The Red Tape that Suffocates Healthy Hospital Competition

certificate of need laws

You appreciate your local hospital, right?

It’s there for you when you need a monthly checkup, or for when you need serious medical care.

It’s obvious that without hospitals we’d be screwed.

Duh.

It’s also true that constant improvement and innovation are vital to a beneficial hospital.

Hospitals should be up to date on the latest medical technology and research. Patient care should be up to the standard of the medical community. Hygiene and safe medical practices should be followed and advanced.

If your hospital isn’t up to date it can prove to be an unpleasant and potentially dangerous experience.

So what are your options if your local hospital is less than acceptable?

Well, in a normal world you would just go to the next closest hospital. This hospital would most likely be a competitor. Since they’re a competitor, they’ve noticed the less than average service being provided by the other hospital.

Their staff and facilities are preferable to your other local hospitable.

So obviously you go here, from now on, for all your medical needs.

Forget the other guy, he wasn’t providing enough value to keep your business.

But what happens if you don’t have an alternative to your local hospital?

What if the crappy hospital was the only one in your area?

What if local competition between hospitals was stifled by local bureaucracies?

What if this scenario was actually reality?

Sadly, it is.

Hospital competition and diversity in the market is something to be worried about.

And it’s all thanks to state and local regulations, specifically the “Certificate of Need” law.

What’s a “Certificate of Need” Law?

Simply put, it’s a legal document that is required in many states before medical facilities can be built. To acquire this certificate, you have to prove that the new facility fulfills the “public’s need.”

Think of it like asking for permission, but to get that permission you have to convince bureaucrats why the public needs it.

“Why does the public need another hospital? How will the public benefit from this? Does the public legitimately need another hospital?”

This law is meant to curb excess waste, as well as prevent an oversaturated market.

Certificates of Need are required before building any medical facilities in 36 states. They’re managed by local, state, and some federal jurisdictions.

On paper, it sounds like a good policy. No one wants dozens of average hospitals in the same area. That would be a waste of resources.

But like every good-mannered government policy, it sounds great on paper, but shows up lacking when applied.

Here are few reasons why the “Certificate of Need” is hurting the hospital industry…

It Limits Competition

Laws like these necessarily curb competition. They set up barriers to new comers entering the market.

You have to prove to a government agency that A) there’s a need in the market, and B) you can fill that need.

The long decision process for this permit also keeps out a lot of potential new businesses. In a market, waiting several months before starting your business can mean the difference between success and failure.

Regulations always result in lower competition rates.

In a market where implementing new advancements and technology is imperative to a well-oiled business model, a lack of competition can severely harm that business model.

Economist Thomas E. Getzen made this apparent in 1977 when he pointed out that

“Almost every well-established, wealthy, and politically connected hospital that applied for certification eventually got it, while denials fell disproportionately on outsiders that threatened the status quo or weaker institutions that lacked a constituency.”

The Competitor’s Veto

Certificate of Need laws usually allow established businesses to decide the fate of new comers.

That means existing companies can choose whether your business fulfills “public need.”

Isn’t that ridiculous?

It gives control over whether you compete or not to your competitors. That’s like allowing wolves to decide which sheep get to live or die.

Certificate of Need laws put the predator in control. It puts the little guy at the mercy of the big corporation.

It Creates Monopolies

Whenever you limit who can enter the market, you automatically create a monopoly; or at best, an oligarchy.

The established companies are protected against competition. These guys got in the market first. They enjoy the benefits of CON laws.

Now, I know what you might be thinking…

“The Hospital industry isn’t that competitive anyway. It’s already a monopoly in many ways.”

You’re right, but see, that’s what economists call a “natural monopoly.” Think of sewage, electricity, and water services. Those markets are obviously monopolistic due to natural barriers to entry.

Natural monopolies are fine. There’s nothing inherently wrong with them.

However, government monopolies are inherently wrong. They create perverse incentives, price distortions, and corruption.

