What Is Going on with Physician-Owned Hospitals?

Michael F. Cannon

Suppose Congress funds Social Security entirely by taxing the wealthy, who would never spend money in a casino. Then Congress gives that money to people who frequent casinos. Obviously, the enrollees who receive that money are receiving a subsidy.

Do the casinos receive a subsidy? If those transfers raise the incomes of casinos, we must answer yes: casinos are receiving an indirect but very real subsidy.

Some factors complicate the analysis. The additional money comes to the casinos not directly from the government, but via intermediaries (the enrollees). Also, it’s not just a handout: to receive the additional money, casinos must provide enrollees with something they value. Even so, the government is redistributing income in a manner that raises the incomes (producer surplus) of casinos.

Other factors clarify the issue. If the casinos are lobbying to preserve and expand Social Security, it indicates they know they are receiving a subsidy. If those transfers were not increasing the casinos’ incomes, they wouldn’t bother.

Suppose the government instead writes checks directly to casinos, such that casinos are the only way enrollees can receive this particular subsidy. That would further clarify the issue. Not only would the government be redistributing income in a manner that raises the incomes of casinos, but it would also be sending money directly to them.

If this change alters the enrollees’ incentives, casinos could receive even larger subsidies. If an in-kind subsidy to enrollees made them less price-sensitive, the quantity and prices of casino services would rise (e.g., “return to player” ratios could fall).

Also, the casinos are far more likely to lobby to preserve and expand these subsidies.

Suppose, finally, as often occurs with in-kind subsidies, the subsidies for card games end up being more lucrative than those for other casino services. The casinos respond by hiring dealers and adding card tables to capture more of those subsidies.

But when dealers launch their own card-game-only casinos, the incumbent casinos complain. They claim that people trust dealers more than casinos, which enables dealers to refer easy marks to their own dealer-owned casinos while sending card sharps to general casinos. They get Congress to prohibit government payments to DOCs.

The dealers go berserk. Even though dealers can still open their own casinos, they accuse Congress of banning DOCs. They demand that Congress change the law.

Are the DOCs subsidy-seeking? Again, we must answer yes.

Their own behavior reveals it. They want to limit their DOCs to card games because implicit government subsidies make those games unusually profitable.

Again, the lobbying clarifies the issue. The DOCs are lobbying to change the law for the same reason the incumbent casinos are lobbying against changing it: there’s subsidies in them thar hills, and each side wants to capture them.

That is the physician-owned hospitals’ issue in a nutshell.

Source: https://www.cato.org/blog/what-going-physician-owned-hospitals