  Asymmetric information results from – well-informed professionals, and – poorly informed consumers.  Potential consequences can include – low quality, – high prices, and – unnecessary services. Copyright 2015 Health Administration Press6

SOME EXAMPLES Copyright 2015 Health Administration Press7

Regulation of medical care  is extensive,  has had mixed results,  is motivated by consumer ignorance,  often reflects industry interests, and  is likely to be imperfect. Copyright 2015 Health Administration Press8

Types of Regulation  Price regulation – Medicare rates – Medicaid rates – Affordable Care Act (ACA) requires medical loss ratios >80 percent – Other? Copyright 2015 Health Administration Press9

Types of Regulation  Entry regulation – Physician licensure – Insurer licensure – FDA approval – Certificate of need – Other? Copyright 2015 Health Administration Press10

Types of Regulation  Competition regulation – Antitrust regulation – Licensure laws – Patent law – Other? Copyright 2015 Health Administration Press11

Types of Regulation  Public quality regulation – Inspections – Mandatory disclosure – Incentives for meeting quality metrics – Other? Copyright 2015 Health Administration Press12

Types of Regulation  Private quality regulation – Accreditation – Certification – Scope-of-practice limits – Malpractice suits – Other? Copyright 2015 Health Administration Press13

Regulation of Healthcare  Regulation is extensive. – Public – Private  Regulation works imperfectly. Copyright 2015 Health Administration Press14

Regulation of Healthcare  Regulation is extensive.  Regulation works imperfectly. – Most price regulations have failed in the United States. – Most quantity regulations have failed. – Most entry regulations benefit the industry. – Quality regulations “work” at high cost. Copyright 2015 Health Administration Press15

Regulation  Regulation is hard to do effectively. – The industry usually captures the process. – Financial and regulatory incentives conflict. – Another arena for competition  There are often alternatives. – Competition and market responses – Tort and contract law Copyright 2015 Health Administration Press16

WILL MORE REGULATION BE BETTER THAN LESS? Copyright 2015 Health Administration Press17

In practice, will more regulation be better than less?  An empirical question  Often answered on the basis of – ideology – self interest Copyright 2015 Health Administration Press18

Healthcare Markets in Practice  Often not ideal because of – consumer ignorance, – provider market power, – a desire to subsidize care for the poor, and – distortion of incentives by insurance. Copyright 2015 Health Administration Press19

Healthcare Regulations in Practice  Often not ideal because of – provider capture, – conflicting incentives, – need for decentralized decision making, and – vague and conflicting goals. Copyright 2015 Health Administration Press20

Regulation has three parts.  The underlying law  The regulations written for that law  The enforcement of those regulations Copyright 2015 Health Administration Press21

All three parts involve politics.  The underlying law  The regulations written for that law  The enforcement of those regulations Copyright 2015 Health Administration Press22

The process balances  public pressure (if any) for action,  interest group pressure for action, and  conformity with prevailing ideology. Copyright 2015 Health Administration Press23

Consumer ignorance  is rational because knowledge – costs a lot to acquire, and – has small expected benefits. Copyright 2015 Health Administration Press24

Consumer ignorance  means that patients – may not know when to seek care, – may not be able to evaluate recommendations, – may not be able to evaluate quality of care, and – may not know the price of care; and  exposes consumers to opportunism. Copyright 2015 Health Administration Press25

The economic model predicts that regulations will  usually reflect provider interests,  eventually be captured by providers,  be inflexible and hard to change,  be designed to protect regulators, and  be insensitive to consumer goals. Copyright 2015 Health Administration Press26

Interest groups seek to  increase demand for members’ products. – ADA efforts to expand dental insurance – AMA efforts to prohibit midwifery  increase payments for members’ products. – Optometrists’ efforts to outlaw price ads – AMA support for any willing provider legislation – Case-by-case participation in Medicare  and reduce the price of complements. Copyright 2015 Health Administration Press27

Interest groups seek to  increase demand for members’ products,  increase payments for members’ products, and  reduce the price of complements. – AHA support for the Nurse Training Act – AMA support for “tort reform” Copyright 2015 Health Administration Press28

Interest groups seek to  restrict substitutes. – Hospitals try to limit ambulatory surgery centers. – Doctors seek to restrict practice by nurse practitioners.  limit increases in supply. – Many EU countries restrict opening pharmacies. – Most US states do not have reciprocal licensure. Copyright 2015 Health Administration Press29

Problems with Regulation  Suppliers eventually “capture” regulators. – Suppliers have information regulators need. – Suppliers have a continuing interest. Consumers do not. – Suppliers have an intense interest. Consumers do not. Copyright 2015 Health Administration Press30

Problems with Regulation: Favoring the Status Quo  New producers often lack power.  Political change is difficult.  Inaction is usually safe for regulators. Copyright 2015 Health Administration Press31

Is more regulation (in practice) better than less (in practice)?  Flawed unregulated markets have flaws. – Quality will be too high or too low. – Consumers will face high markups. – Poor will not be served.  Regulated markets – may not be better, and – will usually be less flexible. Copyright 2015 Health Administration Press32

Economists favor deregulation, but markets require rules.  To reduce information needs  To encourage consumers  To protect honest producers  To make imperfect agency less attractive Copyright 2015 Health Administration Press33

Markets  need rules to work. – Enforceable contract laws – Enforceable property rights laws Copyright 2015 Health Administration Press34

The emerging structure of healthcare in the United States is unique.  Competition among healthcare plans  Push to reduce public regulation  Extensive private regulation Copyright 2015 Health Administration Press35

But the ACA changed rules for insurers.  Guarantee issue and renewability  Limited rating variation – Area – Age (limited to 3 to 1 ratio) – Family composition – Tobacco use Copyright 2015 Health Administration Press36

But the ACA changed rules for insurers.  Set up exchanges  Established benefit tiers  Established essential benefits package  Standardized dependent coverage  And more Copyright 2015 Health Administration Press37

CONCLUSIONS Copyright 2015 Health Administration Press38

Healthcare Markets  Markets and regulations are imperfect.  Will new regulations improve outcomes? – An empirical question – Not answerable by ideology Copyright 2015 Health Administration Press39

Flawed regulations contribute to the inefficiency of healthcare markets.  Licensure  Malpractice laws that – reward hiding problems, – do not reward most victims of malpractice, and – encourage large legal fees  Bizarre taxation of health insurance  Unwarranted tax breaks for not-for-profits  Suppression of information Copyright 2015 Health Administration Press40

Can better public regulations  improve performance – at all? – more than private regulation?  be enacted? Sometimes yes and sometimes no. Copyright 2015 Health Administration Press41

Conclusions  Healthcare regulation is – important, and – widespread.  Its motivation – is ostensibly consumer protection, and – may be interest group protection.  Legislation and regulation are political acts. Copyright 2015 Health Administration Press42