Certificate of Need laws create a government monopoly (more specifically, a government-granted monopoly).

If You Limit Supply, You Increase Prices

The basic premise behind CON laws is that over supply creates higher prices…

The basic assumption underlying CON regulation is that excess capacity (in the form of facility overbuilding) directly results in health care price inflation. When a hospital cannot fill its beds, fixed costs must be met through higher charges for the beds that are used. Bigger institutions have bigger costs, so CON supporters say it makes sense to limit facilities to building only enough capacity to meet actual needs. (source)

This, however, goes against basic economics.

The law of supply and demand states that if demand remains the same and supply lowers, the prices will rise.

If you wanted to lower prices in the hospital industry you would try to raise supply (i.e build more hospitals). If demand remains the same and supply increases, prices will fall.

CON laws defy the law of Supply and Demand. They raise, not lower hospital costs.

What Defines “Need”

Certificate of Need laws are different from licensing laws because they focus on “need” not “qualifications.”

This is what irks me the most about CON laws. They focus on a subjective and superficial term.

What exactly defines “need?” Who defines it? What’s the standard?

These questions are sorely lacking in Certificate of Need laws, as is seen in different local jurisdictions…

“Applicants [in Kentucky] are also required to go to a hearing where they must prove that existing moving services in the state are ‘inadequate’ and that a new moving company will serve the ‘present or future public convenience and necessity.’ It’s hard to prove such things, since no law defines or explains what these terms mean.

“This law is so arbitrary that the only consistent rule appears to be—no competition allowed. In one case, an applicant who had been in the moving business for 35 years was denied a license even though the Kentucky Motor Carriers Division found him fully qualified—simply because it said that existing moving services were ‘adequate.’” (source)

“When four of [the moving truck competitors in Missouri] did file objections, department officials offered Munie the choice of withdrawing his application or appearing at a public hearing where he would be required to prove that there was a “public need” for his moving business. The law is not clear on how exactly he would do this — “public need” is not defined, nor are there any rules of evidence or procedure in the statute.” (source)

CON laws fail to do their job. How can you properly regulate a service if you don’t have an objective standard with which to judge?

In the end, it prohibits capable businessmen from entering the market, and for no good reason.

Conclusion: The Error of a Centralized Markets

Bureaucracies assume they can adequately regulate the market.

They think they can gage how high supply and demand will be. Most of the time, they end up flat on their faces.

The Certificate of Need law is no different.

In the name of capping prices and offering affordable healthcare, they end up encouraging the very opposite.

This is the failure of Centralized Planners.

You can’t control the market without creating nasty consequences.

You can’t regulate economic laws and expect everything to run smoothly.

You can’t help people by controlling their lives.

36 states have some form of a Certificate of Need law.

How many hospitals haven’t been built as a result of CON laws?

How many people have received subpar health care because of CON laws?

How cheaper would hospital bills be if these laws were repealed?

Every market regulation has an unintended consequence, and they always end up hurting innocent people like you and me.

In 2007, Hawaiian bureaucrats denied the building of a $220 million state of the art private hospital on Maui.

Their reason for the denial? The new hospital would negatively affect the existing government run hospital. This is despite the fact that if you lived on the South side of the island, it took 90 minutes to reach the government run hospital in ambulance.

Finally, in 2009, they approved construction. But the negative results of that decision are evident, not to mention felt by the local community.

Governments aren’t capable of regulating supply and demand.

They don’t know better.

And their ignorance ultimately ends up hurting innocent people, like the people of Maui.

If you want to learn more about how regulations hurt you and the economy, sign up for The Informer newsletter. You’ll not only learn about regulations, but also how to communicate it effectively to friends and family.
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About John-Pierre Maeli

Keeping it simple and crystal clear, because anything else is useless. I'm here to not only inform you, but to also connect with you. That's what The Political Informer is all about. Feel free to follow me on either Twitter or Google+ Let's talk!

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