Tag Archives: Mercatus Cetner

Should Regulation Prohibit Self-Penalizing Behavior?

Last weekend, a guy ordered the “Sourtoe Cocktail” at a hotel bar in Dawson City in the Yukon.  The drink is garnished with a real (preserved) human toe. The patron downed the drink, deliberately swallowed the toe, then paid the bar a $500 fine for swallowing the toe.

sour toe

Photo credit: Philippe Morin/CBC

This is the kind of anecdote that would prompt health and safety advocates in that less-civilized country south of the border (the United States) to call for a new regulation — probably one prohibiting the use of human body parts in cocktails. In my humble opinion, the story is a good example of why it’s a waste of government’s time to regulate against behavior that carries its own penalty.

In fact, there’s a double penalty in this case. First is the yuk factor.  I wouldn’t order a drink with a toe in it, much less swallow the garish garnish.  Second is the monetary fine imposed by the bar. And the bar subsequently raised the fine to $2500, since now the establishment has to pull a backup toe out of mothballs. (Presumably that’s the one on the plate of salt in the photo.)

That double-whammy already ensures that swallowing a toe in one’s drink will be a rare occurrence. Yet there is still some risk that it will happen again; a precautionary approach would suggest that a new regulation is indeed needed unless the drink can be proven absolutely safe.

The tale of the Sourtoe Cocktail is a fanciful (but real) example of self-penalizing behavior that is (apparently) not yet prohibited by the Canadian government. The U.S. government, however, has seen fit to enact regulations prohibiting much more mundane behavior that carries its own penalty.

For example, consider energy efficiency standards for appliances used by consumers and businesses. These standards effectively ban the sale of appliances that cost more to operate because they use more electricity or gas. Energy efficiency can have environmental benefits, but in many cases, most of the benefits the government claims for energy efficiency standards come in the form of lower energy bills for the users. In other words, the decision to buy a less-efficient washing machine, furnace, or refrigerator carries its own penalty in the form of higher energy costs.

The Department of Energy’s proferred justification for these regulations is that consumers harm themselves by placing too low a value on the future energy savings. That’s a debatable point that Ted Gayer and Kip Viscusi have amply dealt with in a recent study supported by the Mercatus Cetner and published in the Journal of Regulatory Economics. My colleague Sherzod Abdukadirov listed a bunch of regulations that employ similar logic in his recent post.

Even more questionable is the regulation regarding commercial washing machines that I reviewed for the Mercatus Regulatory Report Card. The Notice of Proposed Rulemaking for this regulation seriously argued that greedy, profit-oriented businesses would leave money on the table by refusing to invest in cost-saving, energy-efficient washing machines that would generate a high rate of return due to the energy savings!

With all the ways people find to harm each other, do we really need regulators to police behavior that carries its own penalty?

New Research on West Virginia’s Medicaid Reforms

Today, the Mercatus Cetner released a new policy brief by Tami Gurley-Calvez on Medicaid reforms implemented in West Virginia, based on a working paper she wrote this fall.  In 2007 the state enacted a Medicaid redesign with one objective being to reduce the rate at which Medicaid patients visited emergency rooms for non-emergencies. Additionally, the plan, called Mountain Health Choices, was intended to incentivize healthy behaviors among Medicaid recipients.

The “choice” in the new plan was an option for women and children to opt into an enhanced plan or default into a basic plan. The enhanced plan offered greater benefits but required participants to agree to “doing [their] best to stay healthy’ and to agree to visit their primary care physician for non-emergency treatment. The objective of reducing ER visits was to both reduce healthcare costs for state taxpayers and to improve healthcare outcomes.

Gurley-Calvez finds that with the Mountain Health Choices reforms, patients on this enhanced plan did visit the emergency room at lower rates. However, patients who defaulted into the basic plan began to visit the emergency room at a higher rate, potentially because they were not eligible for treatment for some illnesses with a primary care doctor. She explains:

Based on this research, states should consider whether they can create a greater connection between health providers and members’ involvement in their own health care. However, policymakers must be cognizant of what drives member decision making in their policy designs. In the West Virginia case, a majority of members did not enroll in the enhanced plan in the short term despite additional health coverage and no direct monetary costs to enrollment. Further, states should consider the possible costs, both near term and future, of restricting treatment options by limiting coverage levels.

This case of attempted cost savings by changing incentives represents an ever-present challenge in public policy. Predicting how people will react to new policies in a changing world is difficult, and policymakers should not be overly confident that the incentives that they design will result in the outcomes that they anticipate.