Hospital Competition Would be a Good Thing

Monday I blogged that ACA (aka the Affordable Care Act aka ObamaCare) is an unworkable political compromise between private health care and government run health care in which insurance companies become rent collectors but add no value. I asked “is it time to just give up the pretense and go to single payer?” – certainly something many on the left believe sincerely would be a good thing.

Reader John McClaughry commented:

“Don't cave in to the socialist "solution" - single payer - just because the fascist "solution" - ACA - fell apart. Replace the unconstitutional individual mandate with income tax based recapture of unpaid medical bills, plus capping the deduction for high priced plans, equalizing tax advantages for individuals, expanding HSAs, allowing catastrophic coverage, breaking up regional health care cartels, removing the efficacy requirement for pharmaceutical patents, allowing insurance purchasing groups, and imposing med mal tort reform. That's for openers.”

John’s suggestion that regional medical cartels be broken up is probably the most important.

A free market usually delivers better product at a decreasing cost over time. That’s even happened with energy despite fears of “peak oil” and it’s certainly happened with computers, telecommunications, and transportation. In order for a free market to work, there has to be competition. We business people don’t willingly lower our prices (and profits); we make reductions so our customers don’t desert us for lower-priced competitors. We don’t plow our money back into R&D just because we love to innovate; we make that investment because we’ll be out of business if a competitor has either a better mousetrap or one that costs less to make.

In much of the country including Vermont competition between hospitals is deliberately suppressed because of the socialist misconception that prices are lowest without the “cost” of over-capacity. Hospitals must get a Certificate of Public Need (CPG) in order to make an investment. They won’t get the CPG if a nearby hospital can demonstrate it already has capacity which will be duplicated. The CPG process assures no competition or pressure to lower cost and prices develops. In theory hospital rates are then regulated to make sure monopolies aren’t exploited. What really happens is that, without fear of competition, hospitals layer on costs such as high pay for doctors and administrators (but not nurses) or overelaborate facilities, which then justify higher prices.

In the competitive world, prices only go down if there is over-capacity. If my competitor and I are running our factories flat out, we won’t reduce prices. But we will add capacity (or someone else will). Pretty soon, as much as we don’t want to, we’re cutting prices to compete. If want to survive, we’re also desperately investing and innovating to distinguish our product and reduce the cost of production. Our customers win.

If there’s competition, some hospitals will fail; that’s a fact. Once airfares became competitive, some airlines failed (and survivors bought their assets at bankruptcy sales). Some of the hospitals which will fail will be “non-profits”. A socialist would say non-profits can offer lower prices because there are no investors demanding a return. Where that’s true, the non-profits will be survivors. If not, they deserve to fail – and should so that more efficient competitors can take their place.

If there’s competition, hospitals will be tempted to cut corners. That’s true and there are expenses we want them to trim. But what about safety? That’s what regulation is for. Airlines can cut costs (and prices) by jamming us in like sardines in the cheap seats; but they can’t put more people on a plane than can be safely evacuated. They can’t skip maintenance. Competitive hospitals will still have to be regulated, just not as much as they are now.

Of course competition is only effective where the consumers care about cost. That’s why McClaughry also suggests HSAs, available catastrophe-only plans, and income tax recapture of unpaid bills.

See also:

A For-Profit Surgical Center is a Good Idea for Vermont

Nice Business To Be In

Freedom, Responsibility, and Preexisting Conditions

Time to Face the Health Care Facts