Cost of Health Services Regulation

Working Paper Series

Health Facilities Regulation

Working Paper No. P-6

Prepared by

Christopher J. Conover

Emily P. Zeitler

Center for Health Policy, Law and Management

Duke University

Under contract to the

Agency for Healthcare Research and Quality

With funding from ASPE/DALTCP

May 2004

Draft: Do Not Circulate without Author Permission

Professional Accreditation/Licensure

Background

Rationale. The principal rationale for accreditation and licensure is to ensure a minimum level of competency for all health professionals subject to such requirements.

 

Statutory Authority.   All states retain the authority to establish licensure or accreditation standards for a large variety of health professionals. In contrast to other domains of regulation, the federal government has never threatened to preempt or compete in this domain of regulation.

 

Key Elements.   There are three types of professional licensure used for health professionals: a) mandatory licensure; b) certification; and c) registration (Van Hemel 2001).

 

Scope.   Currently, “all 50 states and the District of Columbia require licensure for allopathic physicians (M.D.s), osteopathic physicians (D.O.s), dentists, registered nurses, practical nurses, dental hygienists, pharmacists, optometrists, physical therapists, podiatrists, chiropractors and administrators of nursing homes. Physicians’ assistants, midwives, psychologists, social workers, opticians, physical therapy assistants, audiologists and speech pathologists are also frequently regulated by licensure laws” (Macdonald, Meyer and Essig 1992: 16-4).   Some states also have regulations regarding voluntary certification or registration for health professionals. Although there have been critics who have argued for the complete elimination of licensure or its replacement by voluntary certification (Kessel 1958; Friedman 1962; Gellhorn 1976; Baron 1983), no state has tried to completely eliminate licensure (Macdonald, Meyer and Essig 1992).

 

Enforcement.   The courts have generally given states wide latitude in determining which professions to license and the scope of practice permitted for those who obtain licenses (Miller and Hutton 2000).

 

Theoretical Impact

Costs. While protection of public health is the ostensible rationale for licensure, it inevitably also serves to protect professionals from competition, thereby increasing their earnings. Hence licensure has been criticized as benefiting professionals at the expense of consumers insofar as it contributes to higher costs, less innovation and reduced consumer choice.  

 

Benefits. In theory, licensure can ensure a minimum level of quality, which is particularly valuable in alleviating uncertainty if patients are not in a good position to judge quality (Arrow 1963; Leffler 1978). Even if one concedes that licensure permits professionals to earn more income, some have argued that the ability to earn rents helps deter malfeasance, hence contributing to higher quality (Svorny 1992).   It further has been argued that since the quality improvement aspects of licensure are probably positive, one cannot say a priori whether licensure results in a net benefit or harm to consumers (Phelps 2003).

 

Empirical Evidence

Licensure has been studied for longer than any other form of regulation examined in this report. In part for this reason, all the available evidence relates to the stringency of licensure requirements rather than comparing states with and without licensure.

