COMMENTS REGARDING THE FUNERAL RULE REVIEW
Ronald G. E. Smith, Ph.D.
On behalf of the International Cemetery and Funeral Association, I have been asked to comment in response to the request of the Federal Trade Commission (FTC) for comments on its Trade Regulation Rule on Funeral Industry Practices ("the Funeral Rule" or "the Rule" for short). The Rule is currently the subject of the FTC's regulatory review program by which the agency periodically endeavors to identify regulations which may require modification or rescission.
I have been asked to provide answers to several specific questions relating primarily to recent changes in death care industries and markets and in the degree of competition among the traditional and non-traditional participants in those industries and markets. In the course of my comments I have attempted to keep to commonly observable features of the death care delivery system of the United States. Like most people of a certain age, my knowledge of that system is due in part to my participation in it as a reluctant arranger of death care from time to time. In addition to this personal experience, I have followed trends and developments in the death care industries for more than twenty-five years, mostly as an academic observer but periodically as an economic consultant.
The conclusions reached from my observations made over many years were published in a recent book entitled The Death Care Industries in the United States (McFarland, 1996). The comments which follow are based largely on the analysis presented in that book, but in all respects they reflect my current thinking which incorporates subsequent improvements and revisions in ideas and views I may have expressed previously.
II. DEATH CARE PROVIDERS AND INDUSTRIES
As a category of consumer expenditures, death care consists of a set of related goods and services commonly purchased for use in connection with the actual or anticipated death of a human being. The totality of these goods and services may be divided into two separate and distinct categories based on the use to which they are put following death.
Since the provision of each of these categories of death care goods and services requires different skills, equipment and facilities, and other inputs into the process, they have tended to be provided by two (or more) different types of specialized groups of providers. It is both convenient and consistent with the manner in which death care is delivered to consumers to distinguish between the major types of providers of death care in the following terms:
For purposes of economic classification, these different groups of providers of distinctly different types of death care belong to two separate and distinct but related industries:
Taken together, the funeral industry and cemetery industry comprise the death care sector of the economy as a whole.
III. DIFFERENCES BETWEEN INDUSTRIES
These above descriptions of the two death care industries clearly indicate that their primary activities and outputs are substantially different in nature, highly complementary to be sure, but very different nevertheless.
This observation is verified by careful consideration of differences in the technological features of the two industries, in the form of ownership which characterizes the establishments of each type, in the ways in which they conduct their business and interact with consumers, and in the performance of the two types of death care providers. Several of these factors will be discussed in more detail at a later point, but it is important to emphasize here that funeral providers are primarily service providers whereas cemeteries are essentially real estate developments. Collecting, embalming, displaying, transporting, and otherwise handling dead bodies temporarily is different in kind than providing a place where they may be disposed of permanently. These different activities require entirely distinct types of facilities, both of which are found as separate parts of the death care infrastructure of every community.
What is more, those different types of facilities are often owned and operated quite differently. Of the more than 100,000 cemeteries in the United States, many are owned and operated by municipal, religious, fraternal, or other organizations which are not profit-oriented. On the other hand, almost all of the funeral homes in this country are privately owned and operated for a profit.
Although both funeral homes and cemeteries are regulated by various federal, state, and local agencies, funeral directing is a licensed occupation in most jurisdictions, while cemetery management is not. Due to this licensure requirement, funeral directors have often assumed for themselves a professional status that, in my opinion, has limited the means by which they have traditionally competed with one another. Competition among cemeteries has not been constrained by such a view.
While consumers may view both funeral homes and cemeteries as stigmatized facilities in their communities, they usually interact differently with the two types of organizations. For example, consumers typically purchase cemetery property before need; whereas they commonly purchase funerals at the time of need. In part this difference is due to the fact that funerals consist primarily of services to be performed and purchased as and when needed, while cemetery lots, mausoleum crypts, and the like are regarded as tangible property to be purchased and held for later use.
