THCB

Zombie Hospital Economics

The Illinois hospital dinosaurs continue to defy evolution and prove that they are not extinct. I am talking about our health facilities planning board, which just turned down another Certificate of Need application for a new hospital, this time in the northwest suburbs of Chicago. The board justified the decision by stating that the new hospital would harm existing hospitals.

I know that the Chicago School of economics tells us that regulators serve the interests of those they regulate, usually at the expense of the public. But just because the Illinois planning board sits in Chicago, that doesn’t mean they have to slavishly follow the Chicago School. They could act in the public interest at least once in a while! (Though if the board started approving too many new health facilities, someone might notice that they are not needed and put them out of a job.)

The thing is, I am not 100 percent convinced that this is regulatory capture. I think the board actually believes that this decision helps the public, because they believe hospital competition is bad. This idea was floated in the 1960s and 1970, but it is now as extinct as Tyrannosaurus Rex. Studies by the Robert Wood Johnson Foundation, the U.S. Department of Justice and the Federal Trade Commission, and countless academics conclude that competition leads to lower medical prices and, often, higher quality. Numerous federal court judges have blocked hospital mergers on the grounds that competition is good. The Seventh Circuit Court of Appeals in Illinois recently approved class certification against a hospital system whose formation reduced competition in the north shore Chicago suburbs. And a unanimous Supreme Court recently blocked a hospital merger in Georgia, in the process affirming the benefits of hospital competition. Countless independent arbiters, including Supreme Court justices from across the political spectrum, have voiced their support for hospital competition. Whom are you going to believe, all of these independent arbiters, or a bunch of political appointees (appointed by Illinois governors, no less)?

Illinois is the laughing stock of the nation in so many ways — imprisoned governors, a broken pension system, and the Chicago Cubs. Do we have to show off our incompetent regulatory process? With taxpayers on the hook for so much government inefficiency, adding higher medical prices is just one more reason for Illinoisans to think about moving somewhere else, somewhere where government officials have evolved beyond the Cretaceous period.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.” This post first appeared at Code Red.

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Guest

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Tyler
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“the new hospital would harm existing hospitals.” I’m failing to see the logic behind that line of thinking. It seems that these decisions are made based on corporate & political concerns rather than with the well being of Illinois residents in mind. I’m no expert, but wouldn’t opening a new hospital in an area of need do exactly the opposite of harming the existing one? If a new hospital is opened, the existing hospital won’t be overcrowded and under staffed. Patients will be able to receive better care in a more timely fashion and will benefit from this…. Correct me… Read more »

Sumo
Guest

it says everything you need to know that the admibstration did nothing to address healthcare’s little monopoly problem – this I’d an immediate fix that would do as much as anything else to bring exploding costs into something that kinda looks like control

Peter1
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Peter1

“because they believe hospital competition is bad.”

Show me where hospitial “competition” has lowered prices?

“The board justified the decision by stating that the new hospital would harm existing hospitals.”

What kind of capacity are the other hospitals at?

Eric
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Eric

For research on the impact of hospital competition on prices, see studies published by Glenn Melnick, Jack Zwanziger, James C. Robinson, and others. While their studies generally do show that competition slows the rate of hospital spending, it should be noted that much of this research was published in the 1980s before the wave of hospital consolidation. Still, it does validate the point I think Professor Dranove is trying to make, i.e., where multiple providers and health plans compete in local markets, there is downward pressure on hospital prices.