COVID in CALIFORNIA: HOW GOVERNMENT REGULATIONS CREATED CRITICAL HEALTHCARE SHORTAGES— PERMANENT PATIENT-CENTERED REFORMS NEEDED by Lawrence J

Independent Institute EXECUTIVE SUMMARY

COVID IN CALIFORNIA: HOW GOVERNMENT REGULATIONS CREATED CRITICAL HEALTHCARE SHORTAGES— PERMANENT PATIENT-CENTERED REFORMS NEEDED By Lawrence J. McQuillan, Jonathan Hofer, and Douglas E. Koehler

OVERVIEW heed this call to action. Perhaps even worse, reg- On January 19, 2020, the first documented US ulatory barriers prevented rapid and efficient case of the novel coronavirus (COVID-19) ap- private-sector responses, fueling the crisis and peared in the state of Washington. Easily transmit- harming healthcare consumers. In the end, the table, the virus found its way to California shortly public policy response played a high-stakes game thereafter in February—the same month that the of catchup as government-imposed regulatory first nontravel-related (“community spread”) case in the United States was confirmed in Solano County, California. On March 19, eight days after States and communities should have the World Health Organization officially declared credible pandemic preparedness plans the COVID-19 outbreak a pandemic, California to respond to an outbreak within their governor Gavin Newsom (D) signed Executive jurisdictions. The private sector should Order N-33-20, a statewide shelter-in-place order resulting in months of quarantine for tens of mil- play an integral role in preparedness lions of people. before a pandemic begins and should In the initial months of the COVID-19 re- be part of the national response. sponse, California, like many other states, was woe- fully unprepared and lacked the degree of flexibility required to adequately respond to the pandemic. straitjackets created breaking points in California’s The labor market for medical personnel was con- healthcare system. strained, medical equipment suffered from under- For enacting or enforcing regulations that cre- supply, hospitals were under stress, testing was in- ated critical healthcare shortages and that pre- adequate, and potential treatments suffered from vented a fast, efficient response to COVID-19 by a suboptimal economic environment—despite public and private entities, the Independent Insti- many past warnings. A 2005 report published by tute awards its eleventh California Golden Fleece® the US Homeland Security Council, for example, Award to a host of federal and state officials and warned of the potential threat of a widespread viral regulatory agencies, including the California legis- pandemic, stating that, “States and communities lature; Governor Gavin Newsom; past California should have credible pandemic preparedness plans governors; the US Centers for Disease Control to respond to an outbreak within their jurisdic- and Prevention (CDC); the US Food and Drug tions. The private sector should play an integral Administration (FDA); US Centers for Medicare role in preparedness before a pandemic begins and and Medicaid Services; US Customs and Border should be part of the national response.” Protection (CBP); labor unions, professional as- Officials at all levels of government failed to sociations, and boards representing medical per-

Copyright © 2021 by Independent Institute April 27, 2021 www.independent.org 2 | Independent Institute sonnel; and those representing the nation’s flawed importation of foreign-made products and the intellectual property laws. rapid manufacture by domestic producers. That political strategy proved to be destructive during POLITICAL FAILURE IN THE the COVID-19 pandemic. While regulations HEALTHCARE INDUSTRY benefited companies such as 3M over the years, COVID-19 exposed the ways in which regula- they were deadly obstacles to obtaining needed tions are used in California to benefit narrow in- supplies quickly after COVID struck. Public terest groups at the expense of consumers at large. safety was sacrificed to benefit politically con- In the healthcare sector, these interest groups nected interest groups. And although officials represent occupations (e.g., physicians, nurses, eventually adopted emergency liberalizations, by pharmacists), providers (e.g., hospitals, clinics, then much harm had already occurred to both urgent care centers, pharmacies), and suppliers patients and healthcare workers. (e.g., medical device manufacturers, drug devel- Personnel scarcity. Regardless of the adequacy opers). Each interest group typically has its own of medical supplies, if enough healthcare workers lobbying entity, such as the California Hospital are not available, patient care will suffer. And it’s Association. important to keep in mind that California suf- By supporting government regulations that raise fered from severe shortages of healthcare workers artificial barriers to entry, these interest groups are before the outbreak. The pandemic only exacer- able to increase their incomes, profits, and politi- bated these shortages, which became worse from cal influence. They have also learned that the sur- early 2020 through early 2021 although they were est means of blocking competition is to “capture” largely avoidable if not for the staggering number the regulatory machinery of governments and use of government rules that artificially restrict the it to create protected cartels that benefit privileged supply of qualified healthcare personnel and limit groups (their own members) while harming un- their optimal allocation. organized consumers. In addition to the resultant The stated justification for such strict govern- enforcement and administration costs, innovative ment controls has been ensuring patient safety, but lifesaving drugs and devices are delayed and com- the controls go beyond what is needed and do not petition among providers is short-circuited, thus allow market signals to determine where addition- increasing prices and reducing patient access to al workers are required and with what skill sets. higher-quality care. Once in place, the regulations prevent rapid ad- justment to changing circumstances. Healthcare EQUIPMENT AND LABOR workers who are qualified and available to work SHORTAGES are excluded from the market; thus, the supply of Despite multiple warnings years before the healthcare workers is artificially restricted, which COVID-19 outbreak, governments did not is especially harmful during a crisis. stockpile critical supplies adequately and main- For example, the California Board of Registered tained regulatory barriers that prevented fast and Nursing (CBRN), which operates much like a me- efficient market responses by private-sector entre- dieval guild, limits the number of students who preneurs wanting to alleviate emerging shortages. can attend nursing school. Any shortage of nurs- Governments also protected incumbent man- es, therefore, is never a case of individuals electing ufacturers of personal protective equipment not to enter the field—nor is it the case that not (PPE), ventilators, and other medical equipment enough people met the high standards that the from domestic and foreign competition, using field demands. To the contrary, according to the public safety as the justification. For example, the CBRN’s own reporting, more than twenty-one state of California erected barriers to the rapid thousand qualified nursing students were denied

