How Physician Licensing Hurts Medicine and Helps Pseudoscience : The Freeman : Foundation for Economic Education

How Physician Licensing Hurts Medicine and Helps Pseudoscience : The Freeman : Foundation for Economic Education

In his 1962 book Capitalism and Freedom, economist Milton Friedman speculated about an economic factor behind public acceptance of quack medicine. Friedman argued that physician licensing regulations created an economic incentive for substitutes to conventional medicine. He argued that licensure drastically cut the supply of medical professionals, driving consumers to unregulated alternatives.
“Whenever you establish a block to entry into any field, you establish an incentive to find ways of getting around it, and of course medicine is no exception. The rise of the professions of osteopathy and of chiropractic is not unrelated to the restriction of entry into medicine,” he argued. “On the contrary, each of these represented to some extent an attempt to find a way around restriction of entry.… These alternatives may well be of a lower quality than medical practice would have been without the restrictions on entry into medicine.”
Friedman explained that if licenses accomplish their purpose—keeping out marginal suppliers of medicine—then, for those who cannot afford a doctor, “the alternative is untrained practice by somebody; it may and in part must be by people who have no professional qualifications at all.” Friedman certainly had a point in 1962, but today, demand for alternative medicine comes primarily from people of greater means. Demand for basic care is inelastic and subsidized by the welfare state, while most alternative medical treatments aren’t covered by Medicaid, and the poor have less disposable income to spend on chiropractors, expensive supplements, and so on. In any case, licensing reduces supply, driving up the price of medical care, making substitutes look more attractive. The field becomes filled with quacks and snake oil salesmen, leading to more unqualified suppliers than would have prevailed under a free market with competitive private certification.
What is significant about the faith healer and the homeopath is not just that they tend to be cheaper than licensed doctors, but that they often fraudulently promise greater benefits for their service than even the best that medicine can provide. This situation would seem to indicate that the constraints imposed on the supply of health care by government may exacerbate the constraints placed on it by reality.
In nearly every case, what alternative medicine is actually selling is the placebo response, which is a real phenomenon that results from positive interactions with people you trust, whether they happen to wear lab coats or magic crystals. At the same time, because of the reduced supply, overqualified doctors spend a lot of time treating minor complaints. Their time is extremely valuable and in demand, creating high opportunity costs for talking with patients. Moreover, because third parties such as Medicare and insurance pay for nearly all health care, there is little competition between doctors, and almost none at all between doctors and less-skilled technicians who could treat simple complaints as effectively and at lower cost in a less-regulated environment.
These facts allow us to make two predictions that I believe are borne out. First, given the barriers to entry and cartel status of physicians, the quality of doctors' personal interactions with patients is likely to be lower than it would otherwise be. (For instance, one study found doctors listen to patients for just 23 seconds before interrupting them.) Second, people selling alternative and substitute services will compete on this margin by being friendlier, listening more, and promising extremely optimistic outcomes. The result for the patient is a placebo effect, and for society, a vast industry of well-intentioned but unqualified “alternative” providers.