Economics focus

An unhealthy burden

Jun 28th 2007
From The Economist print edition

America's health-care market is not as unfettered as it seems

TO MANY outside the United States, America's health-care system might seem an example of capitalism at its rawest. Europeans and Canadians enjoy universal health care and cheap drugs thanks to government-run systems, the argument goes, but the market-based approach taken by the world's richest nation leaves many millions uninsured and leads the rest to pay the highest drugs prices in the world. Such doubts are sure to be reinforced by this week's release of Michael Moore's “Sicko”, a much-trumpeted new film on health care that bashes the free-market Yankee model even as it praises the dirigiste alternative north of the border.

So is America's health system really red in tooth and claw? Hardly, according to a growing body of academic evidence. As a result of interference at the federal and state levels, health care is one of America's most heavily regulated industries. Indeed, its muddled approach to health-care regulation may act as a massive drag on the American economy—what one expert has called “a $169 billion hidden tax”.

Costing an arm and a leg

That figure comes from a path-breaking study* of a few years ago by Christopher Conover of Duke University. It looked at the many ways in which the American legal and regulatory systems affect the provision of health services and lumped them into five categories: medical torts; the Food and Drug Administration (FDA); insurance regulation; and the certification of both health professionals and health facilities. His team concluded that the overall benefit to society of $170 billion per year delivered by this system of oversight was far outweighed by the $339 billion in annual costs that it imposed (see chart). Even ignoring the cost of big federal tax breaks for employer-sponsored health insurance (which Mr Conover left out), his study estimated that the net cost of America's health regulations resulted in perhaps 4,000 extra deaths each year and was responsible for more than 7m Americans' lacking health insurance.

Building on this point, a forthcoming paper† by Michael Cannon of the Cato Institute, a libertarian think-tank in Washington, DC, investigates the biggest federal component of this regulatory burden: the FDA's oversight of pharmaceuticals. It notes that some 20 cents out of every dollar spent by consumers goes on purchases under the purview of the FDA, which it calls “one of the most pervasive federal agencies in the country.”

Citing the best evidence to date on the costs and benefits of FDA regulation, Mr Cannon argues that the agency “is too slow and demands too much testing”, ultimately harming consumers. He points out that drugs regulators can make two broad types of errors. First, they might approve a drug too quickly, only to find out after its launch that it is dangerous or even deadly. Second, they could delay the launch of a highly innovative drug by demanding onerous or unnecessary trials and thereby deny many needy patients a new therapy.

Proper regulation requires balancing these two risks, but the pitch may be queered by bureaucratic self-interest. If the regulator allows even one drug to slip through the approval process that later proves harmful to some people some of the time, a hue and cry is sure to follow. Look no further than the recent public backlash against the FDA after several deaths were linked to Vioxx, a blockbuster pain remedy made by Merck.

And yet the second (and probably bigger) risk of leaving people untreated because of restrictions on drugs rarely gets the regulators into trouble. As Mr Cannon puts it, “no FDA official has ever been fired or faced a congressional inquiry for delaying the approval of a promising new drug, however unjustified the delay.” What is more, he speculates, big drug firms may quietly acquiesce to this burdensome red tape because it acts as a barrier to entry against newcomers without the cash or lobbying power to navigate the FDA.

The FDA's caution may result in the biggest federal “tax” on health care identified by the Conover study but an even bigger component is to be found in America's distorted system of malpractice insurance, which is regulated at the state level. That is the conclusion of John Graham of the Pacific Research Institute (PRI), a think-tank in San Francisco. In a paper†† published this month, Mr Graham has taken Mr Conover's federal analysis and applied it to all 50 states. The idea is to rank which states allow Americans the greatest amount of “health ownership”.

Mr Graham's analysis concludes that because regulation of health insurance and overzealous pursuit of medical torts are both typically handled at the state level, states are to blame for most of that $169 billion annual burden imposed by excessive health-care regulation (as the chart also shows). The heavy-handedness, he notes, includes groups of surgeons being denied permission to open specialist clinics because rival one-size-fits-all hospitals invoke state regulations protecting their patch. Meanwhile, enterprising “nurse-practitioners” are blocked from offering simple treatments at inexpensive clinics by state rules requiring costly supervision by doctors.

New York—a liberal bastion and home to Hillary Clinton, who in the 1990s unsuccessfully advocated a sweeping reform of America's health provision—comes out rock bottom on the PRI ranking of health freedom. That will undoubtedly please conservatives who still deride her earlier proposals for a government-run health system, which they dub “HillaryCare”. But the unstated and awkward inference of these studies will not. If America's health-care regulations are as costly as they claim, the system is merely masquerading as a free-market model and may be no better than others.