The Regulation of Health Care Professionals Other than Physicians

Deborah Haas-Wilson

Deborah Haas-Wilson is an associate professor of economics at Smith College.

Current regulatory policy concerning health care professionals is based on the assumption that the market for health care services fails because consumers do not have full information about the quality of services these professionals provide. As a result, some professionals may exploit consumers by providing lower-quality services. Economic theory suggests that in the absence of regulation, some health care professionals may provide low-quality services at high-quality prices to uninformed consumers.

Accordingly, the major justification for regulating health professionals is to increase the quality of their services and thus to protect the interests of uninformed health care consumers. Health professional regulations restrict entry into the profession by setting the minimum levels of education and experience required to practice. In addition, those regulations specify the legally permissible boundaries of practice for the health care provider or the allowed scope of health care professionals' practices and specify the allowed business practices of health care professionals.

Under the federal system of government in the United States, each state regulates health care professionals' practice. Health professional practice acts are statutory laws that establish licensing or regulatory agencies or boards to generate rules that regulate medical practice. State licensing statutes establish the minimum level of education and experience required to practice, define the functions of the profession and limit the performance of these functions to licensed persons. State business practice restrictions often include restrictions on the employment of professionals by for-profit firms, restrictions on the use of trade names, restrictions on the operation of multiple branch offices, and restrictions on the location of health care professionals' offices. Before 1977 state business practice restrictions often included restrictions on advertising by professionals. In Bates v. State Bar of Arizona, however, the Supreme Court ruled that professionals, regardless of their state's statutes, may advertise.

State scope-of-practice restrictions include tying requirements that effectively prohibit different types of health care professions from providing the same health care services. For example, certain states prohibit denturism--the practice of dental laboratory technicians' selling dentures directly to the public without the involvement of a dentist. That effectively ties the sale of dentures to the services of dentists and reduces the ability of denturists to compete in the market with dentists. Only ten states allow nurse practitioners to prescribe medication independently. That effectively ties the services of nurse practitioners to the services of physicians and reduces the ability of nurse practitioners to compete in the market with physicians. Other states prohibit independent opticians from fitting contact lens. That effectively ties the sale of contact lens to the services of ophthalmologists and optometrists and reduces the ability of opticians to compete with ophthalmologists and optometrists.

There is theoretical support for the hypothesis that such regulations will result in consumers' receiving higher quality health care services. For example, one study shows that occupational licensing, the requirement that professionals engage in a minimum level of investment in training, increases the market share of high-quality sellers. If such regulations are effective, then they may serve the public interest by preventing poorly trained, incompetent, or unethical professionals from practicing medicine and by altering the behavior of health care professionals in the course of their practices.

Despite the potential for market failure due to consumers' incomplete information in the market for health professionals' services and the potential for professional licensure to partially correct the market failure, the regulations developed by self-regulating health professionals increasingly are being perceived as a means to serve their self-interests, rather than the "public interest.''

Other studies show that a self-regulating profession may set minimum quality standards excessively high or may increase its members' incomes at the cost of reducing consumer welfare. One author writes, "It may be that collective self-regulation is used deliberately to exclude lower-cost technologies because of their threat to the earnings of professionals as labor suppliers.'' Another study shows that the entry of a paraprofession will result in professionals' incomes falling, while consumer welfare will increase with the entry of rival paraprofessions. Thus, self-regulating professionals may have an incentive to enact scope-of-practice restrictions that inhibit entry by paraprofessionals. Other studies show that regulations that increase rivals' costs (such as business practice restrictions) may increase firms' profits whether or not rivals exit the market. Thus, self-regulating professionals may have an incentive to enact business practice restrictions that increase rivals' costs.

In summary, then, the theoretical literature suggests that medical professional regulations may affect the quality of health care services, the costs of producing and the prices for providing health care services, the number of practicing health care professionals, the types of practicing health care professionals, and the incomes of health care professionals.

