Interview with Kathryn Zeiler

Professor of Law at Georgetown University Law Center (USA)

Do you think that regulation would be a key factor in the attempt to improve efficiency in the field of healthcare?

 This question is vitally important today in the U.S. The subject was vigorously debated during the past few months as Congress drafted the bills that eventually became the Patient Protection and Affordable Care Act, and we will continue to debate it. From an economics perspective, the answer is simple. Regulation is, indeed, a key factor given the long list of market imperfections that plague health care and insurance markets. Asymmetric information, for example, is prevalent and impacts the markets in a variety of ways. Consider the inability of patients to determine the quality of care they receive from health care providers. Patients cannot easily determine quality from the outcome because many variables impact patient outcomes. Negative outcomes regularly occur when physicians comply with or even exceed the legal standard of care. In addition, patients often lack information about the financial incentives faced by providers that are constructed by insurers to shift risk to providers or to encourage them to provide a particular type of care. These financial incentives can substantially impact the quality of care. While health care insurers have some incentive to disclose information about financial incentives—the high quality insurers want to distinguish themselves from low quality insurers—a stronger incentive exists to keep the details of the contracts secret, as these contracts can give insurers a competitive edge. When markets do not produce all the information necessary for buyers to evaluate whether the physician provided substandard care, policy makers can regulate information disclosure to increase efficiency. For example, regulators might require providers to disclose financial arrangements during the discovery phase of medical malpractice litigation, while requiring plaintiffs to keep the information confidential so that trade secrets are not revealed. If health care insurers know that injured patients will be able to obtain this information during litigation, under certain conditions they will have an incentive to alter the financial incentives to decrease the probability of harm, which decreases the probability of costly litigation. In this way, regulation of information can better ensure that the liability system will produce an efficient level of care.

 Regulation design, however, is crucial. In addition to correcting market imperfections, regulations can also generate them. Many are concerned that the recent reform creates many imperfections that will generate inefficiencies. While the individual mandate to purchase health care insurance might alleviate the negative effects of adverse selection, moral hazard, and externalities that arise when the uninsured need health care, it also violates one of the assumptions of perfectly competitive markets: individuals have free choice over what they consume. The purchase mandate, coupled with regulations that forbid insurers from collecting higher premiums from those facing a higher risk of incurring substantial health care costs, also effectuates a massive wealth transfer from the healthy to the sick. Because this subsidy occurs off the government books, it is impossible for policy makers to analyze or report the opportunity costs of the massive subsidy, which will seriously undermine the ability of policy makers to determine the most efficient set of subsidies.

In short, regulation is a key factor in creating efficient markets, but policy makers must implement smart regulation to maximize the potential of markets to produce efficient outcomes.

 How do you think that economics experiments can be useful to Law?

Law has the potential to substantially benefit from results produced by economics experiments. The benefits, however, are heightened when policy makers keep in mind the role of experiments in the science of economics, a claim upon which I expound in an essay titled, “Cautions on the Use of Economics Experiments in Law,” (published by the Journal of Institutional and Theoretical Economics). The essay describes the proper role of experiments in the scientific endeavor of economics to develop general theoretical models that accurately predict human behavior. Economics experiments are useful for Law insofar as policy makers incorporate insights only from theories that find widespread support in the empirical literature, which utilizes data collected both in the laboratory during experiments and from the field to test the predictions of economic theories. Relying on theories that are not well supported can cause policymakers to design legal rules using faulty assumptions. Similarly, relying on a small number of empirical studies rather than the entire body of evidence can bias assumptions upon which legal rules are based.