Hospital Supply

In my view, health care supply restrictions are more important than the insurance or demand features that dominate public discussion. If you are spending your own money, yes, you shop for a good deal. But spending your own money in the face of restricted supply is like hailing a cab to LaGuardia at 5 o'clock on a rainy pre-Uber Friday afternoon. We need to free up innovative, disruptive health-care supply. Let the Southwest Airlines, Walmarts, Amazons and Apples in.

But where are the supply restrictions? Alas it's not as simple as the NY taxi commission. Supply restrictions are spread all over Federal, state and local law and regulation, and usually hidden.

So, I was interested to discover an interesting supply restriction in this editorial in the Wall Street Journal last week.

Last year the Daughters of Charity Health System sought to sell its six insolvent hospitals in California to Prime for $843 million including debt and pension liabilities. State law requires the AG [California Attorney General Kamala Harris] to approve nonprofit hospital acquisitions. Ms. Harris attached several poison pills at the urging of the SEIU [Service Employees International Union], which forced Prime last week to withdraw its offer.

State law requires the AG [Attorney General] to approve nonprofit hospital acquisitions. How could this go wrong?

Since 2010 operating losses at Daughters hospitals have tripled to $146 million. High pay scales, inflexible work rules and rich pension benefits have swelled labor costs to 74% of revenues compared to the nationwide average of 58% at nonprofit systems.... 

... Of six bidders, only Prime agreed to assume the $300 million liability for worker pensions. Prime also scored high on 10 of Daughters’s 11 bidding criteria including financial wherewithal and historical service quality. 

Prime’s problem was the SEIU’s  opposition owing to the company’s rejection of a so-called neutrality agreement, which would facilitate unionization at all of its hospitals. Only four of Prime’s 15 hospitals in California are unionized. Since 2009 the SEIU has run a public campaign against Prime, leveling accusations of Medicare fraud and unchecked sepsis. 

Ms. Harris has taken up the union cause. In 2011 the AG vetoed Prime’s acquisition of the bankrupt Victor Valley Community Hospital as “not in the public interest” though a report produced for her own office concluded that Prime’s “capital investment over the next five years should lead to substantial improvement to facilities, infrastructure, and certain services at the Hospital.”

Now you may say, how nice. The Attorney General is stalwartly backing the union cause, trying to raise wages and employment for struggling "middle class" Americans. Except, it's the same people who pay the higher health-care costs and suffer worse service.

Regulation from the top is supposed to "bend down the cost curve" in medicine. But true cost reductions, efficiency improvements,  and quality improvements are painful. Ask United's pilots union, Walmart's competitors, or Kodak's employees.

The tone of the Journal's editorial suggests a morality play. I think not. I can't imagine any regulator, attorney general, HHS secretary, or politician, given the power to approve or disapprove hospital acquisitions, doing so in a way that truly lowers costs and improves quality following the only path we know that actually works, allowing disruptive competition. You only cut costs by, well, cutting costs. And disruptive competitors only enter if they have the right to do so, not the discretionary approval of any politician or political appointee.

Update in response to comments: "After the ACA" has a long list of supply impediments. I'm trying to learn about additional ones.