In a recent post by Kevin Corcoran, a notable commentator, Steve provocatively asks:
“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?”
One might be tempted to dismiss Steve’s remark as a classic example of the Bandwagon Fallacy. However, such a dismissal would be misguided for a couple of compelling reasons:
First, just because an argument features a logical fallacy doesn’t automatically render it incorrect. Indeed, to dismiss it this way would itself be a logical misstep, known as the Fallacy Fallacy.
Second, Steve’s comment echoes a familiar refrain among economists: if a better method existed, it would already be in use. This brings to mind the age-old “$20 bill on the sidewalk” jest. In this anecdote, two economists stroll along when one spots a $20 bill lying on the ground. As he bends to retrieve it, his companion halts him: “There can’t actually be a $20 bill on the sidewalk; if there were, someone would have picked it up by now.” The first economist nods wisely, and they continue walking.
While this is, of course, humorous, it underscores the folly of taking theoretical models at face value. Yet, there is a kernel of truth in it. If genuine profit opportunities are evident, they will be seized swiftly. The scarcity of such opportunities is one reason for the high failure rate of businesses. This statistic highlights one of the reasons many businesses falter. The argument is nuanced—Kevin himself provides an insightful exploration of its subtleties in a different post. It serves as a general principle, not an absolute rule. Profit opportunities do, indeed, exist, and some can be substantial. However, failures persist, obstructing potential mutually beneficial exchanges (which will be discussed further below). Thus, Steve’s inquiry raises pertinent points: if stringent health care regulation were so detrimental, why do affluent nations embrace it so fervently? If governments aim to enhance healthcare, wouldn’t they select the most effective regulatory mix?
When I approach such topics through an economic lens, I begin with the premise that the current system is efficient—my null hypothesis, if you will. In this view, I assume that all profit opportunities have been exhausted, and at present, the market is devoid of failures. The task then becomes evaluating the likelihood that this assumption accurately reflects reality. This is where the principles of methodological individualism and economic reasoning come into play.
Among David Henderson’s 10 Pillars of Economic Wisdom is the assertion that incentives matter. While these incentives do not constitute mind control, they undeniably influence behavior. A key premise of the $20 bill anecdote is that the market incentivizes individuals to discover such hidden treasures. In a market-driven environment, where the benefits predominantly accrue to those who create value, individuals are motivated to pursue those rewards. In simpler terms, the ability to retain profits fuels profit-driven behavior.
In contrast, legislators and regulators operate under a different set of economic incentives. Regardless of their intentions, they do not reap the majority of the enhanced value produced by a well-regulated healthcare system. Cost savings do not augment their budgets, and efficiencies benefit them only insofar as their personal healthcare improves. Even setting aside issues of knowledge and understanding, there’s little economic motivation for regulators to select the regulatory mix that optimizes healthcare outcomes. This suggests that the existing regulatory framework may not be optimal, even if it appears so simply because “everyone is doing it.”
In fact, there are often motivations for regulators and legislators to perpetuate ineffective regulations, even when they recognize these regulations have fallen short. Certain regulations create jobs aimed at rectifying the problems they were supposed to solve, leading to a scenario where, upon acknowledging a regulation’s failure, the preferred response is often to impose additional regulations rather than repeal existing ones. Thus, rather than a clear slate of regulations, we often see a convoluted tapestry of new rules layered over outdated ones, resulting in contradictions that are then “resolved” through further regulation. This is particularly evident in the U.S. healthcare sector, which is marred by a plethora of conflicting regulations that create a chaotic regulatory landscape.
Another critical aspect to consider is the principle of diminishing marginal returns from regulation. This economic law posits that, all else being equal, each successive unit of input yields less output (or benefit) than the previous one.
The late Ronald Coase astutely observed a related phenomenon concerning regulation. In a 1997 interview with Reason Magazine, he stated:
“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 seems likely that we have surpassed the point of diminishing marginal returns in healthcare regulation. While the ideal level of regulation isn’t zero, it also certainly isn’t the approximately 50,000 federal regulations currently in force (as of 2018). Initially, healthcare regulations likely contributed positively to outcomes (with benefits surpassing costs). However, considering the incentives discussed earlier, it is reasonable to contend that we—and indeed all major countries facing similar pressures—are experiencing overregulation. Since regulators do not bear the costs of their regulations but rather reap the benefits, they are incentivized to keep piling on more, even when the net impact is detrimental. It stands to reason that there are regulations we could eliminate to enhance healthcare outcomes.
