Free Market Health Care

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Maryland Would Fare Well With Less Regulation

Marketplace: Freer And Greater Competition, Coupled With Better Informed Consumers, Offers Our Best Hope To Control Health Costs.

April 20, 1997|By WILLIAM L. JEWS

ABOUT 220 YEARS after Adam Smith, the father of modern economics, described the powers of the free market, we still have a long way to go to emancipate the free market economy in Maryland from the interfering hand of state regulation.

Well-intentioned lawmakers in Maryland remain convinced that they can achieve higher quality, more affordable and more efficient health care through regulation than by trusting the marketplace. Given the dramatic changes occurring in the health care industry, an in-depth public discussion on how much regulation is enough is long overdue.

Historically, Maryland has taken a heavily regulated approach to health care to a degree unprecedented in the nation, beginning nearly a quarter of a century ago with the creation of the Health Services Cost Review Commission (HSCRC). The HSCRC proudly notes that hospital costs in Maryland have gone from being 23 percent above the national average in 1974 to 3 percent below last year.

Unfortunately, the cost of a hospital stay in Maryland rose at nearly twice the national average last year. While a new "correction factor" taking effect this month helps ameliorate these increases, the statistics should serve as a warning signal that costs are again rising.

Despite the pride many Maryland legislators take in the regulated health system they have created, it's interesting that no other state has chosen to follow Maryland's lead. With New York's decision in July to abandon its hospital rate-setting system, Maryland stands alone as the only state that sets rates of hospitals through regulation.

The HSCRC, in its Consumer's Guide, concedes that "growth in hospital costs, and health care costs in general, continues to be a serious problem." It points to the "historic lack of competition in the hospital industry" as the primary reason for high costs, coupled with the fact that most Marylanders have health insurance:

"[T]here has been little price competition in part because few people know what services they need, who can best provide them, or how much they will cost at various hospitals. Furthermore, most people have health insurance, so they don't feel the impact of their health purchasing decisions until their premiums are raised. They are also less likely to shop around than they are when making other purchasing decisions."

In short, the HSCRC acknowledges that freer and greater competition, coupled with better informed consumers, offers our best hope to control health costs.

For one real-life example, we need look no further than the failure to address the problem of excess hospital capacity in Maryland. Hospitals spent nearly $900 million to expand and renovate facilities over the past six years. When the Certificate of Need (CON) was established in 1982, average occupancy rates in Maryland hospitals were 82 percent. By 1996, average occupancy was under 56 percent, with one hospital reporting average occupancy of less than 19 percent.

With the shift to managed care, this excess capacity becomes an even greater problem. In what might be called "the law of unintended consequences," the CON program that was intended to limit unjustified hospital expansion instead has become an administrative barrier that protects the status quo. Ultimately, market forces should be permitted to drive the recent trend toward hospital consolidation.

Much more can and should be done to control hospital costs. Last year, 52 hospitals in Maryland increased rates an average of 3.7 percent while just three hospitals decreased rates. One hospital boosted rates 18 percent. This came at a time when the consumer price index increased less than 3 percent and many managed care companies, facing keen competition, held the line on premiums.

Rates increased despite a record $570 million in hospital net profits the past two years. Profits averaged 6.2 percent last year, with some hospitals reporting profit margins as high as 20 percent. That Maryland hospitals could ring up such impressive returns with average occupancy rates of less than 60 percent suggests the need for greater accountability from both hospitals and the regulators who oversee them.

The complexity of Maryland's health care regulatory system results in unnecessary costs and confusion to payers, patients and providers alike. Besides HSCRC, there is a veritable "alphabet soup" of agencies, including the Health Resources Planning Commission (HRPC), established in 1982 to "shape the future dimension" of Maryland's health care system, and the Health Care Access and Cost Commission (HCACC), established in 1993 to create a medical care database, electronic claims clearinghouse and report cards on HMOs.

The future scope of HCACC, in particular, should be re-evaluated. Couldn't the Maryland Insurance Administration, for instance, take responsibility for setting the minimum package of benefits specified under the small group insurance reform law? Do we need HCACC to publish annual "report cards" and collect health cost data?

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