"I'm so hot for your hospital bed"

I’m in a class called Government Regulation of Business and today I found that my idea of a monopoly is way off base.  According to Encarta:

  1. control of market supply: a situation in which one company controls an industry or is the only provider of a product or service
  2. personal and exclusive possession: an exclusive right to have or do something
  3. corporation with exclusive control: a company with a commercial monopoly

My professor consults as an economic expert in anti-trust cases and loves it.  He really got giddy when telling the following story.

Once upon a time there were no aids convalescents outside of hospitals.  So Medicare paid for hospital bills.  Then someone realized that most of these people could recoup at home just as well, and for much lower cost, if they had the proper hospital beds, walkers, bedside tables, etc.  BOOM!  An industry was created around renting out hospital beds and all the rest.

So now we have lots of companies competing to have their beds in patients’ houses.  Medicare is happy because renting is cheaper than hospitals and patients are happy because they’re home.  Hospitals aren’t happy though because they just got cut out of a chunk-o-change.

Some sharp business guy figures out how he is going to increase sales:  work out an exclusivity deal with hospitals to allow him to go in and pitch for his rentals.  “I can have your bed and walker and everything else ready for you at your home when you get there.  You don’t need to worry about price because Medicare will cover it.  Also, I have a list of other companies that could supply the bed for you.”  Obviously the patient isn’t going to shop around, Uncle Sam is covering it.

This strategy worked really well and the company that got in hospitals ended up with around 85% of all sales in the industry.  This is cutting into the profits of other companies.  My professor’s client sues.  Why?  Because they’re getting in the way of competition.  The winning firm is said to be acting like a monopolist.

A firm makes what is essentially a strategic partnership that works well and because of that success is punished.  The other firm could have made similar deals with other hospitals or found another way of reaching customers.  “Innovate or die” becomes “innovate and die” in the face of government.

The best part is that the innovating firm actually offered patients alternate companies to go with, but because Medicare covered the fee the patients didn’t care.  It’s like the government sets up systems and then slaps you when you figure out how to win with them.  Who killed the competition here?