Certificates of Need (controlling supply)

My simple policy proposal is to outlaw Certificates of Need nationwide.

This regulation applies in many states and in some Federal jurisdictions. We have Republican President Richard Nixon to thank for this particular economic disaster on the Federal level. In Georgia a Certificate of Need is granted or denied by the Georgia Department of Community Health.

Here is a relevant study.

The idea is that an entrepreneur or agency cannot expand a medical facility or buy a medical device over a certain price without government approval. Any high school student who has taken basic economics will instantly recognize that this as a government program designed to limit supply, and therefore competition, in order to benefit existing service providers to the detriment of consumers. The purpose of the program is to keep prices high. Shall I say that again? The purpose of the Certificate of Need program is to keep prices high for consumers. (Do not forget that healthcare is 20% of GNP. That ridiculous percentage is not an accident. It is the intention of government to create that outcome.)

I say to the high school students who have taken basic economics, because they will understand the words, that the marginal cost of an MRI scan is probably close to zero. There is, of course, the cost (pennies) of electrical current to run the machine. The cost of reading the scan by a professional is a different matter having nothing to do with the price charged for the scan in the first place.

A reader with some familiarity with CoN might say that the existence of a great many MRI machines (for instance) will destroy the investment value of a single machine purchased at a high price by an early adopter. This is true. So what? It happens all the time. Prices in unregulated markets drop over time and this is good for consumers.

If a hospital with a high priced MRI machine cannot amortize its machine because of many newcomers with lower priced MRI machines, the hospital will suffer a loss. The hospital can sell their high priced machine at a loss to another entrepreneur. That entrepreneur will have a lower capital cost to amortize. If that entrepreneur is undersold, she can sell the MRI machine to another entrepreneur for an even lower price. The MRI machine will continue to exist. The owner may change, but each successive owner will have a lower and lower capital cost to amortize. Prices for the consumers go down and down and down. This is good! This is the free market! The job of the entrepreneur (the purchaser of the MRI) is to estimate whether she will make a profit or loss by purchasing an MRI machine. Hey, guess what? Sometimes entrepreneurs make mistakes and suffer losses. The process of the free market benefits consumers. The Certificate of Need program protects the politicians’ wealthy (campaign donating) constituencies from loses through competition.

An analogy I like to make is to those commercial film developing/print making machines that used to be in thousands of drugs stores. The adoption (without any government regulation) of those very expensive machines forced prices for developing film and buying prints down and down. Now, because we all have cell phones with built-in cameras, those machines costing tens of thousands of dollars years ago are practically useless, all to the benefit of consumers.