Writing on his Substack “Noahpinion,” Noah Smith offers some opinions about the paper “Cost Disease Socialism” I co-authored with Samuel Hammond and Steven Teles. He’s got some nice things to say about the paper, especially the general framing. He makes some criticisms, too — arguing that we place too much emphasis on regulation as a cost driver for key goods, notably health care:

There are some big problems with the Niskanen thesis — in particular, its explanation for why costs are already too high. In construction, there is good evidence that regulation — especially rules allowing NIMBYs to block new projects — is a major source of excess cost. Regulation (especially rules mandating very low child-to-worker ratios) might be the issue in child care as well…

In health care, meanwhile, it’s obvious that in countries where medical services are much cheaper — i.e., every single other rich country — health care is more regulated than in the United States. In fact, price controls of one sort or another are a very common feature of other health systems, and are commonly cited as a factor that holds down costs. It’s easy to identify individual regulations that increase the cost of individual medical services, but economists who study the reasons for excessive health costs rarely point the finger at regulation as a big overall driver. [Italics in original, bold emphasis added].

So Niskanen’s diagnosis for the existing cost problem is highly incomplete and needs a lot of work, especially when it comes to health care and higher ed.

Smith’s point is valuable in the abstract — certain interventions can bring down prices. But his critique is wrong not only because the notion that health care is “more” regulated in other developed countries is debatable at best, but because his argument in the above quotation implicitly (though probably not intentionally) embraces a “more” versus “less” framing of the issue of regulation. It’s far more productive to examine which regulations are “better” or “worse.” Though determining which rules are “more” or “less” restrictive is often a valuable exercise, his framing of the issue ironically embraces the so-called “market fundamentalist” view in which all regulations are an intrusion on the liberty to truck and barter — even if he comes out on the other side. In the economic sectors our paper focuses on, the most urgent need is to lift counterproductive regulations, but this does not mean we embrace a slash-and-burn approach to “deregulate” across the board: our interest is in whether a particular regulation is fixing or exacerbating inequality and lack of access, not whether it would imply “more” or “less” regulation. We don’t discuss markets that are “worse” because they’re “more” regulated; we discuss markets that are “worse” and happen to be “more” regulated.

One of my objections to market fundamentalism of the snake-handling variety is the tendency to shout “regulation!” whenever the price of this or that good or service is too high or access is too low. The dose makes the poison, and how you determine if a given market is “more” or “less” regulated than another is subjective. This “more” or “less” framing also makes it possible to skirt the issue of whether or not a given rule or regulatory regime is better or worse than the alternative. In other words, questions about over- or under-regulation tend to distract from the often-more-relevant discussion of misregulation. 

On some issues, a consensus can emerge on which rules are more burdensome than others and which sectors are “more regulated.” For example, a regime that requires a license to practice a particular trade is “more regulated” than one which doesn’t. 

But things get more complicated very quickly. Looking at the Institute for Justice’s “inverted pyramid” of labor market regulations, we see that they rank private causes of action as an option less restrictive than inspections, and both of those are less burdensome than mandatory bonding. This ranking is generally fine as a rule of thumb. But what if you’re Bob Belcher and have to deal with a health inspector with an axe to grind, but your liability insurance provider charges low premiums because you’re a reputable establishment? What if your health inspections are infrequent and painless, but Saul Goodman comes forward with a crop of customers who mysteriously complain that their finger food actually contains fingers?

All of this is to say that while there are some clear-cut cases when calling this or that market “more” or “less” regulated, it’s generally more useful to analyze whether a given regulatory regime is “better” or “worse” regulated, not only in the outcomes it produces, but in the degrees of freedom available to private parties. Smith partly saves himself by adding the qualifier that “[i]t’s easy to identify individual regulations” (take, for example, the U.S. versus European policy related to at-home COVID tests). But it’s not at all clear to me that the dynamic he identifies is “obvious,” and Smith needs to do more work if he wants to italicize “more.” 

Beginning with the only example cited, we have what appears to be a clear instance where other developed nations more heavily regulate their health care markets than the United States: drug price negotiation. There’s really no argument that this, in isolation, is a more heavy-handed approach than what happens in the U.S. But we need to take a broader view. There are many contributors to high drug prices, and if we really want to look at all the ways the prescription drug market is regulated, we can’t avoid discussions of intellectual property.

All developed nations have patent systems that are broadly similar to America’s in providing regulatory subsidies to patent holders in the form of temporary exclusivity. But patents are often overlooked as a type of regulation, thanks to a robust and well-argued but ultimately unconvincing body of work which categorizes them as private property — a cornerstone of the free market system — rather than as public franchises. Intellectual property is the employer exclusion of innovation policy: a feature of the “submerged state” that veils itself by operating indirectly through an “incentive[], subsid[y], or payment[] to private organizations or households to encourage or reimburse them for conducting activities deemed to serve a public purpose.”