• Industry Compliance Costs: Burden of Documentation.   Only one study was uncovered that offered estimates of the cost of compliance based on time spent documenting care.   This study indicated that a physician seeing 20 Medicare patients a day would have to spend two to three hours daily on documentation to comply with Medicare requirements (Emord 1998).   This burden was broken down into costs of compliance with fraud and abuse regulations and costs of compliance with other COPs, the latter of which is monetized here.
• Indirect Costs: Increased Cost of Physician Services. On the physician side, demonstrating the impact of licensure is complicated by the fact that all states require licensure; hence there is not the same opportunity to rely on inter-state differences to calculate effects on either cost or quality.  
• There is a wide body of somewhat dated literature that attempted to demonstrate the linkage between licensure and the shortage of physicians that few would dispute existed decades ago. But while licensure may have been a contributing factor in this shortage, it would be difficult to disentangle the effects of licensure from other actions taken by the AMA to, for example, restrict medical school admissions. Moreover, there is not strong evidence that a physician shortage still exists.   Indeed, some argue that perverse incentives existing in health care professionals training policy have led to a surplus in the supply of some physician specialties (McEldowney and Berry 1995).  
• Another line of argument has been to calculate the rate of return to medical training to determine whether there are “excess” returns to physicians relative to other occupational choices: there are numerous studies that explored this (e.g., Feldman and Scheffler 1978), but these have been criticized as being biased upward for not taking into account that physicians work more hours than most other professions; moreover, a review of this evidence concluded that “the search for cartel returns resulting from AMA supply controls has not been particularly successful” (Leffler 1978: 172). We did find one study that examined data from 1965 showing that physician utilization is lower in states that require basic science certification or citizenship requirements (i.e., higher entry costs), suggesting that licensure restrictions were more restrictive than optimal from a consumer perspective (Svorny 1987).   But the author did not calculate the loss of consumer surplus associated with this reduction in use, nor would it necessarily apply today given the large increase in subsequent physician supply.
• A study of state mental hospitals showed that more restrictive licensure policies regarding foreign medical graduates were associated with higher costs, but no difference in quality (Windham et al. 1978).
• Indirect Costs: Higher Dental Costs Due to Supply Restrictions.   Several studies have shown that licensure increases the cost of dental services.
• Using state-level data, Shepard 1978 found that fees were 14.9 percent higher in states in which the absence of reciprocity agreements limited entry, concluding that national dental costs were $700 million higher in 1976 than they would have been without such restrictions--7.5% of dental expenditures that year.
• House (1979, cited in Gaumer 1984) used individual-level data to show that fees were 5 to 10 percent higher in states with reciprocity agreement limitations.  
• Boulier (1980) also concludes that removal of licensure restrictions would increase consumer surplus.
• Kleiner and Kudrle (1997) use individual-level data on 464 Air Force recruits along with detailed statutory information on stringency of dental licensure requirements for the period 1960-1987 to show that stricter licensing requirements did not improve dental health, but did result in higher dental prices (a state changing from the lowest level of restrictiveness to the highest would see dental prices increase 14 to 16 percent).
• Conrad and Emerson (1981) show that regulations that limit the number of hygienists per dentist inhibit the delegation of tasks to dental hygienists and result in higher dental fees.
• Indirect Costs: Increased Cost of Optometry Services. A study of optometrists concluded that the combination of restrictions on employment and branch offices along with continuing education requirements raised the price of eye exams by 20.6 percent (Begun and Feldman 1981).
• Indirect Costs: Increased Cost of Hospital Staff. In a study of hospital labor markets for the period 1960-1975, Sloan and Steinwald (1980) found that mandatory licensure was associated with 5-6 percent higher wages for LPNs and any sort of licensure was associated with 13 percent higher wages for medical technologists; mandatory licensure increased RN wages by 4.9% using 1960-1975 data, but the effect was not significant for the 1966-1975 period.
• Indirect Benefits:   Increased Availability of Alternative Providers.
• A comprehensive study of physician assistants, nurse practitioners and certified nurse midwives found that favorable practice environments were strongly associated with a greater supply of such practitioners (Sekscenski et al. 1994); this is supported in a more recent study of nurse midwives (Declerq et al. 1998).
• A study of complementary and alternative medicine (CAM) showed that use of such services was significantly higher in states with at least 2 CAM practice statutes or a liberalized physician practice law that expands their scope of practice to CAM (Sturm and Unutzer 2001).  
• Indirect Benefits: Higher Quality. We found relatively few studies documenting an increase in quality attributable to licensure.
• A study of family physicians in Quebec found that those achieving a higher score on their certification exam demonstrated a sustained relationship (over 4-7 years) with better use of acute and chronic disease management (Tamblyn et al. 2002).
• An early study found that dental licensure improved quality, as measured by reduced probability of adverse outcomes, reduced variability in service quality and higher patient satisfaction (Holen 1978, cited in Kleiner and Kudrle 1997), but this study failed to include treatment price or a number of other pertinent control variables; in contrast, a more recent and methodologically superior study based on the dental health of Air Force personnel concluded that licensure does not improve quality, as neither malpractice rates nor complaints against dentists are lower in states with stricter licensure requirements (Kleiner and Kudrle 1997).

