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Trends, Costs  in Healthcare

Comments from Cato on Regulation

The health industry is often viewed as among the most heavily regulated sectors of the U.S. economy.  Using a “top-down” approach, one can arrive at a “back-of-the-envelope” estimate that health services regulation imposes an annual cost of $256 billion per year (with a range of $28 billion to $657 billion), suggesting that health services regulations could increase estimates of overall regulatory costs by more than 25 percent.

A far more accurate “bottom-up” approach suggests that the total cost of health services regulation exceeds $339.2 billion. This figure takes into account regulation of health facilities, health professionals, health insurance, drugs and medical devices, and the medical tort system, including the costs of defensive medicine. Moreover, this approach allows for a calculation of some important tangible benefits of regulation. Yet even after subtracting $170.1 billion in benefits, the net burden of health services regulation is considerable, amounting to $169.1 billion annually. In other words, the costs of health services regulation outweigh benefits by two-to-one and cost the average household over $1,500 per year.

The literature synthesis in this study includes a broad range of health-related regulations, covering the gamut from health facilities regulation, health-professionals regulation, health insurance regulation, Food and Drug Administration regulation, and the medical tort system.

Access-related facilities regulations cost $11.8 billion but provide benefits of only $3.8 billion. Quality-related facilities regulations imposed a cost of $21.8 billion and provided benefits amounting to $4.0 billion. Medicare GME payments impose a net cost of $4.3 billion.

Continuation of coverage mandates have a net cost of $15.0 billion, while benefit mandates have a net cost of $13.5 billion. These quality related insurance regulations cost $7.2 billion but provide benefits of only $3.7 billion, mainly because of the $3.3 billion net cost imposed by patient protection regulations. FDA regulation imposes an annual cost on society of $49.0 billion and annual benefits of $7.1 billion.  The lion’s share of this cost represents the value society places on the lives that are lost while waiting for better pharmaceuticals to be approved. The medical tort system imposes costs of $113.7 billion but provides benefits amounting to $33.0 billion.

Health services regulation adds to—and often dwarfs—other costs imposed by government intervention in the health care sector.  For example, this analysis has ignored tax policy as it relates to health care. Yet federal and state tax subsidies for health insurance in 2002 amounted to an estimated $177 billion, and generated roughly $106 billion in efficiency losses — an amount that would increase the estimate of the cost of health services regulation by three-fifths had it been included.

On a smaller scale, a recent study of Medicare found that $26 billion of Medicare expenditures in 1996 (equivalent to $34 billion in 2002) is wasted.

There are 6.8 million uninsured whose plight arguably might be attributed to excess regulatory costs, or roughly one in six of the average daily uninsured.

How has the burden of health services regulation changed over time?

Mark Crain and Thomas D. Hopkins have shown that between 1970 and 2000, federal regulatory agency budgets grew by 203 percent in real (inflation-adjusted) terms, or 3.7 percent annually.  

 FDA expenditures during this same period grew nearly ten-fold in current dollars, or 3.3 percent annually in real terms.85 Real PHCE grew 5.4 percent annually during this same period.  

Thus it seems likely that the cost of health services regulation grew at least as fast if not faster than federal regulatory costs in general.  In fact, if the costs of health services regulation had grown only as fast as general regulatory costs rather than PHCE, this would imply that net regulatory costs amounted to 14.4 percent of personal health care expenditures 30 years ago, compared to 8.9 percent today.