John Locke Update / Research Newsletter

North Carolina’s Certificate of Need Laws: A Golden Ticket for Some

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It is easy to understand why North Carolina hospitals are adamant about keeping the state’s Certificate of Need (CON) regulations locked in the law books. After all, what law better protects their fortresses from potential competitors who could possibly provide more innovative services in less expensive settings?  

Under the existing CON statute, medical providers often times must ask permission from "The SHCC," the governor-appointed State Health Coordinating Council, to build or expand an existing health care facility, offer new services, or update major medical equipment. For more on the history and flawed reasoning behind CON laws, see my previous post on the issue here.      

As 2015 approaches, North Carolina legislators are considering disrupting the health care status quo. Reforming the state’s Certificate of Need (CON) law will hopefully ignite some competition within the health care sector and help to reduce costs for patients.  

Approval for another ambulatory surgery center (ASC), a gamma knife, or even a hospital bed is determined in part by a data-driven formula that produces the annual state Medical Facilities Plan, a 450-page inventory that accounts for all types of health care settings and services delivered across the state. North Carolina has one of the most micromanaged CON programs in the country. The SHCC regulates over 25 services, and it can take years for new and established health facilities to break ground. My colleague, economist Dr. Roy Cordato, compares the entire CON system with Chinese restaurants:

The commission might have a formula that would look at data regarding how many Chinese restaurants exist per 100,000 or 50,000 or 25,000 in population; how many of those are strictly take-out restaurants and how many are eat-in or "sit-down" restaurants…if it is determined that the community does "need" one more Chinese restaurant…it may not be able to offer take-out service if there are already "enough" take-out restaurants in the area.      

The methodology behind the State Medical Facilities Plan may have been developed with good intentions to prevent underused facilities and incentivize better health care access in underserved areas, but unhealthy limits on competition let incumbent providers inflate health care costs.   

In North Carolina, having a CON is golden. For health care entities to receive a facility fee reimbursement from Medicare and Medicaid, they must be licensed. To be licensed means acquiring a Certificate of Need. And once a certificate of need is secured, incumbent providers can take advantage of a gaping loophole that enables them to artificially lower the "need" for operating rooms as determined by the State Medical Facilities Plan.  

In November 2012, Surgical Care Affiliates filed a legal challenge to the state’s Department of Health and Human Services (DHHS), arguing that procedure rooms should not be defined as sub par to operating rooms. Prior to Surgical Care Affiliates vs DHHS, procedure rooms were required to be built to different specifications than operating rooms, with smaller square footage, lower ceiling height, and medical gasses pumped in from outside. Less invasive procedures were conducted in these settings. However, since DHHS settled the lawsuit, procedure rooms can now be built to the same standards as operating rooms. What’s important to note here is that procedure rooms are not regulated under CON. As a result, health systems now have a strong incentive to add more full-blown procedure rooms while completely bypassing the obstacle to gain state approval for more operating rooms. And because surgeries performed within procedure rooms are not accounted for within the State Medical Facilities Plan, it appears on paper that there is a low demand for more operating rooms — when the reality could be quite the contrary.

Nobody really knows how many surgeries are being performed in procedure rooms, but Surgical Care Affiliates’ legal win is certainly benefiting the status quo and only makes it more difficult for new providers like physician-led ambulatory surgery centers (ASCs) to enter the market and offer services for less. This doesn’t mean that North Carolina’s Division of Health Services Regulation (DHSR) — an arm of the state Department of Health and Human Services — should regulate procedure rooms. More government regulation is simpleminded and irrational.  Rather, operating rooms should also be removed from onerous CON regulations.  

In 2013, policymakers sought to relax regulations for applicants interested in building single specialty ASCs. So long as physicians would provide seven percent charity care and perform 800 surgeries each year, the SHCC would have to consider their proposals and push aside the "needs" projected by the State Medical Facilities Plan. However, ASC construction would not be permitted in counties with populations of less than 100,000 unless a rural community hospital agreed to a joint venture. This concession was designed to protect hospitals that feared losing their most lucrative services to these outpatient facilities.  

CON lovers like the North Carolina Hospital Association will most likely keep digging in their heels. However, incremental reform initiatives will hopefully be underway once the New Year begins. Better yet, repealing the law would be ideal.

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Katherine Restrepo is the Director of Health Care Policy at the John Locke Foundation. Before joining the John Locke Foundation, she interned at the Cato Institute under the direction of Michael Cannon, Director of Health Policy Studies. Katherine’s… ...

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