Burn Down the Regulatory House

The Wuhan epidemic is bringing to light many regulations and processes that have needlessly impeded efforts to fight the virus by private industry, as well as by government. Quite a few such regulations are now being suspended, causing many to ask, why did we have them in the first place?

At Center of the American Experiment’s web site, economist John Phelan offers a textbook example from our state of Minnesota. Minnesota’s governor has ordered a draconian shutdown that is devastating the state’s economy and will bankrupt thousands of small businesses. Why? As elsewhere, to “flatten the curve.” The concern is that Minnesota doesn’t have enough hospital beds and, especially, enough ICU beds to accommodate COVID-19 patients who will need them during the height of the epidemic. That is the fundamental reason why millions of Minnesotans have been ordered to stay home, at great cost.

But why is the state so short of hospital beds? John Phelan explains. (Forgive the long quote, but the point is vitally important. Links are omitted.)

In 1984, Minnesota enacted a hospital construction moratorium. This prohibits the building of new hospitals as well as “any erection, building, alteration, reconstruction, modernization, improvement, extension, lease or other acquisition by or on behalf of a hospital that increases bed capacity of a hospital.” Whenever hospitals or provider groups propose an exception to the moratorium, the Minnesota Legislature requires the Department of Health to conduct a “public interest review.”
[I]t is incredible to note that, as with [Certificate of Need] laws, the purpose of this system is to make it harder to provide hospital beds in Minnesota. [Researcher Patrick] Moran says: “Policymakers hoped that the moratorium would be more effective than CON in reducing the growth of hospital beds.”

They would appear to have been successful. In the twenty years from 1984 through 2004, 16 exceptions were granted permitting just 94 additional licensed beds. As the chart below shows, between 1996 and 2016, the number of licensed beds in Minnesota actually fell by 921 while the population increased by 81,000. …

The moratorium fixes supply the supply of beds. This encourages medical providers to shift them around in search of the best return. Moran explains:

Many hospitals have strategically “banked” beds, allowing them to circumvent the review process. In 2005, while there were only 11,650 available beds, there were 16,392 licensed beds in the state, allowing many hospitals to rely on unused bed capacity when they expand services. This is why, as the chart above shows, in 2016 29% of licensed beds were unavailable.

We are now paying a heavy price for government policies that deliberately suppressed the building of new hospital capacity in our state. How did such a crazy policy come to be?

No doubt, many Minnesotans would be wondering why state government seeks to limit the expansion of hospital beds.

The rationale for Minnesota’s hospital moratorium is no different from the rationale for [Certificate of Need] laws. The only reason we favor the former over the latter is, as Patrick Moran points out, that we think it will be more effective at limiting hospital expansion. Policymakers want to do that – they claim – because otherwise medical providers would over-invest in capacity which would drive up prices, raise health care costs, and restrict access to these services for the poor.

This is a bizarre argument. The reason we don’t have a McDonald’s on every block isn’t because state government protects us from this, but because it makes no economic sense for McDonald’s to expand capacity with no regard to the demand for it.

And, in fact, research finds that [Certificate of Need] laws – or analogous laws like Minnesota’s moratorium – do little to increase access to health care for the poor, but, instead, limit the supply of such services. But then that is their express intention. As my colleague Martha Njolomole wrote last week:

Findings show that controlling for other factors “CON laws seem to limit access to healthcare, fail to increase the quality of care, and contribute to higher costs.”

Additionally there is proof that repealing CON laws is highly beneficial to states.

“Researchers have found that states that have removed these rules have more hospitals and more ambulatory surgery centers per capita. They also have more hospital beds, dialysis clinics, and hospice care facilities. Patients in non-CON states are more likely to utilize medical imaging technologies and less likely to leave their communities in search of care. Though CON advocates sometimes claim that the rules protect rural facilities, states without CON laws have more rural hospitals and more rural ambulatory surgery centers than states with CON laws.”

This is just one of many instances where irrational laws and regulations have impeded our ability to respond to the Wuhan virus. Via InstaPundit, this excellent piece by the New York Post editorial board, titled “How Red Tape Has Crippled America’s Coronavirus Response.” I will cite just one example from the editorial:

It took weeks for the feds to waive regs even on coronavirus testing kits. For more than a month, the Centers for Disease Control and Prevention only allowed the use of its test — which proved to be inaccurate much of the time — even as companies were champing at the bit to produce better and faster kits.

Perhaps one silver lining of the Wuhan virus is that Americans will see, vividly demonstrated, how poor regulation not only makes all of us poorer, but can threaten our lives. This could provide renewed energy for President Trump’s assault on the federal swamp during his second term, and for similar efforts in the states.

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