These differences in consumer attitudes have been reinforced by the tendency of funeral homes to prefer to deal with consumers at the time of need, while many cemeteries have tended to attempt to sell to consumers before need, under less emotional circumstances. This difference alone has meant that the marketing strategies of cemeteries have differed greatly from those of funeral homes. In particular, cemeteries have tended to emphasize the use of preneed sales organizations to reach out to consumers before need. The different sets of goods and services sold by each type of business as its primary product line have tended to entail entirely different cost structures and to require different credit and financial policies and practices.
The nature of the interaction between consumers and funeral homes is infrequent, often separated by long periods during which no deaths occur in families. When the need occurs from time to time, arrangements are made (and paid for) in a transaction which is typically completed in hours. The funeral activities are then conducted immediately with little or no time for reflection or reconsideration by consumers. Thus, to a highly unusual degree, the relationship between funeral providers and consumers is typically short term in nature, lasting only a few days at most and ending abruptly after interment has occurred. After that the consumer may have no further contact with the same funeral home for many years or ever again.
By contrast, it is a common practice for cemeteries to provide locations which are visited and revisited by consumers throughout their lifetimes. Cemeteries are often selected as a site to be used by generations of family members. When cemetery property is purchased it is usual for the operator to finance the transaction over a lengthy period of time, during which the consumer is provided with a continuing opportunity to interact with the cemetery and possibly to alter previously made arrangements.
IV. IMPLICATIONS FOR FUNERAL RULE REVIEW
To provide for a complete set of death care goods and services of the traditional sort, consumers must make arrangements with a funeral home and a cemetery, interacting with both types of firms, albeit perhaps at different times and for different purposes. For the most part the goods and services obtained from each type of provider is not available from the other. Insofar as that is so, the two types of establishments do not compete directly with each other except with regard to the total amounts spent for goods and services of each type.
In transacting with consumers for the sale of their primary line of goods and services, however, there is a strong economic incentive for funeral homes and cemeteries to sell complementary goods and services together to consumers who comprise the market for such goods. For consumers, it is a time-saving convenience to shop for such goods and services together, and doing so increases the probability that the allocation of funds among alternative death care items will be optimized. Hence funeral homes often sell burial vaults, cremation urns, and retail memorials to consumers along with their basic funeral services. By the same token, cemeteries may sell burial vaults, cremation urns, and even caskets along with their basic cemetery space and memorials. Indeed, the former items may well be regarded as basic cemetery goods like memorials, since both burial vaults and caskets are designed for use in cemeteries.
In any case, it is clear that in the process of selling such items cemeteries do not necessarily engage in the business and sales practices of funeral homes. Since they are not funeral providers in fact they are not simultaneously engaged in the sale of funeral merchandise and services in the manner of a funeral home. This means that the stand-alone cemetery is not in a position to engage in the business practices of "bundling" funeral goods and services or refusing to allow consumers to purchase only the goods and services they desire, which were two objectionable features of the pricing behavior of funeral homes for which the provisions of the Funeral Rule were specifically designed as a remedy.
If that continues to be so, it does not appear to make sense to attempt to apply provisions of the Funeral Rule to cemeteries (or casket stores) as the sellers of caskets or as death care providers. In this connection it should be recalled, and indeed stressed, that the purpose of the Funeral Rule was not to address the sale of caskets or even death care as such, but to address the behavior of funeral homes as sellers of caskets who used objectionable practices in the sales process. Unless and until evidence is adduced to support specific claims of abusive practices used by cemeteries as a group, I do not believe that their mere role as death care providers, or even as sellers of caskets along with traditional cemetery goods and services through their established preneed sales channels, warrants an expansion of the coverage of the current Rule.
