Health Care Regulation: A $169 Billion Hidden Tax

Publication Date: October 2004

Publisher: Cato Institute

Author(s): Christopher J. Conover

Research Area: Health

Type: Report

Abstract:

Students of regulation have known for decades that the burden of regulation on the U.S. economy is sizable, with the latest figures suggesting this cost may approach $1 trillion in 2004. Surprisingly, given that the health industry is often viewed as among the most heavily regulated sectors of the U.S. economy, previous estimates generally have ignored the cost of regulating health care services.

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 high cost of health services regulation is responsible for more than seven million Americans lacking health insurance, or one in six of the average daily uninsured. Moreover, 4,000 more Americans die every year from costs associated with health services regulation (22,000) than from lack of health insurance (18,000). The annual net cost of health services regulation dwarfs other costs imposed by government intervention in the health care sector. This cost exceeds annual consumer expenditures on gasoline and oil in the United States and is twice the size of the annual output of the motion picture and sound recording industries.

Finding ways to reduce or eliminate this excess cost should be an urgent priority for policymakers. It would appear from this preliminary assessment that medical tort reform offers the most promising target for regulatory cost savings, followed by FDA reform, selected access-oriented health insurance regulations (e.g., mandated health benefits), and quality-oriented health facilities regulations (e.g., accreditation and licensure).