October 4, 2016
Table of contents
- Executive summary
- "Lemons" and market failure in health care
- "Lemons" as the basis for advertising restrictions
- Academic studies on the effect of advertising restrictions
- Data required to support evidence‑based assessments of advertising restrictions
- How to study the effects of advertising restrictions
When assessing the marketplace effects of advertising restrictions, Canadian health care regulators should give greater emphasis to empirical evidence. The Competition Bureau (Bureau) analyzed a cross‑section of health care regulations across Canada, and discovered that most regulators tend to restrict advertising in some form.
Contrary to traditional justifications for advertising restrictions, economic studies show that — rather than saving consumers from low quality services — advertising restrictions can have no meaningful effect on product quality and can, in fact, cause unnecessarily high prices for consumers.
This report calls on governments and self‑regulatory bodies to begin collecting and compiling information on marketplace outcomes in Canada’s health care markets. These data are necessary to facilitate greater emphasis on empirical evidence in decision‑making.
Competition is often viewed as playing a limited role in Canada's health care system; however, competitive markets are responsible for delivering many of the products and services upon which our health care system relies.Footnote 1 Preserving a significant role for competition should be a key regulatory goal in health care industries.Footnote 2
Advertising is important for competition. It allows businesses to educate customers on their area of competitive advantage — whether it is price, quality, innovation or another attribute that is valuable to consumers. Without advertising, businesses have fewer ways of attracting customers, and consumers are less informed of their choices.Footnote 3
Advertising is limited in many key Canadian heath care industries. Restrictions on advertising can reduce the ability of businesses to compete by cutting prices, improving their product offerings, or otherwise attempting to increase their sales. This can result in higher prices, lower levels of innovation, and less consumer choice — to the detriment of consumers and the Canadian economy.
Given the important role that advertising plays in competitive markets, the Bureau has undertaken this report to:
- examine the historical justification for advertising restrictions in health care professions;
- survey the economic literature regarding the marketplace effects of advertising restrictions; and
- provide recommendations to governments and self‑regulatory professional bodies on best practices for regulating advertising in Canada’s health care industry.
"Lemons" and market failure in health care
Health care markets can be somewhat different from markets for other goods and services. One reason for this is "information asymmetry", where health care practitioners know significantly more about treatments and procedures than their patients do.Footnote 4 This factor can make it difficult for patients to fully understand and evaluate the quality and thoroughness of the treatments and procedures they undergo.
Nobel Laureate Professor George Akerlof describes the economic effects of information asymmetry in his seminal work, "The Market for Lemons: Quality Uncertainty and the Market Mechanism".Footnote 5 This paper envisions a market for used cars where only sellers know the true quality of the cars that are for sale. Buyers do not know whether they will receive a low quality car (a "lemon"), or a high quality car (a "peach") until after they have made the purchase.
This informational asymmetry has ruinous results for the marketplace. No consumer wants to pay "top dollar" for a car that might turn out to be a lemon. As a result, nobody is willing to pay the proper price for a peach, and no peaches are sold; everyone who buys a used car ends up with a lemon. The high quality portion of this market ends up on the "scrap heap", and buyers can only buy lower quality products.
This tale of rusty old cars is similar to a central economic argument to justify ongoing regulatory control of health care services.Footnote 6 Offering high quality services can be time consuming and expensive for a health care provider. Providers offering a low price may attract a large number of consumers, but low prices could make it more difficult for providers to afford the time and monetary expense necessary to offer high quality services. If prices are seen as the only difference between providers, then a "race to the bottom" among providers could ensue, with each provider trying to undercut the others, until a point is reached where high quality services can no longer be offered at the low prices promised.Footnote 7 This failure of the market mirrors that of Dr. Akerlof’s market for lemons.
Self‑regulating professional bodies play an important role in ensuring that their members can offer high quality services.Footnote 8 If free markets increase the risk of practitioners providing low quality services, then rules should be enacted to more directly address this problem. Professional organizations create and enforce standards of education and practice by ensuring that practitioners are trained and qualified to provide high quality services. This type of regulation can be necessary in situations where the free market fails to provide an optimal level of quality.