V. LEVEL PLAYING FIELD AND JURISDICTIONAL ISSUES
Some may say that the current Funeral Rule creates or perpetuates an "unlevel playing field" by subjecting "funeral providers" to the Rule but not applying its provisions to cemeteries and other providers of funeral goods or services. This ignores the fact that the Rule was enacted and then amended to address the specifically objectionable practices of funeral homes as providers of both funeral goods and services. It would not make sense to apply federal regulations designed for a particular type of business (e.g., funeral homes) to every other type of business simply to assure that all businesses are equally burdened, whether they deserve the burden or not.
It is difficult to understand how funeral homes are competitively disadvantaged because they are prohibited from using objectionable business practices that their competitors do not use, according to the fact-finding record. Furthermore, as indicated above, the extent to which funeral homes and cemeteries compete with one another at all is strictly limited to a few items (primarily outer burial containers and caskets). For the most part, therefore, the two different types of establishments are engaged in selling an entirely different line of goods and services which are not substitutes for one another.
Moreover, the cemetery industry as a whole is far more varied in composition than the funeral industry. As was mentioned previously, almost all funeral homes are privately owned and operated by their owners for the purpose of making a profit. This is not true of cemeteries. As indicated above, there are thousands of cemeteries that are owned and operated by religious, fraternal, and municipal organizations. As such, these cemeteries would presumably not be subject to the Funeral Rule even if its coverage was extended to commercial cemeteries as a select group of participants within the cemetery industry. The effect of this would truly be to create an unlevel playing field since cemeteries of all different types typically sell the same variety of goods and services and thus compete with one another, at least to some extent in their fractional markets.
Already it is true that not-for-profit cemeteries are exempt from some taxes and from the application of some state regulations that apply to commercial cemeteries. The extension of the Funeral Rule to cover commercial cemeteries would compound this situation, since it would affect only commercial cemeteries. In addition to the competitive disadvantage this might impose on commercial cemeteries as a select group within the cemetery industry, it would provide limited and inconsistent protection for consumers as they deal with different types of cemeteries. This would create a much less effective regulatory scheme than that which resulted from the Funeral Rule which applies to all funeral homes.
ANSWER TO QUESTION 6: "Since the Rule was enacted, what effects, if any, have changes in relevant technologies or economic conditions had on the Rule?"
It should be clear to everyone that none of the death care industries or sub-industries involves a technology that is new or rapidly changing. Although "cyber cemeteries" have appeared on the World Wide Web and various non-traditional death care firms operate consumer-oriented Web sites, I do not believe that the Internet has become a medium that is widely used by consumers to engage in comparison shopping for death care goods and services or to interact online with death care providers.
In non-technological terms the major changes occurring in many death care markets for some time now have involved a growing use of cremation as a substitute for burial and an increase in the number of funerals that are prearranged. As a longtime observer, I attribute such changes to various factors, including (1) an erosion in consumer adherence to traditional funeral services due to the influence on public attitudes of continued criticism of American death care practices; (2) the aging of the U.S. population that is raising larger numbers of people into the ranks of the age groups who comprise the major market for prearranged funeral goods and services; (3) the emergence in some markets of discount funeral providers and direct cremation providers; and (4) an increase in the number of funeral homes and cemeteries that are owned and operated as the units of public death care companies. More so than independently owned firms, the latter companies often use sophisticated marketing techniques and highly motivated sales personnel to promote the sale of an extensive range of death care goods and services on a preneed basis.
All of the factors mentioned above have combined to produce changes in death care consumption and sales patterns in recent years for reasons that appear to have little to do with the influence of the Funeral Rule. At any rate it would be extremely difficult to determine the precise extent of its influence on most of the factors cited.
