December 20, 2017

Why Those Who Favor More Regulation are Repeatedly Disappointed by What Happens

Why Those Who Favor More Regulation are Repeatedly Disappointed by What Happens

When I was young, I had a great deal of faith in government laws and regulations to remake society for the better.  Many regulations have positive societal benefits, such as rules that limit environmental emissions or require disclosures that result in changed behaviors.

However, I eventually realized that many attempts to regulate human behavior to achieve desirable social, economic and political goals often have unintended and bad consequences. Regulations that micromanage how marketplaces, people and organizations achieve goals are most likely to have perverse consequences, as opposed to regulations that set goals and leave the details to marketplace forces.

Three kinds of perverse consequences flow from micromanagement and over-regulation:

  • Unintended consequences;
  • Increased societal inequality; and
  • More government corruption.

Examples of unintended consequences of over-regulation

Taxing “the rich” makes everyone else poorer.

Progressives believe strongly in reducing inequality by redistributing income from wealthy to poor and middle class people.  Unfortunately, this usually results in less redistributable wealth and greater poverty.

Connecticut demonstrates the stupidity of raising taxes on mobile, wealthy people.  As taxes increase on wealthy individuals and successful businesses, they leave the state.

Not only is the state deprived of income tax payments, but also payroll taxes, as well as sales taxes on what they and their employees produce and consume. It also loses the contributions wealthy people make to charitable organizations.  Everyone loses.

Putting ceilings on profit margins results in higher profits.

Progressive politicians demanded limits on health insurance profit margins to keep health insurance more affordable. The Affordable Care Act established a “medical loss ratio,” which limits the profit percentages insurers can realize.

However, the unintended consequence, which David Chase spells out in The CEO’s Guide to Restoring the American Dream, is that it causes insurers not to want to eliminate healthcare claims fraud or to reduce wasteful care, because total profits would decline as a result.

Regulatory limits on oncology drug mark-ups also increase oncology profits.  These percentage caps cause oncologists to select higher-priced drugs, when therapeutic choices exist, because, for the same amount of work, they make more money.

Rewarding intermediaries for higher “discounts” results in higher costs.

One of the most complex relationships for health insurance payers is the relationship with pharmacy benefit managers.  PBMs, as they are called, offer many useful services, such as managing complex back-office transactions with retail pharmacies and pharmaceutical manufacturers and distributors. Mail-order delivery of prescription drugs also reduces transactions costs and friction for chronic disease patients.

However, payers mistakenly believe that the PBMs secure significant discounts from what is referred to as an “average weighted price” for each branded, generic, specialty, or compound drug.

There are no standard prices, which means that pharmaceutical companies simply raise their prices and increase the total dollars the PBMs can make on a transaction.  In fact, the PBMs actually want increased pharmaceutical prices, because their percentage discount delivers more profit.

They do not reduce drug usage because of how they are paid.  They do not recommend generics instead of branded drugs, because they make more money on branded drugs. A firm like Remedy Analytics finds huge savings in PBM agreements for its clients.

Rewarding better surgical outcomes shuts out higher risk patients from the best surgical providers.

At first glance, rewarding surgeons and hospitals for better quality and surgical outcomes looks like a great idea.  However, the perverse outcome is that surgeons striving for better performance metrics prioritize lower-risk patients.

Patients who are heavy tobacco users create higher surgical complication risks.  Doctors and hospitals simply delay or refuse to treat these patients to reduce the risk of bad outcomes.

In fact, any performance metrics on physicians and hospitals must be adjusted for risks they assume with their patient populations.  While Medicare attempts to do this by increasing reimbursements for patients with two or more chronic diseases, this creates another opportunity by rewarding physician who treat higher-risk patients.

Penalizing hospital readmissions to improve care during hospitalizations and post-discharge causes more Medicare patients to die.

As the report of this study shows, the attempt to manage more heart failure patients without readmitting them to hospitals has caused more Medicare deaths since the Affordable Care Act was enacted.

Patient satisfaction surveys can lead to disastrously bad healthcare, especially with respect to pain management.

Medicare penalized physicians who scored poorly on patient satisfaction surveys relative to attention to patient pain management.  Not surprisingly, doctors responded by prescribing addictive opioids more frequently.

“Community rating” for healthcare premiums to reduce premium differences within a population make healthcare less affordable for everyone.

“Community rating” regulations require health plan pricing that eliminates pricing differences among high and low risk members.

Initially, health insurance becomes more affordable for higher-risk health plan members.  In reality, it has two perverse consequences:

  • Healthier people are less likely to buy health insurance when they pay higher rates than would be the case when premiums are tied to actual health risks, which creates a higher-risk pool, which means that everyone, including higher-risk patients, pays more; and
  • Health insurance companies market more aggressively to healthier people. They offer more customized services, whereas the firms that targeted higher-risk populations delivered a lower level of service.

“Universal health insurance” reduces healthcare access, which makes universal healthcare less achievable.

