Economic Rent Seeking in Healthcare

This video provides an in-depth exploration of economic rent seeking within the healthcare industry, a concept defined as increasing wealth or revenue without adding corresponding value, often achieved through political privilege. Dr. Eric Bricker, the speaker, introduces this topic by referencing a CNBC article that suggested the healthcare industry had "squeezed all the red to your profits" it could, prompting a deeper dive into what "rent seeking" entails in this context. He clarifies that rent seeking typically manifests as either government subsidies or regulations designed to decrease competition, effectively acting as "privilege seeking" for individuals, organizations, or companies.

The presentation systematically unpacks various real-world examples of rent-seeking behavior across different facets of the U.S. healthcare system. These examples span from the financial structures impacting insurance and pharmaceuticals to regulatory frameworks affecting providers and market entry. Dr. Bricker highlights how existing players often benefit from these mechanisms, making it challenging for new competitors or alternative models to emerge. His approach is educational, aiming to equip the audience with a foundational understanding of these economic dynamics that shape healthcare finance and operations.

Specific instances of rent seeking discussed include the substantial premium subsidies under the Affordable Care Act for health insurance products, which he likens to agricultural subsidies. He also points to state-level licensing requirements for insurance products, which, by preventing cross-state sales, protect incumbent insurers from broader competition. The video further delves into the pharmaceutical and medical device sectors, citing the ban on importing less expensive Canadian prescription drugs and the extension of patents as key examples of rent-seeking that benefit domestic manufacturers.

Beyond these, Dr. Bricker examines the role of healthcare providers and institutions, noting how physicians' strong advocacy for exclusive prescribing power (over nurse practitioners or physician assistants) can be seen as rent-seeking. He also scrutinizes the non-profit status of hospitals, which exempts them from property taxes, and the impact of Certificate of Need (CON) laws that restrict new hospital construction, thereby protecting existing facilities. The video culminates by identifying the tax-exempt status of employer-provided health insurance benefits as potentially the largest tax subsidy in America, underscoring the pervasive nature of rent-seeking in healthcare.

Key Takeaways:

• Definition of Economic Rent Seeking: It refers to individuals, organizations, or companies increasing their wealth, income, or revenue without providing additional value in return, often achieved through political influence.
• Mechanisms of Rent Seeking: The primary forms include government subsidies (direct financial aid) and regulations that intentionally decrease competition, effectively creating barriers to entry or market advantages for specific entities.
• Impact on Health Insurance: The Affordable Care Act's premium subsidies for health insurance policies are presented as a significant example of a product subsidy, while state-level licensing requirements for insurance products act as a regulatory barrier to cross-state competition.
• Pharmaceutical Industry Benefits: The ban on importing prescription drugs from Canada, where they are often cheaper, directly benefits U.S. pharmaceutical companies by protecting their domestic market share and pricing power.
• Patent Extensions: The ability for pharmaceutical and medical device companies to extend patents beyond their original intent is highlighted as a form of rent-seeking, prolonging market exclusivity and profitability.
• Physician Prescribing Power: The strong advocacy by physicians for exclusive rights to prescribe medications, limiting the autonomy of nurse practitioners and physician assistants, can be viewed as a form of professional rent-seeking.
• Hospital Privileges: The non-profit status of many hospitals, which grants them property tax exemptions, and Certificate of Need (CON) laws that restrict new hospital construction, are examples of rent-seeking that protect existing hospital systems from competition.
• Largest Tax Subsidy: The tax-exempt status of employer-provided health insurance benefits is identified as potentially the largest tax subsidy in the U.S., significantly influencing how healthcare is financed and accessed by a large segment of the population.
• "Privilege Seeking": An alternative way to conceptualize rent seeking is as "privilege seeking," where entities actively seek special advantages or protections that are not based on market efficiency or added value.
• Industry-Wide Phenomenon: The video demonstrates that rent-seeking is not isolated to one sector but is a pervasive economic behavior across various components of the healthcare industry, from insurance and pharmaceuticals to providers and regulatory bodies.
• Awareness for Professionals: Understanding the concept of economic rent seeking and its manifestations in healthcare is crucial for professionals across the industry to critically analyze market dynamics, policy impacts, and operational challenges.

Key Concepts:

• Economic Rent Seeking: The process of obtaining wealth or income without creating new value, typically by manipulating the economic or political environment.
• Subsidy: A sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.
• Regulations Decreasing Competition: Government rules or policies that, intentionally or unintentionally, limit the ability of new entrants to compete in a market, thereby protecting existing businesses.
• Privilege Seeking: A synonym for rent seeking, emphasizing the act of seeking special advantages or exemptions.
• Certificate of Need (CON) Laws: State laws that require healthcare providers to obtain prior approval from a state agency before constructing new facilities, expanding existing ones, or offering new services.

Examples/Case Studies:

• Affordable Care Act (ACA) Premium Subsidies: Government financial assistance provided to low-income individuals to help them afford health insurance premiums.
• State-Level Health Insurance Licensing: Requirements for insurance companies to be licensed in each state they operate, preventing the sale of insurance across state lines and limiting competition.
• Physician Prescribing Power: The legal and regulatory frameworks that often grant physicians exclusive rights to prescribe medications, with limitations on nurse practitioners and physician assistants.
• Ban on Canadian Drug Importation: U.S. laws prohibiting the importation of prescription drugs from Canada, where prices are often lower, benefiting domestic pharmaceutical companies.
• Extension of Pharmaceutical and Medical Device Patents: Legal mechanisms that allow companies to extend the period of exclusive rights to their patented products, delaying generic competition.
• Non-Profit Status of Hospitals: Tax exemptions, particularly from property taxes, granted to hospitals that operate as non-profit organizations, based on their provision of "community benefit."
• Employer-Provided Health Insurance Tax Exemption: The policy that health insurance benefits provided by employers are not considered taxable income for employees, representing a significant tax subsidy.