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Economics, competition and the regulation of public health risks

Economics, competition and the regulation of public health risks Health Economics Unit, Monash University, Victoria Abstract Objective: The efficiency of regulation of public health risks has been questioned on the grounds that the costs of regulation here has been a dramatic change in attitude towards public regulation of private activity in the past decade. A prevailing view has emerged that most regulation is inefficient. It is argued that regulation interferes with the working of the market and in doing so leads to greater costs and lower benefits for all. The view is that regulation, even if well intentioned, inevitably ends up serving the special interests of particular groups, e.g. bureaucrats and industry, and is used as a barrier to competitive forces that would improve efficiency.1 A review of the Health Act in Victoria, based on the 1995 Council of Australian Governments agreements on a National Competition Policy,2 suggests that: “... the form which regulation takes often creates unwarranted barriers to entry to relevant markets, limiting consumer choice, stifling innovation and generating monopoly rents for existing producers which result in higher prices to consumers.”3 This view – that legally backed restrictions on behaviour are likely to be an inefficient mechanism to improve individual welfare – contrasts with traditional 19th Century health regulation which saw the protection of the public from environmental risk as the foundation of public health policy. While other forms of intervention have dominated public health strategies in the 20th Century,4 the view that enforcing safety standards in the physical environment, transport, food, radiation, drugs and other medical technologies and services is necessary to protect the public has remained a core feature of public health. National Competition Policy questions the efficiency of that approach. It suggests there may be advantages in moving away from a prescriptive legal approach to regulation towards less explicit approaches with less direct government scrutiny. There are numerous examples in public health regulation in Australia of a move to what has been termed quasi-regulation.5 For example, the Australia New Zealand Food Standards Code approved in November 2000, unlike past food regulation, is not based on specifying detailed input requirements for individual food types, but rather on providing information on health and safety to consumers and letting the market operate. It places greater reliance on generic standards that apply rules consistently to all foods, removing much of the detail and prescription from individual product standards.6 Similarly, a review of radiation protection in Australia suggests it could be possible to have performance-based regulations that only specify the broad objectives of radiation protection, leaving it to industry to demonstrate compliance through risk-based safety management plans instead of prescribing detailed standards, maximum levels of exposure or dose limits.7 Risk management plans have also been proposed in Victoria as a way of regulating the risk from legionella associated with cooling towers8 that, while no less stringent than existing legislation in terms of performance, requires less direct scrutiny and inspection of facilities. How far should we go in this process of deregulation? What principles should determine the extent and type of regulation? To begin to answer these questions, we need to look at the arguments for government intervention to increase public safety and the arguments for competition. The discussion may outweigh the benefits. There are strong arguments that risk management is best left to the market place, where individual consumers can make the trade-off between risk and the forgone benefits of reduced consumption of hazardous products. The paper reviews the economic arguments for the regulation of health risks and the use of safety standards. Results: There are five key arguments for regulation of public health risks. Consumers misperceive the hazards of products and therefore take more risks than they would if fully informed. The provision of information has certain public goods characteristics (it is non-rival). There may be economies of scale in collecting, providing and disseminating information that is costly to acquire. The private decision maker may not be the person bearing the whole risk, exposing others to risk e.g. children. If public policy has chosen to provide public finance for health care it may be efficient to discourage risk taking by individuals even if that risk taking is optimal from the individual’s perspective. Conclusion: There are arguments for public intervention to reduce private health risks and regulation of risk is a legitimate tool to achieve the socially optimal level of risk in certain circumstances. Private subjective assessment of risk may not capture the full social benefits of risk reduction. Regulation by safety standards however may fail to capture the full range of concerns about risk, including avoiding catastrophe, taking personal control of risk, and a distrust of expert opinion. (Aust N Z J Public Health 2001; 25: 41-3) Correspondence to: Anthony Harris, Health Economics Unit, Monash University, PO Box 477, West Heidelberg, Victoria 3081. Fax: (03) 9494 4424; e-mail: Anthony.Harris@buseco.monash.edu.au Submitted: January 2000 Revision requested: November 2000 Accepted: January 2001 2001 VOL. 25 NO. 1 AUSTRALIAN AND NEW ZEALAND JOURNAL OF PUBLIC HEALTH Harris Article here focuses on the traditional public health concerns of physical safety from environmental hazards and products, however, in principle, it is capable of generalisation to health services where there is a risk to health. Radiation