Progressives cynically and fraudulently assert that we have more “universal healthcare” because of the Affordable Care Act.  We have more universal “health insurance,” not more universal “healthcare.”  Having free or affordable insurance does not mean that the insured person has any better access to healthcare.

When insurance is required for higher risk populations, insurance companies struggle to make it more affordable.  To do so, they take several steps that reduce real access:

  • Deductibles significantly increase. More people have better catastrophic coverage, but everyone loses more opportunity to get more ordinary and predictable medical expenses covered. Everyone pays more out-of-pocket because of higher deductibles, which disadvantages middle class health insurance members. Many patients cannot afford to pay for healthcare for which the higher deductibles make them responsible.
  • Provider networks are narrowed. Accordingly, more health plan members forego care at best-in-class provider operations previously available to them.  This especially matters for cancer care, since there is a marked difference among cancer care centers in innovative treatment availability. Health plan members may even find that an “out-of-network” doctor performing services at an “in-network” hospital for a covered surgical procedure bills them separately for the full price of the services.
  • Patients change primary care physicians and specialists more often, since networks change more every year. Doctors are either eliminated from a network or eliminate particular health plans because of inadequate payments to them. Medicaid patients have “free” care, but often no readily accessible doctor that accepts Medicaid patients.

Subsidies for “low income” people keep more people poor.

Poorly designed subsidies for low-income people have the perverse effect of keeping people poorer by causing them to earn less to retain subsidies or other benefits.  Recently, a woman took a 30% pay cut to stay below the healthcare subsidy limit.  If she had lost her healthcare subsidy, the higher premiums actually would have caused her to take home less every year than she could take home at a higher pay level.

Welfare recipients, people qualifying for public housing subsidies, and food stamp recipients have the same dilemma. Their financial incentives not to earn more money are too strong.

Large subsidies for “special needs” children result in artificially inflated “special needs” populations and discourage schools from acknowledging successes.

Connecticut, like other states, supplements school district funds to help defray the cost of schooling for “special needs” children.  This is a worthy public policy for true “special needs” children, such as those with permanent and severe autistic spectrum disorders.

However, many children with mild attention deficit disorder problems are kept in “special needs” categories, even when no longer needing special services, because school districts with relatively fixed special needs program costs lose between $56,000 and $139,000 of state funds per student.

Complex regulations increase inequality by rewarding highly resourceful people who manipulate regulations to their benefit.

America is deeply capitalistic society. Most of us learn to maximize economic opportunity, whatever the rules may be.  In fact, many so-called “victims” are actually entrepreneurial in manipulating protective regulations to benefit themselves disproportionately.

An American society with a more burdensome and intricate governmental regulatory system does not eliminate capitalism.  It simply transfers it to a different playing field.

New York City’s complex rent control regulations did not eliminate profiteering.  It caused greedy landlords to develop new, crafty ways to profit under the rent control rules.  It also spawned a cottage industry of lawyers and consultants that help landlords and tenants take advantage of profit-seeking opportunities from the regulations.

In New York City, until recently, AirBnB created a great arbitrage opportunity for tenants to make significant profits on the difference between their artificially low rents and the revenue yield they secure from AirBnB rentals.  Artificially low event ticket pricing creates ticket-scalping opportunities; anti-scalping laws create a black market for ticket scalpers at much higher prices.

Occupational licensing reduces career opportunity, increases incumbent pricing power and costs society far more, as this study from the Institute for Justice demonstrates.

Government regulatory micro-management increases government corruption risk.

The biggest problem with over-regulation is the opportunity it creates for corrupt, entrepreneurial politicians to manipulate rules for those willing to bribe them.

This “bribery” takes forms virtually impossible to regulate out of existence:

  • When candidates are expected to run for elective office, they receive significant “gifts” from supporters.
  • Public speech fees or business provided to part-time legislators in professional services businesses are disguised campaign contributions.
  • Jobs and business provided to spouses, children, or other relatives of elected officials or candidates are other sources of “bribery.”
  • Charitable contributions to causes elected officials favor, especially if they are causes of major campaign contributors, are popular, but completely legal, way to curry favor from an elected official or a candidate.

I have never supported campaign contribution limits because they drive campaign supporters underground and help incumbents who have many more ways to extract favors from constituents.

Government officials become richer and more powerful the more opportunities they have to regulate our lives.  The temptation to do so is particularly great in a more capitalistic society, and it eventually leads to more opportunistic criminal behavior.

Alonzo Emmerich, the character brilliantly played by the actor Louis Calhern, in the great 1950 film The Asphalt Jungle once said:  “After all, crime is only... a left-handed form of human endeavor.”

The reversal of regulatory overreach almost always improves economic benefit for everyone, whereas oppressive regulations are most likely to be found in poorer, third world countries.

Because some people naturally use government to get rich at other peoples’ expense, we will fight this battle permanently everywhere we give power to government.

Our Founding Fathers built a sophisticated system of checks and balances.   Thomas Jefferson’s wisely observed:

"A government big enough to give you everything you want is a government big enough to take away everything that you have."