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Commentary By Chris Pope

How the Government’s Hospital-Protection Racket Drives up Costs

Democrats seeking their party’s 2020 nomination seem convinced that health care systems in Canada and Europe are better and cheaper than America’s because the government plays a larger role in them. But our country is distinguished less by its level of public spending on health, which is near the average for developed countries, than by the protectionist nature of state intervention in hospital markets that is responsible for the leap in hospital costs The Post ­reported on this week.

Consider some numbers. There are 4,840 community general hospitals in America, compared to only 200 in England’s National Health Service — four times fewer per person. Whereas France performs roughly the same number of MRI scans per capita as we do, it has only a third as many MRI machines. It’s no accident that the cost of MRI scans in France is a third of what it is in America.

America’s hospitals are mostly nonprofit or publicly owned institutions, whose costs consist largely of staffing and equipment and don’t vary directly with the number of patients treated on any given day. Their revenue needs therefore depend to a large extent on the volume of patients over which capital and labor costs can be spread.

Politicians have for decades intervened in markets to protect hospitals from competition, in the hope that helping facilities overcharge privately insured patients would allow them to fund substantial charity care without risk of closure. In 2014, 43% of hospital revenues came from privately insured patients, but these accounted for only 28% of inpatient and emergency department costs.

This arrangement has also led hospitals to upgrade costly high-tech capabilities, yielding widespread overcapacity and ever-increasing prices.

America’s reliance on a multitude of inefficient local hospitals doesn’t just inflate costs; it puts patients at risk, as they receive treatment from medical staff with less expertise in performing specialized procedures. Rates of mortality and complications following surgery are consistently lower at high-volume hospitals. In Canada, only 7% of heart bypass operations were undertaken at facilities that perform fewer than 200 of the procedures per year. By contrast, 65% of those in California were.

This widespread excess capacity isn’t the product of free-market forces but results from years of state interventions intended to support hospital revenues. Early Blue Cross health insurance plans were developed by the American Hospital Association to accommodate rather than to constrain the growth of hospital costs, and the AHA secured tax and regulatory policies to foster their expansion.

Medicare Part A replicated and expanded this costly arrangement — paying hospitals according to the costs they incurred delivering care.

But voters treasure local hospitals, regardless of their inefficiency. As insurers sought to drive down prices, by threatening to leave expensive hospitals out of their networks, legislators imposed regulations that restrict their ability to do so. They have also enacted “certificate of need” laws to prevent specialty hospitals from emerging to undercut them on price. Community hospitals have also been given lucrative exemptions from taxes, and 91% receive special add-ons to Medicare rates.

Rather than sanctioning a patchwork of local hospital monopolies to deliver all medical services at inflated prices, policy makers should instead allow competition to concentrate the bulk of elective care at cost-effective facilities, while focusing subsidies on maintaining local access to emergency care.

In 2014, Americans spent $65 billion on emergency care — less than 7% of hospital spending. It should therefore be possible to assure local access to emergency care by focusing hospital subsidies (which already exceed $70 billion) on that function. Indeed, lump-sum subsidies would likely do a better job of protecting access to emergency services at rural facilities that are threatened with closure by falling revenues from elective care.

In return, the array of regulatory restrictions on hospital market competition should be repealed.

This piece originally appeared at the New York Post


Chris Pope is a senior fellow at the Manhattan Institute. Follow him on Twitter here. 

This piece originally appeared in New York Post