On the other hand, there is evidence of a rather convincing character to the effect that some local death care markets have experienced a modestly increased level of competition (at least) since the Funeral Rule was enacted, and particularly since it was later amended to include a prohibition on the imposition of casket handling fees by funeral homes. I say this based on reports that non-traditional providers of caskets have emerged in a growing numbers of markets. Up to this point, these non-traditional providers consist primarily of two types casket retailers: casket stores and some cemeteries. Here we briefly differentiate between the two types of retailers:
These are retail outlets that are not necessarily affiliated with funeral homes or cemeteries. As such, they represent a de-integrated entity which performs the limited function of selling caskets, an item that is traditionally sold by funeral homes together with other funeral merchandise and services. The emergence of these retail outlets for caskets is directly related to the enactment of the Funeral Rule which un-bundled the offerings of funeral homes. As a means of avoiding the loss of casket sales, funeral homes initially imposed a casket-handled fee on third-party caskets brought into a funeral home by the consumer. This practice was addressed by amendments to the Rule in 1994, prohibiting the imposition of such fees. This opened the doors of funeral homes to the use of third-party caskets by consumers.
Since the casket is a product that is typically used in connection with the services provided by funeral homes, it may not be readily apparent to some why anyone would purchase a casket from another source and have it delivered to the funeral home for use in services provided by it. The answer lies, I believe, in the over-long adherence by funeral homes to a fundamentally flawed practice of pricing caskets in a manner which allows the establishments to cover some of the costs of the services they provide. The inevitable outcome of this practice has been to increase the markups charged on caskets and other merchandise sold by funeral homes (e.g., burial vaults) to unreasonable and non-competitive levels.
This practice set the stage for de-integrated (i.e., stripped down) competitors to enter the market who apply lower markups to such merchandise, resulting in lower prices by comparison with funeral homes. This is their appeal to consumers. Of course the appeal was offset in part or in whole as long as funeral homes were able to impose "casket handling fees" on the customers who use their services but not their merchandise. Once this was ruled out by a provision of the amended Funeral Rule in 1994 the stage was set for the spread of casket stores which has occurred.
The sale of caskets by some cemeteries represents a further integration in the line of death care goods and services traditionally sold by them. While the motivation behind this behavior may also be to exploit the high margins applied to caskets by funeral homes, there is a further aspect involved with the decision of a cemetery to sell caskets. Casket stores represent an entirely new form of enterprise whose acceptability is unproven. Cemeteries, on the other hand, are established providers of death care goods and services to the local markets in which they sell cemetery products to consumers. In their case the sale of caskets represents the addition of a complimentary item to the list of cemetery goods and services typically sold by the cemetery sales force. This adds little to the selling costs of a cemetery, and it may appeal to consumers to be able to purchase the casket as a part of the package of death care goods and services offered by a cemetery on a preneed basis. At the time of need arrangements are made for the casket to be delivered to the funeral home selected. The Funeral Rule, as amended, insures that consumers have this option.
The upshot of the sale of caskets by these non-traditional providers is the addition of new competitors to the markets in which they have emerged, leading to increased competition in those markets. The exact extent to which this has occurred is unknown, and it does not appear to have become a widespread phenomenon. Nevertheless it is a pro-competitive trend that is discernible in markets which have previously lacked such competition. On the assumption that this is beneficial for consumers, then it is presumably a trend that public policy should seek to encourage rather than discourage.
Yet expansion of the Funeral Rule to cover these casket retailers would burden them with regulations which may have the effect of dampening this trend unnecessarily. Similarly, to lift the prohibition on the imposition of casket-handling fees by funeral homes, or to fail to modify the Rule to insure the effectiveness of the prohibition if such appears to be needed, would run the risk of creating conditions which are inimical to the nascent competition which has emerged.
ANSWERS TO QUESTION 14: "How, if at all, since the Rule was amended in 1994, have the following factors changed?
Given the mature nature of the death care industries, the population of death care establishments has been relatively stable for decades. Few new funeral homes or cemeteries are added to the funeral or cemetery industries during any given year, and business failures are uncommon. The longevity of funeral homes is among the highest for any type of business, and cemeteries are expected to exist in perpetuity. Furthermore, both types of establishments are ubiquitous, existing together in local markets throughout the United States. To serve so many geographic markets there must be many establishments of each type. Thus, for example, the number of funeral service providers has exceeded 22,000 for many years, and it does not appear to have changed much if at all since the Funeral Rule was amended in 1994.
