Government Regulation of Hearing Healthcare, part 2

Several posts ago, Hearing Economics looked at the Supply Curve in a free market and likened independent Audiologists to wheat farmers, in the sense that they exercise little if any influence on Pricing.  That post evoked comment from a regular reader:

C:  Holly, you using the analogy of how hearing aid professionals are like wheat farmers is bitterly ironic, as the wheat farmer we are all like is Roscoe Filburn.

R:  Dan, you bring up a well-known case illustrating an extreme effect of regulation and its effect in a free market. I will be discussing regulation once we (finally) get past the Supply Curve.

Which conveniently leads to today’s topic of costs of government regulation.  Let’s start with Roscoe Filburn.  He was an Ohio wheat farmer who had the temerity to grow wheat for personal consumption just when the US Government began manipulating Supply and Price in agricultural markets by virtue of the Interstate Commerce clause in the US Constitution.  Too bad for Roscoe, he planted more than the allowed quota of wheat and was fined $.49/bushel on his overage.  He lost in the Supreme Court, even though none of his wheat was involved in Interstate Commerce, on the grounds that he interfered with the market by growing his own rather than buying wheat on the market.  

Readers who are wondering what Mr. Filburn’s sad story has to do with hearing healthcare are right to wonder.  To date, I know of no instances in which hearing healthcare providers have been punished for exceeding their quotas or of consuming their own products in excess.  In fact, I know of no quotas imposed in our profession or industry to shore up pricing.  Certainly, I know of no Audiologists who have been PAID by the Government to NOT sell hearing aids or test hearing.  But the point of the story is that Government regulation of free markets can introduce anomalies that are not favorable to some participants — that is, it Costs them.

 You don’t have to go far to find out whether Cost is related to regulation in hearing healthcare.  One has only to search the blogs at HearingHealthMatters! to learn that the Government can and has used investigation and regulation to introduce significant additional costs into production, distribution, and fitting of hearing aids in the US. The FDA has long held sway by dint of its 1973 “Final Rule” on hearing aids.  Legal actions abound; and it’s not just the Government.  Special interest groups within our own ranks often instigate the activities that produce Government action.  Depending on the action, costs accrue to hearing aid manufacturers, dispensing practitioners or consumers.  The result is a clash of Supply and Demand that produces adjustments in the Market.  Either Price adjusts or Quantity Consumed/Supplied adjusts or, as usually happens, both adjust.  Until Supply and Demand readjust — what economists call “reach equilibrium” — the Market hurts somebody because there are shortages or gluts.

Shortage

More Willing to Pay than Willing to Sell

Increases in Cost shift the Supply curve left — less Willingness to Sell at the Market Price.  When that happens, it doesn’t take a rocket scientist to figure out that if producers are less Willing to Sell, then fewer consumers who are Willing to Pay will actually get the product.  That’s a shortage.  In our field, you’d think that shortages were a great problem to have, right?  Who wouldn’t want more people desiring hearing aids than you can handle?  Except we do have that situation.  

How many practitioners fit hearing aids on Medicaid patients?  I don’t know the numeric answer, but the generic answer is “Not many.”  That’s not because  Audiologists are money hungry or dislike Medicaid patients; it’s that the reimbursement level (and paperwork) — the Price — is too low to cover the Costs of providing the services/products in some locales.   The more Price is regulated (down) the fewer the Audiologists.   The economics are the same for other healthcare providers:

• Among physicians, self-insured patients are “most popular.”  On average, one in three doctors refuses Medicaid patients and the rate goes up in states that have lower Medicaid reimbursement rates.   

• Physicians gravitate toward cash-based specialties with little Government regulation of Price:   A medical administrator{{1}}[[1]]G. Richard Olds, MD, medical school dean, Riverside CA[[1]] states that:  “We have a shortage of every kind of doctor, except for plastic surgeons and dermatologists. We’ll have a 5,000-physician shortage in 10 years, no matter what anybody does.”  

It’s not just Medicaid and hearing aids.  Don’t forget that Medicare is a Supply shifter too.  Medicare sets Audiologists’ fee schedules indirectly and reimbursement rates directly.  Medicare further requires participants to bill equivalently for non-Medicare patients, thus quashing the “popularity” of self-insured patients as a separate revenue stream.  Again, you don’t have to leave this site to find Audiologists who are upset by shrinking Medicare reimbursement rates and threatening to cease providing some services.  Except that new regulations require Audiologists to participate in Medicare{{2}}[[2]]We’ll definitely talk more about this later![[2]], essentially anticipating and blocking professional shortages.  As Christine Diles pointed out, it’s enough to make you become a hearing aid dispenser so you can escape Government Regulation and earn an honest living{{3}}[[3]]OK, she didn’t say that exactly, but that’s how I took it.[[3]].   

Gluts

More Willing to Sell than Willing to Buy

Technological leaps, decreased labor costs, and reduced barriers to entry increase Supply (rightward shift of the Supply Curve), meaning suppliers’ Willingness to Sell at a given Price increases.  As opposed to shortages, gluts occur when more Suppliers are Willing to Sell than there are consumers Willing to Pay.  The hearing evaluation and services market has been in a glut situation for years, hence the frequency of “free hearing test” enticements by Audiologists{{4}}[[4]]Right. I know they’re not supposed to do that. It makes Medicare mad and also sends the Government the wrong message that maybe they’re paying TOO much for audiology exams.[[4]] and dispensers and the need to bundle services into the Price of hearing aids.  

Interestingly, hearing aid Price bundling has intensified the glut situation for Audiology services as technological advances engineer the convergence of hearing aids and personalized hearing.  Think about it:  In a converging market that makes personal consumer electronics that talk to each other (e.g., calculators, timers, garage door openers, wrist watches, phones and computers) the barriers are relatively low, products are relatively user friendly, and existing firms are making profits.  That attracts other firms to enter the “communication” business, which increases the Quantity Supplied at all Prices, shifting the Supply Curve right.  

Hearing aid manufacturing is a high-barrier business, but what if wannabe firms with personal electronic capabilities created inexpensive hearing aids or– much cheaper– took the FDA at its word and produced PSAPs instead of hearing aids. Either way, whatever they produced could compete as a substitute product along the hearing aid Demand Curve. Why not?  The barrier to market entry drops, many firms enter, Price goes down, down, down… until there are more Suppliers Willing to Sell than their are Buyers.  That’s a glut.  Those of you practicing in areas of the country where hearing aid ads are popping up and reproducing like rabbits are experiencing a hearing aid glut.  As for the bundling aspect, consider that these ads feature hearing tests that are free and/or self-administered.  Professional hearing aid follow-up is implied at best.  Talk about a glut — they can’t even give professional services away. It’s enough to make you demand Government Regulation of competitors.

Economic Equilibrium

Where there is a glut, there is a backlash from Suppliers who object to losing their shirts.  Where there is a shortage, there is a backlash from Consumers who object to price gouging.  Supply dukes it out with Demand until Price is low enough to satisfy Demanders and high enough to satisfy Suppliers.  The backlash fight can go many rounds. The more rounds, the more scrutiny, circling of wagons, and eventually, regulation.  The current hot case is UnitedHealthcare’s entry into hearing healthcare via hi Healthinnovations with  online testing and hearing aid ordering.  More on this and related topics in a few weeks.  

photo courtesy of ingrimayne and manausa