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H E A L T H  T R A C K I N G :
F R O M  T H E  F I E L D
 
9 August 2005  
  

Monopoly Is Not The Answer

The cost burden on individual Americans should
clinch the argument against tolerating,
let alone fostering, health-sector monopolies.


by Clark C. Havighurst


ABSTRACT:

Certificate-of-need (CON) regulation was originally intended to correct market failures that no longer afflict health care markets. It is ironic that Sujit Choudhry and colleagues now invoke it to deal with situations where, in their view, competition is working altogether too well. Protectionist regulation, long discredited in other areas, is particularly misguided in health care, where health insurance greatly increases the profitability of monopoly and imposes the resulting higher costs on unwilling premium payers. To use cross-subsidies to finance even worthy (let alone unworthy) health care projects is to put public burdens unfairly (regressively) on the backs of working Americans.

The paper by Sujit Choudhry and colleagues provides a helpful overview of the legal fallout from the difficulties faced by community and teaching hospitals as a result of new competition from ambulatory surgical centers (ASCs) and specialty hospitals.¹ In the space available, they have not been able to provide much more than an informative summary of the legal issues and their opinion that certificate-of-need (CON) regulation is the best tool for fixing the supposed problem. What is missing in particular is a full justification for their apparent belief that some legal means must be found to protect community hospitals against emergent competition. It is not enough—indeed, it is pure expediency—to say that hospitals must be kept able to overcharge for some health services so that they can provide other services that neither taxpayers nor consumers are willing to pay for but that the authors deem desirable.

Regulation versus market failure. The authors astutely observe that several of the legal tools (for example, federal and state self-referral laws) being used, or considered for use, in resisting the rise of ASCs and specialty hospitals were not originally intended to remedy problems of the kind presented. But CON regulation was itself not clearly intended to suppress competition that is inconvenient for certain hospitals. Ostensibly, at least, the original rationale for enacting CON laws in the regulation-ridden 1970s was policymakers’ belief that market forces could not be trusted to deter overinvestment in health facilities. Since that time, cost reimbursement been replaced by prospective payment (even for capital expenditures), removing a major cause of the problem that first occasioned CON regulation. In addition, private health plans have developed the ability to steer patients to cooperative, low-cost providers, thereby signifying a “need” for the latter’s facilities and services and belying the old notion that supply can create its own demand. Thus, whatever might have been the case in the earlier era, it is far from obvious today that CON regulation is needed to avoid excess capacity. It is ironic that Choudhry and colleagues invoke CON laws, originally adopted on the supposition that competition is unworkable in health care markets, to deal with situations where, in their view, competition is working altogether too well.

To be sure, protection of community hospitals from competition has always been an important subtext in CON regulation, even as the market-failure rationale served as a fig leaf masking such private concerns. The protectionist rationale for such laws suffered a major setback in 1979, however, in that year’s amendments to the original 1974 federal health-planning law, which required states to enact CON laws meeting federal requirements.² Adopted soon after Congress rolled back similar entry controls in the airline and trucking industries, the 1979 amendments revealed a new, more open-minded congressional view of the possibilities for effective competition in health care markets, a faith that was well rewarded in subsequent years. Many state CON laws were never amended to reflect this new federal policy, however, before Congress finally repealed the 1974 legislation altogether in 1986, leaving those laws (most of them originally enacted under congressional compulsion) in place. Strongly supported by the larger hospitals and other entrenched providers, some of those state laws remain on the books today, providing an easy pretext for suppressing competition. Nevertheless, a good argument can still be made against automatically employing CON regulation for explicitly protectionist purposes.

Under any but a blatantly protectionist regime, the key issue in deciding whether to grant a CON for a new ASC or specialty hospital should be whether some market failure contributes to an undue proliferation of such providers by sending the wrong signals to potential market entrants.³ In this case, however, the only problem that might thus seem to justify CON regulation originates in Medicare’s administered pricing system, as Choudhry and colleagues explain in discussing the so-called moratorium on physician self-referrals to new specialty hospitals. Even though this problem is entirely within the power of government to remedy by revising payment policies to level the competitive playing field (which the Centers for Medicare and Medicaid Services, or CMS, proposes to do), the authors’ protectionist impulse still drives them to the more extreme CON solution.

