Michael Hicks: End hospital monopolies to restore free markets
For most of my adult life, I described myself as a free-market economist. But I should explain what it means and how it influences my research and writing. The best way to begin this essay is to observe that almost all economic research examines market failure points. It’s rare to find a technical economics article that reports that the markets are working particularly well.
Over the past 25 years, through several hundred studies, I think I have concluded that markets work well in no more than one or two articles. This is largely how the rest of scientific publishing works. There would be no need for virologists if there were no viruses making people sick. But, most of the time, we don’t get sick from viruses, and very few virology articles focus on healthy people.
The markets are essentially the same. Most of the time, in most places, the markets work well. They allocate goods or services to those who value them most and push factors of production, such as talent or equipment, to where they will be most productive. Without any conception of consciousness, markets tell us when there is too little or too much of a product in a certain place. This causes humans to “truck and barter” from places of plenty to places of scarcity.
Markets allocate financial assets, land, and rare commodities like copper and platinum in ways humans could never efficiently conceive. From the most basic level of human exchange to complex international commerce, there is almost no example where free markets surpass any other man-made arrangement. They offer us the most goods and services at the lowest price.
If all markets operated freely, there wouldn’t really be a need for economists and we wouldn’t have anything to study. But alas, too many markets are not free. Economists define three main conditions under which markets do not operate freely. In each of these cases, some intervention in free markets may be necessary to approximate market outcomes.
The first example of market failure concerns a public good. A public good is one where no alternative market will form, as no one can be excluded from receiving the benefits of the good or service. For example, national defense benefits everyone, regardless of their tax rate. So there will be no free market for the Air Force. If it is to exist, the government must pay for it.
The second example concerns markets in which the production of a good or service affects more than buyers or sellers. The classic example is pollution, which imposes a certain cost on people who neither buy nor sell the polluting good or service. In this case, the costs are higher than what the seller perceives, so the price is too low and the quantity of the item produced is too high.
There are also cases where the production of a good benefits more than those who receive it. Education and vaccines are typical examples. Sure, getting an education and preventing disease benefits us individually, but living in places where better educated people live increases everyone’s income. Living in heavily vaccinated places reduces the risk of disease for everyone. That’s why we publicly fund education and vaccines.
The third type of market failure are monopolies, of which there are two types. Natural monopolies occur when a single producer is the cheapest provider of a good or service. The classic example is a water, sewer, retail natural gas or electric utility. In these cases, the cost of building competing infrastructure would make the product more expensive for everyone.
Artificial monopolies most often occur when there is room for competition, but firms are able to foreclose competitors from the market. Often the government creates these “entry barriers” for rival companies. Patents are temporary barriers to entry. Other times, companies manage to create their own monopolies by buying up competitors or companies in their supply chain.
Free market economists understand that for markets to be truly free, market failures must be corrected. To do this, the government must provide public goods. The government must also participate in regulating polluters and funding education.
There’s plenty of room to disagree on the details, and the government rarely gets it right. In fact, most of these economic articles on market failures discuss how government can do better. Many of these economic studies argue that government should ease regulatory restrictions, or perhaps use market mechanisms more effectively.
Yet for a free-market economist, paying for a US Navy, allocating taxpayers’ money to create a world-class education system, or regulating mercury emissions are well within government’s reach. We free market economists also argue that the government should own or regulate public services in the case of a natural monopoly. We would also agree with the existence and enforcement of laws against artificial monopolies. In fact, the economic argument against monopoly power is that it interferes with the free functioning of markets.
US antitrust laws describe a number of behaviors that are illegal if they reduce competition between businesses. The first law, named after GOP Senator John Sherman, prohibited cartels and price fixing. Interestingly, Sherman’s most famous brother is best known for “reshaping” Atlanta in 1864. Regardless, several court cases led Congress to expand anti-trust laws to prohibit a wide range of activities if they reduced competition. The Sherman Act of 1890 prohibited monopolies after they arose, but the Clayton Act of 1914 prohibited behavior that led to monopolies.
Today, the Indiana Legislature is fighting powerful and entrenched monopolies in our nonprofit hospitals. Let’s see if the things these hospitals have done to secure and maintain their monopolies resemble things that were banned over a century ago to preserve free market competition.
The Clayton Act prohibited mergers and acquisitions that lessened competition. These mergers could be horizontal, such as a single network buying hospitals in several adjacent counties to eliminate competitors. They could also be vertical, through the acquisition of clinics or offices of referring doctors, which would prevent the construction of other hospitals in a region.
The same law prohibited charging different prices to different customers if doing so would create or preserve monopoly power. This is called price discrimination, and it can only be successful if the actual prices charged to consumers are almost completely invisible. The Clayton Act also prohibited “exclusive agreements,” such as requiring doctors with admitting privileges to send patients exclusively to your hospital. Another example could be forcing ambulance services to deliver patients only to your hospitals.
If these actions sound familiar, you’re right. They are an integral part of Indiana’s hospital monopolies. Aggressive legislation to dismantle these monopolies is an unequivocal market economic approach for those whose time has come.