Ill effects of limiting hospital competition

Imagine you’re ready to start a business. And let’s say when you go to the county courthouse for your government-mandated occupational business license, the clerk behind the counter tells you: 

“I’m sorry, but the State Business Regulators in Tallahassee have ruled that you failed to demonstrate on your application that your business would foster competition and promote quality and cost effectiveness to all residents of Sarasota and Manatee counties. Therefore, you cannot open your business.” 

This is not a made-up scenario, mind you. It’s real. And if it happened to you, your initial reaction likely might go something like this: You would look at the clerk, slack-jawed, and say: “I thought this was America … The land of free enterprise. What do you mean I can’t open my business? It’s a free country.”

But that’s how it really works in Florida’s hospital industry. Before anyone can open a new hospital, or say, add beds or MRI or CT scanners to an existing hospital, the hospital must receive approval from the Florida Agency for Health Care Administration. It controls the supply of hospitals in Florida and is the arbiter of what cities, counties or communities “need” or can have a hospital.

Last week, the agency rejected Sarasota Memorial Healthcare System’s state-mandated certificate of need application to open a hospital in Venice. Its rejection said exactly what we quoted above — that Sarasota Memorial failed to demonstrate that its new hospital would foster competition and promote quality and cost effectiveness to all residents of Sarasota County.

In a real free-enterprise system, none of this would be any business or concern of “the state.” Sarasota Memorial, or anyone else, would have the freedom to the use of its own property (e.g. capital) to provide whatever medical services its operators believe would be useful to the community — and at a price and cost that would be profitable for the hospital. It would have the freedom to take its own risks.

Of course, this free-market idea becomes somewhat distorted in the case of Sarasota Memorial. It is taxpayer supported, and its countywide elected board of trustees has moral and fiduciary duties to serve Sarasota County taxpayers as fairly and equitably as it can.

Nonetheless, even as a tax-supported, nonprofit organization, Sarasota Memorial’s board still has some freedom to determine what services are in the best interest of the organization and community.

Except when it comes to expanding. 

Ever since 1973, Florida has been among 36 states restricting the supply of hospitals and medical services through the certificate-of-need process. A year after its adoption, the federal government enacted more laws that tied federal health care dollars and funding contingent on having a certificate-of-need process.

The theory was that if federal and state governments restricted and limited the supply of hospitals and some services, they would stop overinvestment in hospital facilities and equipment, which would help avoid overutilization of health services and help save  on Medicare and Medicaid costs.

Nice theory. But flawed. More on that below.

In addition, Florida also has used its certificate-of-need process to help subsidize and pay for the “charity care” the state requires hospitals to provide to the poor. Here is how it works, according to a 2015 study of Florida’s certificate-of-need laws by the Mercatus Center at George Mason University:

“By limiting the number of providers that can enter a particular practice, and by limiting the expansion of incumbent providers, certificate-of-need regulations effectively give a limited monopoly privilege to providers who receive approval in the form of a certificate of need. 

“Approved providers are therefore able to charge higher prices than would be possible under truly competitive conditions. As a result, it is hoped that providers will use their enhanced profits to cover the losses from providing otherwise unprofitable, uncompensated care to the poor. In effect, those who can pay are charged higher prices to subsidize those who cannot.”

But here is what the Mercatus researchers also found out: “In reality, however, this cross-subsidization is not occurring.”

The Mercatus study details how Florida’s certificate-of-need laws have resulted in fewer hospital beds per 100,000 than the national average. The table below shows that Sarasota, Charlotte and Pinellas counties actually are above the national average of 362 hospital beds per 100,000 population. But if you viewed the data another way, patients in Pinellas and Charlotte counties have more choices than those in Manatee and Sarasota counties.

Likewise, the Mercatus study reveals that Florida has fewer MRI and CT machines per 500,000 than the national average.

The authors of the Mercatus study concluded by noting “40 years of evidence demonstrate that these (certificate-of-need) programs do not achieve their intended outcomes but rather decrease the supply and availability of health care services by limiting entry and competition.”

Yet another example of when lawmakers intervene to regulate a market, they always make it worse for consumers.