Limiting Marketplace Competition

June 28, 2023

Recently, we were reading a news item regarding “Georgia lawmakers prepare to take on state rules that limit new hospital construction.” It’s a topic worthy of discussion when you’re in the healthcare industry. We asked our team for their thoughts on hospital Certificate-of-Need laws.

From Walt Stahl:  California used to have this law in effect, back in 1987-88. When I was with OSHPD it was a ‘race’ to Sacramento for both South Valley Hospital in Gilroy and the hospital in Morgan Hill. These two proposed hospitals were 8 miles apart and both communities wanted it but only Gilroy was granted the right to build. A few years after the Gilroy hospital was built the Certificate-of-Need law went away and Morgan Hill built their hospital, only to see it fail within a few years. The building later became other things including a bible college at one time and eventually a medical office building of some type. The owners of the (hospital) in Morgan Hill eventually bought the hospital in Gilroy and to this date, they still own it.

I do not believe we will again see a certificate-of-need imposed due in large part to the hospital beds that are needed as well as the acquisitions by big hospitals buying smaller hospitals. Market conditions and beds dictate the need, and I think California saw this back in the 1980s.

From Troy Tucker: I don’t see evidence of too many things that the government does that add value above what the marketplace independently does through the supply/demand model. In fact, law enforcement and the military are all that come to mind at the moment. Others are improved in quality, technological advancement, and price reduction through marketplace competition. If an area is oversaturated, the weak providers will cease to be. If the market experiences an increased demand, the supply will be increased by new and/or existing providers to meet that demand.

Healthcare presents an interesting challenge in the rural sector because even when there is demand it’s not all that sizable because individual rural markets are small. Theoretically, the cost of rural healthcare is higher as the economy of scale is very limited, and getting the best and brightest to the rural market is difficult, somewhat equating to a reduction in quality. This is where government does belong, setting standards that prevent a drop-off in quality.

The Certificate-of-Need program seems to serve as an avenue to keep competition out of the market rather than encourage it. If we know that competition brings improvement in quality, tech advances, and price reduction, why would we block competition in the marketplace? That’s rhetorical. I know why, and the answer does not involve community health improvement.

From Christopher Stahl: California is one of a handful of states that does not have some sort of Certificate-of-Need law for hospitals. These regulations, in general, create a harmful premise as they claim to manage a glut in health services but rarely consider communities in need of hospitals.
For-profit hospitals typically have checks and balances to determine their necessity, often structured by investors. These facilities want to operate as viable businesses having no interest in investing millions of dollars only to have the hospital sit unproductively.
Similarly, non-profit hospitals have board members who act as checks and balances. They have donors who won’t bestow money on providers who don’t act as good stewards of these monetary gifts.
The only case I feel can be made for this type of law would be for zoning changes needed to accommodate a new hospital, assisted living, behavioral health, or skilled nursing facility.

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