Policy

What health care should learn from Uber

By John H. Cochrane     
June 17, 2015

From: Magazine

Photo by Elena Guobyte.

I enjoy seeing shared conclusions emerge from unexpected places. I usually find editorial opinion in the New York Times to be rather uncritically in favor of government regulation, so I was particularly pleased to read Eduardo Porter on the lessons of Uber versus taxis for occupational licensing.
He writes:

[Uber’s] exponential growth confirms what every New Yorker and cab riders in many other cities have long suspected: Taxi service is woefully inefficient. It also raises a question of broader relevance: Why stop here?
Just as limited taxi medallions [JC: and a ban on surge pricing, and the mandated shift change, I might add] can lead to a chronic undersupply of cabs at 4 p.m., the state licensing regulations for many occupations are creating bottlenecks across the economy, raising the prices of many goods and services and putting good jobs out of reach of too many Americans. . . .

But like taxi medallions, state licenses required to practice all sorts of jobs often serve merely to cordon off occupations for the benefit of licensed workers and their lobbying groups, protecting them from legitimate competition. . . .

. . . “Lower-income people suffer from licensing,” [Princeton economist Alan B.] Krueger told me. “It raises the costs of many services and prevents low-income people from getting into some professions.”

This is an all-too-often-overlooked effect of so much government-induced cartelization. The costs of higher prices are paid by middle-and-lower-income people. And many job opportunities are denied to lower-income people.

Why does this happen? The public-choice school points out that the government can charge, in the form of political support as well as money, the beneficiaries of its induced cartels, and that impoverishment of the unlucky breeds support for government programs for the unfortunate, whose votes it also buys. When have you ever seen an anti-inequality protest with signs saying, “Repeal occupational licensing laws”?
Porter points out:

In a study commissioned by the Brookings Institution’s Hamilton Project, Morris Kleiner of the University of Minnesota found that almost three out of 10 workers in the United States need a license from state governments to do their jobs, up from one in 20 in the 1950s. By cordoning off so many occupations, he estimates, professional licensing by state governments ultimately reduces employment by up to 2.8 million jobs. The trend worries the Obama administration. The president’s budget, to be unveiled on Monday, will include $15 million for states to analyze the costs and benefits of their licensing rules, identify best practices and explore making licenses portable across state lines.

The rest of the budget may be DOA, but perhaps Congress will see the value in this proposal. Of course, it’s not obvious new studies are needed. We have over a half century of such studies, from Milton Friedman’s 1946 PhD dissertation to the “Occupational Licensure” chapter in his 1962 Capitalism and Freedom to, more recently, a 200-page review from the Institute for Justice, and many more. Edit copy, edit paste could save about $14.99 million bucks. Still, cheap at the price.

Portability is an interesting issue too. In the past, Americans moved a lot more. It’s a lot harder to do now, especially for lower-income Americans blocked by licensing from moving to a hot state. “Only a handful of occupations are licensed in every state, according to a report by the Institute for Justice, a free-market advocacy group opposed to many occupational licenses,” Porter explains.

Notice that the Institute for Justice is “a free-market advocacy group opposed to many occupational licenses,” implicitly questioning the validity of their statements, while the Brookings Institution is just the “Brookings Institution,” not a . . . well, you fill in the blank. Ah well, we can’t hope for completely unbiased reporting.

Porter goes on to say, “Among the tangle of regulations, it is not hard to find rules that defy common sense. An athletic trainer must put in 1,460 days of training to get a license in Michigan. An emergency medical technician needs only 26.”

As we know, occupational licensing is even worse in Europe. Here we come. In a slide for his paper with Lee Ohanian on European stagnation, Jesús Fernández-Villaverde tells the Zidane story:

  • Zinedine Zidane is one of the top five soccer players of all time.
  • He won pretty much everything (World Cup 1998, Euro Cup 2000, Euro Champions League, Intercontinental Cup, Super Cup, Spanish League, Italian League . . .)
  • After retiring, in 2013–2014, he was assistant coach for Real Madrid. Extremely successful year for Real Madrid.
  • In August 2014, he becomes main coach for Real Madrid B Team but . . .
  • . . . he is sued by the director of the Spanish National Football Coach Education Centre because he does not have a three year higher education degree in Soccer coaching.
  • Fined and expelled from the Spanish league.
  • In appeal, his lawyer finds a loophole (due to his French citizenship).
Soccer being a lot more important than taxis, it ended well for Zidane. Not so, however, for Uber, now banned in Spain.

Back to Porter in the Times:

. . . Workers in licensed occupations can make up to 15 percent more than unlicensed workers with similar skills, according to research by Professors Kleiner and Krueger.

But the claim that they protect consumers often rings hollow.

A study of regulations for mortgage brokers, for instance, found that states with licensed brokers did not enjoy fewer foreclosures but did suffer more expensive mortgages . . . .

While the tougher restrictions add to the cost of care, they do not have any discernible effect on its quality: Well-child medical exams cost 3 to 16 percent more in states where nurses cannot issue prescriptions, according to one study, but their [those states’] infant mortality rates are no better. Malpractice premiums, a measure of safety, are about the same.

