Thursday, January 17, 2013

The Big CON, Healthcare Edition

That is to say, "certificates of need." I recently learned about these, among other things, from reading an old John Cochrane blog post, and I am now inspired. I have seen the light. Seen the light in the sense that pretty much all of our national conversation on healthcare misses the point entirely, and by focusing on health insurance and the government pays-what-for-whom-when (Medicare for all! No, Medicare for none!) we're missing the mark by focusing on shifting the demand-curve for healthcare, when all the bodies are (literally in some cases) buried on the supply side.

Which brings me to the Certificates Of Need. A CON is a certificate that hospitals must submit for approval by the state government before they can purchase large-scale new equipment or expand physical operations, or build a new hospital at all. To be approved to expand operations, the hospital must demonstrate that its expansion will not impede the profitabilty of existing hospitals in the area or infringe on their market share.

Think about that, and imagine if that kind of rule were put in place in any other industry. Imagine if Verizon had to submit a form to the Federal government before developing a new cellphone and prove that it would not reduce AT&T's profits. Or Ford was prevented from building a new plant because it would harm GM's market share. We'd have a limited supply of cars and cellphones at higher prices. When you prohibit the expansion of production, that shifts the supply curve to the left. When you shift the supply curve to the left you get less output at higher prices. That's healthcare. It's not cellphones and cars because firms that provide these products are not LEGALLY PREVENTED from expanding plant and equipment; indeed it's encouraged. So prices continaully come down as quality and quantity grow. But not so with healthcare, so we instead get an endless series of schemes to expand "coverage" and reduce costs, when healthcare firms are legally prohibited from organically doing both on their own.

"Whoa, CONS are COOL."  

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