Government Supply-Side Health Care Restrictions that Raise Costs

One of the least reported issues related to health care cost inflation is the existence of artificial government restrictions on health care supply, often called "certificates of need".

The COPN [certificate of public need] law is supply-side Obamacare: top-down, command-and-control restrictions on which providers can offer which services. A certificate of public need is, essentially, a government permission slip. Without one, a Virginia doctor can’t put an MRI machine in his clinic. A hospital can’t build a new wing. A hospital company can’t add a satellite campus. And so on.

Getting such permission slips is a long and costly process. The owner of a Northern Virginia radiology practice, for example, spent five years and $175,000 asking permission to buy a new MRI machine. The state said no.

One reason the process takes so long is that competitors often fight such requests. When Bon Secours proposed the St. Francis Medical Center in Chesterfield, rival chain HCA fought it vigorously, arguing there was insufficient demand. The hospital was approved and enjoys a robust business. You’d think state regulators would laugh off competitors’ arguments, but sometimes they’re actually taken seriously. When a Richmond radiology practice wanted to move—not add, but move—a radiation device to its Hanover offices, the state said no in part because Virginia Commonwealth University’s Massey Cancer Center worried the project “could take some of their business.”

This is cronyism and protection of incumbent competitors, pure and simple.  It is often justified by the economically-ignorant as reducing costs because it reduces expenditures on expensive machinery.  But in what industry can you think of does restricting supply ever reduce costs?

In any other industry, the proper response to that would be: So what? If Kroger sets up across the street from Food Lion, we consider that good for consumers: They have more choice. And if they migrate from Food Lion to Kroger, that’s not a bad thing. It means they’re getting more utility for their grocery dollar.

Studies of the COPN system around the country have confirmed what seems intuitively obvious. A joint examination by the Justice Department and the Federal Trade Commission found that COPN regulations hurt competition, fail to contain costs, and “can actually lead to price increases.” Restricting supply raises prices? Imagine that.

  • kidmugsy

    "A certificate of public need is, essentially, a government permission slip. Without one, a Virginia doctor can’t put an MRI machine in his clinic. A hospital can’t build a new wing. A hospital company can’t add a satellite campus. And so on."

    I'd have thought it near impossible to design a healthcare system sillier than the NHS, but the USA has managed it. By the way, these daft rules are the same sort of madness that anyone in France faces when he wants to open a new business.

  • Another guy named Dan

    The other aspect of these laws is that they allow local pols to take credit for "saving" Saint Mercy Memorial General hospital from the greedy for-profit competitor. It comes down to the fact that unlike the grocery stores in the example, it is politically virtually impossible to shut down even a failing and hopelessly outdated hospital, especially if that hospital is located in an inner-city area.

  • HenryBowman419

    Yet another reason for high hospital costs is related to the hugely inflated prices that hospitals charge. Hospitals have a symbiotic arrangement with the insurance companies, and the result strongly resembles a cartel. Dr. Keith Smith of the Surgery Center of Oklahoma has a brief explanation in this video.

    Note that the Surgery Center of Oklahoma posts prices for its procedures on its web site. Their prices are perhaps one-eighth the prices that nearby hospitals charge. Transparency (both of procedures, outcomes, and prices) lowers prices and increases the quality of care.

    See also Unaccountable, by Dr. Marty Makary.

  • Curtis

    "Restricting supply raises prices? Imagine that."

    Perhaps. How much does an abortion cost a mother-to-be these days? There are several states with either no or only one abortion provider. I dare to say that the cost of such a thing has not sky rocketed even in those states.
    Maybe they took that as their model.

  • frankania

    I would not ask the govt; I would just move my freaking machine and use it as I wanted to. IF the cronyist/"mafia" applied pressure, I would put a big sign in front of my office stating the facts, and WHO is creating the problem. Freedom of speech??

  • Eric H

    I got in a letters-to-the-editor debate with a doctor one time over precisely this. Someone wanted to build a second hospital in town and the doctor "proved" that there was insufficient demand. I pretty much made the same argument, but I made the mistake of stating that he represented the world's most successful guild, the AMA. He made the editor write an apology and left about 12 messages on my machine that day because he was not and had never been an AMA member, and besides that he won an award in mathematics 60 years ago so he couldn't possibly be wrong about supply and demand.

    Both hospitals are doing just fine, 15 years later.