 

Net Assessment

We combined the evidence cited above as follows:

• Government Regulatory Costs.   We could not locate an aggregate expenditure figure for accreditation and licensure activities across all states, so we estimated this based on the average 2002 cost per capita for state medical board activities in New Mexico ($0.50) and California ($1.13) as lower and upper bounds and averaged these for our expected value.
• Industry Compliance Costs.   We assumed compliance costs were at least as high as agency expenditures for our lower bound and three times as high for our upper bound, again averaging these figures for our expected value.
• Industry Compliance Costs: Burden of Documentation.   Emord’s estimate of the average documentation time required for Medicare patients is between 6 and 9 minutes per patient (Emord 1998).   Using these values as the lower and upper bounds, respectively, we multiplied by the total number of Medicare eligibles in 2002 and then monetize this time using the average hourly value of a hospital worker as the lower bound and the hourly value of a physician as the upper bound.   We assume that 70 percent of the time losses documented in the Emord study were not related to fraud and abuse.   This resulted in an annual cost estimate of $216 million ($170, $229).
• Indirect Costs: Higher Dental Costs Due to Supply Restrictions.   In addition, we calculated and added the regulatory impact on dental costs using the 7.5 percent figure from Shepard as an upper bound, one quarter of this value as a lower bound, averaging these two as an expected value.
• Indirect Costs: Increased Cost of Optometry Services. We estimate total expenditures for optometrists based on average annual earnings and total employment as reported by Bureau of Labor Statistics.   We estimate office overhead using weights from the CMS Medicare Economic Index, using as an upper bound the ratio of non-MD salary: MD salary (126%) and as a lower bound the average fringe benefit rate for non-physician compensation (35%). We use the 20.6 percent cost increase reported by Begun and Feldman as an upper bound, one quarter of this amount as a lower bound (on grounds that subsequent competition through major retail outlets such as Sears may have eroded this economic rent) and apply these to the estimated share of such expenditures subject to regulation. Based on figures reported by Benham (1972), roughly one quarter of states had a total prohibition on advertising by optometrists, so we use 25 percent as the lower bound, assume 75 percent as an upper bound and average the two for our expected share.
• Indirect Costs: Increased Cost of Hospital Staff. We then calculated total wage expenditures on a) RNs; b) LPNs; and c) medical technologists based on the total number working in each category times their average respective hourly wages as reported by Bureau of Labor Statistics multiplied by 2000 annual hours. We then applied the regulatory cost impact figures reported by Sloan and Steinwald as follows: a) for RNs we used 0% as our expected value and lower bound since they found no significant effect for 1966-1975; we used their 4.9% estimate from the full period of analysis as our upper bound; b) for LPNs and medical technologists, we used their 1966-1975 results for our expected values and their 95% C.I. for lower and upper bounds. By 1975, 91 percent of SMSAs had mandatory licensure for RNs and LPNs, compared to slightly more than half in 1960 (Sloan and Steinwald 1980). Therefore, we use this 91% as a lower bound and 100% as the upper bound, averaging these for the expected value. Medical technologists were subject to mandatory licensure in 4 of 22 SMSAs in 1975, so Sloan and Steinwald base their results on the impact of any sort of licensure, but do not report its prevalence. We therefore use 50 percent as a lower bound and 100 percent as an upper bound.
• Social Welfare Losses: Efficiency Losses from Tax Collection.   To account for the efficiency losses associated with raising taxes to pay for government regulatory costs, we multiply the latter times the marginal cost of income tax collections (see Table B-1 for how these costs are calculated).

• Social Welfare Losses: Efficiency Losses from Regulatory Costs.   All industry compliance costs are presumed to be roughly equivalent to an excise tax, i.e., raising prices and reducing demand/output correspondingly. We therefore multiply these costs times the marginal excess burden associated with output taxes, using 21% (15%, 28%) as the expected value of MEB (see Table B-1 for details of how MEB is calculated).

 

These computations resulted in an estimated regulatory cost of $6,549 million (3,414, 15,754). Benefits, i.e., higher earnings for selected health professionals, amount to $4,740 (1,981, 12,981).

 

Acronyms

RNs                  Registered Nurses

LPNs                ?

PAs                   Physicians’ Assistants

NPs                  Nurse Practitioners

CMW               Certified Nurse Midwife

SMSAs

 

References

Cooper, Henderson and Dietrich (1998) provide a reasonably current comprehensive summary of the licensure requirements, autonomy, and scope of practice of PAs, NPs, CNMs, CRNAs, CNSs, chiropractors, acupuncturists, naturopaths, optometrists, and podiatrists.

A thorough discussion of this is contained in Langwell and Moore 1982, pp. 28-30.

Calculated from NHE data for 1976 reported in Gibson, Waldo and Levit (1983).