WhytheUSEconomyNeedsMoreConsolidation,NotLess

TRELYSALONG|MAY2024

Largerfirmsaregenerallymoreproductivebecauseofscaleeconomies,butsomeU.S.industriesstillhavetoohighashareofsmallfirms.Policymakersshouldencourage,notdiscourage,greaterconsolidationintheseindustries.

KEYTAKEAWAYS

.Largefirmsaregenerallymoreefficientthansmallerones.Asanindicatoroftheirgreaterproductivity,firmswith500ormoreemployeeshavehigherreceiptsperworkerthandofirmswithfewerthan500employeesin710of938six-digitNAICSindustries.

.Mostofthe228industriesinwhichsmallerfirmsaremoreproductivearethosewithlittleabilitytogainscaleeconomies(e.g.,furniturerepair,foodtrucks,etc.).

.Consolidationcanboostindustry-wideproductivitybyensuringthatmoreproductionisconductedbylargerfirmswithhigherproductivity.

.Someindustrieswouldbenefitfromgreaterscalebutstillhavelargesharesofsmall

firms.Theyincludeindustriesinwhichgovernmentpolicyhassignificantinfluence,suchasbanking,construction,doctor’soffices,farming,andtelecommunications.

.Despitetheefficiencygainsconsolidationcanbring,state,local,andfederalgovernmentpoliciescandiscouragegreaterconsolidation.Policymakersneedtomodifyor,ifpossible,removethesepolicies.

.Overall,it’stimetobalancetheagendaofseekingmorecompetitionwithanequallycompellingandnotmutuallyexclusivegoalofseekingmoreconsolidationandhigherproductivity.

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CONTENTS

KeyTakeaways 1

Introduction 2

EconomiesofScaleandProductivity 4

TheRoleofConsolidationinImprovingEfficiency 5

Examining12Industriesin5Sectors 7

Banks 7

Physician’sOffices 10

Construction 13

Farming 17

Telecommunications 20

PolicyRecommendations 23

Conclusion 24

Endnotes 25

INTRODUCTION

Largerfirmsarethekeytoproductivitygrowth,as,inmostindustries,largefirmsaremore

productivethantheirsmallercounterpartspartlybecauseofwhateconomiststerm“economiesofscale.”Insomeindustries,thereseemtobefewscaleeffects.Forexample,it’shardtoimaginewhyamotorvehicletowingcompanywith5,000workerswouldbemoreefficientthanonewithonly5.Andmanyindustriesalreadyhaveachievedclosetooptimalscale—although,ofcourse,technologyisconstantlychanging,whichisonereasonwhycompaniesmaywanttomergeor

divest.Yet,therearecertainindustriesthatappeartobeabletobenefitfromscaleeconomies

buthavenotadequatelydoneso,inpartbecausegovernmentpolicyeitherrestrictsconsolidationorrewardsfragmentation.

Althoughmostpoliciesarewell-intentioned,manyhaveanunintendednegativeimpactonfirm

growthandconsolidation.Forexample,whilebuildingcodesprotectusfromfaulty

infrastructure,thelackofstandardizationacrosslocalitiesandstatesmeansthatfirmsare

discouragedfromexpandingtonewareas,astheywouldhavetolearnanewsetofcodes,whichwouldincreasetheircosts.Asaresult,firmsinmanyindustriesfacebarrierstoreachingscaleeconomiesandgreaterefficiency.ThisisconcerningbecausetheUnitedStates’nonfarm

businesslaborproductivitygrowthratehasbeenbelowaveragesince2005,leadingtoslowereconomicgrowth,stagnantwages,andreducedcompetitiveness.(2020wasananomalybasedonCOVIDreductionsinemploymentinlowproductivityindustries.)(See

figure1

.)Increasedconsolidation,leadingtogreaterscaleeconomies,couldplayaroleinreversingthistrend.

