Friday, September 08, 2006

Abolishing the licensing of medical practitioners

Should the licencing of medical practioners be abolished? This is not a new issue, but it's once again being brought into the open by some Canadian economists. Here is Milton Friedman's take on the issue, according to the textbook International Economics, by Appleyard and Field (2004):

[Friedman] has stressed continually the role of individuals, the market, and laissez-faire, even suggesting in his popular 1962 book, Capitalism and Freedom, that licensing of medical practioners should be abolished since it is a barrier to entry and thus to efficient resource allocation.

The authors imply that Friedman is/was in favour of abolishing the licencing of all medical practioners, including physicians. Friedman's general beliefs in the merits of competition and free enterprise are attractive to me, but, as I've expressed before on this blog, I believe that healthcare is a unique market where the rules of supply and demand are not sufficient. I could see loosening the requirements of X-ray technicians or easing mobility constraints on immigrant practioners, but the greater kind of abolishment that some economists are proposing would surely create market inefficiencies and remove an important safety net, especially for low-income earners.
There are four reasons I can think of for arguing in favor of the elimination of licensing restrictions on medical practitioners, but none of them seem sensible to me. I'll argue against these myths here.

Licensing distorts supply and demand.
This view was forwarded last week by economist Nadeem Esmail in a report published by The Fraser Institute.

The elimination of restrictions on physician training will resolve the shortfall in the availability of services that Canadians experience, a fact that is not only predicted by theory, but also borne out in practice.
According to a recently published OECD report, nations with universal access health programs that have traditionally relied on largely unregulated markets for physician
training or who have only recently begun controlling medical training have experienced higher levels and growth rates of their physician-to-population ratios than nations, including Canada, that have controlled intake for many years (Simoens and Hurst, 2006). Put another way, nations that allowed the market to determine the number of domestically-trained physicians have enjoyed greater access to physicians than those nations that, like Canada, have tried to actively manage physician supply.

Yes, decreasing regulations will lead to greater physician-to-population ratios. In other words, a decrease in quality will lead to increases in quantity, but I would only trumpet such a cause-and-effect relationship if I were, say, purchasing silverware, not healthcare services.

Contrary to Esmail's approach, I argue that eliminating restrictions on training requirements would decrease efficiency. The healthcare market is unlike a regular market. Licensing regulations act as a signaling device to assist society in the crack-down on medical malpractice. Why should we care about malpractice? It surely creates distortions in the market if the market has a tendency to clear where prices are higher than they should be for the supply of essential, non-substitutable services. Therefore, licensing requirements could actually ease economic distortions in the health market thereby increasing the efficiency of resource allocation.
David Wessel in yesterday's WSJ (via Mark Thoma) explains that inefficiencies exist in the health market when consumers lack information. His point applies in Canada, too.

It's fashionable these days, particularly in Washington, to argue that the best way to improve the quality and restrain the cost of health care is to make the market for health care more like the market for everything else.
The theory:
Give consumers more information, let them choose the best provider and the resulting competition will help to squeeze out costly waste and ineffective care. After all, markets work pretty well for other goods and services. ... But as a cure, the approach rests on the belief that health care is -- in most respects -- like any other product.
An intriguing new comparison of patient-satisfaction surveys and medical records suggests ... [that] [j]ust because patients say they're very happy with their doctors and the care they're receiving doesn't mean they're getting good care...

Further, A minimum licensing requirement shouldn't impact the quality of healthcare supplied or demanded by middle-income earners and above in a hybrid healthcare system. The demand for higher quality practitioners who meet above-minimum licensing requirements would create supply.

License requirements drive up wages.
Assuming that the license requirements are set as a minimum standard, any practitioner who is not a crackpot would have completed the minimum training already, therefore the wages of skilled practitioners should not face upward pressure if the minimum skills of practitioners are legitimate.
Licensing has a de-mobilizing effect on the supply of practitioners.
This doesn't need to be the case. As long as licensing requirements are consistent nation-wide, labour mobility should not be effected. However, Canada would do well to increase the swiftness in which immigrant practitioners are able to enter the market.
Licensing is a barrier to entry.
I would consider a minimal license requirement to be a good thing in that it is barrier enough to keep out voodoo practitioners. This goes back to my previous point about the capability of minimal licensing to impede distortions. Still, removing barriers for, say, trained immigrants would be a sensible move.
In sum, minimal licensing requirements would be a boon to low-income earners and society as a whole. Low-income earners would get their money's worth, and society could avoid marketplace distortions.
I'm stumped. Why would Esmail, Friedman and others propose such a thing in a market where the natural rules of supply and demand simply do not work (because some health services are necessities and non-substitutable)?
On the broader subject of healthcare:
The Cato Institute Web site features a video where Sebastian Mallaby and Jason Furman review Arnold Kling's book, Crisis of Abundance: Rethinking How We Pay for Health Care. Kling's comments follow. I've only heard the first 25 minutes (that's what you get with a 50.6kbps Internet connection and a computer that crashes every 27-33 minutes); however, Prof Greg Mankiw has also recommended this clip, therefore, consider minutes 26 through to 77 to be well-endorsed.

No comments: