John Locke Update / Research Brief

“Need”? Health Consumers Don’t Need So Much Time Wasted, Money Spent on CON Shenanigans

posted on in Economics, Government Reform, Health Care, Law & Regulation, Rights & Regulation
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  • In 2018, the state Division of Health Service Regulation determined that the people of North Carolina “needed” one — and only one — new mobile PET scanner
  • Three years and a fight in the courts later, we still don’t even have that, but we do have a record of the bad behavior inspired by this “Soviet-style” central planning
  • This episode illustrates why North Carolina should join the 15 states that have already repealed their CON laws

The decision of the three-judge panel of the North Carolina Court of Appeals was described as “unremarkable” — which it is, at least in the original sense of snafu. The appellate court ruled unanimously to uphold an administrative law judge’s decision on a matter of an agency interpreting the state statute it administers. Still, let’s consider the issue itself.

In 2018, a state agency determined that the people of North Carolina needed exactly one — and only one — new mobile PET scanner within its borders. Four companies were ready, willing, and able to serve patients in North Carolina with new mobile PET scanners. They have devoted a great deal of money, man-hours, and time — on administrative hearings and court cases, not the service. So far, three years after a need was identified, no new mobile PET scanner has been provided.

Where do we start in unpacking all the problems described above? Here:

  1. What business is it of a state agency to decide how many mobile PET scanners there should be?
  2. How would they know what the “need” is?
  3. What’s the difference between this kind of “need” and consumer demand?
  4. Why can’t all four companies compete?
  5. Who would be harmed by four new mobile PET scanners instead of one?
  6. Who is harmed by no new mobile PET scanners?
  7. Who benefits from no new mobile PET scanners?
  8. Is this how business is normally conducted in a free state?
  9. If not, could this outcome really be what policymakers wanted or anticipated?

Let’s answer these questions one by one.

1. What business is it of a state agency to decide how many mobile PET scanners there should be?

It isn’t, except that North Carolina is one of the states still with Certificate of Need (CON) law. Not only that, but our CON law is one of the most extensive in the entire nation. It even pertains to mobile PET scanners. The state agency is the N.C. Division of Health Service Regulation, and its annual State Medical Facilities Plan contains its determination of “need for new health care facilities and services in North Carolina.” In this case, as stated in the court ruling, “The 2018 State Medical Facilities Plan (‘SMFP)’ identified a statewide need for one additional mobile PET scanner to operate within North Carolina.”

2. How would they know what the “need” is?

They don’t, but they are statutorily designated to affect this pretense of knowledge.

3. What’s the difference between this kind of “need” and consumer demand?

There’s no way to quantify it exactly, but you can bet that consumers demand more mobile PET scanners than are presently supplied in the state health care market. At least four new suppliers were willing to bet on it and take the risk in providing mobile PET scanners, and others might have, too, were it not for the extraneous regulatory and judicial costs they’d incur just in the attempt. As stated in the ruling, InSight Health Corp., Mobile Imaging Partners of North Carolina, and two others were seeking the CON.

4. Why can’t all four companies compete?

They can’t all four compete because of the state agency had “determined” that only one mobile PET scanner was “needed.” Because of that determination, it could award only one “Certificate of Need” for a mobile PET scanner — which went to InSight.

Mobile Imaging — which the ruling identified as a joint venture between Alliance HealthCare Services Inc., which “operates two mobile PET scanners in North Carolina,” and University of North Carolina Rockingham Health Care, Inc., which is “a UNC-owned affiliate of the UNC Health Care System” — appealed the award, leading eventually to this ruling.

5. Who would be harmed by four new mobile PET scanners instead of one?

The whole idea of Certificate of Need is that citizens would be harmed by additional medical services. No, really. The foundation of CON law was that too much supply harms medical consumers. It was enacted in 1978 because of a 1974 federal law seeking to lower health care costs by limiting supplies. I am not making that up — but in Congress’ defense, back then medical billing included charging consumers for the costs of building and adding services (reforms in the early 1980s addressed that billing problem).