The Empirical Literature

There are many excellent surveys of the empirical literature on occupational regulation across the professions. Rather than review this literature again, I shall review the conclusions and discuss in greater detail the empirical literature on one particular market for health professionals' services--the market for vision care goods and services. Many health service researchers have studied that market because it provides a natural experiment with respect to regulation. State-by-state self-regulation of optometrists and opticians has led to a wide variation in the types of regulations governing ophthalmic practices.

In general, the empirical research suggests consensus on the need to deregulate the market for health care professionals' services. Many studies have documented the negative consequences of health professional regulation for consumers and the positive consequences for the regulated group members. Specifically, although researchers have not been able to observe the consequences of a totally unregulated environment, their observation of incremental variations in regulatory practices generally supports the view that tighter controls do not improve the quality of service provided. In fact, restrictive practices invariably contribute to higher fees and practitioner incomes that benefit the protected professional groups at the public's expense. Thus, they call for the deregulation of health manpower.

The Market for Vision Care Goods and Services

Three types of practitioners provide vision care goods and services: ophthalmologists, optometrists, and opticians. Ophthalmologists and optometrists perform eye examinations and prescribe and dispense eyeglasses and contact lenses. Opticians only dispense eyeglasses and contact lenses. In addition, ophthalmologists, who are medical doctors, diagnose and treat eye diseases.

The line between optometrists' and ophthalmologists' practices with respect to detecting and treating eye disease is blurring, however. As of February 1992, thirty states authorized optometrists to use drugs for diagnostic and therapeutic purposes. In the states without therapeutic pharmaceutical agent laws for optometrists, however, optometrists must still refer patients to ophthalmologists for treatment when evidence of eye disease is present.

With respect to contact lens dispensing, the line between the scope of practice for opticians and for ophthalmologists or optometrists also varies by state. In twenty-two states tying requirements between the refractive eye examination or contact lens prescription and the contact lenses are imposed indirectly by laws that prohibit the fitting of contact lenses by independent opticians (opticians practicing independently from optometrists or ophthalmologists). The laws in four of those states prohibit any optician from fitting contact lenses. In sixteen states the laws permit opticians to fit contact lenses, but only under the supervision of ophthalmologists and optometrists. In Alabama, Florida, and the District of Columbia opticians may dispense contact lenses, but only with a prescription that includes both refractive test information and postrefractive eye measurements.

State-by-state self-regulation of optometrists has also resulted in a wide variation in the type of commercial practice restrictions placed on optometrists. In 1980 thirty-seven states restricted the employment of optometrists by nonprofessional firms, twenty-eight states restricted the permissible locations of optometrists' offices, twenty-two states restricted the number of branch offices per optometrist, and thirty-eight states restricted the use of trade names by lay-employed optometrists. Before 1977, the year of the Bates decision eliminating bans on truthful advertising, many states restricted advertising of ophthalmic goods and services; thirty-five states prohibited optometrists from advertising discounts or premiums.

Employment restrictions prohibit unlicensed persons and firms from hiring optometrists. Such restrictions prevent nonprofessional firms from selling eye examinations and eyeglass or contact lens prescriptions so that they cannot offer the one-stop service provided by dispensing ophthalmologists or optometrists. To the extent that there are economies of scope in providing eye examinations and eyeglasses or contact lenses, the employment restrictions force nonprofessional optical firms to incur the higher cost of producing eyeglasses and contact lenses alone. The National Association of Optometrists and Opticians estimates that state laws that require optometrists and vision care firms "to practice in a side-by-side configuration increase the construction cost of such offices as much as $20,000 per office and the operating cost at least another $10,000 per office every year.''

Trade name restrictions usually provide that an optometrist's license may be revoked or suspended for practicing under a name other than one's own name or under a false or assumed name; however, trade name restrictions generally do not prohibit an optometrist from working for another optometrist and practicing under the name of the professional corporation. Thus, optometrists employed by professional optical firms can use trade names in their advertising, while optometrists employed by nonprofessional optical firms cannot. Since consumers may use trade names as substitutes for search or as an aid in processing information about different sellers, the trade name restriction reduces the ability of nonprofessional optical firms to attract new customers and realize scale economies.

