Why Competition Doesn't Work in Medicine — And Can Actually Make Things Worse

In almost every corner of the economy, competition is the consumer's best friend. When a second coffee shop opens on your block, prices drop and quality rises. When airlines compete for your route, fares fall. This is Economics 101 — more suppliers chasing the same customers means better deals for everyone.

Medicine doesn't work this way. In fact, more competition in healthcare can mean higher costs, more procedures, and no better health.

Here’s what I mean: consider a community with five orthopedic surgeons. Together, they handle all the broken bones, torn ligaments, and arthritic knees in the region. Each earns around $500,000 a year — a good living driven by genuine patient need.

Now two new orthopedic surgeons move to town. In a normal market, you'd expect prices to fall.

But multiple studies have shown prices stay roughly the same. And remarkably, the two new surgeons also earn $500,000 — not by working harder or attracting new patients, but by doing more procedures on the same population. The surgery rate goes up. Benefit to the community does not.

This is what economists call physician-induced demand. Because patients rely almost entirely on their doctor's recommendation — "You really should have that knee replaced." When their income is threatened, more borderline candidates get operated on.

Standard competition assumes informed consumers comparing prices and choosing freely. But when you're in pain, frightened, and your doctor is recommending surgery, you are not a typical consumer. Prices are rarely disclosed in advance. Quality is nearly impossible to assess. And insurance means most patients don't feel the full cost of care, so patients readily follow the surgeon's advice.

The same is true in hospital use. Milt Roemer, a former UCLA professor of mine, coined the phrase "A built bed is a filled bed." More hospital capacity drives more admissions — not because patients need them, but because empty beds cost money.

Decades ago, states recognized this and enacted Certificate of Need laws, requiring hospitals to prove there was a community need before adding beds, trauma units, or MRI machines. The logic was simple: limit supply to what a community actually needs, and you reduce unnecessary procedures. These laws remain controversial — critics argue that they create monopolies. But there is plenty of data showing that limiting oversupply and competition helps reduce prices. 

What’s required for it to work, though, is price regulation and full transparency. When prices are regulated, outcomes are publicly reported, and patients can compare options, competition can improve quality. The goal isn't to eliminate competition — it's to design it so providers compete on value, not volume.

Until then, the invisible hand in medicine is too often reaching into our wallets.

— Dr. Michael Wilkes with a Second Opinion

Further Reading:

• Do more hospital beds lead to higher hospitalization rates? a spatial examination of Roemer's Law
• An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith
• The Industrial Organization of Health-Care Markets
• Hospital and Health Insurance Markets Concentration and Inpatient Hospital Transaction Prices in the U.S. Health Care Market
• The Supply of Surgeons and the Demand for Operations

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