protection, for example, often includes not just standards for individual exposure and dose, but also standards and accreditation of institutions, professions and occupations in the delivery of services. The trade-off between risk and benefit A ban on an activity or a requirement for modification may impose significant opportunity costs and loss of welfare for individuals. These could be directly in the form of consumption losses (smoking bans), forgone health gains (pharmaceutical regulation) or in the form of an increase in price (cost of safety modification). Where an activity offers little threat to safety, and where the cost of regulation (inspection, testing and registration) is high in relation to the overall cost of production, it is not clear that such regulation is worthwhile. In principle, regulation may be so costly to undertake that it would preclude or delay the implementation of interventions that could improve the quality of life of those in the community. It is not at all obvious that all possible safety improvements, and therefore all safety regulations directed at safety improvements, should be implemented. There is always a trade off between the cost of regulation and the forgone benefits associated with the activity. The cost of compliance with regulation may prevent some low throughput medical technologies from entering the market. Refusing to register a new drug or medical procedure on grounds of safety may deprive some patients of therapeutic benefit. We know that consumers do value safety but that an absolute level of safety cannot be achieved.9 People purchase smaller cars for their fuel efficiency, knowing that they increase the risk of death and injury in a traffic accident. The quest for the optimal trade-off is a task not only for individuals who make purchasing decisions, but also risk regulation agencies that expend society’s resources to promote health and safety. Economics and the regulation of safety People are capable of making decisions in a risky context. It is then often argued that if individuals are fully informed about the consequences of the decisions and make rational choices, then their choices ought to be respected. With costless and perfect information on those risks, individuals will purchase an optimal level of safety for a given attitude to risk and a given budget. In this model of the world there is no role for government involvement in the regulation of hazardous products. Economic theory recognises the limit of this model of the world, and that intervention in private markets for products may be necessary to ensure an optimal level of safety. There are a number of arguments in the conventional economics literature for public intervention in the market for safety.10,11 1. Costs of information acquisition and imperfections in the market for information. In a model developed by Spence,10 consumers misperceive the hazards of products and therefore take more risks than they would if fully informed. This assumes that individuals are not able to acquire and act on information as they gain experience of the product. This may be reasonable in the case of some medical devices and drugs given the catastrophic nature of the risk. Information provision may not be sufficient to counter this market failure if the problem is one of processing information, and regulation of safety standards may be required. 2. The provision of information has certain public good characteristics. A public good has the attribute that consumption by one person does not preclude the consumption by another, making it difficult to organise the market sale of the product. This leads to an under-supply, providing a case for the public provision of safety information. 3. There may be economies of scale in collecting, providing, and disseminating information that is costly to acquire. If the population has identical tastes, it would be efficient for the public decision maker simply to promulgate a standard. That is to say government is merely implementing what consumers would have chosen if fully informed, but without the excess cost to individuals of acquiring that information. 4. The private decision maker is not the person bearing the whole risk. The most obvious examples are the addictive drugs (licit and illicit) where the consequences stretch far beyond the addict. Children provide another example. From the child’s perspective, it may be a lottery as to the degree of protection afforded by the parents. Clearly, not all parents have the same attitude to risk nor the same ability or willingness to pay for safety. Public provision of information, which stresses the responsibility of parents, may not be sufficient to ensure an efficient or just degree of risk faced by each child. It may be possible to force the private decision maker to consider the costs imposed on others. However, the enforcement of a safety standard may be simpler, less costly and more effective in enforcing an optimal level of safety. 5. Social insurance. Most wealthy countries accept the responsibility of providing subsidised medical care for those who need it, irrespective of ability to pay or risky behaviour. Low income or risky behaviour does not preclude patients from treatment. This is partly because of an altruistic concern for other individuals’ health, and partly a concern for equality of access to health care or a degree of equality of health. Given such a commitment, part of the risk of hazardous activities (medical care expenditure following an accident for example) is shifted to the public sector. If public policy is based on a concern for the health of others it may be efficient to discourage risk taking by individuals, even if that risk taking is optimal from the individual’s perspective. There may be a number of policy options available to achieve this, of which regulation is one. An argument