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After Congress repealed in 1987 the federal mandate that states maintain a Certificate of Need (CON) program for health services, which had failed spectacularly to contain costs, 14 states opted to end their CON programs. North Carolina chose to remain a CON state, however.

Worse, North Carolina’s CON program is highly restrictive, regulating 25 services.

In December 2012, a House Select Committee on Certificate of Need Process and Related Hospital Issues recommended several reforms of North Carolina’s health planning process. Among the recommendations was allowing "market driven competition in the provision of health services" — an idea that would be studied under House Bill 177, "Amend Certificate of Need Laws," which also included other CON recommended reforms.

Son of CON: Certificate of Public Advantage

One aspect of North Carolina’s CON law, however, is highly unique among the states. North Carolina is one of two states to have Certificate of Public Advantage (COPA) agreements. The other is South Carolina, though 11 other states have COPA laws (and New York is considering one).

Where CON laws effectively yield a health care service cartel, COPA creates a health care service monopoly.

As with CON, the foundational justification for COPA was ostensibly to mitigate health care cost increases. The General Assembly instituted COPA in 1993 because, as stated in the law’s findings, "Cost increases make it increasingly difficult for physicians in rural areas of North Carolina to offer care" and "cooperative agreements among physicians, hospitals, and others for the provision of health care services may foster improvements in the quality of health care for North Carolina citizens, moderate increases in cost, and improve access to needed services in rural areas of North Carolina."

From there the legislature declared that "competition as currently mandated by federal and State antitrust laws should be supplanted by a regulatory program to permit and encourage cooperative agreements between physicians or between physicians, hospitals, and others" when their benefits to citizens would "outweigh their disadvantages caused by their potential or actual adverse effects on competition." That is what COPA aims to be.

Those findings are steeped in the "exceptional market" assumption of heath care — i.e., the belief that the health care market is different from any other kind of market — which underlies CON laws as well as a host of other government interventions into health care markets going back several decades, including Obamacare.

Under the theory behind COPA, excessive costs keep health care services out of rural areas, while antitrust laws prevent cooperative agreements among health care providers that would mitigate costs and thereby extend services into rural areas. In that view, such agreements should therefore be allowed and encouraged by state health planners who would have oversight of the COPA recipients. Strict state regulatory oversight of the COPA recipient would, the assumption is, effectively impose the price discipline on its services that would have been imposed by a normally functioning market.

Fostering cooperation or crushing competition?

Since the law’s passage in 1993, North Carolina has issued only one COPA. It was in 1995 to Mission Health System in western North Carolina (WNC), which allowed Memorial Mission to merge with St. John’s Hospital — the only acute-care hospitals in Asheville — to form Mission Hospital. The COPA covers Buncombe and Madison counties.

Serious concerns have been raised over COPA and Mission Health. The largest employer in WNC, Mission has entered into numerous partnerships since 1996, expansion that has provoked criticism from other hospitals and smaller health care systems. Critics complain that the state has allowed Mission to engage in "empire building," "predatory" practices, and threatening competing providers of services either to partner with Mission or be driven out of business (or "crushed") by Mission duplicating those services.

A 2013 Asheville Tribune report on "The Kingdom of Mission" noted that "physicians and consumer advocates have complained that Mission mostly self-reports its COPA compliance, with little oversight from the state agencies that are supposed to police it." It described COPA as the "hunting license" Mission uses in what critics termed a "manifest destiny-like cherrypicking of different private specialist practices so as to capture an entire spectrum of medical services under its umbrella."

COPA advocates see it completely differently. They see it as Mission being enabled to foster cooperation for the benefit of rural patients.

Concerning its compliance, Mission hired an independent, third-party accounting firm (Dixon Hughes Goodman, LLP, which was selected by Attorney General Roy Cooper) to conduct a review, which found Mission in full compliance. Furthermore, the review found Mission’s cost of care to be $577 lower per case than at comparable hospitals. Mission’s operating margin was found to be lower than COPA would have allowed, by $62.3 million.

Though its monopoly is regulated and limited to only two counties, Mission enjoys significant power in WNC boosted by such regulatory protection. It has acquired five hospitals in surrounding counties and is building expansions in other counties.

In 2010, the State of North Carolina commissioned an economic analysis of COPA and Mission. Economist Gregory S. Vistnes of Charles River Associates in Washington, D.C., conducted the study, released in 2011. Vistnes found several perverse incentives at work threatening to undermine the foundational purposes of the COPA agreement with Mission, including (emphasis added):

  • "The COPA’s Margin Cap creates an incentive and opportunity for MHS to evade the intent of the COPA: by expanding into other markets (with respect to either geography or service), MHS can increase prices and realize higher margins than the COPA seeks to allow."
  • "The COPA’s Cost Cap offers only limited regulatory protection for consumers, yet it creates undesirable incentives for MHS to increase outpatient prices and volumes."
  • The COPA creates an incentive and opportunity for MHS to engage in "Regulatory Evasion" by which MHS can evade price (or margin) regulation in one market by instead imposing price increases in a related, but unregulated, market."

Vistnes also observed that "The incentive problems associated with the COPA regulation appear to be consistent with MHS’s observed conduct and complaints about MHS’s conduct that have been voiced by certain parties."

A highly novel state policy needs careful watching

The same House committee that was examining North Carolina’s CON program also looked into COPA. Its work on COPA revealed a program so convoluted that a simple solution seemed elusive. The committee acknowledged Mission’s continued compliance as well as the ongoing concerns of COPA’s anticompetitive effects.

The committee’s ensuing recommendation, however, was effectively a punt:

The Committee recommends that the hospitals, health care providers, and interested individuals in the region make every effort to resolve their differences regarding the COPA prior to the end of the 2013 Session of the General Assembly. If a satisfactory resolution to the issues is not reached in that time, the Committee recommends that the General Assembly conduct a study of the economic impact of the COPA and the effectiveness of that agreement.

The stark differences in characterizing COPA’s effects would seem to demand further study. COPA is highly novel state policy instituted to circumvent antitrust laws on the theory that so doing would make it easier for health professionals and hospitals to work together under the watchful eyes of state regulators to serve patients more easily and at lower cost.

If this experiment has instead created a health behemoth able to circumvent the regulators, leverage its protection from competition into driving remaining competitors out and forcing health professionals to do business with it or else, and increase prices on patients, then it would be time to pull the plug. A "kingdom" established under state policy would be a quintessence of cronyism.

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