by Katherine Restrepo
Director of Health Care Policy, John Locke Foundation
If medical providers have plans to build or expand an existing health care facility, offer new services, update or purchase major medical equipment, they will most likely have to apply for a "certificate of need" from the Health Planning Development Agency, an arm of North Carolina’s Department of Health and Human Services (DHHS).
Why the need for central planning approval by the state?
History reveals Congress’s intent behind enacting certificate of need (CON) laws under the federal Health Planning Resources Development Act in 1974. The goal was to cut down on health care inflation. At that time, reimbursements for services were based on the cost of production, or a cost-plus system. Providers therefore had strong incentives to build and expand the capacity of health facilities, knowing they wouldn’t have to assess patient demand.
Yet once the reimbursement system shifted to fee-for-service, the feds repealed the CON mandate in 1987. Fifteen states have since scrapped their CON programs, while the severity of the oversight and approval process for the provision of health services in the remaining states varies.
Those in favor of keeping CON intact claim that this law prevents duplicative services and underuse of facilities, both of which arguably inflate health care costs. Central planning is therefore necessary to determine which regions of the state have sufficient demand — a "need" — for certain medical commodities.
Hospitals also leverage CON to their advantage, since the program acts as a barrier to competition. As Paul Starr notes in his Pulitzer Prize winner, "The Social Transformation of American Medicine,"
"The interest of state legislators was plainly cost control. However, the main inspiration for certificate-of-need came from the American Hospital Association and its state affiliates. The hospitals, anxious to avoid other forms of control, stood to benefit from the limits on competition that this sort of regulation would create. Opposed were profit making hospitals and nursing homes and some state medical societies, which objected to anyone but doctors regulating medical services."
At the moment, North Carolina stifles competition. The state has one of the most stringent CON programs in the nation, regulating a total of 25 services ranging from acute hospital beds to organ transplants to ambulatory surgery centers. And the onerous approval process involved can take between 90 days and two years and beyond. That’s usually the case when a lot of committees, their respective subcommittees, and a red sea of bureaucratic tape becomes involved — not to mention that competitors can contest the Division of Health Services Regulation’s (DHSR) decision on a submitted proposal. If that’s the case, the Office of Administrative Hearing (OAH) reviews the CON proposal and must determine yay or nay within 270 days. If the CON party is not satisfied with that ruling, an appeal can be made to the NC Supreme Court.
For a heavier dose of the CON process, read on here.
Granted, the program did undergo some reform in 2005, which allowed gastroenterologists to perform colonoscopies in their own endoscopy units. As a result, the state saved roughly $225 million in Medicare payments within six years, since procedures performed in such free-standing facilities are reimbursed at a lesser rate than full service hospitals.
Combined with lower payment from Medicare and private insurers, an increase in the supply of services creates competition and puts downward pressure on healthcare costs. Since relaxing these regulations, 56 new units have sprung up throughout North Carolina.
Although recent reform proposals failed to be considered in the 2013 legislative session, the CON program itself prompts discussions on price transparency and cost of care.
For example, highly concentrated non-profit health systems often charge higher rates for services because they leverage more negotiating power when contracting with insurance companies, have more overhead to cover, and must provide indigent care to maintain their nonprofit status. Higher charges also offset uncompensated care.
And, sometimes Medicare patients have no choice but to undergo procedures in an inpatient hospital setting. While Medicare lists over 1,000 procedures that must be performed in an inpatient setting, many of these can be safely performed in an outpatient Ambulatory Surgery Center (ASC). It would be wise for CMS rulemaking to change, enhancing patient choice and Medicare savings.
Furthermore, while ASCs generally charge lower rates, be mindful of which one you walk into. Hospitals that purchase free-standing ASCs can submit a CON application to convert them into hospital-based operating rooms, allowing for potentially higher reimbursement rates.
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