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5%

4%

3%

2%

1%

0%

-1%

-2%

Figure1:Year-over-yeargrowthinU.S.laborproductivity

1

19941998200220062010201420182022

Yet,consolidationisdemonizedbyneo-Brandeisiansandotherproponentsofthe“smallisbeautiful”antitrustschool,makingitmuchhardertojustifymodifyingpoliciesthatlimitconsolidation.Indeed,theyhaveallbutshunnedtheveryideathatconsolidationcanbe

beneficialand,accordingly,theeconomicconsensusthatsomefirmscanbenefitfromgreater

scale—allinordertosupporttheirclaimthatasmallbusinesses-dominatedeconomyistheidealone.AsRobertAtkinsonandMichaelLindhaveasserted:

Neo-Brandeisiansgooutoftheirwaytodenytheveryexistenceofscale

economiesbecausetheyknowthatthisreality,morethananyother,undercutstheirclaimthatbreakingupbigcompanieswouldbegoodfortheeconomy.MattStoller[attheAmericanEconomicLibertiesProjectandOpenMarketsInstitute],reflectsthatviewwhenhetweets,“I’mincreasinglyconvincedthebiggestconinbusinesshistoryisthenotionof‘economiesofscale.’”

2

Troublingly,theBidenadministrationhassubscribedtotheviewthatsmallfirmsaretheidealoutcomeformostindustries.Inadditiontoappointingneo-BrandeisiansandtheiralliestotoppositionsattheFederalTradeCommission(FTC)andDepartmentofJustice(DOJ),the

administrationstatedinitsExecutiveOrderonPromotingCompetitionintheAmericanEconomythat“theproblemofconsolidationnowspansthesesectorsandmanyothers”—essentially

demonizinggreaterconsolidationwithoutconsideringthebenefitsitcouldbringtoatleastsomeindustries.

3

Yet,asthebroadeconomicconsensusshows,manyindustriesdobenefitfrom

greaterscaleandconsolidation.

4

Thus,policymakerssubscribingtothe“smallisbeautiful”doctrineneedtoreconsiderhowtheyviewindustryconsolidation.

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Policymakersthusneedtopromotegreaterconsolidationinindustriesthatbenefitfromlarge

scaleeconomiesandthathavenotyetachievedsuchscale.Thebestwaytodothatistomodifyor,ifpossible,removegovernmentregulations—atthelocal,state,andfederallevels—that

disincentivizeconsolidationorpromotefragmentation.Thisisnecessarybecausedoingsowouldallowefficientfirmstostayinthemarketandgrowwhileencouragingthelessefficientonesto

eithermergeorexitthemarket,boostinganindustry’sproductivity.Asastartingpoint,theBidenadministrationshouldfollowuponitspriorexecutiveorderoncompetitionwithanewone,suchasan“ExecutiveOrderonRemovingBarrierstoConsolidationintheAmericanEconomy”that

woulddoatleasttwothings.First,suchanorderwouldcallforregulatorysizeneutralityto

minimizebiastowardfirmsofaspecificsize.Second,itwouldexamineindustriesandpolicieswiththegoalofeliminatingpoliciesandregulationsthatkeepindustriestoofragmented.

Thisreportshows1)thatlargerfirmsintheeconomyaregenerallymoreefficientduetoscaleeconomies,2)howconsolidationcanhelpsmallerfirmsmaximizeeconomiesofscale,and3)

how12industriesin5sectors(banking,doctor’soffices,construction,farming,and

telecommunications)facebarrierstoconsolidationbecauseofgovernmentregulations.Foreachofthefivesectors,itsuggestswhatgovernmentscandotoenablemarket-basedconsolidation.

ECONOMIESOFSCALEANDPRODUCTIVITY

Thevastmajorityofindustriesintheeconomyenjoyscaleeconomiesfortworeasons.Thefirstisthatmostindustrieshavenotinsignificantfixedcoststhatdonotgrowasoutputincreases(a

factthatisparticularlytrueinthehightechnologymarketsthatdriveinnovation).Firms

producingasmalloutputvolumewillfacehigheraveragecostsbecausetherearefewerunitsofoutputtospreadoutfixedcosts.However,asoutputincreases,theaveragecostofaunitof

outputgoesdownbecausefixedcostsremainstabledespitecostsgrowingwithrevenues.For

instance,itcanbecheaperperunitofoutputtoproduce100,000itemsthan100because

specializedmachinescanbeintroduced.Second,everyadditionalunitofproductionusually

declinesincostasworkersgainexperience.Thesecostdeclinescontinueuntilthefirmreachesanefficientscalewhereingreaterefficienciesareoutweighedbyrisinginefficienciesfromsize(suchasgreatercoordinationcosts).

5

Theefficientscalevariesbyindustryforanumberof

reasons,soitisdifficultforgovernmentstodeterminethe“proper’limit.

However,largerfirmsaregenerallymoreefficientthansmalleronesinthevastmajorityof

industriesthroughouttheeconomy.Inananalysisoflargefirmswithover500employeesfrom938six-digitNAICSindustries,wefoundthatthereceiptsperworkerarehigherthanthe

industryaveragefor710industries.

6

Incomparison,theremaining228industrieshavereceiptsperworkerthatarelessthantheindustryaverage,althoughsomeofthiscouldbearesultof

theircharginglowerprices.

7

These228industrieswithlowerreceiptsperworkerthanthe

averagetendtobeindustrieswhereinmassivescaleisunnecessarytoachievethelowestcosts.Forexample,largenailsalons(NAICS:812113)havereceiptsperworkerof$40,854comparedwiththeindustryaverageof$64,131.

8

Nailsalonshavefewfixedcostsandlittlereturnsfrom

scale,meaningthattheiraveragecostswillonlydeclinebyaminusculeamountafterservinganumberofcustomers.Infact,themarginalcostofservinganadditionalcustomermayincreaseifanailsalonbecomestoolargeforidiosyncraticreasons,suchasnailtechniciansgettinginthewayofoneanother.Inotherwords,someindustriesareefficientwithsmallfirmspartlybecausetheydonotneedlargeoutputswithmanyworkersinordertomaximizescaleeconomies.

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Butmostindustrieslikelyneedlargeoutputstomaximizescaleeconomies.In2017,thereceiptoflargefirmsintheaverageindustrywas21.7percenthigherthantheaveragefirminthe

economy,or$353,619,comparedwiththeaveragefirm’s$290,617.

9

Smallfirms’receiptsperworkerwere24percentlowerthanthatoftheaveragefirm.

10

(See

figure2.)

Figure2:Averagereceiptsperemployeeacross938six-digitNAICSindustries

11

$400,000

$350,000

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$0

Largefirms

Allfirms

Smallfirms

THEROLEOFCONSOLIDATIONINIMPROVINGEFFICIENCY

Consolidationiskeytofirmsinindustrieswithahighminimumefficientscaleasawaytomaximizeefficiency.Theprocessisasfollows:

.First,consolidationintheformofmergersandacquisitions(M&A)oranincreaseinmarketsharefromonefirmtoanotherallowsfirmstobecomelarger.

.Asaresultoftheirgrowthinsize,thesefirmsacquirealargershareofthemarketandcanbenefitfromgreatereconomiesofscaletolowermarginalproductioncosts(or

increasedeconomiesofscopeortheeliminationofdoublemarginalizationinconglomerateorverticaltransactions).

12

.Finally,asthesefirmscontinuetogrow,theywilleventuallyreachapointwheretheir

unitcoststoproduceanadditionalunitofgoodscannolongerdecrease.

13

Atthatpoint,thefirmhasmaxedoutanyefficiencygainsfromincreasingscale.

Insum,consolidationhelpsfirmsmaximizetheirefficiencyfromscaleeconomiesbybecominglarger.(See

figure3

.)

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Figure3:Theprocessofincreasingefficiencythroughconsolidation

Greatermarketshare

lowersproduction

coststhrough

economiesofscale

M&Asorcapturingothers’marketshareallowsfirmstogrow

Unitcostsdecrease

untilfirmsreach

maximumefficiency

Whenconsolidationincreasesafirm’sefficiencybyachievingsignificantscale,itceterisparibusincreasestheindustry’sefficiencyinpartialequilibrium.ThisiswhyM&Aisgenerallybeneficialtofirmsandindustries.Whenfirmsmergeoracquireanotherfirm,theycanleveragescale

economiesandreducecoststhroughsynergies,suchasbycombiningtheircoreknowledge.

14

Forexample,twostoresneedseparateaccounting,advertising,andpurchasingservices,butifthesetwostorescombine,theycanuseasinglesetofservicesandworkerstoservetwocustomers,

therebyreducingtheoverallcostsofsellingaunitofgoods.Moreover,ifthesetwostoreshavespecialprocessesthatmaketheirindividualprocessesefficient,theycanalsosharethisknow-how,furtherincreasingthemergedstore’sefficiency.Asaresult,amergercreatesincentivestoreducecostsforfirmsand,additionally,improvethequalityofafirm’sserviceorgoods.

15

Thereisanaddedreasontofocusonthisissueandthatistheroleofinformationand

communicationstechnology(ICT).ResearchhasshownthatadoptionofICTisakeydriverof

firmproductivity.However,asarecentstudybytheU.S.CensusBureaushows,ICTadoptionispositivelycorrelatedwithfirmsize.

16

Forexample,10timesmorelargefirmsadoptedartificialintelligence(AI)thandidsmallfirmsin2020.Onereasonforthisisthereareoftensomewhathighfixedcostsrelativetomarginalcostsforinformationtechnology(IT)andsoftware,and

thereforetheeconomicsofadoptionworkbetterforlargerfirms.

AsfirmefficiencyincreasesfromgreaterM&A,anindustry’sproductivitywillceterisparibusalsorise.ThisisbecauseM&Aredistributesresourcesbetweenfirmssothatthemoreefficient,

acquiringfirmwillbeabletoreducecosts,chargelowerprices,andcreatecompetitivepressuresinthemarketthatdriveoutless-efficientfirms.Indeed,astudybyJoelDavidfindsthatM&A

increasesoutputbyabout14percent,and9ofthosepercentresultfromimprovedproductivitydistributionoffirms.

17

DemirerandKaradumancorroboratedthiswithastudyonpowerplants,whichconcludesthat“highproductivityfirmsbuyunderperformingassetsfromlow-productivityfirmsandmaketheacquiredassetsalmostasproductiveastheirexistingassetsafter

acquisition.”

18

Inotherwords,M&A,orconsolidation,increasesefficiencyatthefirmleveland,ultimately,attheindustrylevel.

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EXAMINING12INDUSTRIESIN5SECTORS

Inthefollowingfivesectors—banking,doctor’soffices,construction,farming,and

telecommunications—largefirmsaremoreproductivebecauseofscaleeconomies,despitethe

factthatgovernmentregulationshavekeptorarekeepingtheindustriesinthesesectors

fragmented.Thisiswhytheaveragefirmsizeforthe11industriesinthesesectorsisbelow500employees,orwhattheSmallBusinessAdministrationdescribesasa“smallbusiness.”

19

(See

figure4

.)Theaveragefarmsize,measuredusinggrosscashfarmincome(GCFI),was$207,756,orwhattheUnitedStatesDepartmentofAgriculture(USDA)wouldconsiderasmallfarm.

20

Figure4:Averagenumberofemployeesinstudiedsectors

21

Residentialremodelers

Newsingle-familyhousingconstruction Newhousingfor-salebuildersNewmultifamilyhousingconstructionCommercialandinstitutionalbuilding

Physician’soffices

Allothertelecommunications IndustrialbuildingconstructionWirelesstelecommunicationscarriersWiredtelecommunicationscarriers

Commercialbanking

050100150200250300350400

Asaresultofthesmallaveragefirmsize,weexplorethesefivesectorsascasestudiesinthefollowingsubsections.Eachofthefivesubsectionswillprovideevidencethat1)anindustry

benefitsfromscaleeconomies,2)largerfirmsaremoreproductive,3)governmentregulationsdisincentivizeconsolidation,andasaresult,4)howtheindustrystillhasahighshareofsmallfirms.

Banks

Largerbanksaregenerallymoreefficientthansmallonesbecauseofscaleeconomies.Studies

havefoundthatthelargerabankgrows,thegreateritsefficiencygainsfromscaleeconomies.

Indeed,studiesbyMcAllisterandMcManus,FerrierandLovell,andHunterandTimmehave

foundthatbankswithover$1billioninassetscouldstillbenefitfromscaleeconomies.

22

Furthercorroboratingthisfinding,bankswithover$1trillioninassetswerefoundtostillhaveincreasingreturnstoscale,meaningthattheycouldstillgrowlargerandbenefitfromscaleeconomies.

23

Incontrast,smallbankswithlessthan$100millioninassetsarefoundtohavesubstantialscale

inefficiencies.

24

Inotherwords,banksbenefitfromlargescaleeconomies.

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Thishelpsexplaindatafor2017showingthattheaveragelargecommercialbankwithmorethan500employeeshadareceiptperemployeeof$302,358,whichwas2.6percenthigherthantheindustryaverageof$294,594.

25

Incomparison,smallcommercialbankswithlessthan500

employeeshadareceiptperemployeeof$263,435,whichwas10.6percentlowerthantheindustryaverage.

26

(Seefigure5.)

Figure5:Commercialbankingreceiptsperemployee

27

$350,000

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$0

Largefirms

Allfirms

Smallfirms

Despitelargebanks’greaterproductivity,governmentregulationshavehistoricallykeptbanks

smallbypreventingconsolidation.Asearlyasthe19thcentury,statesandthefederal

governmentalreadyhadaseriesofunitbankinglawsthatpreventedbranchbankinginordertoprotectsmall,localbanksfromcompetitionandconsolidation.Atthestatelevel,somestates

permittedtheirbankstooperatebrancheswithintheirheadquarteredstateorwithinthesame

cities.

28

Yet,otherstatesweremuchmorerestrictiveandforcedtheirbankstooperateoutofa

singlebuilding.

29

Atthenationallevel,bankscouldonlyoperatewithinasinglebuildingfrom

1863to1927.

30

Asaresult,theseunitbankinglawskeptbanksrelativelysmallsincetheycouldonlygrowtoalimitedsizeandreachalimitedshareofthemarket,giventherestrictionontheirlocation.

AlthoughtheMcFaddenActof1927promotedthegrowthofnationalbanks,allowingthemto

operatebranchesaslongastheycompliedwithstatelaws,thebankingindustrywasstill

fragmentedbecause,atbest,eachbank’sgrowthwasstilllimitedtothesizeofitsstate.Indeed,RobertAtkinsonandMichaelLindassertedthattheseprotectionistpoliciesforsmallbanks

resultedinanindustrywith“thousandsoftiny,undercapitalized‘unit’banksownedbymembersofthelocalgentry”whileothernations’industrycomprised“afinancialsystemdominatedbyafewnationalbanks.”

31

Asaresult,whileothernations’branchbankingpolicieseliminatedbankrunsintheearly20thcentury,theUnitedStatescontinuedtofacebankpanicsexacerbatedbyunitbankinglawsuntilthelate20thcentury,whentheinterstatebankinglawswerepassed.

32

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Moreover,theactalsoraisedwagesinthefinancialindustry.

33

Inotherwords,government

regulationshavehistoricallyunderminedgrowthandconsolidationinbankingthatcouldhaveledtoscaleeconomiesbenefits,fewerbankpanics,andhigherwages.

Yet,despitetheconsequencesofhistoricunitbankinglaws,policymakersstillinsistonkeeping

bankssmallthroughregulationthatdiscouragesconsolidation.InJuly2021,theBiden

administrationsignaledinitsExecutiveOrderonPromotingCompetitionthattheadministrationplansonincreasingscrutinyofbankmergers,writing,“ToensureAmericanshavechoicesamongfinancialinstitutionsandtoguardagainstexcessivemarketpower,theAttorneyGeneral,is

encouraged…toadoptaplan…fortherevitalizationofmergeroversightundertheBakMergerAct.”

34

Inresponsetotheorder,DOJhas“recentlyindicateditwouldtakeamoregranular,wide-rangingapproachtobankmergerreviewsamidincreasedantitrustscrutiny.”

35

Rallyingbehindthesedetrimentalpolicies,neo-Brandeisianantitrustcriticshavewarned,“ThetotalnumberofbanksinAmericahasfallenbysome60percentsince1981,evenasthe

populationhasgrownsubstantially,”implyingthatlargebanksaregainingmoremonopoly

power.

36

Truthbetold,however,C4andC8concentrationratios—thefouroreightfirmswiththehighestmarketshare—forcommercialbanksaredeclining:From2002to2012,theC4andC8concentrationratiosforcommercialbanksfellfrom29.5to25.6andfrom41.0to35.8,

respectively.

37

Tobesure,itisonethingforoneofthetop-fourbanksintheUnitedStatestoacquireanotherbank,whichmayormaynothavecompetitiveimplications.Buthaving500smallandregionalbanksgetboughtupbylargerbanksisunlikelytoreducecompetition.

38

Unfortunately,governmentregulationscontinuetoimpedetheprocessofconsolidationthatencouragesbankstomaximizeeconomiesofscale.Indeed,thesegovernmentregulationsarepartlywhytheindustrystillhasalargeshareofsmallfirmsdespitelargerfirms’greater

efficiency.In2017,only5.6percentofcommercialbanks(281)werelarge,whiletheremaining94.4percent(4,735)weresmall.

39

(See

figure6.)

Figure6:Smallandlargefirms’sharesofthecommercialbankingindustry

40

Smallfirms94.4%

5,016

Firms

Largefirms

5.6%

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Withsomanysmallbanks,theUnitedStateshasmorebankspercapitathanmostothernations.AsRobertAtkinsonandMichaelLindwrote:

ButbecausemostothernationsneverhadAmerican-styleunitbankinglaws,theyhavealwayshadsignificantlyfewerbankspercapita.In1998Japanhadjust170banks,oronebankforevery747,000people.Canada,widelyviewedashaving

thesafestbankingsystemintheworld,hadonebankforevery1.16million

residents.TheUnitedStateshasonebankforevery58,000people.Andin1999,theshareofdepositsandassetsofthefivelargestUSbankswasjust27percent,comparedto77percentinCanada,70percentinFranceand57.8percentin

Switzerland.

