Markets Can’t Do the Job Alone: Planning & Regulation in Health Care

In partnership with the Finger Lakes Health Systems Agency, CGR sponsored a conference in Albany on November 27 to discuss the role planning should play in New York’s health care industry. This column is an edited version of my remarks to conference participants.

My father-in-law practiced radiology at Howard Community Hospital in Kokomo, Indiana for 40 years. And I was always hearing stories about the latest threat from St. Joe’s, the competition across town—a new CAT scanner, or this new technology called “magnetic resonance imaging.” When the radiology practices of Howard Community and St. Joe’s merged just before he retired, you’d have thought the Berlin Wall had come down.

Some might naively suggest that we have a choice between a health care system based on competition and a system based on—well, something else. Yet as my father-in-law’s experience illustrates, competition is rife in health care, just as it is in the rest of society. Planning—and its pit bull partner, regulation—must seek to create a context within which normal competition among health care actors—providers, payers and consumers—creates socially-acceptable outcomes.

During the Carter Administration, Congress deregulated the airlines and dismantled the Civil Aeronautics Board. Before airline deregulation, airlines were prohibited from competing on price, an idea based on the notion that competition would compromise safety. The premise may have been correct—yet the policy assumed that by fixing prices, Congress and the CAB had somehow eliminated competition—the economist’s equivalent of repealing gravity. Instead, the airlines competed on everything else. So you might find a direct flight from Albany, NY to Albany, GA—and not only would you have room to stretch out (because the planes were rarely full), but you’d actually be served food (and food that was arguably edible).
Deregulation changed all that—now air travel is dramatically cheaper. The fact that it is also infinitely less satisfying is because air travel is now accessible to the mass market and more people than ever are taking to formerly friendly skies. But that’s another conversation.

There is a lesson in airline regulation that applies to the health care market. For a large portion of the health care market, prices are fixed, even in the parts of the market that are supposedly “competitive.” The price signals that remain are weak and often misdirected. As a consequence, conventional market solutions based on price signals just don’t work.

On approach is to address the problem of price signals directly by improving the quality of price information and by re-connecting prices and decisionmakers. That’s what consumer-directed health care is all about and it, too, is worth another column. But without significant changes, a purely market-based system of resource allocation just won’t work.

Yet competitive forces remain. Providers, squeezed from every side, are tempted to lure consumer dollars with new and improved facilities, sexier programs, or claims—sometimes spurious—of unique clinical quality. In an expanding market—say, Las Vegas or Tampa—this kind of competition doesn’t make much of a difference as facilities are expanding rapidly. But when New York’s stable population is combine with falling admission rates and lengths of stay, this competition among hospitals becomes a life-or-death struggle. Over-capacity—exactly what we should be avoiding—is one outcome. That higher cost is associated with overcapacity has been shown by the Dartmouth Atlas of Health Care (see http://www.dartmouthatlas.org/), which reaffirms to some extent 18th century economist Jean-Baptiste Say’s Law, that “supply creates its own demand.”

The NYS Commission on Health Care Facilities in the 21st Century (called the Berger Commission after its chairman, Stephen Berger) was formed to rationally accelerate the elimination of costly excess capacity among health care facilities. Was it necessary? I think so. But I can’t imagine that any of us would endorse such a process as the normal course of events.

As a new administration in Albany establishes its health care policies, our goal should be to develop a system that makes such a Commission unnecessary in the future. Facility capacity has an enormous impact on the cost and quality of care. And when markets have been shorn of their power to rationally allocate demand and supply, some other mechanism is needed. A system of planning and regulation is required that will:

• Manage system capacity without stifling innovation among providers. The price system rewards efficiency through profit. How do we encourage efficiency & effectiveness among providers when price signals are weak or, worse, misdirected?
• Ensure an appropriate spatial distribution of care, ensuring access not just in affluent suburbs but in impoverished neighborhoods, too.
• Encourage insurers to work in concert with planners and regulators, and support the interests of employers. Insurers play a quasi-regulatory role and often serve as proxies for employers, who have been pummeled with increasing insurance premiums.
• Empower employers to help limit rising costs and bring business innovation to bear on the problems of health care.
• Support effective community engagement around health care needs. Policy prescriptions can’t come simply from Albany. Regional entities—like the independent and professional Finger Lakes Health Systems Agency—are needed to inform and engage statewide policy.

This question of capacity is very much a current issue in the Rochester area as both the University of Rochester Medical Center and Unity Health have put forth proposals to expand. FLHSA will soon be issuing a report on the need for acute car beds in the area. This is an important question and one that deserves all our attention.

Competition in the health care market is very powerful. We can’t assume it away. Nor can we rely on the price system to make good allocation decisions for us (as we do for burger joints or toothpaste). Some level of planning and regulation are necessary. The challenge is designing a system that is fair, efficient and responsive to changing needs.