Question

1. Most states restrict the number of hospitals in a given geographic area under “Certificate of Need” (CON) laws. These laws require any new hospital facility to provide evidence that there is a demand for its facility that is not currently being met by the existing healthcare facilities in that geographic market.

1. Identify the market inefficiency that these CON laws are trying to fix.

2. How does restricting the number of hospitals correct this inefficiency? Explain briefly.

Answer 1

(1) THE MARKET INEFFICIENCIES ELIMINATED BY CON LAWS:-

THE ABSENCE OF CON LAWS WILL RESULT IN UNREGULATED MARKET COMPETITION AMONG HOSPITALS. SUCH A COMPETITION DRIVES MEDICAL PROVIDERS TO OVERINVEST IN MEDICAL FACILITIES AND EQUIPMENTS IE. IT RAISES THE DEMAMD OR SUCH FACILITIES. THEREFORE, AS PER THE LAW OF DEMAND, THE COST OF THE EQUIPMENTS IN THAT PARTICULAR GEOGRAPHIC AREA INCREASES. THE BURDEN OF INCREASED COST IS SHIFTED ON TO THE PATIENTS IN THE FORM OF HIGH PRICES THAT ULTTIMATELY LEADS TO THEIR EXPLOITATION.

(2) RESTRICTING THE NUMBER OF HOSPITALS BY APPLYING CON LAWS WILL HELP IN CORRECTING THE INEFFICIENCY OF SUCH MARKET. IT WILL WORK IN THE FOLLOWING MANNER :-

CON LAWS RESTRICT THE ENTRY OF NEW HOSPITALS IN AN AREA. BY DOING SO, THESE LAWS REDUCE THE COMPETITON AMONG HOSPITALS THAT FURTHER REDUCES THE DEMAND FOR HEALTHCARE EQUIPMENTS AND DRUGS.THIS LOWERS THE COST WHICH ULTIMATELY LAEDS TO REDUCTION IN PRICES OF HEALTHCARE FACILITIES, MAKING IT AFFORDABLE FOR THE POOR PATIENTS.

APPLICATION OF CON LAWS-->REDUCTION IN NUMBER OF HOSPITALS-->REDUCTION IN DEMAND FOR MEDICAL EQUIPMENTS--> DECREASE IN COST OF SERVICES -->PRICES OF MEDICL SERVICES DROP ---WELFARE OF POOR PATIENTS