The large number of funeral service providers includes various types of establishments, ranging from full-service funeral homes to the providers of limited types of funeral services and/or merchandise. The full-service establishments are about evenly divided between rural locations and metropolitan areas. Most establishments have annual volume of less than 100 calls. There are relatively few establishments that perform more than 200 cases a year, and many of these are owned by the large death care companies.
In addition to a very large number of mostly small funeral homes, the population of establishments in the funeral industry includes several other types of providers of funeral goods and services. One notable example of these is the discount provider of curtailed funeral services, for example, such as those that include grave side services only. The number of these providers is unknown, but their presence in some large metropolitan markets has attracted attention as a recent development in the funeral industry.
The funeral industry also includes several types of providers of funeral goods or services, but generally not both. One of these is the type of firm which provides direct cremations (i.e., funeral services but not merchandise). It is my belief that the number of these firms and the number of markets in which they operate have increased in recent years, but I am not informed about any recent changes in their number.
A second type of provider of funeral services is represented by a local crematory which performs cremations on behalf the customers of the funeral homes in a given geographic area. Beyond this, such establishments do not ordinarily deal with the public. These firms are operated about evenly by funeral homes and cemeteries. As of 1995, according to the Cremation Association of North America, there were 1,155 crematories located throughout the US.
A type of establishment which provides funeral goods but not funeral services to consumers is represented by casket retailers. As discussed previously, these include casket stores that sell caskets and perhaps other funeral merchandise directly to consumers. This group also includes some cemeteries that sell caskets in addition to their traditional line of cemetery goods and services.
In connection with the consolidation of the death care industries, more local funeral homes and cemeteries are operated as the units of public companies. These companies have grown to include hundreds and even thousands of units primarily by acquiring established funeral homes and cemeteries. Following their acquisition, these establishments continue to be operated under their own names, and some members of the families which previously owned them are usually retained as managers.
Preservation of the original "d/b/a" or "doing business as" name has been a uniform business strategy of all of the publicly-traded death care companies. In large part therefore the changes occurring as a result of the consolidation of the death care industries have taken place behind the scenes where improvements have been made in such areas as inventory management and purchasing. Insofar as consumers are concerned, the transactions entered into between customers and the units of public companies are the same as the ones that occur between consumers and independently owned establishments.
Differences in the merchandise and services available from both types of establishments are largely due to differences in the characteristics of the fractional markets they serve. For regulatory purposes generally and for the application of the Funeral Rule, no distinction is made between establishments which are independently owned and those which are the units of public companies. Nor is any distinction made between large and small establishments and firms to which the provisions of the Rule apply equally.
In some respects, of course, the ownership and operations of a large number of units by a public company involves different techniques of management and control than is utilized by a family owned and operated firm, even when the latter consists of several units. There are often differences in the resources available to the different types of firms and in their growth and profitability objectives. Reference was made above to the fact that the public companies may adopt aggressive sales and marketing strategies. These are often implemented at the local level in geographic areas where several units are operated together in what is called a "cluster" of facilities. The purpose of a cluster is to generate economies of scale by sharing equipment and personnel among the clustered facilities.
A final type of death care facility has become more common in recent years. It consists of a funeral home that is co-located in or adjacent to a cemetery for the purpose of operating the two facilities together in an integrated manner. The two facilities may or may not be owned in common, and in a recent development funeral homes have begun to be added to more religious and other nonprofit cemeteries. In an economic sense these combination facilities have been developed as a means of obtaining the benefits of joint operation, including cross selling funeral and cemetery goods and services.
