Fixing health-care cronyism — intentional and unintentional

Have you noticed Americans’ health-care choices are continuing to shrink? Hanlon’s Razor states one should “never attribute to malice that which is adequately explained by stupidity,” but is that the case here?

Over the past several decades, a combination of laws and exemptions from existing laws have effectively crushed consumer freedom in the health-care industry. One of the biggest culprits is a kind of state-based regulatory scheme known as “certificate of need” (CON).

CON laws first came into existence in New York in 1964. They initially required that health-care providers who wished to open or expand hospitals, surgical facilities, or imaging centers obtain approval for a certificate of need from the state—and often from competitors, too. Since 1964, numerous states have imposed similar requirements.

Lawmakers passed CON laws under the false presumption that too much competition in a saturated health-care market drives up prices for medical services. CON laws seek to limit competition and “unnecessary” services, in direct opposition to well-established economic principles related to supply and demand.

Since CON laws were first imposed, quality data have shown these assumptions are false. In fact, CON laws have instead caused gaps in health-care availability, because the expansion of health-care facilities has been gummed up in the CON authorization process, which can last years or even decades. As a result of CON laws, the supply of medical facilities often trails population growth, unnecessarily restricting health-care access.

This problem is illustrated by the fact that when St. John Providence Hospital opened in Michigan in 2008, it was the first hospital to open in Southeastern Michigan in more than 20 years, despite substantial population growth in the surrounding area.

CON certificates have become so valuable that they are bartered and traded for like commodities among those seeking to open or expand health-care facilities. Prospective builders will buy up existing facilities simply to obtain their CON-certified beds.

Lawmakers imposed another harmful government regulation in 2010 with the passage of the Affordable Care Act, which, among many other things, modified the Social Security Act § 1887 to essentially create a prohibition on physician-owned hospitals and surgical centers. This eliminated one of the primary threats to existing hospital monopolies: the possibility of fed-up physicians opening their own medical facilities. If this law had existed in 1864, arguably the best medical center in the world — the Mayo Clinic, founded by the Doctors Mayo — would not exist today.

Further, exemptions from Stark laws and other anti-kickback laws have further solidified the status quo. These laws were intended to prevent providers from making self-referrals for financial gain. These laws are circumvented with regularity and impunity, as employed physicians are regularly pressured by hospital administrators to prevent “leakage”—the referral of patients to physicians or facilities outside of a doctor’s hospital system or other associated medical network.

Leakage is aggressively tracked and enforced. Physicians are rated, incentivized and often directly pressured by administrators if they do not conform. This is killing independent practices in many specialties, such as cardiology, which rely on primary care physician referrals to survive, depriving countless communities of one of their only alternatives to hospital-owned practices.

What happens when all these factors — CON laws, a prohibition on physician-owned hospitals and surgical centers and leakage — converge? Competition, innovation and entrepreneurship disappear, blocking new, high-quality, cost-effective options from coming into the health-care marketplace. As a result, entrenched entities become regional monopolies, empowering them to demand ever higher prices from patients and other payers because of the lack of economic pressures that normally improve quality and lower costs in other industries.

This brings us back to Hanlon’s Razor. Did all of this occur by chance or malice? Or perhaps a bit of both? Whatever the reasons are for these problems, one thing is clear: To improve our health-care system, we need more innovation and competition and that won’t happen until these systemic issues are dealt with.

Chad Savage M.D. is a policy fellow at the Docs 4 Patient Care Foundation and the founder of the DPC practice YourChoice Direct Care.