March 18, 2015

Three Prescriptions for Better Health Care

Summary

The Supreme Court recently heard oral arguments in King v. Burwell, another case involving the Affordable Care Act (a.k.a. "Obamacare"). If the Court decides that the law's words mean what they say, then federal subsidies for individuals will be available only in states that have established insurance exchanges. For those who live in the 36+ states that have chosen not to set up their own exchanges, this presents a problem.

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The Supreme Court recently heard oral arguments in King v. Burwell, another case involving the Affordable Care Act (a.k.a. "Obamacare"). If the Court decides that the law's words mean what they say, then federal subsidies for individuals will be available only in states that have established insurance exchanges. For those who live in the 36+ states that have chosen not to set up their own exchanges, this presents a problem.

First the ACA makes insurance more costly by imposing mandates on insurers. Then it requires everyone to buy this artificially expensive product. Many believe the subsidies were an attempt to entice states to set up their own exchanges -- if they did so, they could shift some of this artificially high cost from state consumers to federal taxpayers (never mind that they are one and the same). But if the Court rules against the government, consumers in many states will face higher insurance costs without the benefit of taxpayer support. This means that it will fall to state leaders to find new ways to reduce the costs of health care.

Liberals, conservative, and libertarians agree on the goals: Patients should have access to innovative, low-cost, and high-quality care. And though another round of federal reform may be years off, a number of state-level changes can move us closer to a competitive and patient-centered health-care market, making it possible to realize these shared aspirations.

In a new paper published by the Mercatus Center at George Mason University, we identify three areas for reform: States can eliminate certificate-of-need laws, liberalize scope-of-practice regulations, and end the regulatory barriers to telemedicine.

Certificate-of-need (CON) laws, found in 35 states and the District of Columbia, require individuals looking to open a new health-care facility or expand an existing facility to first obtain permission from a regulator. To do so, they must prove to the regulator that their community "needs" this additional service or facility. Although CON laws were originally intended to minimize costs to Medicare and Medicaid by limiting duplicative procedures, the balance of evidence suggests that these laws fail to contain costs and, by restraining competition, may actually increase costs.

The CON approval process is ripe for anti-competitive manipulation. It allows incumbent providers to testify against their would-be competitors, and statutes often direct regulators to explicitly protect the established facilities. CON laws create formidable barriers to entry. In Virginia, one doctor spent five years and $175,000 navigating the CON approval process trying to add a second MRI machine to his office. If CON laws increase costs and are prone to protect entrenched interests, why do they continue?

One reason is that many well-meaning supporters believe CON laws encourage additional care for the needy. But the evidence suggests this isn't true. Recent research by George Mason University economist Thomas Stratmann and Ph.D. student Jacob Russ finds that CON laws are associated with fewer hospital beds and MRI services, and they don't correlate with increased access to care for the needy. Allowing providers to enter and expand their operations without first asking the permission of their competitors' friends would be a first step toward a more competitive and patient-centered health-care market.

States can also reform scope-of-practice laws. These regulations, which differ from state to state, limit the tasks nurses, nurse practitioners, physicians' assistants, and many other health-care providers may undertake when caring for patients. They are said to protect consumers, but evidence suggests they protect certain medical-care providers from competition and fail to improve health quality. Limits on scope-of-practice constrict the supply of health care and contribute to the shortage of primary-care providers in the United States.

A recent National Bureau of Economic Research study analyzed the effects of scope-of-practice regulations on a variety of dimensions including wages, employment, costs, and the quality of medical services. The authors found that restrictive state regulations on nurse practitioners increase the cost of a well-child exam by about 16 percent, and have no discernible effect on outcomes such as infant mortality or malpractice premiums. These findings are consistent with those of previous research. A state that liberalizes its scope-of-practice regulations can expect its citizens to pay lower costs for better access to health care.

A third promising reform would be to remove the regulatory barriers to telemedicine. Telemedicine is an emerging innovation that uses technology to remotely diagnose, treat, and monitor patients. It promises to allow patients better access to high-quality care with greater efficiency. While technology has changed the way many other industries -- from retail to air travel -- deliver their services, our colleague Robert Graboyes shows that such convenient and cost-saving changes largely bypass health care.

Telemedicine may change this, but many states have policies standing in the way. Some, for example, require doctors to perform in-person examinations before writing prescriptions; others won't allow a diagnosis without an in-person visit; and still others discriminate against out-of-state providers. States should remove these barriers and allow the benefits of telemedicine to expand the options for delivering care.

Health-care policy should be about patient needs, not about politics. While federal reform is hopelessly politicized, states have a unique opportunity to make meaningful change to the way health care is provided. We recommend states focus on repealing certificate-of-need laws, easing restrictions on scope-of-practice, and removing barriers to telemedicine. Seizing this opportunity for change will allow competitive forces to bring innovation to health care and put patients first.