One of the ways that the existing American health care system isn't exactly a free market is the existence of "certificate of need" laws that require companies or organziations to get approval from a state government before opening a new hospital or clinic or nursing home or diagnostic center. About 36 states have this sort of requirement, the National Conference of State Legislatures reports. It's an idea that's somewhat unusual; after all, if a person wants to open a dry-cleaner or a cellphone store or a restaurant, there's no requirement to apply to the government to demonstrate that there is a "need" for such a store before it opens.
As the National Conference of State Legislatures puts it, "The basic assumption underlying CON regulation is that excess capacity (in the form of facility overbuilding) directly results in health care price inflation. When a hospital cannot fill its beds, fixed costs must be met through higher charges for the beds that are used." This, too, is a somewhat unusual assumption. When car dealers have an excess capacity of cars, they cut prices by putting the cars on sale. The National Conference of State Legislatures also explains, "In 2004 the Federal Trade Commission (FTC) and the Department of Justice both claimed that CON programs actually contribute to rising prices because they inhibit competitive markets that should be able to control the costs of care and guarantee quality and access to treatment and services."
A paper just released from the National Bureau of Economic Research looked at what happened in the Pennsylvania cardiac surgery markey after that state's certificate of need law was repealed in 1996. "We show that entry led to a redistribution of surgeries to higher-quality surgeons and that this entry was approximately welfare neutral," the summary says. In other words, competition is better for quality than is a system where state regulators, in a misguided effort to control costs, limit the entry of new competitors.