For consumers, cemetery-mortuary combinations offer the convenience of "one-stop shopping" for death care of all types. At the time of need the goods and services selected by the customers of these so-called cemetery-mortuary combinations are provided together in one location, but they are provided by essentially two distinct facilities - a funeral home which happens to be located in or adjacent to the grounds of the cemetery. The basic difference between the nature of the two types of establishments and their inputs and outputs continue to apply to co-located facilities. Thus the emergence of more of these establishments does not seem to imply any modification of the Funeral Rule.
Answer to Question 14(b): The ability of new providers, both traditional and non-traditional, to enter the industry?
Barriers to entry have traditionally played a significant role in the funeral and cemetery industries. Legal barriers applicable to the industries include licensure and operating permit requirements, and legal prohibitions of various kinds that differ from state to state, public health laws, zoning ordinances, building codes, environmental pollution controls, occupational safety and health regulations, and consumer protection laws applicable to the transactions between death care providers and their customers. The necessity for complying with these legal requirements limits the ability of would-be participants to enter the death care industries. This is important because limitations on the ability of participants to enter an industry may limit the number of participants in local markets, affecting the degree of competition within them.
The impact of any particular barrier depends on how difficult it makes it for new entrants to qualify under the requirements imposed. State laws and regulations such as those which prohibit the sale of monuments, burial vaults, caskets, and other items by cemeteries are a high barrier. Indeed, the latter don't allow cemeteries to enter the market for those items at all. This effectively bars them from competing with funeral homes and memorial dealers in such cases. The impact of other legal barriers varies from case to case.
Barriers to entry may also be financial in nature. That is, the investment outlay required to enter an industry may be so high that few would-be participants can raise the necessary funds. This factor has also played a significant role in the death care industries in the past. For both the funeral industry and the cemetery industry the financial barriers to entry have been high because of the large investment of funds required to finance the construction of a new funeral home or cemetery and to operate it until it reaches the break-even point. For cemeteries there is the further difficulty arising from the scarcity in many populated areas of suitable tracts of vacant land on which to develop a cemetery. For both types of facilities the start-up period is typically lengthy because of the importance to consumers of the reputation and goodwill (heritage) of an establishment which often take years to acquire.
While these financial barriers to entry have risen in recent decades as a result of inflation and other factors, it is possible and even likely that they have been offset to some extent by the growing resources at the disposal of the consolidation companies. By virtue of their status as large investor owned companies with access to the public capital markets they have been in a position to overcome the financial obstacle to entry in local death care markets which they viewed as attractive areas for expansion. Although they have generally preferred to expand by acquiring existing firms, they have also built new facilities in a number of markets. The public companies have also added new facilities to their existing locations, including adding funeral homes to their large cemeteries in many cases. In this respect the consolidation trend may be factor leading to more competitive conditions in some death care markets.
Another factor tending in the same direction has been the de-integration of some funeral industry activities leading to the establishment of discount funeral providers, direct cremation firms, and casket stores. In effect, these non-traditional operators provide only a limited portion of the traditional goods and services provided by full-service funeral homes. They are therefore able to avoid the large investment outlay required to develop a new full-service establishment. By advertising their goods and services they are able to cater for business in ways which do not rely on the slow processes used by traditional providers. This too appears to have increased the degree of competition in some death care markets.
From a financial standpoint it is also easy for cemeteries to add the sale of caskets to the line of cemetery goods and services traditionally sold by their preneed sale organizations. This too adds to the potential competition within local death care markets. In a number of states, however, cemeteries are legally not permitted to sell caskets, or even to sell burial vaults and memorials, both of which are obvious cemetery goods. These laws have a definite anti-competitive impact.
As previously mentioned, the sale of caskets by casket retailers is a competitive practice that is to a large extent dependent on the provisions of the Funeral Rule prohibiting the imposition of casket-handling fees. It is also dependent on the ability of non-traditional providers of caskets to obtain a supplier for the line of caskets sold.
