Houston Strategies

Is the Texas Medical Center a result of free markets or government?

First, in case you missed it, the Chronicle editorial board backed Christof, Carroll, and I's op-ed from Sunday in their own op-ed this morning calling for Houston to get its fair share of the federal infrastructure stimulus spending on intelligent projects with long-term benefits. Hope our political representatives are taking notice.

Moving on, this is a post I've been saving up for a while based on an interesting email conversation, which I will reproduce here in edited form:

From Niraj:

Do you believe that the deliberate clustering of an industry is a good thing economically-speaking? I'm personally interested in the answer in regards to the Texas Medical Center, which in my mind is one of three clusters in Houston (along with energy and aerospace).

My libertarian friend Chris (also a fan of your blog) was stumped when I asked him this question. He believes generally that the clustering of the medical center is a good thing for Houston's economy because it attracts NIH research money as well as healthcare workers and professionals.

He also believes market forces could have led to this clustering (but not necessarily that it would have), and thus there was no need for government or philantrophy-based direction. In the end, he concluded the de-centralization of medical facilities in the Houston area (e.g., Methodist and St. Luke's building hospitals in Sugar Land, the Woodlands and Katy) is better economically speaking, as more consumers are being served and efficiently so, and that market forces are making this happen.

So in addition to my question above, what is your opinion on whether the clustering of institutions as has happened in the TMC is possible by market forces alone?

My response:

Industry clustering is absolutely a good thing that has been studied by economists over the years. By having a larger critical mass of talent, expertise, and money, more good things happen in a virtously reinforcing circle (like, of course, tech in Silicon Valley, finance in NYC, autos in Detroit, or entertainment in LA). The suburban decentralization is just good sense: keep the top specialists at the TMC, and let people attend the easier suburban locations for routine care. They'll come into town for the important stuff.

The thing is, I consider philanthropy *is* a market force. It's still individuals acting of their own free will without govt interference. The TMC clustering happened because of philanthropy, and it hasn't happened in other cities because it didn't there. I tend to think natural forces for hospitals would decentralize them so they each have a niche region they dominate. That's good for the hospital, but doesn't yield the clustering benefits (mainly around research and their spinoffs). The clustering benefits the city as a whole, but I'm not sure it completely benefits the individual hospitals, who face stiff competition right next door to each other. Of course, that competition is what drives their high performance.

Hospitals need to differentiate themselves from the competition just like any other business. Normally, one of the easiest factors of differentiation is geographic convenience to potential patients. That would spread them over the city, and each would probably be close to "average" in each of its departments. But the "market" does not just include hospitals and patients, but city-boosting philanthropists. They think, "if we can get the hospitals to cluster, they will have to differentiate on factors other than geographic convenience, like top-notch specialty departments different from the other hospitals around them, and that will make health care an export industry beyond the city, boosting its economy." That's a harder route to differentiation, so the hospitals need an incentive to participate by clustering. I believe that incentive in TMC's case was free land from the philanthropist.

Now, in some cases, like cancer, it's clear MD Anderson rules, and if someone has serious cancer, that's where they go, regardless of their local suburban hospital. But other specialties are more competitive, so the suburban branches help boost differentiation based on geographic convenience (as well as being closer to populations most likely to have good health insurance), but the most sophisticated specialties are still centralized for the necessary critical mass.

Niraj response:

After reading about the TMC's history (which your email prompted me to do), it seems some credit ought to be given to state and local governments. For one, state-sponsored institutions -- UT-Houston dental and medical schools, UT MD Anderson cancer hospital and the UH pharmacy school, among others -- invested into the TMC and spent billions of dollars to build facilities in the TMC. Also, agreements of the land owned by the MD Anderson trust (now the TMC trust) was given special tax status (no or low tax, I imagine) by local government. City and state government have given deeds to land to the TMC or its member institutions, and vice versa.

This information came mostly from the TMC website here and here.

So it appears on a second reading that philantrophists envisioned the TMC cluster and gave birth to the idea, that is they made it into a reality, in the 1940s by buying and donating land, creating a trust and a governing body and convincing a few institutions to move there. Then, government began to support the project (by giving land, creating a no or low tax zone, enhancing infrastructure and building state institutions on the land) and thus fueled the nascent cluster's growth.

Do you think, based on what I've described, that the medical cluster in Houston was given birth and growth thanks to both free market forces (namely philantropy) and government both, the two working in concert?

My final response:

It's hard to say how the TMC would have evolved differently without the govt support you mention. I still think it would be big and important, but maybe not as much - with slower growth. There's no doubt govt can create good things by directing its resources. The question is always whether better things would have happened if those resources had stayed in the market and been deployed that way. The overall track record for govt is not great, but that doesn't mean they haven't had some very significant positive impacts.

Looking forward to your thoughts in the comments.

Labels: economic strategy

posted by Tory Gattis @ 5:47 PM