Debates over whether to permit commercial hospitals have heated up again. Both proponents and opponents have poured out superfluous or illogical arguments. Even government officials and politicians are at odds with each other although it's not a coalition government but a unitary regime with the ruling party controlling a majority of seats at the parliament. The policy reform initiative hits a snag due to lack of understanding of the nation's economy and health care system and populism capitalizing the people's illusion about charity-like medical service and ungrounded worries.

Medical service market protected with selective entry barriers

Under the current medical law, only doctors, schools and non-profit entities can set up a hospital. Those without license and companies are banned to establish a hospital and run it as a listed company. The entry barrier is such that it can hardly be found in other nations.

The regulation is justified on the ground that it protects the consumers by preventing excessive competition and ensuring the quality of goods or service. The medical industry has another cause for entry barrier: the medical service should be public and non-commercial. Then, the key issue is whether the entry barrier pursues a reasonable regulatory goal and if so, whether it is an effective means.

The argument that individuals without license and for-profit entities should be banned from entering the medical service industry in order to prevent excessive competition is not plausible. Our medical service market is not yet big enough to need to control the growth pace. More service providers should enter the market with bigger capital investment to meet the growing demand for better and broader medical service and provide an effective public health care system. The fact that the entry barrier has been in place for several decades even with doctors and hospitals in short supply clearly shows that the real purpose of the regulation is not to prevent excessive competition.   

Even if inhibiting excessive competition is a reasonable goal for the entry barrier, controlling the total amount of the market entry, regardless of who establishes a hospital, is far from achieving the goal but only an unnecessary regulation.

Second question is whether the regulation is an effective policy means to ensure non-commercial medical service. I'm quite pessimistic. About 16.3 percent of the nation's big hospitals, 56.9 percent of small hospitals, and most clinics are owned and run by doctors seeking profits. Since clinics have no constraints on profit distribution or asset disposals, profit-oriented hospitals, both de jure and de facto, exist in reality in a broad sense. As individual doctors are allowed to open a hospital or clinic for profit, banning non-doctors and corporates from the industry for the sake of "non-commercial medical service" is nothing but a discriminatory regulation that has no rational ground.

Entry barrier hurts medical service industry's competition

It's doubtful whether hospitals are actually run in a non-profitable manner. As most non-profit private hospitals have limited capital of their own, they heavily rely on external capital or borrowing for investment and operation. As such, they have to pay interest with the profits earned from medical services. Servicing the loan with operating profits is in essence not much different from companies' distributing the profit to their shareholders through dividends. Since loan repayment is far more burdensome than dividend payment, hospitals cannot help but to seek for profits, sometimes even more actively than commercial entities.

In other words, private-owned hospitals have no other choices but to make profits to pay interest or dividend and to secure investment funds unless they can tap other financing sources such as government subsidy or outside contributions. Everyone knows that it's hard to tell the difference between commercial and non-profit hospitals. Do you try to figure out whether it's owned by an individual or a medical organization when you go to a neighborhood clinic? Most people do not care.

With the private sector taking over more than 90 percent of medical services, it's too naive to believe that "non-profit" medical service can be guaranteed with entry barriers. Rather than such regulations, it depends more on how to make and implement a sophisticated incentive system to promote the "publicness" at all the medical service providers, including those run by non-doctors and companies.

As such, the current regulation over the ownership is not only unreasonable both in terms of goals and means but also unrealistic. Its harm to the industry and consumers is far from negligible. It limits competition among medical service providers for consumers by unfairly barring individual and corporate investors and hurts the industry's overall competitiveness by making funding for investment difficult.

Inflated and distorted side-effect of for-profit hospitals

The joint research carried out by the finance ministry and health ministry shows that reforming the entry barriers to allow company-type hospitals would expand consumers' choices and generate various spill-over effect in the industry with greater value added and new jobs. This clearly tells why a reform is imperative.

The persistent controversy and confusion reflects how divided the people's perception is over the side-effect of the reform. Simply concluded, the concerns over the adverse effect are either overdone or misleading.

Opponents voice deep worries about the failure of some small-sized hospitals. But this does not sound pressing much. Inviting outside investment to hospitals would necessarily increase the total sum of medical service providers and intensify competition among them. Those who are shunned by consumers will go bust. When the market is free to enter, a supply vacuum is no longer a concern. This is the short-cut to make the industry more competitive and give more benefit to consumers. Then, what and whom are you worried about? 

Fears of a possible rise in medical service fees are also highly distorted. If the new-type hospitals are obliged to join into the national health insurance scheme, they also have to follow the existing state-controlled pricing system, producing little change in individual patients' medical expenses. Under the current system, the fees are hardly different between private-owned hospitals and public ones.

The entire medical expenses may rise when the supply of medical service providers increase as a result of the deregulation. In order for a doctor to see a patient longer than now, to 5 or 10 minutes from the current 3 minutes, and meet the people's demand for quality medical service, the supply should be increased and then a hike in fees is unavoidable. A rise in medical expenses is not a big problem if the government oversees hospitals more carefully and provides useful information in such a way that the consumers can make better choice. Furthermore, jobs and value-added can be created by far more than the increase in medical expenses.

The biggest concern over the reform is that the access by the poor people to the medical service may be unfairly limited. The jitters are also driven by misperception. The fear that the company-type hospitals may raise the fee by two to four times starts from a wrong assumption. As mentioned before, as long as the commercial hospitals are subject to the current national health insurance scheme, they can't claim far higher rates than those owned by individual doctors.

Allowing company-type hospitals are critical to advancing the medical service industry. Larger-scaled investment and higher competition among suppliers could improve the innovation and efficiency, which in turn would beef up the industry's competition and provide higher value and more convenience to meet the growing consumer needs. It will be a long way to go for the medical service industry to reach the level of advanced economies if the blind criticism tainted with illusion about non-commercial hospitals, ungrounded distrust about the government and tendency to act on populism foils breakthrough reforms.

By Lee Ki-hyo / Dean of Graduate School of Public Health at Inje University

 

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