Barriers to Free Market Competition in Healthcare Delivery

Posted on December 13, 2009 by Dr. David Edward Marcinko MBA MEd CMP™

Why Supply and Demand Doesn’t Work in Medicine

By Dr. David Edward Marcinko; MBA

[Publisher-in-Chief]

Much has been written here, and elsewhere, about free market competition in healthcare; especially in light of the current national political debates. Yet, these markets are not free.

Like Evolution – Healthcare Competition is Only a Theory

Perfectly competitive healthcare markets are not free; they exist only in economic theory as a useful comparative artifice. In reality, industries and markets have varying constraints on competition. The healthcare industry has often been characterized as unique with its many significant barriers to free market competition, such as market controls on price and quality.

According to colleague Robert James Cimasi, of Health Capital Consultants LLC, in St. Louis MO; there are three main reasons for these barriers in healthcare:

Competitive Healthcare Barriers 

  1. The nature of healthcare creates an unpredictable, urgent, and “infinite” level of demand.
  2. The ubiquitous involvement of insurance companies, private and governmental, as intermediary organizations in the purchase of healthcare interferes with consumer motivations and consequently their choice of providers and services.
  3. The difficulties in measuring healthcare quality and beneficial outcomes (both of quantifying and qualifying them) and the lack of information on the relative costs of healthcare providers and services also inhibit consumer selection, further removing incentives to providers to increase quality and lower costs. 


Barriers to Healthcare Competition               

Included among the many other barriers to competition in healthcare delivery are the following:

  • Patients don’t purchase services directly from providers;
  • Patients don’t compare prices between providers;
  • The government is the largest purchaser of healthcare;
  • Private purchasers often lack market power;
  • Patients, purchasers and providers lack information;
  • Occupational licensing;
  • Many providers have monopoly or near-monopoly power (yet antitrust laws prevent some potentially beneficial integration);
  • Providers are rewarded for increasing costs;
  • Capital investments are overly subsidized (It should be noted that Stigler argues that an industry will not use its power to collect money from the government unless the list of beneficiaries can be limited, due to the fact the amount of subsidies will be divided among a growing number of rivals.*
  • Certificate of Need (CON), regulation, and licensing laws are an entry barrier to competing and substitute providers and services; and
  • Exit barriers protect low-quality providers.

Assessment

Of course, the supply side is also flagrantly encouraged by excessive medical testing, procedural interventions and surgery; mostly excused by malpractice phobia as a well as the personal financial interests of involved stakeholders.

References

Stigler, George J. “The Theory of Economic Regulation.” The Bell Journal of Economics and Management Science. Vol. 2, No. 1 (Spring 1971): 5.

Conclusion

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