We often hear that governments in the United States should regulate health care more because free markets have made it more expensive than in other countries. It’s true that medical care in the United States is usually more expensive than in other countries, even after accounting for differences in wealth. But the cause is not the free market. For more than half a century, there hasn’t been a free market in health care because governments at both the federal and state levels have heavily regulated doctors, hospitals, and drugs. We propose abolishing virtually all of this regulation so that doctors’ and hospitals’ services and drugs would be more plentiful and cheaper.
This is one of the opening paragraphs of Charles L. Hooper and David R. Henderson, “A Cure for Our Health Care Ills: The Supply Side,” the Econlib Feature Article for October.
One of my favorite paragraphs is this one, written by Charley:
While the majority of physicians are not members of the American Medical Association, the AMA has successfully persuaded the government to limit the freedom of nurse practitioners, midwifes, chiropractors, foreign doctors, and retail clinics to provide economical medical care.7 Foreign medical graduates fill about 15 percent of residency positions. Many more trained foreigners would prefer to practice medicine in this country but are not allowed to under laws that have little or nothing to do with professional competence.8 Even if foreign physicians are allowed to immigrate here, to scale the imposing wall of rules facing them—verifying their credentials, proving English proficiency, passing the United States Medical Licensing Examination, working or volunteering with the purpose of acquiring letters of recommendation, and winning a coveted residency position—takes about a decade. Many simply give up.
One of the difficulties in writing an article such as this is that there’s so much to cover. We reached a little beyond the usual upper word-count limit for Econlib Feature Articles and had a record number of footnotes to back up our case, and still didn’t do a complete job.
Read the whole thing.
READER COMMENTS
Roger McKinney
Oct 1 2018 at 12:26pm
Excellent! The US has created unlimited demand through Medicare and Medicaid. Limited supply with unlimited demand causes high prices and corruption.
Alan Goldhammer
Oct 1 2018 at 4:10pm
Generally good points except for the ones made in the pharmaceuticals section and I’ve commented in the past to Mr. Hooper about some of the problems in previous analyses. The Pelzman book that is referenced is wildly out of date and misses the big changes within the FDA in terms of increased personnel brought about by the Prescription Drug User Fee Act. I have yet to see any libertarian proposal for what should replace the current approval system based on proof of safety and efficacy. One thing that is often overlooked by commenters on the current system is the validity of the “FDA Defense” in product liability litigation. If you eliminate this you will jam the court system up so fast with lawsuits (some valid but a lot not) any time a patient suffers a side effect or does not get the therapeutic outcome they hoped for. the only alternative to this is to go to a complete “informed consent” approach where the patient has to affirm that the drug may “not” be safe and effective. Do the two of you have an alternative?
I also see the Canada example of patients experiencing delays in treatment. Remember that Canada does not have an insurance system run by the national government but relies on the individual provinces. Certainly all of our friends in Toronto and Montreal report no issues or dissatisfaction in care. they also don’t come to the US for healthcare either.
David Henderson
Oct 1 2018 at 5:42pm
Generally good points
Thanks.
except for the ones made in the pharmaceuticals section and I’ve commented in the past to Mr. Hooper about some of the problems in previous analyses.
Yes, you have.
The Pelzman book that is referenced is wildly out of date and misses the big changes within the FDA in terms of increased personnel brought about by the Prescription Drug User Fee Act.
It’s definitely dated–by the way, it’s Peltzman–but I think his numbers still hold up pretty well. Also, while the PDUFA has helped, the wait is still about 10 to 12 years.
I have yet to see any libertarian proposal for what should replace the current approval system based on proof of safety and efficacy.
Then do a search on EconLog. Look at blog posts by me and then search on the terms “Hooper” and “FDA” and you’ll find a lot of blog posts on this, with reference to other people’s work. Or do a search on “Dan Klein” and “Alex Tabarrok” with respect to the FDA.
One thing that is often overlooked by commenters on the current system is the validity of the “FDA Defense” in product liability litigation. If you eliminate this you will jam the court system up so fast with lawsuits (some valid but a lot not) any time a patient suffers a side effect or does not get the therapeutic outcome they hoped for.
