Hospital Market Needs More Competition

By John Hood

RALEIGH — When the leaders of WakeMed, one of the three hospital systems with large facilities in North Carolina’s most populous county, announced plans to merge with Charlotte-based Atrium Health, a broad swath of politicians, activists, and interest groups objected to the proposal.

Perhaps the most consistent argument against the deal was that it would reduce competition. “There is a simple business principle that when suppliers consolidate and competition is reduced,” said State Treasurer Brad Briner, “it is the consumers who suffer.” Ardis Watkins, executive director of the State Employees Association of North Carolina, and North Carolina State Health Plan vice-chairman Brian Miller wrote in a joint op-ed that robust competition “benefits consumers through lower prices and improved quality.”

“With North Carolina’s hospital markets already highly concentrated,” they concluded, “officials should regard further mergers with suspicion, especially those hurried through under the cloak of darkness.”

I tend to agree with Briner, Watkins, Miller, and other critics of hospital consolidation. While generally skeptical of antitrust laws and regulations — they are often the product of insider lobbying by established firms, not the salvation of scrappy underdogs, and embrace fanciful notions of “predatory pricing” and other make-believe scenarios — the health care market has become one of the exceptions that proves the rule. Most medical providers receive most of their income from Medicare, Medicaid, and other government programs, not their actual clients, with most of the remainder coming from private insurance that is both massively subsidized (through exemptions from income and payroll taxes) and heavily regulated.

When individual proprietors or firms in other markets combine into larger entities, through vertical or horizontal integration, there are potential returns to scale or coordination that get passed along to consumers. Why? Because if the resulting conglomerates attempt to keep all the potential savings for themselves, or use their enhanced market power to charge higher prices, that creates an opportunity for other firms to enter the market and compete for the business.

That’s not how the medical marketplace works, however. There are many legal and regulatory barriers to entry, barriers that incumbent providers helped to erect through past lobbying efforts and enthusiastically exploit to their continuing advantage. For hospitals, one such high barrier is North Carolina’s certificate-of-need system, in which would-be operators need a permission slip from the state to open new facilities, buy new equipment, or add new services.

CON does feature competition, of a sort. If the state deems a region to “need” more hospital beds or MRI machines or whatnot, incumbents and challengers bid for the “certificates” required to supply them. But this is only a pale imitation of the robust competition we see in other industries, or even in health care markets where CON is irrelevant.

Not all opponents of the WakeMed/Atrium deal are worried about too little competition. When UNC Health — which operates not only its largest hospital in Chapel Hill but also Raleigh’s Rex Hospital and other facilities in Wake County — responded to WakeMed’s initial announcement by offering itself as an alternative suitor, some civic leaders cheered it on. This was absurd. At least Atrium is a big outside player. Merging UNC and WakeMed would make the Triangle’s hospital market vastly less competitive.

Now, to be clear, hospitals aren’t the only segment of the health care system that would benefit from heightened competition. North Carolina still makes it too difficult for medical professionals originally licensed in other states to move and practice here without jumping through regulatory hoops. We still keep nurses practicing independently from delivering the full spectrum of medical services for which they are trained and licensed. And state policymakers should also make it easier for physicians who deliver direct primary care — funded by monthly membership fees, not insurance claims — to expand their operations here.

WakeMed may well benefit from partnering with some other entity. But North Carolina leaders can and should insist on an expansion, not a contraction, of competition. And while they’re at it, how about repealing CON entirely?

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).