Regulation, Competition and Cross-subsidization in Hospital Care: Lessons from the Economics of Regulation.

This paper reviews the parallels between "hidden" regulation in the form of cross subsidies in hospital care and past experience with cross subsidies in transportation and utilities. We review the pervasive regulation of the U.S. health care industry during the past 60 years, evaluate the similarities between regulation in health care and in other U.S. industries and outline the ways in which current health care regulation, particularly the use of cross subsidies to finance health care for the uninsured and under insured, is failing. The paper describes a number of predictions regarding the course of regulatory development in health care from normative and from economic theory of regulation. Several aspects of the regulatory situation in health care industry suggest the need for some refinement of economic theory of regulation. Finally, while policy advocates urge for added regulation in health care, our analysis shows that the current state of the health care market may make it impossible for such regulation to accomplish its purpose.