Entry and Regulation Evidence from Health Care Professions

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Entry and Regulation Evidence from Health Care
Professions

• Catherine Schaumans
• Frank Verboven
• March 2006 K.U.Leuven

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Professional regulation

• applies to both conduct and entry.
• Economic debate
• Public interest view (Pigou)
• Private interest view (Stigler, Posner)
• Public policy
• U.S. antitrust laws apply since 1975.
• Europe only recent interest to make regulations
  in line with competition policy.
• See declarations by Monti in 2003.

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Health Care Professions

• Links between both professions

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The Establishment Act

• In every town, the number of pharmacies is
  restricted based on population criteria.

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Public interest motivation for pharmacy regulation

• The combination of
• high regulated markups
• geographic entry restrictions
• guarantees
• sufficient entry in unprofitable areas
• without generating excessive entry elsewhere.

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Empirical questions

• What kind of strategic interaction exists
• within the professions
• between the professions?
• Can the public interest motivation of the
  regulation be supported?
• Deregulating entry restrictions
• Lowering regulated markups

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Rest of presentation

• Intuition of the entry model
• Empirical results
• Competition within professions
• Interaction between professions
• Evaluation of public interest view
• Conclusions

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General intuition of the entry model

• We want to relate profits to the number of firms.
• We do not directly observe profits, but only
• the number of entering firms
• (and regulated wholesale markups).
• To infer profits we therefore assume Nash
  equilibrium
• firms enter as long as this is profitable, given
  other firms entry decisions.
• Modify the standard entry model to account for
• markets with binding entry restrictions
• interaction between different types (pharmacies
  versus physicians).

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General intuition of the entry model

• Empirically, we observe the number of pharmacies
  and physicians per town
• We relate this to demographics, including
  population.
• Interpretation of results
• If market size needs to more than double to
  support twice the number of pharmacies, this
  implies that additional entry lowers profit
  margins.
• If predicted number of firms would be higher than
  what is legally allowed, then the entry
  constraints are binding.

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• Data on 847 small Belgian towns
• Demographics (NIS, Ecodata)
• Number of firms (RIZIV)

Source NIS, Ecodata
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Source RIZIV
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Summary of profit effects to pharmacies

• Market profitability is positively affected by
• market size (population)
• old and unemployed.
• Additional entry by pharmacies reduces profits,
  but this
• is only due to reduced sales
• is not due to reduced profit margins.
• Additional entry by physicians increases profits,
  hence
• both professions provide complementary services.
• The entry restrictions are strongly binding, i.e.
• at regulated wholesale markups more pharmacies
  want to enter.

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Policy reforms

• What is the impact of
• reducing the fixed wholesale markups
• lowering the entry restrictions
• on
• total number of pharmacies (and physicians)
• number of markets without pharmacy?
• Answering these questions is important to
  evaluate the public interest view of regulation.

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Summary of policy reforms

• Deregulation has both direct effects on
  pharmacies and indirect effects on physicians
• Deregulating entry and adjusting regulated
  markups such that the total number of pharmacies
  remains constant, leads to
• large markup reductions (tax savings)
• no loss in availability (geographic coverage).
• ?No public interest motivation for the current
  regime.

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Conclusions

• Findings
• Entry decisions of pharmacies and physicians are
  strategic complements
• No competition within professions
• No support for public interest view of regulation
• Further work on deregulation or re-regulation in
  other professions needed.