Federal Regulations Slow Start-ups and Health Care Innovation

NCFCA debaters may reasonably be skeptical of basing an affirmative case on reducing state regulation of hair braiders and other small-scale entrepreneurs. For one thing, they are at the state level, not federal. And over-regulation could be addressed by state legislation, rather than state or federal courts invalidating existing regulations. Plus, though clearly a case of injustice, debate judges might see too little economic gain for affirmatives proposing significant reforms encouraging Federal courts to intervene in such matters.

However, an earlier post noted on the overall costs of excess federal regulations–drawing from NAM’s Cost of Federal Regulations and CEI’s Ten Thousand Commandments)–the financial cost of lost production and income are estimated at an astounding two trillion dollars each year.

Jared Meyer, in Forbes online, July 23, 2015, “Government Is Standing In The Way Of Millennial Entrepreneurs,” reviews the impact on young people of excessive financial regulations:

Equity-based funding, though it is more difficult to secure, is often more attractive than debt and can be very beneficial for young start-ups. Firms funded by angel investors or venture capitalists gain from the guidance and networks of their investors. However, the Securities and Exchange Commission implements strict regulations on equity-based investment.

Small businesses, including start-ups, can gain exemptions from the SEC’s rules. Rules 504, 505, and 506 of Regulation D of the Securities Act of 1933 exempt certain companies, but, despite these exemptions, the restrictions on equity-based investment can severely limit a start-up’s ability to raise sufficient capital. This is a major reason why less than one percent of start-ups are funded by venture capitalists. 

Next Meyer looks at excessive state and federal labor regulations:

Even if entrepreneurs are able to fund their businesses, labor regulations can prevent projects from getting off the ground. One example of this is occupational licensing. While it may be in the interest of public safety for doctors and EMTs to be licensed, it does not make any sense for low-risk occupations—such as African hair braiders. …

 Occupational licensing restrictions discourage young entrepreneurs from pursuing their dreams. Instead of starting their own companies, they may choose to work in professions that do not require licensing. University of Minnesota professor Morris Kleiner and Princeton University professor Alan Krueger have estimated that one out of three American workers in 2008 had to be licensed or certified by the government to earn a living, up from one out of twenty in the 1950s. 

Meyer looks at the cost other regulations, including those proposed on overtime pay and new federal contractor vs. employee directives. The regulations small businesses face go on and on. Large business face these and other regulations, but are generally able to allocate staff and consultants to figure out how to comply. These efforts are costly and often counterproductive, and make U.S. firms less competitive against foreign competition.

Meyer refers to regulation of Emergency Medical Technicians (EMTs) and doctors. But there is a larger story here too. The same special interest forces that try to limit hair braiders have long held power over doctors, nurses, and medical schools at the state level. Just as hair braiders wonder why they should have to pay for year of cosmetology training in areas (like chemical hair bleaching) that are irrelavent to their work, so potential medical care providers question one-size-fits-all medical schools.

Allowing Walmart, Walgreens, and other firms to finance new medical schools to train more doctors and medical diagnostic professionals would allow inexpensive (or free) access to entry-level medical services across the country. A health care professional who can diagnose medical problems doesn’t have to have the skills to perform surgery, for example.

John Goodman asks in his July 24, 2015 Forbes column “What Does Uber Medicine Look Like?” Goodman begins:

Uber is completely revolutionizing the market for urban transportation. Could a similar revolution occur in other fields, including the market for medical care? That’s what University of Chicago economist John Cochrane wondered the other day. But we no longer have to speculate. Uber medicine has already arrived. 

There are a number of firms that will bring a doctor to your doorstep at the flick of a cell phone app, including Doctors Making House Calls (North Carolina), Pager (New York City), Heal (Los Angeles) and Medicast (Seattle).

Again though, the limited supply of doctors and diagnostic professionals, and the heavy hand of state regulations, limits the future of Uber medicine.

Back to the Federal Court system topic, should Federal courts insist on reforms or invalidate state regulations limiting medical schools, the provision of medical services, and cross-state medical insurance? The February 16, 2015 WSJ article, “Innovation is Sweeping Through U.S. Medical Schools” notes the antiquated operation of medical schools (and that some are reforming):

Critics have long faulted U.S. medical education for being hidebound, imperious and out of touch with modern health-care needs. The core structure of medical school—two years of basic science followed by two years of clinical work—has been in place since 1910. 