for regulation therefore is that it may be efficient to intervene in order to achieve the socially desired level of health at minimum cost. One might argue that even if individuals have imperfect information about or understanding of risk, there still exists legal liability to protect consumers. However, legal liability does not provide optimal protection from risk given the potentially high 2001 VOL. 25 NO. 1 AUSTRALIAN AND NEW ZEALAND JOURNAL OF PUBLIC HEALTH Conceptual Challenges Economics, competition and the regulation of public health risks cost of reliance on the legal system. A system based on tort law would likely lead to tort premiums that would restrict the ability of individuals to trade safety against cost. Firms would probably not find it profitable to produce high-risk, low-cost products for those who want them because of the expected high cost of legal liability. A tort-based system of risk management is likely therefore to restrict consumer choice in a similar way to a single regulatory standard. Indeed, it could be argued that the courts over time would set an implied set of standards and penalties. There is no reason to believe these implied standards would accord with either individual or public attitudes to a risk benefit trade-off. the patient and failure has more frightening consequences means that there is likely to be a greater concern for safety regulation. Conclusion The presumption of much economic policy is that the benefits of a restriction on competition will generally only outweigh the costs in situations of market failure. Therefore, intervention in markets should generally be restricted to those situations. Economic theory would support the general proposition that every attempt to change individual behaviour in order to move towards an optimal level of safety should be subject to an assessment of the costs and benefits. Regulation may be the appropriate solution where risks are likely to be misperceived, borne by those other than the user, risk reduction is unacceptably costly for the individual, or where it is simply the most efficient solution to a shared problem. The decision-maker may have to consider whether the social benefits to be gained by optimising the allocation of resources in a particular risky decision are greater than the social costs of overriding a concerned public. It may be that not all current public health regulations meet those conditions, and that alternative means of ensuring an optimal level of safety exist. Here, the major difficulty in determining the optimal intervention policy in public health lies less in the principles and more in the practical measurement of the costs and benefits of alternative policies. Policies in general cannot be determined from a priori considerations. It is illegitimate to argue against regulation simply because it is often inefficient; rather the empirical costs and benefits must be calculated and compared. How much regulation? Government regulation is necessary to ensure the optimal level of risk. How much regulation should there be? The traditional economic view put by Viscusi is that, “the reference point that is appropriate from an efficiency standpoint is to replicate what would have occurred had markets functioned fully and efficiently”.9 That is, we should consider how an individual would trade-off risks and benefits over time if well informed. It could be argued that, in the context of a public insurance system, community attitude to risk and its distribution across individuals and over time may differ from any simple aggregation of well-informed individual attitudes. This leaves open to question the extent to which we should rely on individual attitudes to risk to determine public policy towards potentially hazardous products. For example, should policy respond to public fears that experts see as unjustified? It seems that individuals have a propensity to pay disproportionate attention to low probability rates and to over-react to newly discovered hazards. Some may pay less attention to very long-term hazards that span generations. This creates pressures on governments to regulate particular types of risk. While this may be an argument for ignoring population attitudes to risk as irrational and uninformed, one has to be careful to distinguish between public ignorance and public concern.12 The disproportionate attention to low probability events may be due to misunderstanding, mis-communication, mis-information; but it may also be due to a mistrust of expert opinion and bureaucrats. Examples where the public’s perception of risks has not been in accord with the objective evidence include nuclear power, recombinant DNA technologies and genetic modified food.13,14 Often accidents convey a message about potential for recurrence or catastrophe. If an accident causes a great deal of harm, but it is understood that this will not recur and the processes by which it happened are currently understood, there is far less concern. In contrast, an accident may cause little harm but it may signal an increased probability or seriousness of future accidents. The two implications are that, first, we should not ignore the value of such signals in setting safety goals. Second, we might want to see greater effort expended to minimise the possibility of small but frightening accidents, particularly where the individual is not in control of the risk. If we take the example of implantable versus external medical devices, even for identical risks, the fact that the implantable device is perceived as less under the control of 2001 VOL. 25 NO. 1 Acknowledgement I am grateful to Jeff Richardson for helpful comments. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Australian and New Zealand Journal of Public Health Wiley

Economics, competition and the regulation of public health risks