"Lemons" as the basis for advertising restrictions
Advertising in regulated professions is thought to make a market for lemons more likely to arise.Footnote9 Unrestricted advertising, it is believed, can hasten the "race to the bottom", with the resulting negative effect on service quality. In response, self‑regulatory bodies have tended to control the ability of health care practitioners to advertise, including restrictions on the types of advertising allowed (e.g.: billboards or newspaper ads), and the content of those advertisements (e.g.: practitioners cannot directly advertise prices).
The issue of advertising restrictions in health care professions has been considered by the Supreme Court of Canada. In Rocket v. Royal College of Dental Surgeons of Ontario, a dentistry firm challenged the ability of a professional organization to regulate some forms of advertising.Footnote 10 The court struck down a wide‑scale prohibition on advertising as a violation of Canada’s Charter of Rights and Freedoms; however, the court also noted that consumers would be "highly vulnerable" if there were no regulation of advertising. The standard articulated by the court is that advertising restrictions are justified where a claim is "inherently not susceptible of verification" by consumers. This principle flows from the logic of the market for lemons, where the quality of health care services is not verifiable until after the time of purchase.
The court also noted that restrictions must be proportionate to their objective. In highly technical fields, such as health care, consumers can be swayed by "buzzwords" with little relevance to quality of service. For example, a dentist may advertise: "We offer pharmacologic agents to ensure a pain‑free experience". Consumers concerned about discomfort may not appreciate that all dentists use pharmacologic agents in the "freezing" process, and may therefore be misled by the advertisement when choosing a dentist. If the objective of a regulator is to ensure that buzzwords are not used to mislead consumers, then any regulation should be proportionate to that objective. In this situation, limiting the ability of practitioners to use buzzwords may be appropriate, but a blanket prohibition on advertising is likely a disproportionate response.
When there are legitimate policy objectives at play — such as ensuring that professionals provide care in a safe, effective, and high quality manner — then regulation can be necessary to achieve those goals. At the same time, advertising is an important component in ensuring competition in the marketplace and, as previously noted, competition benefits consumers and the economy in the form of lower prices, greater innovation, and increased consumer choice. Advertisements help consumers know their options, and help new businesses establish their presence in the marketplace.
Academic studies on the effect of advertising restrictions
The regulator’s challenge lies in evaluating the balance between restrictions that are necessary to meet their appropriate regulatory goals, and those that may go too far. There are at least two ways to do this.
The first is to make efforts to clearly define the regulatory goals. This involves drafting regulations that most directly meet those goals while considering and addressing possible unintended consequences. Industry participants are in regular contact with consumers: this provides them with a privileged position from which to understand the potential for unintended consequences. However, regulators need to carefully consider stakeholder input to ensure that the regulatory process is not used to further the private interests of any stakeholder group.
The second way to evaluate whether regulations strike the right balance is to test their effects on marketplace outcomes, such as price, quality, and levels of innovation. Economists routinely test cause‑and‑effect relationships between policies and marketplace outcomes. Four relevant economic studies that seek to measure the effect that advertising restrictions have had are discussed below:
- "Advertising Restrictions and Competition in the Children’s Breakfast Cereal Industry" (2003)Footnote 11
In the Province of Quebec, the Consumer Protection Act forbids advertising aimed at persons under the age of 13.Footnote 12 Robert Clark of HEC Montréal’s Institute of Applied Economics studied the effect that these restrictions had on the consumption of children’s breakfast cereals in Quebec, as compared to the rest of Canada.
The study found that more people tend to purchase "established" brands of breakfast cereal in the Province of Quebec, compared to the rest of Canada. This makes sense: if new brands cannot advertise their presence in the market, then how would consumers know that there is an alternative choice? This study confirms the important role of advertising as an information tool for consumers. When advertising is prohibited, it can be more difficult for newer products or services to attract customers.