Monopoly: the problem, not the solution. A body of law that is more clearly relevant to the growth of ASCs and specialty hospitals than any discussed by Choudhry and colleagues is antitrust. Yet they do not even mention it—probably because, if anything, antitrust law would limit, not expand, the freedom of a dominant hospital to fend off unwanted competition. Defining the lengths to which a monopolistic seller—Microsoft, for example—may go in holding onto an otherwise lawful monopoly has long been a challenge for antitrust courts. Presumably the authors would argue, as others have, that courts should be lenient toward nonprofit hospitals seeking to gain or hang onto a monopoly because such hospitals will put their monopoly profits to good use. The antitrust laws were enacted, however, to maintain competitive conditions in all markets, except where other legislation, such as a state CON law, clearly limits competition’s role. They should not be interpreted to allow judges to decide, case by case, whether competition is in the public interest or whether monopoly profits are being used in a desirable way. Clearly, Choudhry and colleagues favor CON regulation in large part because it would give hospitals with monopoly power a lawful way to resist competition they could not otherwise lawfully exclude.

Not only do the authors not refer to antitrust law, but one looks in vain for the word monopoly in their paper. Yet monopoly is precisely what they are promoting in seeking to maintain the ability of local hospitals to generate excess revenue from specific, highly profitable services in order to cross-subsidize other activities. But hospital monopolies are not necessarily benign. Resources too easily gained may easily be wasted in inefficient operation and spent on things not clearly worthy of public support. Although the authors worry that democratic legislatures would not agree to subsidize all of the many things hospitals do with their surplus revenues, they do not show why that would necessarily be a bad thing in a nation that spends far more on health care than any other spends. The huge enterprises that U.S. hospitals have become are largely unaccountable for the amounts of revenue they raise or the uses to which they put that money. Indeed, they are major contributors to ever-rising health care costs. Using CON regulation to maintain their ability to extract resources from the economy only to pour them back into more health spending would seem exactly contrary to the expectations of those who supported CON laws in the hope that they would help keep costs under control.⁴ Competition is the best way both to limit dominant hospitals’ claims on gross domestic product (GDP) and to restore to voters and their representatives the power to decide just what extras are worth paying for.

Contrary to the common view that nonprofit hospitals’ monopolies in various lines of business are not as problematic as monopolies of other kinds, there is a strong basis for viewing monopoly with special concern in health care markets. The complicating factor is private health insurance, which puts health care monopolists in the enviable position of being able to charge prices even higher than the theoretical “monopoly price”—the setting of which is constrained by price elasticity of demand, precisely what insurance dramatically reduces. Indeed, only health insurance enables local hospitals with monopoly power in various submarkets to charge the staggering prices one sees on itemized hospital bills. The extraordinary profitability of health-sector monopolies should dictate at least as much vigilance against monopoly in the health care sector as elsewhere in the economy.

Finally, even if one accepts Choudhry and colleagues’ assumption that community and teaching hospitals can be trusted to spend the public’s money well, the way the resulting cost burden falls on individual Americans should clinch the argument against tolerating, let alone fostering, health-sector monopolies. To the extent that the health care system’s good works are cross-subsidized from monopoly profits, their costs are reflected in health insurance premiums paid more or less equally by all Americans having private health coverage. It would be hard to imagine a more unfair (regressive) way to finance public projects, however worthy they may be. Concern for the welfare of middle- and lower-income premium payers should easily trump the authors’ sympathy for the supposed plight of community hospitals.

NOTES

1. S. Choudhry, N.K. Choudhry, and T.A. Brennan, “Specialty versus Community Hospitals: What Role for the Law?” Health Affairs, 9 August 2005, content.healthaffairs.org/cgi/content/abstract/hlthaff.w5.361.
2. See generally C.C. Havighurst, Deregulating the Health Care Industry: Planning for Competition (Cambridge, Mass.: Ballinger Publishing Co., 1982). Choudhry and colleagues are wrong in stating that the idea of relying on market forces in health care became popular among policymakers only with the advent of the Reagan administration.
3. See generally C.C. Havighurst, “Developing Non-institutional Health Services: The Role of Certificate-of-Need Regulation,” in Cost, Quality, and Access in Health Care: New Roles for Health Planning in a Competitive Environment, ed. F. Sloan, J. Blumstein, and J. Perrin (San Francisco: Jossey-Bass, 1988).
4. Although industry proponents of CON regulation represented to legislators that its object was to control costs, their real goal was to put in place a program that would legitimize their inexorable increase (by confirming “need”) and reduce pressure for changes in health care financing. See generally Havighurst, Deregulating the Health Care Industry; and S. Payton and R. Powsner, “Regulation through the Looking Glass: Hospitals, Blue Cross, and Certificate-of-Need,” Michigan Law Review 79, no. 2 (1980): 203–277.

To read the paper by Sujit Choudhry and colleagues, please click here.

Clark Havighurst (havighurst{at}law.duke.edu) is the William Neal Reynolds Professor Emeritus of Law at the Duke University School of Law in Durham, North Carolina.

DOI: 10.1377/hlthaff.w5.373
©2005 Project HOPE–The People-to-People Health Foundation, Inc.