The generic drug industry isn’t perfect, but a little entry goes a long way to bring down drug prices. In the absence of generic entry, negotiation is one way to bring down prices. However, such prices are themselves the product of a regulatory subsidy given to private parties to generate new drugs. There are plenty of critiques to be made of the current patent system (and no shortage of good ideas on how to fix it), and the U.S. has tools to soften patent law’s sharp edges, mainly in the form of compulsory licenses to limit the effects of regulatory exclusivity and enhance market competition. But if we view it as “more” or “fewer” rules, these are add-ons just like drug price negotiation is.

How should we view a regime that checks the excesses of rules by stacking on more rules? Though a code of federal regulations with text to limit the effect of other regulations will be longer than one without it, it doesn’t make sense to call the former “more regulated” than the latter. When the Copyright Office announces new exemptions to the anti-circumvention provisions of the DMCA, the law becomes more complicated but also more liberal.

To use an even more relevant example from the world of occupational licensing, look to North Carolina Dental Examiners v. FTC, where a 6-3 Supreme Court ruled that state-action immunity from federal antitrust enforcement did not apply. “Because a controlling number of the Board’s decision makers [were] active market participants in the occupation the Board regulates,” the Court explained, “the Board can invoke state-action antitrust immunity only if it was subject to active supervision by the State.” A number of states in recent years have enacted laws requiring state supervision of licensing boards.

In this case, we have state governments stepping in to check the excesses of quasi-private boards that themselves control competition in the market by acting as gatekeepers to enforce regulations crafted by the state. These reforms are praised by free marketeers — as they should be — even though they involve more government intervention and add complexity to labor market regulations. If we’re willing to call a licensing board supervised by the state a less-regulated regime than a licensing board free of supervision, it’s tough to see why we shouldn’t call a regime of negotiated drug prices less regulated than one where pharma companies name their price.

That’s all a very long way of saying that Smith mischaracterizes our position when he casts us as hostile toward “regulation” of health care in general, and oversimplifies the relationship between regulations and markets when he calls other systems “more regulated” than the U.S. The other side of this coin is that in many ways, the market for health care delivery is much more free in Europe than in the United States.

The ability to travel and receive medical treatments in another EU country is one area where our friends across the pond are able to cut costs by cutting regulations on human movement. Terms and conditions apply and a Belgian traveling to get surgery in the Czech Republic jumps through more hoops than if he were going to be treated in Thailand, but it is absolutely an example of a laxer regulatory regime which the U.S. would benefit from.

Dean Baker explored this issue (sometimes called “medical tourism”) in a 2017 paper for the American Enterprise Institute. Using hip replacement, knee replacement, bypass surgery, and angioplasty as examples and data on the number of procedures performed in 2010, he found that even modest uptake of medical travel with reimbursement would save consumers and taxpayers over $10 billion annually. There are numerous details that would need to be worked out for a robust regime of medical travel to be established in the United States, but considering the differential between the costs of treatment in countries like Spain or Argentina and the U.S., there are significant savings to be found.

Mobility and jurisdictional recognition of licensing is another case where Europe has a leg up on the U.S. While progress is being made in America, the practice of medicine across jurisdictions is governed by a patchwork of inconsistent state regimes. In the EU, full reciprocity has been policy for years.

Beyond where health care practitioners can ply their trade, the EU’s system is also far more rational when examining what they have to do to practice. In addition to subjecting more professions within the health care system in general to licensing, the United States throttled the number of residency slots for physicians decades ago, and we have yet to recover from the effects of this policy. It also takes about as much education to become a specialist in the EU as it does to become a physician of any kind in the U.S.

The costs of the regulations that the United States imposes but peer nations avoid or limit are major drivers of America’s sky-high health care prices. This, of course, is not to dismiss the desperate need for a comprehensive universal coverage regime in the U.S., the need for aggressive antitrust enforcement against hospital consolidation, and other areas where state intervention could go a long way to bring down costs to taxpayers, insurers, and those paying out-of-pocket. There’s a reasonable debate to be had over whether or not an America with a health care system comparable to those in similar nations would be more or less regulated than the one we have now. But it would be a debate, not a blowout. More importantly, we should think about regulatory reform in health care like a good doctor. The question is not whether your patient needs more treatment or less. The question is how you diagnose the disease and what interventions are necessary to fix it.

Photo: doomu via iStock