In discussions about health care systems, the role of regulation often comes to the forefront. A recent post by Kevin Corcoran examines this topic, featuring a provocative comment from Steve, a frequent commentator. Steve questions the relationship between the quality of health care and the extent of regulation, raising significant points worth exploring.
“Is there a health care system in the world that would be regarded as first world quality that does not have health care heavily regulated? Is it just a coincidence that in the countries where health care is not heavily regulated that health care is generally poor?”
At first glance, one might dismiss Steve’s remark as an example of the Bandwagon Fallacy. However, such a dismissal would overlook two vital factors.
First, the presence of a logical fallacy in an argument does not automatically invalidate it; rejecting it solely on this basis constitutes a Fallacy Fallacy.
Second, Steve’s observation resonates with a common notion among economists: if a superior method existed, it would likely be implemented. This is akin to the classic “$20 bill on the sidewalk” joke where two economists walk by a $20 bill. When one economist bends down to pick it up, the other cautions him, saying, “There can’t be a $20 bill on the sidewalk; someone would have already picked it up.” This humorous anecdote illustrates the folly of taking economic models too literally, while acknowledging there’s some truth to it—genuine profit opportunities are scarce precisely because they tend to be swiftly seized.
This situation contributes to high business failure rates, as suggested by statistics. Steve appears to make a similar argument: if stringent health care regulations were indeed detrimental, why do the wealthiest nations enforce them so rigorously? If governments seek to enhance health care, would they not implement a regulatory framework that yields optimal results? These are compelling questions.
When analyzing situations economically, I begin with the perspective that the current conditions are efficient—my null hypothesis, if you will. I assume that all profit opportunities are being utilized and that, at this moment, market failures are absent. From here, I assess how accurate this assumption is in reflecting reality, utilizing methodological individualism and economic reasoning to guide my thoughts.
One of David Henderson’s 10 Pillars of Economic Wisdom posits that incentives matter. These incentives do not control minds, but they do influence behavior. The core tenet of the $20 bill joke revolves around the market’s ability to motivate individuals to seek out unclaimed benefits. In a functioning market, those who generate value typically reap its rewards, thus fostering profit-seeking behavior.
In contrast, legislators and regulators do not encounter the same economic incentives. Regardless of their good intentions, they do not capture most of the value that a well-regulated health care system generates. Cost savings do not typically enhance their budget. Efficiencies only matter to the extent that they personally benefit. Ignoring any knowledge issues, there is no inherent economic motivation for regulators to establish a blend of regulations that maximizes health care outcomes. As a result, it cannot be assumed that the current regulatory framework is optimal, even if it is widely adopted.
Moreover, there are often incentives for regulators and legislators to maintain ineffective regulations, even when they acknowledge these regulations have not achieved their objectives. Existing regulations might create jobs aimed at addressing the issues they were supposed to solve, leading to a preference for adding new regulations rather than repealing old ones. This can result in a tangled web of regulations that conflicts with one another, particularly evident in the U.S. health care sector, where the regulations appear more like a chimera than a cohesive system.
Another consideration is the concept of diminishing marginal returns concerning regulations. In economics, this principle states that, all else being equal, each additional unit of input yields increasingly smaller benefits.
The renowned economist Ronald Coase highlighted a similar trend concerning regulation in a 1997 interview. He remarked:
“When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies–perhaps all the studies–suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn’t mean that if we reduce the size of government considerably, we wouldn’t find then that there were some activities it did well. Until we reduce the size of government, we won’t know what they are (emphasis added).”
It is plausible that we have surpassed the threshold of diminishing marginal returns in health care regulations. The ideal level of regulatory oversight is unlikely to be zero; conversely, it is also improbable to remain at the approximately 50,000 federal regulations on the books as of 2018. Initially, these health care regulations likely yielded significant positive benefits. However, considering the incentive dynamics discussed earlier, we could reasonably suspect that we are now overregulated—across all major countries facing similar challenges. Because regulators reap benefits without facing the costs of regulations, they are incentivized to perpetuate and add regulations, even when the net effects are detrimental. It is conceivable that some regulations could be eliminated, leading to improved health care outcomes.
In conclusion, while regulation plays a critical role in shaping health care systems, the relationship between regulation and quality is complex. Reflecting on economic incentives and the potential for inefficiencies can provide valuable insights into how we might navigate and improve the current state of health care regulation.
