Fine Print - May 2011

Regulation play
By G.D. Gearino

If anyone decides to compile a list of the most unsettling sentences ever found in a news report, I’ll nominate this candidate, culled from my local daily newspaper a few weeks ago: “A battle is shaping up over 101 new hospital beds that state regulators say are needed to meet the surging demand for health care in Wake County.” Who knew that through those 27 simple words the unhappy state of our modern regulatory apparatus could be unwittingly revealed?

There are people, of course, who believe there is not enough regulation in life, that all economic ills could be cured by imposing more rules and exercising more oversight upon the business world. The problem with that belief is that it runs contrary to everything we know about human behavior. After all, we’ve been refining, updating and expanding history’s most famous set of formal regulations — the Ten Commandments — for thousands of years. In hindsight, it’s all been for naught. Can anyone make the case that we’ve eliminated, or even significantly reduced, adultery, theft, murder, idol worship and taking that name in vain during the millennia since Moses brought the tablets down the mountain?

But belief in the power of regulation is hard to shake. That’s how we find ourselves at a moment in time when anonymous state bureaucrats can claim to know the exact number of hospital beds fast-growing greater Raleigh will need in the future. Ninety-eight will be too few; 103 will be too many. We’ll need exactly, specifically, precisely 101 of them.

Lest you lump me in with the crowd of hard-core regulation haters, please understand that I think some (and maybe even most) regulatory agencies have a place in the world. I’ll go even further and say that most regulators, if given the flexibility to exercise judgment, probably would turn out to have good sense. Problem is, what once was a clear line separating the regulated from the regulators is now blurred. The federal government is both a securities regulator (through the Securities and Exchange Commission) and an investor in a global public company (General Motors Corp.) — which issues securities. Similarly, the government was an investor in hundreds of banking companies, through the Troubled Asset Relief Program, and a regulator of the banking industry by way of the SEC, Federal Deposit Insurance Corp., Office of Thrift Supervision and the Federal Reserve. Needless to say, you shouldn’t be an investor and a regulator. When it comes to the medical industry, the state of North Carolina is on that same kind of spongy ground.

All regulation starts with a noble premise, and in the state’s case it’s this: The health of North Carolina citizens is too important to be left entirely to the whims of the marketplace. (That’s literally the first declaration in the law establishing the state’s authority to regulate the industry.) But from that point forward, the integrity of the regulatory process is challenged in two separate ways — both of which are illustrated in the debate over who gets the 101 beds in Wake County.

First, regulators are in the position of picking a winner from a group of applicants that includes ... well, the state of North Carolina. The three hospital groups vying for the beds are WakeMed, the Raleigh-based hospital once owned by Wake County but now independently operated; Novant, the Winston-Salem-based owner of hospitals in the Carolinas and Virginia; and Rex Healthcare, which is owned by UNC Health Care System. And UNC Health Care, of course, is owned by the state. All parties can pledge that such a circumstance will make no difference when the decision is made, but the stark reality is that the state sits on both sides of the table as the fate of the 101 beds is discussed. Little wonder that WakeMed has made a legal case over UNC Health Care’s built-in advantage in an unrelated decision refereed by the state.

The second challenge is the fact that one of the state’s primary considerations as it goes about the business of supervising the health-care marketplace is the state’s own bond rating. A majority of the hospitals in North Carolina have financed their construction or expansion through tax-exempt state bonds, according to a top executive in the Department of Health and Human Services. Since 1974, he says, some $17 billion of bond financing has been used to build hospitals, “and we’ve never had a default in the history of the program.” That’s one reason why the state’s bond issues have long enjoyed good ratings — and thus command lower rates in the financial markets, which keep borrowing costs down.

But that’s also why regulators find themselves putting a cap on the supply of hospital beds in Wake County (as well as the rest of the state) — in essence, limiting the supply. You see, hospital beds are to regulators what oil is to OPEC: a commodity whose availability is carefully controlled to ensure a good revenue stream. Seen in that light, the determination that Wake County will need 101 additional beds — no more and no less — has a subtle precision. It balances the health needs of citizens against the need for hospitals to make enough money to guarantee the health of the state’s bond rating. Funny, but I didn’t find the second of those considerations emphasized quite as lyrically in the statute books as the first.