Hospitals, Healthcare, and Competition

A healthy dose of competition in healthcare would bring about lower prices and improved quality.

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Robert G. Hansen is senior associate dean of the Tuck School of Business at Dartmouth College.

HANOVER, N.H.--The battle for a more efficient and effective healthcare system in the United States is being waged on many fronts, but a recent skirmish in New Hampshire has been especially fascinating to watch.

A for-profit specialty hospital, Cancer Treatment Centers of America, Inc. wants to open a cancer treatment center here, and as part of its due-diligence it has boldly requested an exemption from the usual Certificate of Need process and the Medicaid Enhancement Tax.

The Certificate of Need process requires a new entrant to the market to establish that its services and capacity are "needed," and gives existing hospitals a chance to argue why the entrant should be barred. The Medicaid Enhancement Tax is a 5.5 percent tax on net patient revenue that New Hampshire hospitals pay to the state. Historically, these taxes were returned to the hospitals (something colloquially called Mediscam) but starting in 2011, New Hampshire has not only stopped returning the tax revenues but further cut Medicaid reimbursements.

[See a collection of political cartoons on healthcare.]

Cancer Treatment Centers of America's entry therefore raises several related issues: for-profit versus non-profit ownership structures and incentives; the nature of competition between hospitals and the role of the Certificate of Need process; and the coverage and reimbursement of Medicaid patients. I cannot deal with all of these in-depth so will only briefly touch the Medicaid issue (it is important).

Thus far, the media have cast a jaundiced eye on the for-profit status of the Cancer Treatment Centers of America as if that made it somehow less "good" than the many non-profit hospitals in the state. I am wary of this bias against for-profits. While the profit motive can certainly drive socially destructive behavior at times, it's also a very powerful incentive to reduce costs and focus on what patients really want. Furthermore, the empirical evidence overall does not show that for-profit hospitals give lesser quantities of charitable care than their non-profit brethren.

A more pertinent concern is over the interaction of non-profit status, market power, and pricing. In the healthcare sector, many organizations face inelastic demand and relatively little competition. Non-profits can and do take advantage of these situations, with the outcome being excess staff, excess salaries, and excess capacity—all financed by high prices. A recent merger between two non-profit hospitals in Toledo, Ohio, for example, was just rejected by a trial judge on the basis that the merger was likely to harm competition and raise prices. [See photos of healthcare reform protests.]

Non-profit hospitals enjoy a myriad of benefits from their status, most notably exemption from taxes. Moreover, teaching hospitals are often closely affiliated with universities, which get even more benefits from their non-profit status. And even if non-profit hospitals give more charitable care, it is unclear whether the competitive playing field tips in their direction.

The Certificate of Need process is another drag on competition, giving existing hospitals a chance to keep competitors out of the market. Can you imagine what cellular service would be like if AT&T and Verizon could prevent a new competitor from entering, merely by arguing that they already have enough capacity to handle call volume? Or what if the U.S. Postal Service had kept UPS and Federal Express from "skimming away" the most profitable overnight and package business? What if Apple had been thwarted by the record companies and not been permitted to "unbundle" music and sell single songs rather than albums?

I can already hear my healthcare colleagues chiding me, saying, "Bob, you have to understand that healthcare is different." If hospitals face more competition in cancer treatment, it is said, they will have to cover costs by either raising prices elsewhere or by doing greater volume of profitable services like spine surgery—so-called supplier-induced demand.

[See the U.S. News rankings of the best hospitals.]

My response is, "You're right, healthcare is different. There is less competition in healthcare than almost anywhere else, and we need more."  I have also heard anecdotes about how patients were given unnecessary or improper treatments at for-profit hospitals. My first response here is, "Shocking! And that never occurs at non-profit hospitals?" (See supplier-induced demand, above.)  And my second response would be, "Well maybe we need to let consumers have more choice and listen to their voice a bit more."

Healthcare is in for a lot of change. I believe that if we allow for some wise experimentation through the forces of competition, we will all enjoy generally lower prices and higher quality.

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