- "Advertising Restrictions and Concentration: The Case of Malt Beverages" (1995)Footnote 13
Many jurisdictions limit advertising of alcohol.Footnote 14 Tim Sass of Florida State University and David Saurman then of San Jose State University studied the effect that stringent advertising restrictions in some areas of the United States have had on consumer choice, compared to areas of the United States where such restrictions are more relaxed.
Drs. Sass and Saurman’s findings align closely with those from the breakfast cereals study in Quebec: when advertising is significantly limited, consumers tend to flock to more established, well‑known brands rather than trying newer, less familiar ones.
- "The Effect of Commercial Practice Restrictions: The Case of Optometry" (1986)Footnote 15
Some laws and regulations go beyond prohibiting advertising to include control of other areas of commercial practice. For example, regulators may specify that practitioners can only offer services in particular locations within a city, or limit how many branches a practitioner can own.
Deborah Haas‑Wilson of Smith College compared prices paid for optometric services between certain jurisdictions in the United States with greater restrictions on commercial practices and those with fewer restrictions. Dr. Haas‑Wilson also compared the correctness of resulting prescriptions as an indicator of the quality of optometric examinations.
Dr. Haas‑Wilson not only found that prices tended to be lower in the areas with fewer restrictions on commercial practice; the study also found that markets with fewer restrictions did not have lower quality outcomes for patients. The conclusion from Dr. Haas‑Wilson’s study was that, by removing restrictions, patients tended to pay less while still receiving a high quality of service.
- Advertising and the Price and Quality of Optometric Services (1984)Footnote 16
Dr. Haas‑Wilson’s study on the effect of commercial restrictions was heavily influenced by an earlier study by John Kwoka then of George Washington University. Dr. Kwoka compared the prices paid by consumers in regions of the United States where advertising was restricted with prices paid in areas where advertising was allowed. Dr. Kwoka also compared the amount of time spent by optometrists in each examination as a measure of the quality of that examination.
Dr. Kwoka finds that, on the whole, prices are lower and quality is higher in markets where advertising is allowed. This is consistent with the findings in Dr. Haas‑Wilson’s study.
These studies highlight two broad effects of advertising restrictions:
- The first two studies find that, when advertising is restricted, consumers tend to stick with the established products that they already know. This makes it harder for new products to establish themselves as alternatives, and can insulate established products from the positive forces of competition and innovation. Ultimately, if new products are not seen as useful alternatives to existing ones, then one should expect higher prices in these markets.Footnote 17
- The last two studies show that, when professions are free to advertise, the "race to the bottom" feared by regulators may not, in fact, occur. Rather than lowering the quality of services, the result of advertising is to make affordable care available to more patients without any associated decrease the quality.
This evidence calls into question the validity of regulations that restrict advertising. Rather than achieving intended policy objectives in a manner that provides the maximum scope for competition, there is a risk that restricting advertising may cause consumers to pay unnecessarily high prices.
Data required to support evidence‑based assessments of advertising restrictions
With these studies in mind, the Bureau set out to analyze advertising restrictions in some of Canada’s health care industries. We surveyed a broad cross‑section of provincial regulations governing pharmaceutical, dental, and veterinarian services across Canada, and discovered that most regulators do tend to restrict advertising in some form.
Our survey found that there is a broad range of advertising restrictions currently in place. While restrictions vary on a profession‑by‑profession and province‑by‑province basis, some form of restriction appears to be present in each province and profession that we studied. For example, price advertising, where a professional advertises the prices that they will charge for particular treatments, is often limited by regulation. As well, comparison advertising, where one practitioner compares his or her skills with those of another practitioner, is typically prohibited in the professions that we studied.
However, the mere presence of advertising restrictions is not the whole issue. The issue, rather, is three‑fold. First is whether these regulations serve a legitimate policy objective, like preventing the dissemination of misleading information. Second is the effect that the restriction has on the prices and quality levels in these professions. And third, if it is found that advertising restrictions do, in fact, increase prices or otherwise harm consumers, is an exploration of whether there could be less restrictive means of achieving policy objectives.
