Wednesday, December 26, 2012

After the Affordable Care Act? After Obamacare? Part Three: barriers to entry for new suppliers of health care

Reviewing parts one and two of this series, John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.

The next aspect Cochrane examines is barriers to entry for new suppliers of health care. In Cochrane’s words:

“So, where are the Walmarts and Southwest Airlines of health care? They are missing, and for a rather obvious reason: regulation and legal impediments.

A small example: In Illinois as in 35 other states, every new hospital, or even major purchase, requires a “certificate of need.” This certificate is issued by our “hospital equalization board,” appointed by the governor (insert joke here) and regularly in the newspapers for various scandals. The board has an explicit mandate to defend the profitability of existing hospitals. It holds hearings at which they can complain that a new entrant would hurt their bottom line.” (1) (2)

Hence we find new supply, new competitors as they were, having government stand in their way of freely entering the market. Further, in many cases current suppliers support and lobby for continued government sponsored barriers of entry. Therefore current supply becomes the status quo with “profitability” protected by government erected barriers to entry and consumers find higher prices rather than lower prices and lower quality rather than higher quality, both of which, created by intense competition.

Cochrane goes onto to identify occupational licensing creates a restricted supply thereby pushing up price (by the way the subject of one Milton Friedman’s PhD dissertation):

“I’m not arguing that we have to get rid of licensing. But licensing for quality does not have to mean restriction of supply to keep wages up, including state by state licensing, restriction of residency slots, or restrictions that encourage overuse of doctors where they are not needed.”

“If you’re a parent, you’ve been through it. It’s 2 am in
a strange city. The kid has an ear infection. He needs amoxicillin, now. Getting it is going to be a 3 hour trip to an emergency room, hundreds of dollars, so a “real doctor” can peer in his ear, then off to the pharmacy to fill the prescription. A nurse practitioner at the Wal clinic could handle this in 5 minutes for $15.” (3)

What Cochrane is pointing out is that basic services that could easily be supplied at much lower prices are purposely supplied at higher prices. The purposeful overuse of higher priced alternatives is government failure at its zenith.

It is becoming apparent that, if you have read the three parts to this point, a major cost driver in health care is none other than government. More succinctly, politicos through the mechanism of government have created a protected rent seeking proposition through legislation spawning regulation that drives up health care costs.








(1) After the ACA: Freeing the market for health care.

(2) Certificate of Need: State Health Laws and Programs, NCSL, 03/2012

 (3) After the ACA: Freeing the market for health care.


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