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Publisher
Wiley
Copyright
Copyright © 2001 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1326-0200
eISSN
1753-6405
DOI
10.1111/j.1467-842X.2001.tb00548.x
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Abstract

Health Economics Unit, Monash University, Victoria Abstract Objective: The efficiency of regulation of public health risks has been questioned on the grounds that the costs of regulation here has been a dramatic change in attitude towards public regulation of private activity in the past decade. A prevailing view has emerged that most regulation is inefficient. It is argued that regulation interferes with the working of the market and in doing so leads to greater costs and lower benefits for all. The view is that regulation, even if well intentioned, inevitably ends up serving the special interests of particular groups, e.g. bureaucrats and industry, and is used as a barrier to competitive forces that would improve efficiency.1 A review of the Health Act in Victoria, based on the 1995 Council of Australian Governments agreements on a National Competition Policy,2 suggests that: “... the form which regulation takes often creates unwarranted barriers to entry to relevant markets, limiting consumer choice, stifling innovation and generating monopoly rents for existing producers which result in higher prices to consumers.”3 This view – that legally backed restrictions on behaviour are likely to be an inefficient mechanism to improve individual welfare – contrasts with traditional 19th Century health regulation which saw the protection of the public from environmental risk as the foundation of public health policy. While other forms of intervention have dominated public health strategies in the 20th Century,4 the view that enforcing safety standards in the physical environment, transport, food, radiation, drugs and other medical technologies and services is necessary to protect the public has remained a core feature of public health. National Competition Policy questions the efficiency of that approach. It suggests there may be advantages in moving away from a prescriptive legal approach to regulation towards less explicit approaches with less direct government scrutiny. There are numerous examples in public health regulation in Australia of a move to what has been termed quasi-regulation.5 For example, the Australia New Zealand Food Standards Code approved in November 2000, unlike past food regulation, is not based on specifying detailed input requirements for individual food types, but rather on providing information on health and safety to consumers and letting the market operate. It places greater reliance on generic standards that apply rules consistently to all foods, removing much of the detail and prescription from individual product standards.6 Similarly, a review of radiation protection in Australia suggests it could be possible to have performance-based regulations that only specify the broad objectives of radiation protection, leaving it to industry to demonstrate compliance through risk-based safety management plans instead of prescribing detailed standards, maximum levels of exposure or dose limits.7 Risk management plans have also been proposed in Victoria as a way of regulating the risk from legionella associated with cooling towers8 that, while no less stringent than existing legislation in terms of performance, requires less direct scrutiny and inspection of facilities. How far should we go in this process of deregulation? What principles should determine the extent and type of regulation? To begin to answer these questions, we need to look at the arguments for government intervention to increase public safety and the arguments for competition. The discussion may outweigh the benefits. There are strong arguments that risk management is best left to the market place, where individual consumers can make the trade-off between risk and the forgone benefits of reduced consumption of hazardous products. The paper reviews the economic arguments for the regulation of health risks and the use of safety standards. Results: There are five key arguments for regulation of public health risks. Consumers misperceive the hazards of products and therefore take more risks than they would if fully informed. The provision of information has certain public goods characteristics (it is non-rival). There may be economies of scale in collecting, providing and disseminating information that is costly to acquire. The private decision maker may not be the person bearing the whole risk, exposing others to risk e.g. children. If public policy has chosen to provide public finance for health care it may be efficient to discourage risk taking by individuals even if that risk taking is optimal from the individual’s perspective. Conclusion: There are arguments for public intervention to reduce private health risks and regulation of risk is a legitimate tool to achieve the socially optimal level of risk in certain circumstances. Private subjective assessment of risk may not capture the full social benefits of risk reduction. Regulation by safety standards however may fail to capture the full range of concerns about risk, including avoiding catastrophe, taking personal control of risk, and a distrust of expert opinion. (Aust N Z J Public Health 2001; 25: 41-3) Correspondence to: Anthony Harris, Health Economics Unit, Monash University, PO Box 477, West Heidelberg, Victoria 3081. Fax: (03) 9494 4424; e-mail: Anthony.Harris@buseco.monash.edu.au Submitted: January 2000 Revision requested: November 2000 Accepted: January 2001 2001 VOL. 25 NO. 1 AUSTRALIAN AND NEW ZEALAND JOURNAL OF PUBLIC HEALTH Harris Article here focuses on the traditional public health concerns of physical safety from environmental hazards and products, however, in principle, it is capable of generalisation