Entry and Regulation Evidence from Health Care Professions

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Entry and Regulation Evidence from Health Care
Professions

• Prof. Frank Verboven
• Presentation at DG-Competition
• 13 December 2006
• The Economic case for professional services
  reform

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Background to this study

• Academic research paper
• Joint work with Catherine Schaumans, doctoral
  student at K.U.Leuven
• Financed by K.U.Leuven and Fonds Wetenschappelijk
  Onderzoek (Flemish Science Foundation)

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Health care markets

• Complicated markets (like many markets )
• Demand side patients need
• Medical diagnosis
• Medical treatment, including drugs
• Supply side
• Pharmaceutical companies investing in RD
• Physicians treating patients
• Government broad access to medical care
• Offer high reimbursement
• Guarantee sufficient geographical coverage

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Implications of high reimbursement policy

• Agency problem
• Physician has an incentive to prescribe too many
  drugs
• Common solution
• Separate physician and pharmacy ownerships
• Competition problem
• Pharmaceutical companies and pharmacies may have
  an incentive to charge too high prices
• Common solution
• Regulate prices, including pharmacy gross margins

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Broad geographic coverage policy

• Combine
• relatively high regulated gross margins
• geographic entry restrictions
• to guarantee
• sufficient entry in the unattractive areas
• without triggering excessive entry elsewhere
• Such policies have been followed in many European
  countries, including Belgium, France, Italy, etc.

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The Establishment Act in Belgium

• In every municipality, the number of pharmacies
  is restricted based on population criteria.
• The population criteria are modified depending on
• the number of pharmacists within a pharmacy
• the distance between two pharmacies

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The scope of our study

• Estimate an econometric model of entry and
  competition with geographic entry restrictions
• Evaluate the policy of
• relatively high regulated gross margins
• combined with tight entry restrictions.
• Is it indeed in the public interest (ensure
  sufficient geographical coverage)
• or is it rather in the pharmacies private
  interest?

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General intuition of the entry model

• We observe the number of pharmacies (and
  physicians) per town
• We relate these to demographics, including
  population size.
• Interpretation of results
• If population size needs to increase
  disproportionally to sustain an additional
  pharmacy,
• then entry implies enhanced competitive
  behavior.
• If predicted number of sustainable firms would be
  higher than what is legally allowed, then there
  is room for additional entry.

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Data on 847 small Belgian towns

• Demographics (NIS, Ecodata)
• Number of firms (RIZIV)

Source NIS, Ecodata
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Summary of empirical findings

• Profitability is positively affected by
• town size (population)
• old and unemployed.
• Additional entry by pharmacies reduces profits,
  but this
• is only due to reduced sales
• is not due to enhanced competitive behavior.
• The entry restrictions are strongly binding, i.e.
• at regulated profit margins more pharmacies want
  to enter.

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Policy simulations

• What is the combined impact of
• reducing the profit margins
• loosening the entry restrictions
• on
• total number of pharmacies
• number of towns without pharmacy?
• This enables us to evaluate the public interest
  view of the current regulation, i.e. the
  guaranteeing of broad geographic coverage.

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Additional policy experiments

• Introducing free entry and lowering regulated
  profit margins,
• such that the total number of pharmacies across
  all towns remains constant, leads to
• large markup reductions (tax savings)
• net margin drop by about 62
• gross margin drop in the range of 10-18
• no significant loss in geographical coverage
  (-0.8).
• ?No public interest motivation for the current
  regime.

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What next in Belgium and elsewhere?

• Gradual erosion of profits due to a ceiling on
  the regulated profit margins
• ? Ultimately entry restrictions may become
  redundant.
• Can profit margins themselves be deregulated?
• ? May require rethinking of reimbursement
  policies.
• What market failures motivate the many other
  restrictions in the establishment Acts?

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What next in Europe?

• Similar or other restrictions apply in many other
  countries
• Urgent need for more independent economic research