For the first decade or so of their existence Medicare (the government program subsidizing health care for the elderly) and Medicaid (the government program subsidizing health care for the poor) operated on a cost-plus basis. In other words reimbursements to doctors and hospitals were based on the providers’ costs and, as you might expect under a system with such perverse incentives, physicians’ salaries rose very rapidly (at a multiple of the non-healthcare rate of inflation), hospital revenues rose rapidly, health care costs rose rapidly, the system became unworkable, and, by the late 70’s, the compensation system was changed in an attempt to control costs. This was also the period during which the federal government offered enormous subsidies to prepaid health plans known as “Health Maintenance Organizations” for similar reasons.
But during this period the federal government strongly suggested to the states that they require Certificates of Need before allowing new healthcare facilities to be built, before allowing existing healthcare facilities to expand, or before allowing healthcare facilities to acquire new equipment e.g. X-ray machines, CAT scanners, MRI machines, etc. “Mandated” is too strong a word since the federal government’s ability to make demands on the states is actually quite limited.
A CON is a form filed with the state that, in effect, demonstrates that the proposed facility or equipment does not compete with existing facilities in the area. A lengthy review process substantiates the claims in the CON. Already existing facilities, as you might imagine, are quite motivated to fight the opening of new competitive facilities and attempt to use the CON review process to block competitors and frequently succeed.
The rembursement system that motivated the federal government to suggest Certificates of Need is long gone but the CON process remains. Three quarters of the states require CON’s including New York, Florida, Georgia, Pennsylvania, Michigan, and Illinois. The Federal Trade Commission has determined that health care costs in CON states are, in general, higher than in non-CON states.
The CON process works in a number of ways to prevent competition in health care. First and most obviously it limits competition among health care providers. But there’s also a secondary effect: by limiting the market for big-ticket medical equipment it discourages new companies from entering that market and prevents economies of scale in companies already in that market.
So based on the experience in health care in the United States we have a handy roadmap for creating a cartel in the health care industry:
- Limit the number of professionals by creating a bottleneck in medical education.
- Limit the number of facilities through the CON process.
- Prevent the facilities that do exist from competing with each other throught the CON process.
- Discourage entry into the medical equipment business by constraining the market universe.
- Discourage competition in pharmaceutical production through patents.
I don’t doubt for a minute that each of the steps on this roadmap has benefits both for healthcare providers and for healthcare consumers. Limiting the number of professionals, for example, ensures the highest possible quality training for professionals; the patent system subsidizes the development of new pharmaceuticals.
But the healthcare system built on that roadmap doesn’t operate in a free market and, in order for market forces to influence the cost of health care, there has to be a free market. It’s a prerequisite; it won’t arise spontaneously.
Previous post on this subject:
Federal Trade Commission, Improving Health Care: A Dose of Competition
John Locke Foundation, Certificate-of-Need Laws: It’s Time for Repeal
Tufts Managed Care Institute, A Brief History of Managed Care