In defense of health care regulation

The following is co-authored by Austin Frakt and Aaron Carroll. It first appeared on Ezra Klein’s blog at The Washington Post.

In two posts on this [Ezra Klein’s] blog, Karl Smith wrote that the supply side of health care has a lot to do with the rising cost of care. We agree. Health-care costs will not be tamed without addressing the provision of care. One issue Smith raised is whether that should be done by loosening regulation in health care.

[T]he current health-care system is riddled with regulation, litigation and occupational and pharmaceutical licensing. We have levels heaped upon levels of protection against bad drugs, bad doctors and bad health-care consumers.  While all of these rules provide us with a sense of security, they most likely undermine the evolution of health care and make what care we do have outrageously expensive.

It is no doubt true that regulation limits innovation. However, “innovation” is not unambiguously welfare increasing, and this fact is not confined to health care. For example, what do we now make of the lightly regulated innovations in the financial sector over the last decade or so? It seems to us, and many others, that in that domain a little more protection through regulation is in order. Similarly, in a recent NBER paper,Charles Jones pointed out that if the Cuban Missile Crisis had ended in nuclear war, as it very well could have, we would have a decidedly different view of the atomic and nuclear innovations that had occurred in the preceding 30 years. If not for some government diplomats, the costs would have outweighed the benefits.

Notwithstanding the substantial benefits bestowed upon society by medical science, innovation in health care is fraught with uncertainty, as well as high costs. The uncertainty is multifaceted. It includes, on the one hand, whether a new drug, device, or technique will be a financial success and, on the other, whether it will improve health. The latter is a matter of science; the former depends in large part on marketing. Both aspects are in need of regulation.

In a now-infamous 40-year study that began in 1932, 600 low-income, African American men were provided free medical care, meals and burial insurance, but never told if they had syphilis. Two-thirds of them did. Even though treatment for the disease existed during the study, it was not offered. This study, known as the Tuskegee syphilis experiment, is now the prime example of unethical treatment of human subjects in medical research. As a consequence of the appropriate outrage that followed the Tuskegee experiment, health-care research is now more regulated via institutional review boards (IRBs), as required by the National Research Act.

In light of this history – and this was not an isolated incident – we should be careful about deregulating the enterprise of health-related scientific research. There are other aspects relating to the science of medicine that could use more regulation. One of us (Aaron) posted on just this point earlier in the week, echoing Rita Redberg’s recent NY Times op-ed. Both illustrate how we squander substantial resources on ineffective health-care treatments. Is this due to too much regulation or too little?

Ever since Kenneth Arrow’s seminal 1963 paper on the welfare economics of health care, health economists (among others) have recognized the information asymmetry in the provider-patient relationship. It’s well established that patients are often unable to distinguish between effective, helpful health care and ineffective, wasteful care. Consequently, much of the decision-making in the realm of health care is influenced by physicians, giving rise to huge variations in practice patterns. In many cases, little scientific guidance exists, and physicians do what they learn and practice by accumulated wisdom of an unscientific type (which is not to say it is wrong, but it isn’t provably right). And, yes, they are generally highly rewarded for their work, whether based on sound science or, as is sometimes the case, not. Imposing more science on the practice of medicine is a role for more regulation, not less.

Smith makes another excellent point about health care being an information and communication technology industry. However, right now, it is in the business interests of many involved in medicine to thwart information sharing and communication. If a company creates an electronic medical record, it usually doesn’t want it to talk to anyone else’s. An interoperable EMR system can mean lost customers; it opens the door to the possibility that providers might buy a competitor’s program. It’s much better for an EMR company if providers are forced to buy their laboratory system, their scheduling system, and their radiology system.

Yes, that means that all the doctor’s offices can’t interface with the system at the hospital, or the emergency department, or with each other, but too bad. That’s how the unregulated marketplace works. We all suffer for it.

Could we not use more regulation to provide incentives for physicians to practice according to guidelines informed by science? Could we not usemore regulation to develop, fund and follow the results of comparative-effectiveness research? Could we not use more regulation to set standards for EMR systems so that information could flow more freely?

Bloodletting doesn’t work. Yet with no controls over the system, we’re sure someone would push it, or some snake-oil equivalent, on unsuspecting patients. The history of medicine suggests that this, or something like it, is far from implausible. In fact, it suggests that such things are happening today (useless knee surgeries and the like).

Remember ThalidomideFen-phenVioxx? They’re all potent drugs that harmed patients, and they were pulled from the market due to regulatory oversight.

We could go on.

So, yes, by all means, we need to involve providers – the supply side – in any solution to our health-care spending problem. But we should be careful with “deregulation.” To be sure, more regulation isn’t always better regulation (regulatory capture happens), but less isn’t always the answer, either. We need to be smarter about regulating. Not all regulation is created equal. And, in health care, if not elsewhere, much of it does far more good than harm.

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