This paper is concerned with the welfare implication of regulatory measures which can effectively function as entry barriers in health care markets. The 1985 Amendments to the Medical Service Law required the implementation of a Health Care Plan, where ‘Health Care Areas’ were established aiming for the appropriate allotment of hospital beds to each Area. This Plan determines the threshold numbers of hospital beds medically needed in each Area and it is impossible for new entrants to operate in the Area where the number of beds has already exceeded the threshold. This means that the regulation of hospital beds can effectively create entry barriers which might weaken competition in the health caremarket. Therefore, we explore what is the economic rationale for this type of entry regulation.
One of the prominent features of health care markets is that health care facilities do not necessarily behave in profit-oriented way. We assume that health care facility's objective functions are defined over the number of treated patients and quality of services each patient receives. Health care facilities are supposed to maximize their objective functions subject to profitability constraints under a competitive environment. We construct a rigorous model of competition among nonprofit firms in the framework of spatial economy originated by Hotelling. A remarkable result is obtained. It is the counterpart of so-called excess entry theorem in industrial organization literature. An implication of our result is that entry regulation might be welfare-enhancing, although it should be cautiously interpreted in the context of the current Japanese system of health care provision.