CON jobs and collusion

Our human nature leads us to believe that as good people we of course accept that rules are for everyone; it is just that we are special cases. Tax preparers are used to the complaints that this rule is unfair, it should not apply to me; or I am poor, I shouldn’t have to pay that. Economists hear this whine: I believe in competition in general, but my industry is a special case, to wit:

  • We need to work together – cooperation – not competition
  • My competitor wants to cherry pick the most profitable parts of my business
  • I can handle any increase in demand just fine
  • Competition will hurt my industry & increase costs
  • I bring all kinds of benefits to my community
  • Sometimes we hear this argument: My competitor is for profit, whereas I wear the not-for-profit halo

Economists think of another word whenever they hear voices urging cooperation, collaboration, or working together in place of ‘destructive’ competition. That word is collusion.

This blog has written here about the Missouri Certificate of Need (CON) laws and urged their repeal. We write again because all the excuses just listed came up before the Missouri Health Facilities Review Committee which decided the heavyweight contest between the two biggest hospital systems in central Missouri.

Much misinformation centers around the idea that somehow competition or capitalism does not benefit the health care industry. Little justification is ever given besides the brazen contention that the free market is responsible for our healthcare woes. In fact, we haven’t seen anything like a free market in health care for generations; the villain is bad government regulation.

Our favorite excuse is that my competitor is just cherry picking the most profitable parts of my business, as if it were not rational and good business to expand into the most profitable new areas. It strikes us as disingenuous and hypocritical for one to say that state power should be used in the public interest so that I keep my dominant position in the most profitable areas. It is not in the public interest that a hospital’s cash cows should be exempt from competition. Here as elsewhere competition will normally lead to more consumer choice, lower prices, higher quality of service, or all three. Oligopolies, not known for innovation, love sanctioned ‘collaboration’ that keeps potential competitors out of their markets.

Another bogus claim is that productive cooperation is not possible without protection from competition via the CON laws. To the contrary, competition will lead to better cooperation through specialization. One hospital could have a great burn unit, another well known expertise in open-heart surgery. It would normally be foolish for one to compete in the areas of the other’s great strengths; this can lead to sensible competition in the remaining areas, to everyone’s benefit.

Competition will increase costs??? Economists love this excuse because it conceals the true benefits of competition. To compete of course requires some investment or capital costs. But once these are in place the benefits will show themselves in reduced costs, higher quality, & so on. Conversely, keeping competition at bay via state law will enable a hospital to keep chugging along with no incentive to reduce costs.

We have noted earlier that the original motivation for the CON laws was to keep the spigot of Federal money open. That changed three decades ago, but the CON laws have not been repealed in many states. The reason is that CON is very useful in inhibiting competition. Ph.D. economists and attorneys with long experience in the antitrust area at the Federal Trade Commission and the Department of Justice have written about the CON laws. An excellent article from the Goldwater Institute summarizes the consensus and includes many useful references. Below are the highlights:

  • Medical costs are 11% higher in CON states
  • The Federal Trade Commission found in 1988 that “repeals of CON programs would not lead to increased hospital costs”
  • CON states have 99 fewer beds per 100,000 population and lower availability of MRI services, CT scanners, and optical and virtual colonoscopies.
  • In 2008 the Federal Trade Commission and the Antitrust Division of the Department of Justice wrote: The Agencies’ experience and expertise has taught us that Certificate-of-Need laws impede the efficient performance of health care markets. By their very nature, CON laws create barriers to entry and expansion to the detriment of health care competition and consumers. They undercut consumer choice, stifle innovation, and weaken markets’ ability to contain health care costs. Together, we support the repeal of such laws, as well as steps that reduce their scope.

For perspective we note that the Federal government is also in the business of restraining competition. Since 2010 the Feds have approved only a single new bank, just one, not the hundreds we would normally expect; (see here) while the Dodd-Frank disaster harms small and midsize banks and secures the dominance of the large ones. The latter, without competitive pressure to strengthen them, will tend to become “too big to survive.”

Our advice is for all committees and commissions responsible for implementing CON laws to ignore anti-competitive opposition. Perhaps one day legislatures will have the public spirit to put together a mammoth bill repealing all anti-competitive laws and regulations, including CON and franchising laws, along with occupational licensing laws, all of which inhibit economic growth and generally harm the public interest.   Troglo



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