to health services where there is a risk to health. Radiation protection, for example, often includes not just standards for individual exposure and dose, but also standards and accreditation of institutions, professions and occupations in the delivery of services. The trade-off between risk and benefit A ban on an activity or a requirement for modification may impose significant opportunity costs and loss of welfare for individuals. These could be directly in the form of consumption losses (smoking bans), forgone health gains (pharmaceutical regulation) or in the form of an increase in price (cost of safety modification). Where an activity offers little threat to safety, and where the cost of regulation (inspection, testing and registration) is high in relation to the overall cost of production, it is not clear that such regulation is worthwhile. In principle, regulation may be so costly to undertake that it would preclude or delay the implementation of interventions that could improve the quality of life of those in the community. It is not at all obvious that all possible safety improvements, and therefore all safety regulations directed at safety improvements, should be implemented. There is always a trade off between the cost of regulation and the forgone benefits associated with the activity. The cost of compliance with regulation may prevent some low throughput medical technologies from entering the market. Refusing to register a new drug or medical procedure on grounds of safety may deprive some patients of therapeutic benefit. We know that consumers do value safety but that an absolute level of safety cannot be achieved.9 People purchase smaller cars for their fuel efficiency, knowing that they increase the risk of death and injury in a traffic accident. The quest for the optimal trade-off is a task not only for individuals who make purchasing decisions, but also risk regulation agencies that expend society’s resources to promote health and safety. Economics and the regulation of safety People are capable of making decisions in a risky context. It is then often argued that if individuals are fully informed about the consequences of the decisions and make rational choices, then their choices ought to be respected. With costless and perfect information on those risks, individuals will purchase an optimal level of safety for a given attitude to risk and a given budget. In this model of the world there is no role for government involvement in the regulation of hazardous products. Economic theory recognises the limit of this model of the world, and that intervention in private markets for products may be necessary to ensure an optimal level of safety. There are a number of arguments in the conventional economics literature for public intervention in the market for safety.10,11 1. Costs of information acquisition and imperfections in the market for information. In a model developed by Spence,10 consumers misperceive the hazards of products and therefore take more risks than they would if fully informed. This assumes that individuals are not able to acquire and act on information as they gain experience of the product. This may be reasonable in the case of some medical devices and drugs given the catastrophic nature of the risk. Information provision may not be sufficient to counter this market failure if the problem is one of processing information, and regulation of safety standards may be required. 2. The provision of information has certain public good characteristics. A public good has the attribute that consumption by one person does not preclude the consumption by another, making it difficult to organise the market sale of the product. This leads to an under-supply, providing a case for the public provision of safety information. 3. There may be economies of scale in collecting, providing, and disseminating information that is costly to acquire. If the population has identical tastes, it would be efficient for the public decision maker simply to promulgate a standard. That is to say government is merely implementing what consumers would have chosen if fully informed, but without the excess cost to individuals of acquiring that information. 4. The private decision maker is not the person bearing the whole risk. The most obvious examples are the addictive drugs (licit and illicit) where the consequences stretch far beyond the addict. Children provide another example. From the child’s perspective, it may be a lottery as to the degree of protection afforded by the parents. Clearly, not all parents have the same attitude to risk nor the same ability or willingness to pay for safety. Public provision of information, which stresses the responsibility of parents, may not be sufficient to ensure an efficient or just degree of risk faced by each child. It may be possible to force the private decision maker to consider the costs imposed on others. However, the enforcement of a safety standard may be simpler, less costly and more effective in enforcing an optimal level of safety. 