The president issued a new executive order requiring price transparency in healthcare. The next step is translating his admirable action into a practical plan for reducing healthcare costs.
This is no easy achievement, because decades of damaging laws, regulations, and practices must be rectified in order to enable real competition in a genuine free-market for healthcare. To put this in perspective, consider why there is no Costco-like equivalent able to bulk purchase high quality healthcare services for less and then pass along the savings to its consumer members?
While healthcare insurance companies could, in part, act in this capacity, it does not appear the healthcare market functions this way. Instead of healthcare and, by extension, insurance costs decreasing, they are rising faster than the inflation rate. Moreover, individuals, without bulk buying capacity, are sometimes able to obtain medical care at a lower cost, by just paying out of pocket for the services rendered. Furthermore, although physicians’ reimbursement rates, actually paid on behalf of patients by insurance companies, Medicare, and Medicaid, have often been cut, this has not resulted in overall lower healthcare or insurance costs.
It is suggested that these are manifestations of an underlying problem. The fact is there is no real competitive free-market for healthcare and, thus, it does not behave as we might expect. This is due in no small measure to legal and other constraints that, over the past fifty years, have fostered virtual healthcare monopolies or oligopolies in many local marketplaces. Under these circumstances, even enormous buying power can yield few, if any, price concessions; the provider can just say, take it or leave it and there is no practical alternative of shopping elsewhere.
The effect of maintaining this protected non-competitive market place is profound, pervasive, and sometimes insidious. For example, the proliferation of new and more cost-effective means of delivering healthcare, such as ambulatory surgery centers and diagnostic and treatment facilities, outside of existing hospitals is often restricted. In New York, independent for-profit versions of these facilities are virtually barred from entering the marketplace. There is no economic or medical justification for this kind of behavior. It only serves to preserve the existing market share of hospitals and their intrinsically higher cost structure, which benefits them to the detriment of the public they serve.
It all began innocently enough with an effort in centralized healthcare planning. New York led the way, in 1964, by adopting a law designed to restrict spending by hospitals. The law currently applies to hospitals, nursing homes, diagnostic and treatment centers, ambulatory surgery centers, hospices and certain other healthcare services and providers. It requires pre-approval (known as a Certificate of Need) before constructing or renovating such healthcare facilities, acquiring major medical equipment, adding or deleting services or changing ownership. The review process is substantive and rigorous. However, enabling competition in order better to serve all patients for less cost is not one of the criteria. If anything, the opposite is true, because it is designed effectively to prevent competition. Thus, the applicant must prove there are a sufficient number of prospective patients who are not served by existing providers. By artificially limiting supply, a critical free-market mechanism for assuring competitive pricing is eliminated.
This problem was exacerbated when Medicare and Medicaid were introduced, beginning in 1965.
These federal programs empowered seniors and the indigent to access healthcare by paying for the services on their behalf. This created substantially greater demand, which in the short term would likely have caused price pressure, until the free-market could adjust. Under ordinary free-market conditions, it could be expected that new and more efficient facilities would be built to service the new demand. However, the governmental regulators arrogantly and presumptuously thought they knew better and could control costs, by circumventing the free market. They, thus, adopted a cost-plus pricing mechanism, which set the price it would pay for healthcare at the total cost of providing care plus a small profit, as a percentage of costs. The costs included amortization of any capital investments, interest on any financing and a return on equity. The obvious weakness in this pricing formula was that it incentivized an institution to generate more profits by just spending more. In effect, inefficiencies were rewarded and efficiencies were penalized. How then could the amount spent on healthcare be limited so as to contain the overall cost of healthcare?
The federal authorities mistakenly believed that New York’s centralized planning model, as embodied in its Certificate of Need law, was the answer to reining in healthcare spending. This erroneous concept was ultimately embodied in the National Planning and Resource Development Act of 1974. It required States to pass Certificate of Need laws to participate in the federal program. Instead of solving the issue of increasing costs of healthcare, it only served to compound the problem.
As implemented, the law not only prevented the free-market from expanding the supply of healthcare providers to meet the dramatic increase in demand, by restricting the building of new facilities and introduction of certain additional services, it also artificially contracted it. In New York, this was done by consciously eliminating for-profit hospitals and forcing many other hospitals to close. It was presumed that if the for-profit hospitals could be eliminated, then the non-profit hospitals could be counted on to contain costs and not take advantage of the governmental programs.
This naive reliance on so-called non-profit hospitals to act altruistically, instead of in their own self-interest, proved unwarranted; they didn’t act as predicted. Indeed, the major hospital systems in New York City make substantial profits and spend relatively little on charitable care for the uninsured and indigent population. Indeed, they can hardly be differentiated from their for-profit counterparts in other parts of the country. Yet, they benefit from enormous subsidies like income tax and real estate tax exemption and tax -free bonds.
This misplaced reliance was unfortunate. Instead of achieving savings as intended, it generated substantial increases in healthcare costs. The failed cost-plus pricing formula was abandoned long ago and the 1974 Act was repealed in 1986. However, the Certificate of Need centralized planning apparatus and non-competitive market structure it engendered remains in effect in most States. The institutional bias against for-profit operators is also an implicit part of many such regulatory establishments. In New York, there are no for-profit hospitals and the many small specialty and other hospitals that were once a feature of the various localities within the New York City are no longer in existence. Indeed, even today, it is unlikely that a Certificate of Need could be obtained permitting a new for-profit ambulatory surgery center to be built in New York City. There are also other artificial limitations under the New York State Public Health Law that make it well neigh impossible for publicly traded and most for profit healthcare companies to open or acquire these kinds of facilities in New York. Is it any wonder that the cost of healthcare continues to rise?
Eliminating these archaic and overly restrictive laws, which no longer serve the originally intended or any useful purposes, is a good first step towards allowing competition instead of preventing it. There are also other anti-competitive practices that must be addressed. These include the accelerating trend of hospitals acquiring medical practices, but more on this in a future post.
It’s time to restore the free market to healthcare. As the U.S. Supreme Court well noted, in its description of the underlying premise for our federal anti-trust laws:
‘… the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.’
Price transparency, empowering consumer choice, restoring genuine competition, and a free market for healthcare are essential components for achieving high-quality, lower-cost healthcare.
Leonard Grunstein, a retired attorney and banker, founded and served as Chairman of Metropolitan National Bank and then Israel Discount Bank of NY. He also founded Project Ezrah and serves on the Board of Revel at Yeshiva University and the AIPAC National Council. He has published articles in the Banking Law Journal, Real Estate Finance Journal, and other fine publications. To read more of his reports — Click Here Now.
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