A new report from the federal government outlines recommendations for how to reform America’s health care system. Together, the secretaries of Health and Human Services, Treasury, and Labor layout state-level policies that can be reversed or changed to allow for more freedom, competition, choice in health care. The lack of competition in healthcare is a major factor the leads to higher costs. By addressing policies that decrease competition, state lawmakers can play a large role in freeing up health care markets.

For the rest of this week, I am going to choose one issue from the federal report to discuss each day. A four-part series, if you will. Each issue I choose will be one that North Carolina lawmakers could change to allow more healthcare freedom, competition, and choice. First up: Certificate-of-Need laws.

North Carolina has one of the most restrictive regimes of Certificate of Need (CON) laws. If you aren’t familiar with this issue, John Locke Foundation has some great resources here. In short, CON laws requires permission from the government to build a new health care facility or expand an existing health care facility. Let’s start with a little history:

Most states adopted CON programs in response to a since-repealed federal mandate, the National Health Planning and Resources Development Act of 1974, which offered the states powerful incentives to adopt CON programs. CON programs were supposed to control healthcare costs and mitigate incentives for an arms race in healthcare spending fostered by cost-based healthcare reimbursement systems. Although both public and commercial reimbursement systems have changed significantly over time, many states have maintained substantial CON requirements. Congress repealed the 1974 Development Act in 1986, and a number of states have since repealed or revised their CON laws.

CON laws aren’t unique to health care, however. Dating back to the 1800s, they were used by incumbent providers and the government to prevent competition in certain markets. In more recent history they were more common in health care. Currently, North Carolina is one of the 35 states which have not fully repealed their CON laws. Since the Federal CON program was enacted, there have been many federal studies done on the effect of CON laws:

FTC and Antitrust Division staff have examined the competitive impact of CON laws for several decades. For example, staff from the FTC’s Bureau of Economics conducted several studies of CON laws in the late 1980s, both before and after repeal of the federal law that had encouraged their adoption. In addition, the agencies jointly conducted 27 days of hearings on healthcare competition matters in 2003, receiving testimony about CON laws and market entry, hospital provider concentration, and other pertinent aspects of healthcare competition; they jointly released a substantial report on healthcare competition issues, including those related to CON laws, in 2004. Finally, through their competition advocacy programs, the Agencies have reviewed numerous state CON laws and encouraged states to consider the competitive impact of those laws.

The best empirical evidence suggests that greater competition incentivizes providers to become more efficient. Recent work shows that hospitals faced with a more competitive environment have better management practices. Consistent with this is evidence suggesting that repealing or narrowing CON laws can reduce the per-patient cost of healthcare. Studies have found no empirical evidence that CON laws have restricted “over-investment.” However, CON laws can restrict investments that would benefit consumers and lower costs in the long term and are likely to increase, rather than constrain, healthcare costs. This is because CON regimes impose the legal and regulatory costs of preparing an application, then seeing that application through an often-lengthy approval process and potential third-party challenges. As a result, healthcare providers must spend
resources on administrative processes rather than on constructing healthcare facilities or delivering healthcare services. In addition, those regulatory costs can be a barrier to entry, discouraging some would-be providers from entering certain healthcare markets, and discouraging some incumbent providers from expanding or innovating in ways that would make business sense but for the costs of the CON system. Even for providers willing to bear those regulatory costs, CON requirements may be hard barriers to entry if their applications are denied. Hence, CON laws can diminish the supply of healthcare facilities and services while exacerbating concentration in provider markets.

Supporters of CON say they will increase the quality of healthcare facilities and improve access. Neither of these claims holds up against the evidence:

Studies that directly analyze the impact of changes in CON laws on health outcomes provide a more complete picture; the weight of that research has found that repealing or narrowing CON laws is generally unlikely to lower quality of care, and may improve the quality of certain types of care. Moreover, CON programs can tend to foster or sustain undue provider concentration; and additional empirical evidence suggests that “[a]t least for some procedures, hospital concentration reduces quality.”

Evidence also fails to support the claim that CON programs would increase access to care for the indigent, or in medically underserved areas. The general argument has been that CON laws, by limiting competition, allow incumbent healthcare providers to earn greater profits—by charging higher prices and preserving their volume of lucrative procedures—than they would earn in a competitive environment. It is posited that those extra profits will be used to cross-subsidize care for the underserved. There are inherent weaknesses in this
supposition. First, the charity-care rationale is at odds with the cost-control rationale. The notion that CON-protected incumbents would use their market power and profits to cross-subsidize charity care presumes that those providers will charge supra-competitive prices for non-charity care. Such supra-competitive pricing might harm many healthcare consumers, including low-income or under-insured patients who are ineligible for charity care. Second, because CON programs impede entry, expansion, and innovation, they can impede access to care for all patients, including low-income patients. Finally, the evidence does not show that CON laws promote charity care. Research suggests that safety-net hospitals are no stronger financially in CON states than in non-CON states. There is also empirical evidence contradicting the notion that dominant providers use their market power to cross-subsidize charity care, including an empirical study of the relationship between competition and charity care that found a “complete lack of support for the ?crosssubsidization Hypothesis.’”

Not surprisingly, the federal report recommends repealing CON laws. North Carolina should follow this recommendation in the 2019 legislative session by removing a law that is the antithesis of competition, consumer choice, and economic freedom.