Our recent editorial on Senator Grassley’s effort to get the New York-Presbyterian Hospital System to justify to him its tax-exempt status brought a call from a friend who accused us of sounding like Marxists by concentrating on the salaries being paid out by the hospital system, which are high for charity work [“Grassley and the Hospitals,” May 26, 2005]. We tried to explain that if there’s any Marxism at work, it is on the part of the tax-exempt hospitals, whose lobbying against restraint in Medicare and Medicaid spending has sent health-care costs in New York soaring, and the state and local tax burden along with it.

But there’s another way in which the health-care system in New York is running along lines that’d make Karl Marx smile, and that is the law banning publicly held companies from entering the competition. One reason that New York’s Medicaid costs are more than Texas and California’s combined is that Texas and California have for-profit hospitals run by publicly traded companies, while New York does not. Nationwide, around 15% of all community hospitals are for-profits. In some states, the percentage is even higher; it’s 28% in Texas, for example. Publicly traded companies are operating for-profit hospitals in at least 28 states, but so far as we can tell, there’s not a one in New York.

A 2002 study by two economists (one of whom is Mark B. McClellan, current administrator of the federal Centers for Medicare and Medicaid Services) found that in areas with for-profit hospitals, it cost 2.4% less per patient to treat elderly heart-attack victims than in areas without for-profits. The patient didn’t even have to stay in a for-profit to benefit; the opening of a for-profit in the area encourages nearby not-for-profit hospitals to improve their efficiency to keep up. And that savings came without any noticeable change in patient outcomes. By our reckoning, that works out to at least $1 billion New Yorkers would save on the state’s $42 billion annual Medicaid tab, assuming this kind of discount applies across the board. That could translate to a $1 billion tax cut for New Yorkers now bearing the highest state and local tax burden in the nation.

New York law provides at least three obstacles to the entry of firms such as Community Health Systems, Triad Hospitals, LifePoint, and others that are providing health care in other states. First, it imposes strict regulations on who can own a hospital (called a “character and competence test”), and then extends that test even to shareholders in a publicly traded for-profit hospital operator. Second, New York also blocks from running a hospital any corporation whose stock is owned by any other corporation. The regulation effectively bans any public company from opening a medical center.

While this technically leaves the door open for small groups of doctors who would want to open a physician-owned hospital (another form of for-profit), yet a third regulation stands in the way, one that requires any new hospital to demonstrate that it’s meeting an unserved need in the area where it wants to open. No wonder the Empire State only houses three physician-owned for-profit hospitals: two community hospitals and a substance-abuse treatment center.

Changing the law would throw open the doors to the kind of competition that has helped control costs in other states. Naturally, the tax-exempt hospital association opposes such a change; the executive vice president for policy at the Healthcare Association of New York State, Ray Sweeney, tells us the laws, imposed in the 1970s, are important “to maintain community stewardship.” Seems to us what is going on now is the community is being taxed to maintain an extravagantly expensive system that is lobbying to prevent competition from public companies that might drive prices down. “Stewardship” is one word for it, but we can think of some others.