5. Social insurance. Most wealthy countries accept the responsibility of providing subsidised medical care for those who need it, irrespective of ability to pay or risky behaviour. Low income or risky behaviour does not preclude patients from treatment. This is partly because of an altruistic concern for other individuals’ health, and partly a concern for equality of access to health care or a degree of equality of health. Given such a commitment, part of the risk of hazardous activities (medical care expenditure following an accident for example) is shifted to the public sector. If public policy is based on a concern for the health of others it may be efficient to discourage risk taking by individuals, even if that risk taking is optimal from the individual’s perspective. There may be a number of policy options available to achieve this, of which regulation is one. An argument for regulation therefore is that it may be efficient to intervene in order to achieve the socially desired level of health at minimum cost. One might argue that even if individuals have imperfect information about or understanding of risk, there still exists legal liability to protect consumers. However, legal liability does not provide optimal protection from risk given the potentially high 2001 VOL. 25 NO. 1 AUSTRALIAN AND NEW ZEALAND JOURNAL OF PUBLIC HEALTH Conceptual Challenges Economics, competition and the regulation of public health risks cost of reliance on the legal system. A system based on tort law would likely lead to tort premiums that would restrict the ability of individuals to trade safety against cost. Firms would probably not find it profitable to produce high-risk, low-cost products for those who want them because of the expected high cost of legal liability. A tort-based system of risk management is likely therefore to restrict consumer choice in a similar way to a single regulatory standard. Indeed, it could be argued that the courts over time would set an implied set of standards and penalties. There is no reason to believe these implied standards would accord with either individual or public attitudes to a risk benefit trade-off. the patient and failure has more frightening consequences means that there is likely to be a greater concern for safety regulation. Conclusion The presumption of much economic policy is that the benefits of a restriction on competition will generally only outweigh the costs in situations of market failure. Therefore, intervention in markets should generally be restricted to those situations. Economic theory would support the general proposition that every attempt to change individual behaviour in order to move towards an optimal level of safety should be subject to an assessment of the costs and benefits. Regulation may be the appropriate solution where risks are likely to be misperceived, borne by those other than the user, risk reduction is unacceptably costly for the individual, or where it is simply the most efficient solution to a shared problem. The decision-maker may have to consider whether the social benefits to be gained by optimising the allocation of resources in a particular risky decision are greater than the social costs of overriding a concerned public. It may be that not all current public health regulations meet those conditions, and that alternative means of ensuring an optimal level of safety exist. Here, the major difficulty in determining the optimal intervention policy in public health lies less in the principles and more in the practical measurement of the costs and benefits of alternative policies. Policies in general cannot be determined from a priori considerations. It is illegitimate to argue against regulation simply because it is often inefficient; rather the empirical costs and benefits must be calculated and compared. How much regulation? Government regulation is necessary to ensure the optimal level of risk. How much regulation should there be? The traditional economic view put by Viscusi is that, “the reference point that is appropriate from an efficiency standpoint is to replicate what would have occurred had markets functioned fully and efficiently”.9 That is, we should consider how an individual would trade-off risks and benefits over time if well informed. It could be argued that, in the context of a public insurance system, community attitude to risk and its distribution across individuals and over time may differ from any simple aggregation of well-informed individual attitudes. This leaves open to question the extent to which we should rely on individual attitudes to risk to determine public policy towards potentially hazardous products. For example, should policy respond to public fears that experts see as unjustified? It seems that individuals have a propensity to pay disproportionate attention to low probability rates and to over-react to newly discovered hazards. Some may pay less attention to very long-term hazards that span generations. This creates pressures on governments to regulate particular types of risk. While this may be an argument for ignoring population attitudes to risk as irrational and uninformed, one has to be careful to distinguish between public ignorance and public concern.12 The disproportionate attention to low probability events may be due to misunderstanding, mis-communication, mis-information; but it may also be due to a mistrust of expert opinion and bureaucrats. Examples where the public’s perception of risks has not been in accord with the objective evidence include nuclear power, recombinant DNA technologies and genetic modified food.13,14 Often accidents convey a message about potential for recurrence or catastrophe. If an accident causes a great deal of harm, but it is understood that this will not recur and the processes by which it happened are currently understood, there is far less concern. In contrast, an accident may cause little harm but it may signal an increased probability or seriousness of future accidents. The two implications are that, first, we should not ignore the value of such signals in setting safety goals. Second, we might want to see greater effort expended to minimise the possibility of small but frightening accidents, particularly where the individual is not in control of the risk. If we take the example of implantable versus external medical devices, even for identical risks, the fact that the implantable device is perceived as less under the control of 2001 VOL. 25 NO. 1 Acknowledgement I am grateful to Jeff Richardson for helpful comments.

Journal

Australian and New Zealand Journal of Public Health – Wiley

Published: Feb 1, 2001

There are no references for this article.