Now a wave of innovation is sweeping through medical schools, much of it aimed at producing young doctors who are better prepared to meet the demands of the nation’s changing health-care system. 

Obviously there have been innovations over the last century in medical schools, but not nearly enough. And more important, there are way too few medical schools, and too many regulations limiting innovative medical clinics.

A measure of economic freedom has been allowed in Oklahoma, where the private and for-profit Surgery Center of Oklahoma operates. This Reason article, and the video below, explain. Here is an example of dramatic cost differences for the same procedure performed by the same doctor:

Reason obtained a bill for a procedure that Dr. Sigmon performed at Integris in October 2010 called a “complex bilateral sinus procedure,” which helps patients with chronic nasal infections. The bill, which is strictly for the hospital itself and doesn’t include Sigmon’s or the anesthesiologist’s fees, totaled $33,505. When Sigmon performs the same procedure at the Surgery Center, the all-inclusive price is $5,885. 

This Report examines the role of competition in addressing these challenges. The proper role of competition in health care markets has long been debated. For much of our history, federal and state regulators, judges, and academic commentators saw health care as a “special” good to which normal economic forces did not apply. Skepticism about the role of competition in health care continues.

This Report by the Federal Trade Commission (Commission) and the Antitrust Division of the Department of Justice (Division) (together, the Agencies) represents our response to such skepticism. In the past few decades, competition has profoundly altered the institutional and structural arrangements through which health care is financed and delivered. Competition law and policy have played an important and beneficial role in this transformation. Imperfections in the health care system have impeded competition from reaching its full potential. These imperfections are discussed in this Report.

In an Investor’s Business Daily article a decade ago Christopher Conover looked at the costs and nature of health care regulations and notes a key reform is rarely even considered:

… Unfortunately, there is little discussion of one policy response that would significantly lower health care costs: doing away with outmoded and questionable health care regulations that raise prices but produce little if any benefit.

As one health economics textbook puts it, “the U.S. health care system, while among the most `market oriented’ in the industrialized world, remains the most intensively regulated sector of the U.S. economy.” Regulation is taxation by another name. Instead of taxing private resources to fund government spending, regulation directs how private individuals use those resources. The costs of regulation are the benefits we would derive from alternative uses of those resources.  

And Conover notes the overall costs of over-regulation in 2002:

Our review of the literature on 47 different types of health care regulation suggests their total cost was roughly $339.1 billion in 2002. After subtracting the $170.1 billion in benefits that we calculate those regulations provide, we find that health care regulation places a net burden on society of $169.1 billion annually. 

Regulatory costs are significantly higher today, as is the inconvenience and costs for everyday people, especially those with low or middle income who find it harder and more expensive to purchase medical care and health care insurance. Should the federal courts take steps to protect the economic freedom of would-be doctors, nurses, and medical schools from excess state regulations?

Sue Blevins writes on these issues in a 1995 Cato Institute study. Little has changed since then with state and federal health care regulation:

Nonphysician providers of medical care are in high demand in the United States. But licensure laws and federal regulations limit their scope of practice and restrict access to their services. The result has almost inevitably been less choice and higher prices for consumers.

Safety and consumer protection issues are often cited as reasons for restricting nonphysician services. But the restrictions appear not to be based on empirical findings. Studies have repeatedly shown that qualified nonphysician providers–such as midwives, nurses, and chiropractors–can perform many health and medical services traditionally performed by physicians–with comparable health outcomes, lower costs, and high patient satisfaction. 

Licensure laws appear to be designed to limit the supply of health care providers and restrict competition to physicians from nonphysician practitioners. The primary result is an increase in physician fees and income that drives up health care costs. 

The history of medical regulation in the United States is a long one, and it may be difficult to unravel rapidly. The various articles and videos linked in this post can give students an introduction to the topic. My overall intent here is to offer examples of a high costs of economic regulations in health care to support the injustice claims with smaller economic costs caused by over-regulating hair-braiders and start-up entrepreneurs.

[Update: more from Kaufmann Foundation here: “Occupational Licensing: A Barrier to Entrepreneurship” and “Occupational Licensing is Holding Back the American Dream.”)

Here is short EconomicFreedom.org video “Diagnosis Unknown: Healthcare Uncertainty Paralyzes U.S. Entrepreneurs” on effect of of high and uncertain health care costs on U.S. businesses: