Pres. Barack Obama has argued that “one of the best ways to bring down costs, provide more choices, and assure quality is a public option that will force the insurance companies to compete and keep them honest.” But if you want to know how state enterprises really feel about competition, take a look at Obama’s home state of Hawaii.

On the island of Maui, there is only one acute-care hospital, the state-run Maui Memorial Medical Center. For years, residents of Maui have complained that the hospital does not meet their needs — too few beds, not enough specialists, and long waits in the emergency room. State bureaucrats finally cleared the way earlier this year for a small private hospital to be built, but only after scuttling plans to build a larger, more accommodating private hospital. A larger hospital, they said, would have an adverse impact on “the existing health-care system.” In other words, it would compete too effectively with what is now a state-run monopoly.

To block the construction of the private hospital, which its backers dubbed the Malulani project, the Hawaii State Health Planning and Development Agency (SHPDA) simply denied its application for a Certificate of Need (CON). In Hawaii, private companies must petition the state if they want to build a new hospital. Certificate of Need laws proliferated during the regulatory heyday of the 1960s, and the federal government started requiring states to adopt them in the 1970s. The federal requirement was repealed in 1987, and a number of states followed suit by dropping these anti-competitive laws. But many states, including Hawaii, still have them.

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Under the guise of controlling health-care costs (sound familiar?), Certificate of Need laws allow established market players to game the system by convincing regulators that competition would force them to charge more or to cut politically popular but money-losing services such as substance-abuse counseling. This CON job is even easier to pull when the established market player is a state-run hospital, such as Maui Memorial.

In denying Malulani’s CON application, the SHPDA relied almost entirely on the testimony of interested parties, primarily officials from Maui Memorial who claimed that the new hospital would hurt their bottom line. “The financial impact . . . of Malulani would be severe,” one Maui Memorial official testified. “Total estimated net revenue loss in Maluiani’s third year of operation is estimated to be $54,913,000 . . . Revenue losses of this magnitude would limit any safety-net programs [Maui Memorial] could provide.”

Coming from a private hospital, this sob story might or might not convince a sympathetic regulator to protect it from competition. Coming from a state-run hospital, it is simple extortion. Taxpayers are on the hook for any holes in Maui Memorial’s operating budget, so the hospital’s administrators can scare their political overseers with a big number or threaten to make unpopular service cuts to get their way.

The involvement of the state also allows other interest groups to exert control over the process. The Hawaii Government Employees Association, the union that represents Maui Memorial employees, feared the Malulani project and pressured policymakers to oppose it. Ronald Kwon, a Maui-born internist who led the Malulani project, says, “The largest employer in Hawaii is the state government, and the largest union is the HGEA, and when they don’t want something to happen, they can be very effective at blocking it.”

In addition to Maui Memorial administrators and employees, a consortium of interests on the neighboring island of Oahu, the seat of state government, got in on the act. Jan Shields, a nurse who worked at Maui Memorial and later became an advocate for Malulani, explains why: “Maui is the money island,” she says. “The rich get care, because they hop on a plane and fly over to Oahu and go to one of the private hospitals. But the middle class who can’t afford to fly over, and certainly the poor, are stuck with the government hospital.”

Shields points out that the Oahu panels involved in the Certificate of Need review process sank Malulani for the simple reason that a large number of Maui patients are flown to Oahu for care each year — the rich at their leisure and the middle class and poor in emergencies. For instance, Maui Memorial does not have a neonatal intensive-care unit. It can only try to stabilize premature or sick newborns until the cavalry arrives. “So if you have a sick baby,” Shields says, “say it’s a preemie and it’s born at Maui Memorial, the babies just get poor care until the transport team can come from Oahu, pick them up, and bring them back. And, as a result, our babies don’t do as well.”