“Professional organizations that push for licenses can’t say, ‘We want to erect a fence around our occupation,’ so they say it is to protect public health and safety,” said Dick M. Carpenter II, research director at the Institute for Justice. “It is an assertion with zero evidence.”

The Wall Street Journal offers a similar story by Tom Gordon about do-it-yourself legal clinics, which are, no surprise, under attack by lawyers on similar “protection” grounds. But of course we expect that from WSJ, a free-market . . . what was it the Times said about the Institute for Justice again? Not mentioned: Uber teaches us that star ratings are far more effective than taxi commissions when it comes to inducing quality. I ride Uber not because of the price, but because every single driver so far has been courteous and safe and the cars clean.

A health-care analogy

The Uber analogy prompts a health-care analogy. The conversation around health-insurance problems routinely asserts that the big problem with the health-care market is that people don’t pay out of pocket. But people pay for taxis predominantly out of pocket. And before Uber, we got awful service.

Health care with big copays under the Affordable Care Act and Accountable Care Organizations may look a lot like hailing a cab on New Year’s Eve. In the rain. Supply competition is the key to reaping the benefits of markets.

In my view, health-care-supply restrictions are more important than the insurance or demand features that dominate public discussion. If you are spending your own money, yes, you shop for a good deal. But spending your own money in the face of restricted supply is like hailing a cab to LaGuardia at five o’clock on a rainy, pre-Uber Friday afternoon. We need to free up innovative, disruptive health-care supply. Let the Southwest Airlines, Walmarts, Amazons, and Apples in.

But where are the supply restrictions? Alas it’s not as simple as the New York taxi commission. Supply restrictions are spread all over federal, state, and local law and regulation—and usually hidden. So I was interested to discover an interesting supply restriction in an editorial in the Wall Street Journal.

Last year the Daughters of Charity Health System sought to sell its six insolvent hospitals in California to Prime for $843 million including debt and pension liabilities. State law requires the AG [California Attorney General Kamala Harris] to approve nonprofit hospital acquisitions. Ms. Harris attached several poison pills at the urging of the SEIU [Service Employees International Union], which forced Prime last week to withdraw its offer.

State law requires the AG to approve nonprofit hospital acquisitions. How could this go wrong?

Since 2010 operating losses at Daughters hospitals have tripled to $146 million. High pay scales, inflexible work rules and rich pension benefits have swelled labor costs to 74% of revenues compared to the nationwide average of 58% at nonprofit systems. . . .

. . . Of six bidders, only Prime agreed to assume the $300 million liability for worker pensions. Prime also scored high on 10 of Daughters’s 11 bidding criteria including financial wherewithal and historical service quality.

Prime’s problem was the SEIU’s opposition owing to the company’s rejection of a so-called neutrality agreement, which would facilitate unionization at all of its hospitals. Only four of Prime’s 15 hospitals in California are unionized. Since 2009 the SEIU has run a public campaign against Prime, leveling accusations of Medicare fraud and unchecked sepsis.

Ms. Harris has taken up the union cause. In 2011 the AG vetoed Prime’s acquisition of the bankrupt Victor Valley Community Hospital as “not in the public interest” though a report produced for her own office concluded that Prime’s “capital investment over the next five years should lead to substantial improvement to facilities, infrastructure, and certain services at the Hospital.”

Now you may say, how nice. The attorney general is stalwartly backing the union cause, trying to raise wages and employment for struggling “middle class” Americans. Except, it’s the same people who pay the higher health-care costs and suffer worse service. Regulation from the top is supposed to “bend down the cost curve” in medicine. But true cost reductions along with efficiency and quality improvements are painful. Ask United’s pilots union, Walmart’s competitors, or Kodak’s employees.

The tone of the WSJ’s editorial suggests a morality play. I think not. I can’t imagine any regulator—attorney general, HHS secretary, or politician—given the power to approve or disapprove hospital acquisitions, doing so in a way that truly lowers costs and improves quality following the only path we know that actually works, allowing disruptive competition. You only cut costs by, well, cutting costs. And disruptive competitors only enter if they have the right to do so, not with the discretionary approval of any politician or political appointee.

John H. Cochrane is AQR Capital Management Distinguished Service Professor of Finance at Chicago Booth.

Works cited

Dick M. Carpenter II, Lisa Knepper, Angela C. Erickson, and John K. Ross, License to Work: A National Study of Burdens from Occupational Licensing, Arlington: Institute for Justice, May 2012.

Jesús Fernández-Villaverde and Lee Ohanian, “The Political Economy of European Economic Stagnation,” Policy seminar at the Hoover Institution, Stanford, CA, January 14, 2015.

Milton Friedman, “Income from Independent Professional Practice,” PhD diss., Columbia University, 1946.
__________, “Occupational Licensure,” Chap. 9 in Capitalism and Freedom, Chicago: University of Chicago Press, 1962.

Tom Gordon, “Hell Hath No Fury Like a Lawyer Scorned,” Wall Street Journal, January 28, 2015.

Eduardo Porter, “Job Licenses in Spotlight as Uber Rises,” New York Times, January 27, 2015.

“When Unions Trump Hospitals,” Wall Street Journal, March 18, 2015.