Copyright © 2021 by Independent Institute April 27, 2021 www.independent.org 3 | Independent Institute enrollment during 2016−2017, or 60 percent of During this time, the United States fell behind in all qualified applicants. its per-capita testing levels—with California be- Facing a statewide nursing shortage during a coming one of the nation’s most visible examples pandemic, the CBRN continued to keep enroll- of poor testing rollouts. ment caps in place, a morally reprehensible act. These professional cartels hampered training and VACCINES, TREATMENTS, AND prevented employment levels from adjusting to THERAPEUTIC ANTIVIRAL DRUG market demands based on price signals. DEVELOPMENT Eventually liberalizations were adopted: Quali- The most important success story to emerge from fied healthcare workers from out of state were al- the COVID-19 pandemic has been the fast de- lowed to work in California (albeit with approval velopment of several (hopefully widely effective) from the government after filing paperwork). Re- vaccines. It is important to note that this resulted tired workers were welcomed back. Scope-of-prac- from unleashing the innovative potential of non- tice restrictions and staffing ratios were relaxed, governmental research entities—most of them giving supervisors more flexibility. Licensing re- private pharmaceutical companies—while at the quirements were also eased to allow faster hiring of same time minimizing government interference healthcare personnel and more allocative flexibility. in the creative process. In fact, Pfizerexplicitly re- These were sweeping improvements that should jected US government research grants in order to be continued in perpetuity in order to help health- maintain its independence and “keep Pfizer out of care patients and medical personnel—pandemic politics.” or no pandemic. If it is the right thing to do now, Nevertheless, for a variety of reasons, includ- it is the right thing to do in the future. ing a confusing tiered prioritization system and a clunky software platform called PrepMod, Cali- BOTCHED COVID 19 TESTING fornia has struggled to get its allotted vaccines into Early in the COVID-19 outbreak, it became clear people’s arms. In fact, during the first four weeks that communities needed rapid, inexpensive, fre- of vaccine distribution, only Alabama, Georgia, quent testing. Yet procuring tests was a disaster and Virginia performed worse than California in from the start. The CDC botched the initial roll- vaccinating its population. The state vaccinated out and covered up its mistakes, while at the same only 2,468 people per 100,000 compared to the time the FDA prevented private alternatives from national average of 3,300. reaching the market. Only after opening up the Despite the stumbling vaccine rollout, however, testing market to private innovators and more lab- this recent liberalized approach to vaccine devel- oratories was progress made; yet the goal of rapid opment has the potential to accelerate new drug and frequent at-home nonprescription testing has development significantly in the future. not been achieved after one year—an unmitigated disaster that has cost lives and devastated the econ- PATIENT-CENTERED omy due to government-imposed lockdowns. RECOMMENDATIONS Eventually, test manufacturers—in partner- During the first months of the COVID-19 out- ship with a number of agencies, including the break, government healthcare regulators tried to do National Cancer Institute—were allowed to send business as usual, but it quickly became apparent in samples voluntarily to verify testing accuracy. that regulations, designed to benefit incumbents, But the policy was short lived and commercial were causing a worsening crisis in care. Americans test developers were required to request emergen- deserve a more responsive healthcare system that is cy use authorizations with their validation data, able to respond to new circumstances quickly and a step backward from previous FDA protocol. nimbly; that provides convenient, high-quality

