by Jon Sanders
Director of the Center for Food, Power, and Life, Research Editor | John Locke Foundation
Certificate of Need (CON) laws were foisted upon the states by the federal government with the passage of the Health Planning Resources Development Act of 1974. The theory behind CON laws is that the economics of health care systems, unlike other markets, is such that more supply leads to higher prices. This theory required a central planner to determine when, how much, and where health services were needed, from hospitals and medical equipment on down to the number of beds.
Unsurprisingly, the CON mandate was a spectacular failure, pushing health care costs to historic highs, and in 1987 Congress repealed it. Fourteen states subsequently repealed their CON laws. North Carolina was not among them.
The research literature into CON has been remarkably consistent: CON laws fail to lower health care costs; if anything, they raise them. Researcher Patrick McGinley summed it up this way: "In searching the scholarly journals, one cannot find a single article that asserts that CON laws succeed in lowering health care costs. CON ‘has elicited a remarkable evaluative consensus — that it does not work.’"
While CON laws, by limiting supply and restricting competition among health care service providers, made their services more expensive for consumers, they likewise boosted existing providers’ profits. That old, familiar imbalance of dispersed costs among the people and concentrated benefits among a powerful few proved yet again a breeding ground for cronyism — which has helped keep the failed policies in place.
Reforming health planning: The need for competition
In 2011, the House Select Committee on Certificate of Need Process and Related Hospital Issues took up a review of North Carolina’s health planning process and sought to determine whether the state’s CON program was serving its purpose. In December 2012 the committee recommended several reforms.
One was a "full and a complete review of all new institutional health services regulated under Certificate of Need law to determine the need and rationale for each included service regulation." Such a review would be necessary because North Carolina’s CON program is one of the most restrictive in the nation, regulating 25 different health care services.
Research has shown that the more restrictive the CON program, the more inflationary its effect on health care costs. North Carolina’s CON law applies to "[a]ll new hospitals, psychiatric facilities, chemical dependency treatment facilities, nursing home facilities, adult care homes, kidney disease treatment centers, intermediate care facilities for mentally retarded, rehabilitation facilities, home health agencies, hospices, diagnostic centers, and ambulatory surgical facilities" as well as certain upgrades and expansions of existing health service facilities or services.
Another major reform the committee recommended is "exempting diagnostic centers from Certificate of Need Review and amending the Certificate of Need laws pertaining to single-specialty ambulatory surgery operating rooms." Carolina Journal reported what significance such a move could have:
If the state allows a wider array of ambulatory surgery centers, savings would occur in Medicaid and state health plan payments. Adding 50 new ambulatory centers and shifting 10 percent of patients from hospitals to the centers would save $16.7 million in Medicaid payments from 2014 to 2020, according to the Orthopaedic Association. At 100 new centers and with a 20 percent shift of patients, the savings would be $33.1 million.
The association’s projections for the state health plan coverage for state employees, under the same scenarios, would save the state $53.3 million with 50 new centers and $114.3 million with 100 new centers.
Savings would accrue because reimbursement rates for hospitals are far greater than reimbursement rates for ambulatory surgery centers. A similar change to CON law in 2005 that allowed endoscopy units to open saved the state around $225 million in Medicare payments.
Other reforms proposed by the committee included several adjustments to "statutory expenditure thresholds regarding expedited reviews, major medical equipment, and replacement equipment" and several changes "to streamline the appeals process, to redefine the parties having standing to appeal, and to deter the bringing of frivolous, harassing, or meritless appeals."
Notably, the committee’s Recommendation 19 urged the General Assembly to "study reform of the health care market and the health care delivery system in North Carolina to increase cost effectiveness and quality of care through the encouragement of market driven competition in the provision of health care services" (emphasis added).
The importance of this recommendation is underscored by a landmark 2004 report by the U.S. Federal Trade Commission (FTC) and the Department of Justice (DOJ). It found CON programs beset with "serious competitive concerns that generally outweigh CON programs’ purported economic benefits." As suggested by the report’s title, "Improving Health Care: A Dose of Competition," the agencies favored expanding competition in the provision of health care services, observing that "consumer welfare is maximized by open competition and consumer sovereignty — even when complex products and services such as health care are involved."
As Roy Cordato wrote in his Macon Series report on CON laws,
There is possibly no proposition in economics that is more accepted than the idea that if you want to reduce the cost of something, you foster an environment that encourages open competition and entrepreneurship and discourages monopoly. But the role of competition goes well beyond this. Rivalry among businesses — and health care providers are no exception — stimulates new technologies and innovative and more efficient ways of delivering goods and services to customers. Existing providers continuously have to keep their costs low and their products desirable in order to fend off potential competitors looking for an opportunity to earn profits. These potential competitors, like the neurologists discussed previously who wish to provide MRI services, are always looking for ways to outperform existing providers.
In the General Assembly in 2013, two bills were introduced that would have incorporated the committee’s recommendations. Neither was enacted.
House Bill 177, "Amend Certificate of Need Laws," which included the ambulatory service center exemption and the study of reform through market competition, passed the House 112-2 but failed to advance in the Senate, while House Bill 83, "Enact CON Committee Recommendations," languished in committee. The Senate could, however, revisit H.B. 177 in the 2014 short session.
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