State restrictions on the permissible locations of optometrists' offices provide that it is unprofessional conduct or an illegal practice to work in an office not devoted exclusively to the practice of optometry or other health care profession or in a place in which materials are displayed that pertain to a commercial undertaking not related to the practice of optometry. Thus, locational restrictions prevent optometrists from offering services in department and drug stores.

Branch office restrictions usually set the maximum number of branch offices an optometrist may operate or require the optometrist to be in personal attendance a certain percent of the time the office is open to the public. Thus, branch office restrictions prevent optometrists from expanding their practices by opening new offices and restrict chain optical firms' ability to rotate optometrists among branch offices.

The Impact of Occupational Regulation on the Market for Vision Care Services

Licensure.All states and the District of Columbia require the licensure of optometrists. In 1986 I measured the restrictiveness of optometrist licensure according to the number of subjects covered in the state licensing examination. I found that increasing the restrictiveness of optometrists' licensing examinations had a positive and statistically significant impact on the price of the eye examination and eyeglasses but had a statistically insignificant impact on the quality of the eye examination--measured by the thoroughness of the examination.

With respect to opticians' licensure, Elizabeth Savoca and I found that in states where opticians need a license to practice, consumers have a higher probability of selecting an optician to dispense contact lenses. But such licensure appears to have a statistically insignificant effect on the quality of contact lens fittings opticians provide. Thus, consumers may erroneously use licensure as a signal for quality of care.

Scope-of-Practice Restrictions.

A literature search did not turn up any empirical studies on the impact of therapeutic pharmaceutical agent laws on optometrists. With respect to scope-of-practice limitations on opticians, I found in a 1987 study that contact lens prices are 8 percent higher in states where independent opticians are prohibited from fitting contact lenses. Savoca and I found, however, that this scope-of-practice restriction does significantly improve the quality of contact lens fittings--measured as the absence of seven potentially pathological conditions caused by poorly fit contact lenses. Using the same data, however, the Federal Trade Commission concluded that the quality of contact lens fittings provided by opticians was not significantly different from that provided by ophthalmologists and optometrists.

Business Practice Restrictions.

Another study estimated the effect of the degree of professional control, measured as the proportion of optometrists within each state belonging to the American Optometric Association, the market share of large chain optical firms, and the assessment of five representatives of large chain optical firms of the "difficulty which a commercial firm has entering and operating in a state for reasons other than competition with existing commercial firms.'' Other authors found that eyeglass prices increased as the degree of professional control increased. The authors later measured professional control as the presence of three business practice restrictions--the employment, branch office, and advertising restriction--and a continuing education requirement for optometrists and found that those four regulations increased the price of an eye examination by 31.6 percent.

The FTC measured professional control as the absence of chain optical firms' employing optometrists and as the type of media advertising observed in the market. The commission report concluded that optometrists' prices for eye examinations and eyeglasses were significantly lower in the least restrictive areas--those with large chain optical firms and price and nonprice advertising--as compared with the most restrictive areas--those with no large chain firms and no observed advertising. With respect to quality, the FTC wrote: "Clearly, the degree of restrictiveness does not radically alter the shape or position of the distribution of thoroughness of practice'' and "there is no significant difference between restrictive and nonrestrictive SMSAs or between various kinds of optometrists in each SMSA concerning the frequency with which they accurately fill prescriptions.''

My 1986 study measured the degree of professional control as the presence of four state business practice restrictions--the employment, branch office, location, and trade name restrictions--and found they increased the price of an eye examination and pair of eyeglasses by 5 to 13 percent in those states with the restrictions and had a statistically insignificant impact on the quality of eye examinations. I also found that those restrictions increased the price of contact lenses and had a statistically insignificant impact on the quality of contact lens fittings.

Lastly, my 1989 study suggests that the business practices restrictions on optometrists deter entry by chain optical firms. When other determinants of entry are held constant, it appears that between 1970 and 1985 the three largest chain optical firms--Pearle Health Services, Cole National Corporation, and Sterling Optical Company--opened 1.5 to 1.7 fewer stores per year in states that restricted the business practices of optometrists.