Answer to Question 14(c): What types of non-traditional entrants have appeared in the industry, and how are they different from traditional providers?
This question has been answered in response to Questions 14(a) and
(b) and in my earlier comments, to which the reader is referred. For
purposes of the record, let me merely identify the principal types of
non-traditional providers which I have previously divided into two
groups based upon whether they represent a de-integration or a further
integration of death care processes.
In contrast to the latter establishments, the addition of non-traditional items such as caskets to the line of goods and services traditionally sold by a cemetery or memorial dealer has resulted from attempts on the part of those types of establishments to become more integrated. In general, it was pointed out above that the prohibition on casket-handling fees imposed on funeral homes by amending the Funeral Rule in 1994 has created the conditions under which casket retailers have emerged in more local death care markets.
Answer to Question 14(d): Mergers and others types of consolidation in the funeral industry?
The funeral and cemetery industries in the United States are comprised of large numbers of small, independently owned and operated establishments. Almost all of these establishments serve limited geographic markets in which many have been continuously operated for generations. This fragmented structure has suited both industries well, but it has not been immune to the tendency observed in most retail industries for family ownership to give way to chain operation. This development has occurred as more and more funeral homes and cemeteries have been acquired by several large death care companies and a handful of regional consolidators.
The process began several decades ago, but its pace accelerated during the decade of the 1990s as three large investor-owned consolidators significantly expanded their operations by acquiring increasing numbers of establishments annually. For the consolidators this trend has been driven by pursuit of the benefits of operating on a large scale (especially those obtainable from purchasing and financing activities), and improvements in managerial and financial planning and control methods, among other things.
For the family owners of independent funeral home and cemetery businesses, acquisition by a consolidator is often the result of succession, tax, and estate planning, a desire for liquidity and diversification, and concerns about the growing complexities of operating a small business under conditions of increasing regulatory oversight and competitive threats posed by the consolidators, cemetery-mortuary combinations, discount funeral providers, direct cremation firms, and casket retailers.
To the extent that the Funeral Rule has nurtured some of these competitive forces, it is also possible that the Rule is a contributor to the consolidation trend that has accelerated since the Rule was promulgated and perhaps more so since it was amended to include the casket handling charge prohibition. Furthermore, insofar as the difficulties and pressures of operating in a more highly regulated environment has played a role (even a marginal one) in increasing the willingness of family firms to sell out to the consolidators, it is possible that expansion of the Rule to cover cemeteries may trigger further consolidation, involving a loss of still more family owned and operated firms in the cemetery industry.
Taken together, the U.S. holdings of the four largest consolidators are approximately 3100 funeral homes, 1,080 cemeteries, numerous crematories, and assorted financial and insurance operations. It has been reported that together the four companies, Service Corporation International, The Loewen Group, Stewart Enterprises, and Carriage Services, represent approximately 15 percent of the commercial establishments in the death care industries and 20 percent or more of the annual revenues generated by the industries. This represents a far greater degree of consolidation than was true ten years ago, or even five years ago. Yet the death care industries continue to be heavily dominated by small, independently owned firms, some but not all of which are potential acquisition candidates for one or more of the consolidators, particularly as additions to their established clusters.
Although the pace of the consolidation trend may have slowed of late as several major companies have scaled back their US acquisition programs, it is likely that the process of consolidation will continue in both industries. It is also likely that competition will continue to increase in local death care markets as a result of the tactics of the consolidators, cemetery-mortuary combinations and any non-traditional providers which have entered or will enter those markets.
Against this background of increasing competition it is worth repeating a point previously made: Insofar as increasing regulatory burdens are one of the factors leading families to sell out to chain operators, then any expansion of the Funeral Rule to cemeteries could inadvertently contribute to further consolidation in the death care sector. What is more, it is possible that the greatest burdens will fall on the smallest establishments.
