How Certificates of Need laws drive up health care prices

by Jordan Bruneau, The Economic Freedom Project, published in News and Observer, November 30, 2013.

Retired optometrist William C. Padgett has been trying to create an elderly care facility in Beaufort County for over a decade.

Thousands of seniors across the state sit on a waitlists for various levels of domestic care, and several assisted living companies are eager to open facilities. Nevertheless, Dr. Padgett cannot procure the Certificate of Need permit from the N.C. Department of Health and Human Services necessary to break ground.

Health care providers in 36 states are required to obtain CON permits from state health planning agencies before they can offer or expand services. A CON, as the name suggests, is issued only if the agency finds that a genuine need for the service exists.

As the United States struggles to bring down the cost of health care and meet the needs of a rapidly aging population, CON laws are an unnecessary regulation preventing necessary health care expansion. But CON laws do even more damage than block patients from getting access to care: They impede innovative treatments and drive up health care prices.

Tragically, CON laws have been shown to inhibit access to cutting edge care. For example, Michigan recently refused to grant CONs to several hospitals looking to upgrade cancer radiation treatments from X-ray therapy to proton therapy. Proton therapy can more accurately target tumors, allowing patients to receive higher doses of radiation while better protecting the surrounding healthy tissue. And yet the Michigan Department of Community Health does not agree that this life-saving treatment is a need. Scrapping CON laws would give more patients access to the top quality care they deserve.

State CON laws grew out of the 1974 National Health Planning Resources and Development Act, which erroneously attributed spiking health care costs to a poor distribution of health care resources. Subsequently, the act required states to set up health planning agencies to control expansion of health care services and facilities. This “logic” is perplexing given that example after example shows that the best way to reduce costs is through fair competition and entrepreneurship. CON laws do the exact opposite.

Research shows that health care costs are greater in states with CON laws than in states without. In fact, data from the Kaiser Family Foundation reveal that the average annual per capita health care costs in states with CON laws are 11 percent higher – more than $700 – than the average in states without CON laws.

Dialysis users in Washington state know that CON laws increase costs firsthand. Several years ago, Washington state health care providers sought to expand dialysis centers across the state in response to skyrocketing cases of type 2 diabetes. Their requests for CONs were denied because they did not meet the state planning board’s need requirement. As a result, dialysis prices in the state have increased from about $300 to more than $1,000.

Lawmakers eventually discovered that economic theory does, in fact, hold true for health care. Twelve years after implementation, in 1986, the law was repealed because it failed to reduce health care costs. Nevertheless, 36 states doubled down on their CON systems, holding on to the idea that expanding supply, if unneeded and unused, would lead providers to increase prices on existing patients to recoup their costs. This is like saying that movie theater expansion should be limited to community need or else existing moviegoers will be overcharged should new seats sit empty.

So why have 36 states held on to CON laws if they are so detrimental for patients? Cronyism.

Investigations by the Department of Justice and Federal Trade Commission found widespread evidence of existing providers manipulating the CON process to prevent or delay competition to protect their profits. Cronies use the CONs to protect themselves from competition – even if that means Grandma can’t find a care home to take her in, your uncle with type 2 diabetes is forced to shell out twice as much for treatment and your friend with cancer has to settle for sub-par radiation therapy.

Combine powerful, established businesses with access to regulations that squash competition and customers will always lose. In this case, the customers are patients. CON laws stand between them and access to the best care.