Copyright © 2021 by Independent Institute April 27, 2021 www.independent.org 4 | Independent Institute care at affordable prices; and that encourages rap- 4. Permit interstate and international com- id innovation to fight emerging threats and offer petition in healthcare occupations by allowing lifesaving breakthroughs. The following reforms a freer flow of talent. Consumers benefit from would help patients significantly: the increased choices that result from rigorous 1. Allow private companies in the United competition among providers. California should States and abroad to supply the equipment de- therefore open its market to qualified healthcare manded by the healthcare sector. Healthcare pro- workers in other states. Too many foreign-born viders should be able to source needed products physicians in the United States drive taxis, work from private manufacturers in the United States at car washes, or manage supermarkets instead of or around the world without licenses or permits as saving lives only because cartel regulations and long as each manufacturer certifies that its prod- visa restrictions protect native US residents from ucts are FDA compliant or compliant with the competing with foreign-born doctors. standards of a private governing body. The default 5. Free up testing by allowing private com- should be “permissionless innovation and compe- panies to provide tests, testing sites, and test- tition,” with any damages stemming from prob- ing laboratories without government approval. lematic products to be remedied in the civil courts Both the state of California and the US govern- through tort proceedings. ment proved early on to be incapable of provid- 2. Abolish scope-of-practice rules and staffing ing fast and reliable mass testing for COVID-19. ratios. Research demonstrates that adverse health As public outrage increased, government officials outcomes have not occurred when states relaxed relaxed rules to encourage private-sector partici- their scope-of-practice rules. Eliminating such pation and innovation. As with medical supplies, rules would help restore the flexibility that health- the standard should be permissionless innovation, care facilities need to function efficiently. For -ex holding companies accountable for fraud or dam- ample, a study in Medical Care Research and Review ages through criminal or civil court proceedings. found no differences in health status between pa- The same approach should become the norm for tient groups assigned to a nurse practitioner versus all testing, not just for COVID-19. a primary care physician two years after treatment. 6. Permanently allow telemedicine across Another study published in 2018 in the Journal state lines. State licensing laws have stifled the de- of Health Economics found that health outcomes velopment of telemedicine, because such laws re- were comparatively better after scope-of-practice strict the practice to only those who are licensed in laws were eased. the state. However, it is difficult for many people 3. Reduce practice barriers for nursing and to visit a clinic or hospital for care, especially older all other healthcare occupations. Government persons and people with disabilities. Telemedicine occupational licensure of the healthcare industry is is therefore an invaluable development that lowers not needed. In fact, evidence that licensing results the opportunity costs for people seeking medical in better health outcomes is spurious. Additional- evaluations and consultations. ly, a white paper prepared by the Department of During the interme of the pandemic, a number the Treasury, Council of Economic Advisers, and of governments waived these licensing laws that Department of Labor during the Obama Admin- targeted telemedicine. In the state of California istration found that despite the increased costs due specifically, the original Proclamation of a State of to licensing laws, consumers are not receiving bet- Emergency and Executive Order N-43-20 lifted ter health services. It is simply impermissible that, limits on telemedicine, while a Medicaid waiver facing a nursing shortage amidst a pandemic, the allowed for the reimbursement of payable claims CBRN would maintain its program admissions by out-of-state telehealth providers. At the federal caps. level, a HHS waiver relaxed regulations as well.

