Competition is good medicine

by John Hood, John Locke Foundation and NC SPIN panelist, January 13, 2014.

Although the 2013 legislative session produced many victories for economic freedom, a notable exception was the unwillingness of lawmakers to encourage competition and innovation in medical care.

North Carolina continues to use an archaic form of regulation called “certificates of need” to protect hospitals from competition. Unless the state gives you a CON, you can’t build a new hospital, add a new surgical center, or purchase a major medical device. The practical effect of such a policy is to create local monopolies or duopolies for expensive medical treatments or procedures. Don’t like the price or quality of the services available from the state-approved hospital or hospitals in your area? That’s too bad — unless you can afford to leave the area for care.

Proponents of CON laws say that they save money for patients, insurers, and taxpayers by avoiding excess capacity in the system. In other words, they say that health care is different from every other sector of the economy, where the claim that restricting supply reduces the price would rightly be seen as ridiculous.

As my colleagues Jon Sanders and Roy Cordato have established, there is little empirical evidence to support the idea that the price system works in reverse for medical services. Because some states have abolished CON regulation while others (such as North Carolina) have retained it, researchers can identify and hold other variables constant and then try to detect differences potentially attributable to CON. In most cases, the resulting studies have not been friendly to the CON concept. It turns out that protecting hospitals from competition primarily boosts the income those who work or sell services at those hospitals.

One recent study looked at the market for acute cardiac care. Vivian Ho of Rice and Meei-Hsiang Ku-Goto of Baylor examined Medicare data to see whether states with CON and states without CON differed in prices and Medicare reimbursement for coronary artery bypass graft (CABG) surgery or percutaneous coronary interventions. They found that deregulated states had lower prices for CABG surgery and less Medicare spending in both categories. Noting that previous studies had found no improvement in service quality in the regulated states, the authors concluded in the April 2013 issue of Medical Care Research and Review that “CON regulations for CABG may not be justified in terms of either improving quality or controlling cost growth.”

Robust competition among hospitals and surgical centers on price and quality is a necessary but insufficient condition for true health care reform, which would empower patients with the information and financial incentives to purchase medical services more efficiently. To the extent consumers face artificial limits on their ability to choose among competing providers, the potential of consumer-driven health care to bring costs under control without sacrificing service quality or medical freedom will also be limited.

Because North Carolina has lived under a CON regime for decades, outright repeal of the regulatory scheme, although preferable, may not be achievable at this time. So lawmakers should at least consider lifting CON restrictions for some markets or procedures, such as outpatient surgeries. Would doing so put additional pressure on some of North Carolina’s incumbent hospitals? Yes. But our current system for delivering medical services is going to have to change way one or the other. We can’t afford it. And the idea that transferring more decisionmaking authority to Washington, as the Affordable Care Act does, will make that delivery system more efficient is an even more fanciful notion than the idea that restricting hospital supply reduces the price of hospital services.

Rather than continuing to indulge flights of fancy, North Carolina needs to take reasonable steps towards real health care reform. The state can’t do much about the Obamacare debacle at the moment. But the state can reform its own regulatory policies to encourage greater competition and innovation. That way, when Washington finally gets its act together and pursues real health care reform, North Carolina will be ready.