John Hood: Reduce health cost, not just price

RALEIGH — Too many North Carolinians lack access to the medical services they need. One possible response, as we have heard incessantly for more than a decade, would be to expand Medicaid under the terms of the Affordable Health Act, with most of the expense to be borne by the (already heavily indebted) federal government.

It’s hardly the only possible response, however. Through its own regulations, North Carolina restricts the availability of medical services and, as a result, inflates the cost of those services. Rather than looking for ways to redistribute that inflated cost to taxpayers, state policymakers should try deflating it.

In a recent column that discussed higher education, I emphasized the distinction between price and cost. If we say the average university education costs too much, which it most assuredly does, you could propose that we do more to shield students and their families from that cost by increasing state appropriations to public universities, for example, or by transferring student-loan debt from private balance sheets to the (already heavily indebted) federal government.

Such a policy would reduce the price of education, not its cost. In fact, if we keep the price of a good or service artificially low by making third parties such as governments pay more of the bill, its actual cost may go up.

The same analysis applies to health care. The finance problem matters, of course. My own preference is to reform the tax treatment of health insurance by converting the current exclusion, inefficient and unfair as it is, into a set of risk-adjusted tax credits so even households of modest incomes can purchase private plans on a competitive market, as proposed by a variety of conservative reformers and institutions.

But focusing too much on how health care is financed distracts us from how health care is delivered. In North Carolina, we make it far too difficult for new providers to enter the marketplace. We squash competition and innovation. As a result, we make health-care costs unnecessarily high.

Consider the case of certificate-of-need (CON) laws. They force hospitals and other providers to obtain state permission to open new facilities or add new services. As a new report by the John Locke Foundation documents, North Carolina’s CON laws are egregiously out of step with current practice and common sense.

Of the 35 states that still have CON, our state’s rules are especially strict. We are one of only eight states that require state permission slips for all six major categories: hospital beds, beds outside hospitals, equipment, facilities, services, and emergency medical transport. When the American Planning Association counted up CON rules across 26 different services, facilities, and equipment purchases, only Vermont (all 26) and Hawaii (25) regulated more of them than North Carolina (23) did.

James Bailey, a Providence College professor and visiting scholar at the Federal Reserve Bank of Philadelphia, conducted a careful review of the empirical research on CON effects. Most studies showed that, not surprisingly, restricting supply makes health care costlier and harder to get.

In his new Locke report, Bailey wrote that CON laws reduce hospital beds by 13%, hospitals per capita by 30%, substance-abuse treatment centers by 42%, and neonatal intensive-care beds by 49%. CON states also have longer waits in emergency rooms. Prices are, not surprisingly, higher in CON states, as well, by about 14% on average, though the effect on overall health-care spending is tempered somewhat by the fact that fewer services get delivered.

Could North Carolina get rid of CON regulations entirely? Sure. Some did so decades ago. Others, such as New Hampshire and Florida, have fully or mostly eliminated their systems in recent years.

But even if we just made our CON laws more “normal,” reducing their breadth and streamlining the regulatory process, that would give North Carolinians more access to the medical services they need at a lower price — not by shifting the cost to taxpayers but by using competition and innovation to drive down the actual cost of delivering services.