Support for this point is found in recent research sponsored by the Office of Advocacy of the U.S. Small Business Administration and designed to measure the cost and other effects of government regulations on small business. As a part of the Office's research program, Thomas D. Hopkins found in "A Survey of Regulatory Burdens" (1995) that the clerical costs associated with regulatory burdens are disproportionately higher for small firms. The lack of clarity in regulations and frequent changes in them by regulators were considered to be especially burdensome.
By their very nature cemeteries are fragile institutions in their communities. Unlike funeral homes, they are inherently burdened with perpetual existence. For this reason it is a matter of public interest that they remain safe and well maintained places in the neighborhoods where they are permanently located (even when they eventually cease to operate as active facilities). This is a serious challenge for most of the cemeteries in this country. It is not clear to me how expansion of the Funeral Rule to cemeteries would enhance their long-term economic viability which is in the best interests of their customers and the public at large.
Answer to Question 14(e): Profits of funeral industry members?
I do not have much confidence in most of the readily available data relating to the financial performance of funeral homes and other funeral industry participants (e.g., direct disposal firms or casket retailers), and I am unaware of any source of data relating to the financial performance of the cemetery industry (which consists of many establishments that are owned and operated by not-for-profit organizations). For purposes of attempting to provide at least a partial answer to this question I have utilized two sources of data as follows:
As calculated by the Value Line Investment Survey (February 5, 1999), the return on total capital earned by SCI increased from 6.4% in 1989 to 7.5% in 1998. The company's return on shareholders' equity increased from 9.1% to 11.5% during that same time period. For Stewart Enterprises, the return on total capital decreased from 7.7% in 1991 to 6.5% in fiscal 1998, and its return on shareholders' equity increased from 7.4% to 11.0% during that same time period. Based on this data, I conclude that these results are an indication of adequate, but far from spectacular, financial performances by these large death care companies.
I believe that the issues under consideration by the Federal Trade Commission require a comprehensive view of the death care industries. Without such a view it is impossible to contemplate the full implications of a decision to expand the Funeral Rule to cemeteries. As I have indicated at various points throughout, I do not believe that such an expansion of the Rule is warranted in the light of current conditions in the cemetery industry. Without attempting to summarize the case presented in the preceding comments, I would like to end by observing that there are promising signs of new forms of competition among traditional and non-traditional participants in the death care industries. To expand the Rule to cemeteries, or to other participants in those industries who are not "funeral providers" as defined in the Rule, is to run the risk of disrupting the fragile competition among death care providers that has emerged. I believe that this increased competitiveness is likely to yield more benefits for consumers than could possibly flow from any expansion of the Rule to establishments that are not "funeral providers" as defined in the Rule and that have not been shown to engage in the objectionable practices of funeral homes that precipitated enactment and subsequent amendment of the Rule.
August 10, 1999
1. Note: Because the industry described here includes participants who perform activities that do not involve the conduct of funerals per se, I have elsewhere described this industry as the mortuary services industry. This description avoids the impression that the treatment of dead bodies necessarily involves a "funeral service," or ceremony of any kind, as the use of the term "funeral" connotes. I continue to believe that "mortuary" or "mortuary services" industry is a more accurate term; however, in light of the use of "funeral" industry throughout the FTC proceedings, I have here adopted that terminology. In previous discussions I have sometimes treated crematories as a separate industry based on the unique technology they employ to prepare bodies, however, it now appears to me that cremation is a special form of preparation of the body for disposal, which is a mortuary service or funeral industry function.
2. Note: I have previously developed a classification system which included a final disposition industry consisting of cemeteries and a memorialization industry consisting of memorial dealers. Again the distinction was based on a difference between the technologies of disposing of bodies and memorializing the site (i.e., between grave-digging and monument-making). Yet clearly the function of a cemetery is to perform both activities. In cases where they do not provide or install memorials for various reasons, memorial dealers form a sub-industry which performs a portion of this cemetery function.