CON proved in short order to be such a disaster that Congress repealed it in 1987. Fifteen states have since repealed their CON laws. North Carolina, unfortunately, has not.

In reality, those who would be harmed by more mobile PET scanners would be providers of current mobile PET scanners. They would face a loss in customers and revenues owing to consumers having more choices.

6. Who is harmed by no new mobile PET scanners?

Health care consumers in North Carolina. People with a medical need for mobile PET scanners are harmed while health care companies wage high-stakes battles in state courts over state agency decisions regarding a law that 15 states and the federal government have already ditched for making health care more costly and less accessible to citizens.

7. Who benefits from no new mobile PET scanners?

Current providers of mobile PET scanner services. Also lawyers — the fact that so far the appellate court has had to rule on an ALJ decision upholding an agency decision should suffice. But as long as CON remains on the books, others who benefit are compliance staffers for the companies as well as people employed to interpret and implement CON law for the agency. The ruling noted that the agency has “a team of twenty individuals in the implementation of North Carolina CON law.”

Public choice economics would give insight to another group who benefits: lobbying firms paid to keep CON laws on the books to further enrich their clients by limiting choice and competition that otherwise would be appreciated by health care consumers.

8. Is this how business is normally conducted in a free state?

No, of course not. There’s no special division within a state agency to determine how many, for example, auto parts stores, grocers, or even chicken sandwiches people in North Carolina “need.” As my friend and former colleague Dr. Roy Cordato put it,

Most people would look at such a system and think “this is crazy; only a Soviet-style central planner could be happy with such a bureaucratic nightmare.” Besides, we all understand it is competition that makes the consumers in the marketplace better off. Competition brings lower prices, more convenience, better quality, new technologies and innovations, and so on.

9. If not, could this outcome really be what policymakers wanted or anticipated?

We have to think it isn’t. It certainly wasn’t from the beginning. CON has since become a serious public-choice problem in North Carolina, where a small group of insiders play for big wins and the costs to everyone else go unnoticed — and therefore unlobbied.

Bad law provokes bad behavior, leaving consumers worse off

The court case shows the lengths to which competitors play in this game-that-shouldn’t-be-a-game. Reading the decision, one picks up the following. InSight was going to serve two locations, and Mobile Imaging, six. Two host facilities — it is important to note — was the minimum requirement for the CON. InSight had “proposed a statewide mobile PET route with the scanner moving weekly between six potential host sites in eastern, central, and western North Carolina” but “At least three potential host sites told InSight they would not provide documentation to support its CON application due to their concerns about [Mobile Imaging’s] reaction.”

InSight had testified that the UNC Health–affiliated Mobile Imaging maintained an “effective monopoly on mobile PET services” and “described [Mobile Imaging’s] history of opposing opportunities to allow additional providers to introduce services to North Carolina’s health care market.” The potential host sites declining to support InSight’s CON application “were wary of taking action to put their current service with [Mobile Imaging] at risk.”

Remember about the two host facilities? Mobile Imaging “undertook efforts to encourage InSight’s two host sites to rescind their support for InSight’s CON application” — going so far as to “draft rescission letters for both of InSight’s host sites: Caldwell and Harris Regional. Caldwell’s president signed the letter. Harris’ did not.” Fortunately for InSight, the agency, ALJ, and appellate court all saw through Mobile Imaging’s “anti-competitive behavior to ensure it was awarded the CON.”

Unfortunately for North Carolina health consumers, as well as Mobile Imaging and the other two competitors in this case, North Carolina’s policymakers have not seen through the greater anticompetitive problems wrought on this state by CON law.

The John Locke Foundation has long advocated repeal of North Carolina’s CON law. Fifteen states already wised up and got rid of theirs. This “unremarkable” court case gives insight in why state policymakers should get us out of the CON law mess.

Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. Serving as Senior Fellow of Regulatory Studies and also Research Editor at the John Locke Foundation, Jon gets in the weeds of all… ...

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