Good point, but there’s a simple solution. Firms that think it’s easier to go through the FDA process and invoke the “FDA Defense” will still be able to do so. Firms that think it’s worth speeding up the drug and not invoking the FDA Defense will do so.
the only alternative to this is to go to a complete “informed consent” approach where the patient has to affirm that the drug may “not” be safe and effective.
It’s not the only alternative but it’s a good one. Thanks for pointing it out. By the way, Sunstein and Thaler talk about–and advocate–this in their book Nudge.
Do the two of you have an alternative?
Again, do a search and you’ll see that we’ve discussed this a lot.
I also see the Canada example of patients experiencing delays in treatment. Remember that Canada does not have an insurance system run by the national government but relies on the individual provinces.
True, but it’s run by provincial governments that are tightly constrained by the Canada Health Act of 1984.
Certainly all of our friends in Toronto and Montreal report no issues or dissatisfaction in care. they also don’t come to the US for healthcare either.
As a scientist, I’m guessing you see the problem with this kind of argument. I’m guessing you don’t have more than 50 friends in Toronto and Montreal. That doesn’t compare to the thousands across Canada in the Fraser studies.
Charley Hooper
Oct 2 2018 at 9:09pm
The Pelzman book that is referenced is wildly out of date and misses the big changes within the FDA in terms of increased personnel brought about by the Prescription Drug User Fee Act.
Are you claiming that FDA requirments previously caused a large reduction in the number of new drug approvals, but that isn’t the case anymore? Has there been a new study, like Sam Peltzman’s, that shows how FDA actions caused the number of new drug approvals to increase relative to the baseline?
Ed Bradford
Oct 2 2018 at 1:56am
Drug prices are under absolute control of the Pharma’s. They set any prices they want and our government simply pays for them at the asked price (not quite exactly true but true for all patented drugs.) It is not a surprise that the US pays from 5x to 20x the price for drugs in America than the same drugs sold abroad. What is needed is export duties on pharma patents and drugs. That would even out the prices of drugs throughout the world and would lower the prices all patent drugs significantly in America (while raising them abroad).
Danno
Oct 2 2018 at 11:55am
What is needed is export duties on pharma patents and drugs.
The Export clause of the U.S. Constitution prevents this. Look up United States v. IBM (1996)
“…the Export Clause prohibits even nondiscriminatory taxes on exports.”
https://en.wikipedia.org/wiki/Import-Export_Clause
Charley Hooper
Oct 2 2018 at 6:29pm
Biopharma companies set drug prices, but they set both U.S. and ex-U.S. prices. The fact that prices are higher in America is not an accident. Why don’t manufacturers set a price of, say, $1 million per pill? They have competitors and customers and both force companies to set lower prices. It is also important to note that drug companies set the list, or wholesaler acquisition price, but the real price they get—the net price—is a function of the WAC price and any discounts that are negotiated or mandated.
Why are many ex-U.S. prices lower? Monopsony. Foreign governments, wary of busting their budgets, may decline to purchase good drugs that their citizens would love to have.
Prices are based on the market where the drug will be sold, not the country where the drug is made. The industry is international and it is possible to change the manufacturing location of a given drug, weakening the effect of any proposed export duties.
SaveyourSelf
Oct 4 2018 at 11:59am
While the services provided by nurse practitioners, midwifes, and chiropractors, and retail clinics may be economical, they are not equivalent to those provided by physicians. There is, therefore, justification in limiting their scope of practice.
Whereas limiting the number of foreign medical graduates in the US does limit the supply of doctors and thereby drive up prices, a far more significant limitation on the supply of doctors in the USA is the restrictions on the number of US medical graduates medical schools are permitted to train. This graduation rate is set by a subcommittee of the American Medical Association. I recently spoke to a member on that committee and she told me the rates were recently increased. So much so, in fact, that there were 3000 US trained medical graduates who could not find residency slots after graduation last year. It appears the new bottleneck in education is residency. This is undoubtedly a move in the right direction, but it does not fix the ultimate problem – price manipulation via barriers to entry.
[Full disclosure: I am a foreign medical graduate practicing in the US.]
Charley Hooper
Oct 5 2018 at 4:21pm
Thank you for your perspective and information. That’s helpful.
Comments are closed.