Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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WHO NEEDS HOSPITALS? : Examining the Need for Change of Role

The deregulation of the telephone company may eventually lead to better cheaper service, but its initial effect has been to raise the costs and decrease the quality of telephone service. The telephone company is a monopoly, and because about 30%of telephone service relates to the copper wires running to everyone's telephone, it is hard to justify competitive copper wires. "Bypass" is the term used for the process of sending signals from point to point without using local hard wires, and perhaps in time, we will see practical radio signals, laser beams, etc which will replace the local wires, just as they are starting to do with long-distance transmission. Even in the financial district of Manhattan Island, it has been difficult to justify the laying of competitive wires; as the population and telephone traffic thin out, it gets progressively more productive to consider competitive wires. Eventually, however, you reach a point in progressively more rural area where the wires themselves are too expensive to justify, and the high density areas subsidize service to remote areas. At that point, politics and public policy begin to throw their weight in favor of regulation; regulation then does not have an anti-monopoly purpose, it has a political purpose.

The failure of the telephone companies to improve the quality of their service can probably be traced to regulation, not deregulation. Utilities like the phone company seemingly have to be permitted, but society does not mean to give them a license to steal. Profits are limited to 12.5% return on equity. There is simply no point in increasing efficiency when you can't keep any profits beyond the 12.5% you are already making. The local politicians in Alaska want you to run copper wire to the top of Mount McKinley, and there is very little reason to argue with them. The creature comforts of phone company management are greatly enhanced by getting politicians off their backs, getting unions off their backs by giving in to them, and enhancing the feelings of "family" which comes from working in an environment where no one strains himself.

To turn to another deregulated monopoly, the airlines have similar had a deterioration of service since the big bang. Prices are cheaper, and air travel is consequently increased in volume, but quality is worsened and the big carriers have swallowed up the little fellows. However, the main factor in the concentration of the industry has been the shortage of airports which was unplanned for consequence of the increased air travel stimulated by lowered prices. Airports are built by tax money; to the airlines, they are more-or-less free. Communities originally built airports to encourage air travel to their regions. In a time of shortage, access to landing space and times are favors which politicians can bestow on those best able to deserve them. Larger airlines are naturally better able to deserve favors than small or beginning ones, so concentration and monopoly results.

The similarities between hospitals and the two semi-deregulated industries are clear. Non-profit hospitals see little point in cutting their costs or improving their efficiency for the sake of improving profits. Competition in filling their beds is a much more important worry, and that idea leads to the exploration of buying up or merging with competitors. The rural issue arises; if you are going to have telephone wires to the top of Pikes Peak, perhaps the same political techniques will create or maintain hospitals there, too. Hospital beds have become like airport landing slots, created at public expense but monopolized by those best able to influence the political process.

Strong similarities between industries as radically different as hospitals, airlines, and telephone companies reflect the fact that deeper societal forces are at work. Politics, through its one-man-one-vote power, is in conflict with economics, where money talks. The rhetoric, and the reality, of corrupt partisan politics versus self-serving personal greed may confuse the discussion to the point that one or the other may dominate a particular industry's regulatory process for quite a long time. The country cannot afford do-gooders destroying the efficiency of major industries, but the country has a right to impose public service obligations which conflict with efficiency. Scarcities, high prices, and poor quality of service are signs that regulation has put a strain on the equilibrium between politics and economics. If things are bad enough, one or the other must yield.

Originally published: Monday, October 22, 2018; most-recently modified: Wednesday, June 05, 2019