41

Toencouragegreaterefficiency,theBidenadministrationshouldmodifyitsexecutiveorderto

encouragemorebankacquisitionsratherthandiscouragethem.Inthemodifiedexecutiveorder,theadministrationshouldencouragetheFTCandtheDOJAntitrustDivisiontoreviewmergersbetweensmallandregionalbanks—notincludingmergersbythelargestfourorfivelargest

banksnationally—withafocusonhowefficiencygainscanpotentiallyoutweightheincreasesinconcentration.DoingsowouldallowthebankingindustryintheUnitedStatestobenefitfrom

increasingreturnstoscale.AsRobertAtkinsonandMichaelLindasserted:

Butevenwiththenumberofbanksfallingbymorethanhalfinthelastfew

decadesbankeconomiesofscalehavestillnotbeenexhaustedandtheUnitedStatesstillsuffersfromtoomanybanks.AstheFederalReservehasfound,eventhelargestbanksfaceincreasingreturnstoscale…TheFedfound,‘Ourresultssuggestthatcappingbanks’sizewouldincuropportunitycostsintermsof

foregoneadvantagesfromIRS’…Otherstudieshavefoundsimilarresults.

42

Inotherwords,whentheadministrationencouragesgreaterbankconsolidation,itwill

alsoencouragegreaterbankefficiencybecausebankswillbecomelargerandbenefitfromincreasingreturnstoscale.

Physician’sOffices

Largerdoctor’sofficesaregenerallymoreefficientthansmallonesbecauseofscaleeconomies.

Tobestservetheirpatients,doctor’sofficesmustadoptnewtechnologiesandmedical

treatments.However,thecostofimplementingthesenewmethodsisoftenhigh,meaning

doctor’sofficesfacehighfixedcoststoobtainthetoolsneededtotreatpatients.Asaresult,a

largerdoctor’sofficecanservemorepatientstospreadoutitsfixedcostsandloweritsaverage

cost.

43

Indeed,casestudiesof14smallprimarycarepracticesfindthatonlysomeofthese

practicescouldcoverthe$44,000-per-doctorcostofelectronichealthrecordsoftwareafter2.5years,suggestingthatsmalldoctor’sofficesdonothavethescaletoimplementeventhemost

basicefficiency-enhancingtechnologies.

44

ThisiswhyBaker,Bundorf,andRoyaltyconcluded

thatmultispecialtygrouppracticesaremorelikelythansinglespecialtygroups(whichtendtobesmaller)tobenefitfromscaleeconomies.

45

Forexample,OneMedical,alargenationalpracticegrouprecentlypurchasedbyAmazon,hasitsownin-officelaboratoriesforbloodworkandrelatedanalysis.

Thedataisinaccord.In2017,largephysician’sofficeshadareceiptperworkerof$204,931comparedwithaveragesmallfirms’receiptsperemployeeof$190,182.

46

Inotherwords,large

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$250,000

$200,000

$150,000

$100,000

$50,000

$0

firmswere4.6percentmoreproductivethantheaveragewhilesmallfirmswere3percentlessproductive.(SeeFigure7.)

Figure7:Receiptsperemployeeinphysician’soffices(notincludingmentalhealthspecialists)

47

Smallfirms

Largefirms

Allfirms

Despitethebenefitsthatdoctor’sofficescangainfromscale,governmentregulationsatthe

federalandstatelevelhavehistoricallybeenanimpedimenttothegrowthofdoctor’soffices.Forexample,in1964,NewYorkadoptedtheCertificateofNeed(CON)law,restrictingthe

constructionofnewhospitalsundertheassumptionthattherestrictionofcapitalexpenditurescouldreducethehighcostofhealthcare.

48

AstheAmericanHospitalAssociationlobbiedfor

morestatestoalsoadoptsimilarregulations,thefederalgovernmentpassedamandatein1974tohaveallstatesimplementaCONprogramaspartoftheNationalHealthPlanningand

ResourcesDevelopmentAct.

49

Asaresult,allstates,exceptLouisiana,hadaCONl