Copyright © 2021 by Independent Institute April 27, 2021 www.independent.org 5 | Independent Institute 7. Speed the development and deployment of the world. Under a prize model, govern- new vaccines and therapeutic drugs. A number ments, private nonprofits, and other entities of reforms could be continued or adopted that could offer lump-sum grants—$5 billion, for would speed up the development of new vaccines example—to a company or partnership that and therapeutic drugs. Ten years, on average, to develops a drug for curing an identified dis- develop a new vaccine is nonoptimal. A number of ease. This prize model reduces government reforms are worthy of further consideration: interference in research and development a. The federal government should continue and while freeing entrepreneurs to innovate. expand the Accelerating COVID-19 Thera- f. A variation of the prize model advanced by peutic Interventions and Vaccines (ACTIV) Nobel laureate economist George Stigler in- program to expedite clinical trials and accel- cludes a stipulation that prevents the prize erate the review of trial data. “winner” from patenting the new knowledge b. The mandate of the FDA should be changed as a condition of receiving the grant. Such a to require evaluating only the safety of a pro- stipulation would replace patent protection posed new drug, not its efficacy. As a result, with a lucrative prize and allow the world’s initial R&D costs would be reduced, and a scientific community to learn from and uti- strong case could then be made for shorten- lize the new knowledge immediately. ing the duration of pharmaceutical patents. In addition to these reforms, a number of other (Any FDA delays in approving a given drug COVID-19–related regulatory changes that have could be tacked onto the duration of the already been implemented on a temporary basis patent equal to the actual delay.) If this is should be continued permanently or even expand- prevented, complex arrays of property rights, ed. These include, but are not limited to, the emer- or “patent thickets,” can form, reducing the gency liberations found in Table 1. application of new ideas and making it more These changes should be adopted permanently difficult to commercialize new products. regardless of when the next healthcare crisis strikes. c. Drugs approved in select foreign countries Such reforms are the moral response because should be allowed on the US market, with ap- they will improve the lives of people today and of propriate disclosures. This reciprocity would future generations by facilitating better access to permit drugs to reach consumers quicker in affordable, high-quality care and more lifesaving the United States, bypassing FDA regulato- breakthroughs—a win for all patients regardless of ry bottlenecks. Reciprocity should apply to the existence of a pandemic. medical devices and PPE as well. d. Patent applications should be published im- LAWRENCE J. MCQUILLAN is founder mediately. Prior to 1995, applicants could and director of the California Golden Fleece® abuse the patent system and hold secret pat- Awards. He is also a senior fellow with the ent rights that might “surface” during legal Independent Institute and director of its Center disputes, earning them the moniker of “sub- on Entrepreneurial Innovation. marine patents.” Now patents generally get JONATHAN HOFER is a policy research published eighteen months after their priori- associate with the California Golden Fleece® ty date. This reform is a noted improvement; Awards and a policy analyst with the Institute’s however, innovation could benefit from fur- Center on Entrepreneurial Innovation. ther transparency. DOUGLAS E. KOEHLER is a policy e. Operation Warp Speed should be wound researcher with the Institute’s Center on down, but its “prize” feature should be ad- Entrepreneurial Innovation. opted widely in the United States and around

Table 1. EMERGENCY LIBERALIZATIONS THAT BENEFITED CALIFORNIANS Personal Protective Equipment and FDA authorized, in multiple EUAs, the use of unapproved Medical Equipment medical products and unapproved uses of approved products if the company certifies that the product is FDA compliant. Products include PPE, medical devices, diagnostic tests, ventilators, and more. FDA allowed unlicensed companies to manufacture PPE and medical equipment. FDA fast-tracked the importation of PPE and medical devices subject to an EUA. These new rules were implemented by the CBP. Trump Administration activated the Defense Production Act to compel production of medical equipment, to prevent the exportation of PPE, and to mobilize the military for COVID assistance. Healthcare Personnel State scope-of-practice rules were eased. State licensing, certification, training, and staffing ratios were relaxed for healthcare occupations and facilities. State rules were streamlined to quickly hire inactive/retired healthcare professionals and qualified out-of-state medical personnel. Some state training rules for nursing students were waived, allowing the students to graduate early and be hired sooner. COVID-19 Diagnostic Testing FDA reversed its course, allowing commercial manufacturers to sell tests to laboratories without an FDA EUA (this was later reversed). Test manufacturers could voluntarily send samples to government and academic labs to verify the accuracy of the manufacturer’s test (later reversed). FDA transferred to states oversight responsibility for lab- developed tests. Newsom Administration turned to the private sector and signed mass-testing contracts with OptumServe, PerkinElmer, and Verily. FDA issued EUAs for at-home, self-administered test kits developed by Lucira and Abbott (prescription required) and Ellume (OTC). Vaccines and Therapeutic Drugs Predevelopment and postdevelopment government funding of promising vaccines and therapeutics through Operation Warp Speed. Channeled payments through a private contractor to expedite the process (Other Transaction Agreement [OTAs]). Expedited clinical trials and the review of trial data through the ACTIV program. FDA issued EUAs for monoclonal antibody therapies and COVID-19 vaccines.

Source: The table was compiled by the authors using material in this report: Lawrence J. McQuillan, Jonathan Hofer, and Douglas E. Koehler, COVID in California: How Government Regulations Created Critical Healthcare Shortages— Permanent Patient-Centered Reforms Needed (Independent Institute, April 2021).

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