Current Federal and State Policy Developments

The occupational licensing laws and related scope-of-practice and business practice regulations promulgated by licensing and regulatory agencies appear to have very significant implications for the costs of health care services and the degree to which competition in health care markets can be used to control costs.

Despite the clear empirical evidence that those regulations increase the quality-adjusted prices of health care services and decrease the ability and willingness of certain health care professionals to compete in the market, the federal and state governments appear to be doing very little to deregulate the market for nonphysician professionals' services. This is somewhat surprising given that the empirical literature suggests the appropriate public policy is to deregulate.

In the market for vision care services the Federal Trade Commission initiated the process of deregulation but did not complete it. In 1985 the FTC proposed a trade regulation rule (16 C.F.R. 456) that would prohibit states from imposing restrictions on the employer-employee relationships between optometrists or opticians and nonprofessional corporations, the number of branch offices an optometrist or optician may operate, the practice of optometry on the premises of mercantile establishments, and the practice of optometry under a trade name. The FTC rule took effect in 1989 but was overturned by a U.S. Appeals Court panel the following year. The FTC has decided not to ask for a hearing by the full U.S. Court of Appeals or to petition the U.S. Supreme Court for a ruling.

Thus, those four business practice restrictions are still in effect in the market for vision care services; however, those restrictions will be challenged as unconstitutional and as violations of U.S. antitrust laws. LensCrafters, Inc., a commercial eyeglass dispenser, and various licensed optometrists who sublease office space from LensCrafters are taking the Oklahoma Board of Examiners in Optometry and the Nevada State Board of Optometry to court. Those optometrists have been threatened with the revocation of their professional licenses for subleasing space from LensCrafters.

The plaintiffs argue that the boards of optometry are unable to provide them with a fair and impartial hearing conforming to the requirements of fundamental fairness and due process of law as required by the Fourteenth Amendment to the U.S. Constitution. The plaintiffs allege that each board member has a personal financial interest in the prosecution of charges against the optometrists because each board member may receive a pecuniary gain if the optometrists are precluded from subleasing office space from LensCrafters. Further, the plaintiffs argue that the board members have demonstrated that they harbor a bias against optometrists who practice next to chain optical stores and that they have prejudged the issues in their disciplinary proceedings.

The antitrust claims will include violations of Sections 1 and 2 of the Sherman Act insofar as the boards of optometry entered into a contract, combination, or conspiracy in unreasonable restraint of interstate trade and commerce and insofar as the boards engaged in conduct that constitutes a conspiracy to monopolize.

Begun and Feldman suggest that there are three reasons for the lack of public action to deregulate the market for nonphysician professionals. First, the occupational interest groups have entrenched power. Second, research results have been overgeneralized from markets in which consumers are better informed, such as those for dental and vision care, to those in which consumers are less well informed, such as those for surgery or mental health care. Finally, there is inadequate attention to consumer preferences for regulation of health care professionals.

Whatever the reasons, federal and state policymakers do not seem to be moving toward deregulation of nonphysican health professionals as a means to control health care costs. Rather, federal and state policymakers seem to have focused on two issues: which nonphysician professionals should qualify for direct insurance reimbursement and how the informational asymmetry between consumers and health care professionals can be reduced.

Direct recognition statutes effectively extend independent-practitioner status to nonphysician professionals. Extending independent-practitioner status to nonphysician professionals has the potential to promote more cost-effective delivery of health care services if the services of nonphysician professionals are substitutes for the services of physicians and nonphysician professionals charge lower fees or provide a less intensive mix of services than physicians. Extending that status may also be cost-effective if increased competition from nonphysician professionals results in other providers' lowering their fees.