On the first issue — whether advertising restrictions serve a legitimate policy objective — we have little reason to doubt that regulators are exercising their mandate with good intentions. Both the economic literature about lemons and the Supreme Court note the potential risks of truly unrestricted advertising, and provide some justification for restrictions.
It is the second issue — the effect that restrictions have on consumers — that is less clear based on current evidence. We know, from the economic literature surveyed, that there is a risk that advertising restrictions may cause consumers to pay unnecessarily high prices. What we do not know, given that these studies were undertaken in the context of different products and different jurisdictions, is how well they apply to the surveyed health care professions in Canada.
To determine the effect that advertising restrictions have on consumers, we need to examine the best evidence available. Given that advertising restrictions have been in place in Canada for a long time, the best evidence would be an empirical study of the actual effects that advertising restrictions have had on consumers. Such a study would compare the prices and quality levels that consumers in Canada receive, compared to those in jurisdictions with fewer restrictions on advertising.
Such studies, however, require data that are not readily accessible. The Bureau’s research has found that these data, if they exist at all, reside in the filing cabinets of individual practitioners, and are not centralized in a meaningful way. To be used in an empirical study, the data need to be collected, compiled, and made available for researchers to analyze. We recommend that governments and self‑regulatory bodies should consider doing just that.
Getting the balance right between ensuring that legitimate policy objectives are met and ensuring that competition is not unduly impeded should not be judged solely on the subjective merits of whether a rule seems appropriate. Rather, it should also be judged on the best available evidence, including an empirical comparison of the effect that advertising restrictions have on marketplace outcomes. Only with this evidence can we assess whether advertising restrictions are, on balance, helping or hindering. If, in fact, the evidence shows that consumers subject to advertising restrictions pay higher prices or are otherwise harmed by those restrictions, then it is prudent to assess whether there is a less restrictive way to achieve policy objectives that does not result in harm to consumers.
How to study the effects of advertising restrictions
In order to prepare empirical evidence of the effect that advertising restrictions may have on competition, a researcher would need to compare the prices, quality levels, and other relevant factors experienced by a "control group" with those experienced by a "treatment group".
In the context of health care advertising restrictions, the "treatment group" consists of the consumers who receive health care services in markets where advertising restrictions exist. The "control group" can either be:
- a similar set of consumers in a jurisdiction that does not have similar restrictions on advertising, or
- when advertising restrictions have recently been enacted, consumers in the same jurisdiction from prior to the implementation of the restriction.
Either way, well‑established statistical techniques can be used to compare prices, quality levels, and other relevant factors to measure the effect that the restriction has on these variables.Footnote 18
Specific marketplace rules, or specific methods of delivering health care services, can complicate any such analysis. In these circumstances, a researcher needs to ensure that these special considerations are incorporated into, and controlled for, in any empirical analysis.
Advertising restrictions have long been justified as a means to ensure that consumers receive high quality medical services. The concern has been that, absent regulation, the delivery of high quality services may be sacrificed as a result of cut rate prices.
However, economic studies of the effects of advertising restrictions have cast doubt on these justifications. Studies across a range of products and in a variety of jurisdictions find that, when advertising restrictions are lowered or removed, consumers do not experience significant quality reductions, and may even benefit from lower prices.
These studies highlight the need for further evidence‑based assessment of health care regulations in Canada. Regulation may not, in fact, be necessary to ensure satisfactory patient outcomes and yet, regulations can have negative or unintended effects on the marketplace, leading to higher prices for consumers, less innovation, and diminished levels of competition.
This report calls on governments and self‑regulatory bodies to begin collecting and compiling information on marketplace outcomes in Canada’s health care markets, and to move toward greater emphasis on empirical evidence in decision‑making. Through proper analysis of these data, evidence‑based assessments can be made of the suitability of advertising restrictions.
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