Economist Writing Every Day

My home province of Quebec in Canada has been under lockdown since the Holidays (again). At 393 days of lockdown since March 11th 2020, Quebec has been in lockdown longer than Italy, Australia and California (areas that come as examples of strong lockdown measures). Public health scientists admit that the Omicron variant is less dangerous. But the issue is not the health danger, but rather the concern that rising hospitalizations will cause an overwhelming of an exhausted health sector.

And to be sure, when one looks at the data on hospital bed capacity and use-rates, you find that the intensity of lockdowns is well-related to hospital capacity. Indeed, Quebec is a strong illustration of this as its public health care system has one of the lowest levels of hospital capacity in the group of countries with similar income-levels. The question then that pops to my mind is “how elastic is the supply of hospital/medical services?”.

In places like my native Quebec, where health care services are largely operated and financed by the government, the answer is “not much”. This is not surprising given that the capacity is determined bureaucratically by the provincial government according to its constraints. And with bureaucratic control comes well-known rigidities and difficulties in responding to changes in demand. But that does not go very far in answering the question. Indeed, the private sector supply could also be quite inelastic.

A few months ago, I came across this working paper by Ghosh, Choudhury and Plemmons on the topic of certificate-of-needs (CON) laws. CON-laws essentially restrict entry into the market for hospital beds by allowing incumbent firms to have a say in determining who has a right to enter a given geographical segment of the market. The object of interest of Ghosh et al. was to determine the effect of CON-laws on early COVID outbreak outcomes. They found that states without such laws performed better than states with such laws (on both non-COVID and COVID mortalities). That is interesting because it tells us the effect of a small variation in the legal ability of private firms to respond to changes in market conditions. Eliminating legal inability to respond to changes leaves us with normal difficulties firms face (e.g. scarce skilled workers such as nurses, time-to-build delays etc.).

But what is more telling in the paper is that Ghosh et al. studied the effect of states with CON-laws that eased those laws because of COVID. This is particularly interesting because it unveils how fast previously regulated firms can start acting like deregulated firms. They find similar results (i.e. fewer deaths from COVID and non-COVID sources).

Are there other works? I found a few extra ones such as this one in the Journal of Risk and Financial Management that find that hospitals were less overcrowded in states without CON-laws. Another one, in the Journal of General Internal Medicine finds that states with CON-laws tended to have more overcrowded installations — notably nursing homes — which meant higher rates of COVID transmission in-hospital.

All of these, taken together, suggest to me that hospital capacity is not as fixed as we think of. Hospitals are capable of adjusting on a great number of margins to increase capacity in the face of adverse exogenous shocks. That is if there are profit-motives tied behind it — which is not the case in my home country of Quebec.