Examples of recent extensions of direct reimbursement include changes in the Federal Employee Health Benefit Program and changes under Medicare. As of November 1990 insurance carriers under the Federal Employees Health Benefit Program were authorized to directly reimburse nurse practitioners, nurse midwives, and clinical nurse specialists. Currently, Medicare reimburses five types of nonphysician health care professionals classified as "limited licensed practitioners''--optometrists, dentists, oral and maxillofacial surgeons, podiatrists, and chiropractors--as physicians when they furnish specific services for which the law considers them to be physicians. In addition, physical or occupational therapists, physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, nurse midwives, clinical psychologists, and clinical social workers are reimbursed to varying degrees.

Direct reimbursement eligibility under Medicaid and other third-party insurers varies by state. Between 1989 and 1990 nineteen additional states began to allow nurse practitioners to receive direct Medicaid reimbursement for their services, and four additional states began to require that nurse practitioners receive direct reimbursement from insurance companies. Between 1989 and 1992 seven states enacted vendorship legislation that requires third-party payers to reimburse certified or licensed clinical social workers for covered mental health services.

Increasing consumers' knowledge about the quality of service health care professionals provide has the potential to promote more cost-effective delivery of health care services if more informed consumers are better able to choose more cost-effective professionals or professionals who provide treatment at lower quality-adjusted prices. There is theoretical support for the hypothesis that disseminating information about professionals' reputations for quality and price may correct the market failure due to asymmetric information.

The quality of health care professionals' services, however, is difficult to define and even harder to measure. One study distinguishes among three components of quality: the technical aspects of quality, the interpersonal aspects of quality, and the amenities of care. The technical aspects refer to how well medical science and knowledge are applied to the diagnosis and treatment of the medical problem. The interpersonal component of quality is defined in terms of the responsiveness, friendliness, and attentiveness of the health care provider in interacting with the patient. The amenities of care include the appeal and comfort of the health care facility.

Further, measures of quality of care fall into three categories: structure, process, and outcome. Structure refers to the relatively fixed characteristics of the medical delivery system, such as the number, types, and qualifications of health care providers and facilities. Process measures reflect what is done to and for the patient--the application of medical procedures, drugs, and so forth. Outcome refers to the changes in the patient's current and future health status that can be attributed to antecedent medical care.

Paul Ginsburg and Glenn Hammons worry: "Because consumers are better at discerning interpersonal aspects of quality than technical aspects, they will make more informed trade-offs between a provider's price and interpersonal quality than between price and technical quality. But by assuming that technical and interpersonal quality are highly correlated, consumers may err by putting too much weight on the latter.''

Currently, there are computer programs that can produce patient survival rates by hospital or by physician that are adjusted for severity of illness. Thus, we have the technology to compare health care professionals on the basis of at least one outcome measure. Other potential outcome measures include states of physiological, physical, and emotional health and patient satisfaction.

In Pennsylvania the state Health Care Cost Containment Council publishes comparisons of mortality rates by procedure for every hospital in the state and plans to begin releasing individual physicians' records in 1993.


The current policy trends in the market for nonphysician professionals' services leave existing regulations in place for better or for worse, attempt to correct the basic market failure due to asymmetric information by collecting and publishing comparative quality information, and stimulate competition by increasing the number of nonphysician professionals eligible for direct insurance reimbursement.

How will the three trends mix? Will consumers be better off with more information and more choices? Will health care costs be contained? On those issues the jury is still out.

Selected Readings

Begun, J. and Feldman, R. "Policy and Research on Health Manpower Regulation: Never Too Late to Deregulate'' in R. Scheffler and L. Rossiter, eds., Advances in Health Economics and Health Services Research. Greenwich, Conn.: JAI Press, 1990.

Cox, C. and Foster, S. The Costs and Benefits of Occupational Regulation. Washington, D.C.: Federal Trade Commission, 1990.

Haas-Wilson, D. "The Effect of Commercial Practice Restrictions: The Case of Optometry.'' Journal of Law and Economics, Vol. 29 (1986).

Haas-Wilson, D. "Strategic Regulatory Entry Deterrence: An Empirical Test in the Ophthalmic Market.'' Journal of Health Economics, Vol. 8 (1989).

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