Is competition working?

• Author: Kaelble, Steve
• Position: Hospitals say that competition is good both for them and the patient

Are hospitals on a buying-and-building spree, battling for market share? Indiana hospitals say a freer marketplace invites cost-saving innovations and cooperation.

The theory goes like this: When retailers compete, the price goes down; when hospital compete, the price goes up. Retailers boast of their rock-bottom prices, while hospitals push their new services and equipment that heal better and faster, but at greater cost. And the bills continue to grow.

Critics concerned about spiraling health-care costs find sense in this argument, and it gives them a place to point their fingers. Hospitals, however, say it's not that simple. True, regulatory changes in the 1980s left medical providers on a much more competitive footing, and health-care consumers are much more service-oriented than price-conscious. But hospitals say one of the major components of the theory outlined above--excessive duplication of expensive services--simply isn't true. And they add that hospitals' competitive mode encourages them to act as other businesses do, seeking creative ways to corral costs and arranging sensible cooperative ventures, all the while offering the products that consumers demand.

An understanding of the issue must begin with a little history. "In multiple-hospital communities, there has always been a form of friendly competition for the types of services," says Robert Morr, vice president of the Indiana Hospital Association. "However, it became a matter of public policy in the 1980s. Reaganomics changed public policy and said the types of governmental controls that had been in place in the '60s and '70s really had not controlled growth in health-care spending in this country, so why don't we try the competitive marketplace philosophy? It works in the private sector, so why don't we let that play out?"

Prior to the mid-'80s, Indiana and many other states had a "certificate of need" process that required hospitals to argue their cases in front of regulators before buying major new equipment or building a new facility. In addition, many states had mandatory regulation of rates, and Indiana had a voluntary rate review process. Now, most of those controls are gone, and critics say hospitals have gone on a buying-and-building spree, battling for market share without really considering the need for a new piece of equipment or a new service.

Fort Wayne had the dubious honor last year of being a Wall Street Journal example of this alleged type of reckless competition. Among other things, the article charged that competing hospitals there were bringing to town more expensive pieces of equipment such as magnetic-resonance imagers than necessary, and costs were going up as a result. MRIs, in fact, often are at the center of duplication-of-services allegations, in Fort Wayne and all the other cities where hospitals compete.

Such arguments would seem to presume that hospital administrators don't have the smarts to make good business decisions. That offends people such as William J. Loveday, president and CEO of Methodist Hospital of Indiana, an Indianapolis institution that has not one, not two, but three MRIs. "I think it's a question of whether you have the demand for it. What you can't do is you can't afford to buy an MRI and run it just five or six hours a day. But if you've got demand and have three MRIs that run 16 hours a day like our three do here, you need them."

Hospitals, he says, know the realities of supply and demand. "From an investment standpoint, you can't afford as a hospital today to make investments in technology that are low-utilization. That's an asset that sits on your books so to speak, and if it doesn't have...