This week, the John Locke Foundation sponsored a lecture by one of North Carolina’s top hospital lobbyists, a self-professed fan of the free market, albeit with one big exception. The purpose of his presentation was to rebut a previous speaker, a physician who strongly objects to the state’s Certificate of Need (CON) law. CON is a regulation that limits health care supply unless a specific “need” is determined by state bureaucrats. If medical providers have plans to build or expand an existing health care facility, offer new services, or update major medical equipment, they will most likely have to ask permission from the State Health Coordinating Council.
Here is what I learned from the lobbyist:
- The way to ease the burden of an overregulated environment like health care is to add more regulation in the form of CON.
- More CON is bad because it disrupts the free market. Less CON is bad because the free market is disruptive.
But now that Obamacare has supposedly added seven million more individuals to public and private health insurance rolls, the supply side of health care cannot be ignored. The political agenda focuses more on reducing the number of uninsured and not enough on prescribing ways that patients can access services in less expensive settings.
Just one way to increase supply is to repeal North Carolina’s Certificate of Need law. Why the need for approval by state bureaucrats?
History explains Congress’s intent behind enacting CON laws under the federal Health Planning Resources Development Act in 1974 — the goal was to cut down on health care cost inflation. At that time, reimbursements for services were based on the costs 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Yet once the reimbursement system shifted to fee-for-service, the feds repealed the CON mandate in 1987, citing that the program did not effectively restrain health care costs. Fifteen states have since scrapped their CON programs, while the approval and oversight process varies in remaining states. North Carolina burdens health care entrepreneurs with one of the most stringent CON programs in the nation, regulating over 25 services that range from organ transplants to acute care hospital beds to ambulatory surgery centers (ASCs).
Despite the feds admitting to CON’s inadequacies, the SHCC argues that centralized decision-making must remain intact to prevent duplicative services and underused facilities that may yield low quality care. To ensure this does not happen, the 24 governor-appointed board members publish an annual Medical Facilities Plan, a 450-page inventory that accounts for all types of entities and respective services offered across the state.
Even in red states with republican-controlled legislatures that pay lip service to the free market, CON laws still exist. This is because powerful stakeholders like the North Carolina Hospital Association have successfully blocked many legislative reform initiatives. Nonprofit health systems for the most part leverage CON to their advantage, since it protects them from outside competitors. 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.
Basic economics clearly illustrates that restricting the supply of health care services keeps costs artificially high. Hospitals nod to this, but claim that CON laws help them remain financially afloat. To maintain nonprofit status, health systems must care for all patients who walk through their doors – including uninsured, self-pay, and medical assistance. With CON in place, hospitals shift more costs onto private coverage patients offsetting total uncompensated care and ostensibly providing better access to indigent care. However, a report recently published by the Mercatus Center concludes that better metrics are needed to determine whether CON laws directly correlate with health systems providing more indigent care:
While the goal of improving access to healthcare for the needy is noble…the authors question the ability of regulators to effectively monitor and track the actual provision of indigent care. Indigent care is not a well-defined concept and doesn’t lend itself to transparent accounting. Using the best measure available, uncompensated care, these restrictions do not appear improve the poor’s access to healthcare.
Granted, North Carolina did execute 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 freestanding facilities are reimbursed at a lesser rate than those performed in full service hospitals.
Yet the process for physician-led parties seeking to offer services at reduced rates can take years to receive a stamp of approval from the SHCC. And that’s just half the battle. Other groups filing competing applications will likely contest the state’s granted certification – even parties unaffiliated with the application can appeal the state’s decision. If that happens, 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. Basically, whoever submits a CON application must ask competitors permission for business.
A relevant example pertains to Triangle Orthopedic Associates (TOA), North Carolina’s largest private orthopedic practice. Years ago, TOA and Duke University Health System filed competing applications for an MRI machine. TOA ended up winning the bid. While Duke didn’t petition against the decision, a separate company, Alliance Imaging, did. It had previously provided MRI services to TOA and feared the loss of business that would result if TOA procured its own machine.
What the healthcare industry needs is a strong dose of disruptive innovation – relaxing regulations that will increase provider competition, force downward pressure on costs, and enhance patient choice. Reform proposals in the 2013 legislative session sought to make it easier for providers to open up single specialty ambulatory surgery centers under certain conditions and eliminate diagnostic centers from CON review altogether. Stand-alone outpatient facilities bring many benefits to the table. Not only do they operate more efficiently (as surgeries performed in smaller settings result in less turnaround time than in full-service hospitals), but physician-led ASCs typically have operating costs 45-60% lower than hospitals for the same procedures. Although these proposals failed to be considered, the CON program itself continues to prompt discussions on price transparency and cost of care.