Carolinas will test new hospital rules

Published February 8, 2024

By John Hood

Hospitals are among the most heavily regulated institutions in America. Over the next half-decade or so, North and South Carolina will test two contrasting models for expanding choice and competition in this critical sector.

As part of last year’s agreement between the North Carolina General Assembly and Gov. Roy Cooper to expand our Medicaid program, lawmakers tinkered with the state laws that force hospitals, surgical centers, and other providers to get permission slips from the government — called certificates of need (CON) — to open new locations, add new equipment, or offer new services.

As the Charlotte Business Journal reported a few weeks ago, the Tar Heel State no longer requires a CON to expand capacity at psychiatric and addiction-treatment facilities. In 2025, surgical and imaging centers in 23 urban and suburban counties will no longer be subject to the regulations.

South Carolina also enacted CON reform in 2023. But its legislation was much more ambitious. Over the next three years, the Palmetto State will abolish virtually all CON requirements. By 2027, only nursing homes will be subject to them.

Robb Leandro — yes, that Leandro — is a health-care attorney at Parker Poe. He told the Journal that North Carolina’s approach to CON reform was “subtle and more pointed,” as opposed to a “pull-the-Band-Aid-off approach.” He’s especially concerned about the fact that South Carolina’s reforms apply to the entire state, whereas North Carolina’s most-consequential changes apply only to metropolitan areas. “There is a place for CON in rural communities,” he argued.

Why? Because rural hospitals tend to operate on thinner margins than their urban counterparts. If ambulatory surgical centers or other facilities attract paying customers away from rural hospitals, leaving them more reliant on Medicare and Medicaid patients whose care is reimbursed at lower rates, that could lead to declining quality of care or even closure.

That’s the argument, anyway. I find it less persuasive than others do. Under a less-regulated system, most investment in new facilities is going to occur in fast-growing metropolitan areas, not rural markets. And a number of states got rid of their certificate-of-need regimes years ago. As far as I know, they didn’t experience a crisis in rural health care as a result.

Indeed, in 2018 George Mason University’s Mercatus Center published a study of the effects of CON regulation on rural health care. Its scholars found that, contrary to the standard argument, states without CON regulations tend to have more hospitals and surgical centers in rural areas than do states that require CON. Moreover, such anti-competitive laws make its more likely that patients from both urban and rural areas will go out of state for care, which represents lost revenue to in-state providers. “CON laws may not be protecting access to rural health care,” they concluded, “but are instead correlated with decreases in rural access.”

More generally, new research on CON confirms the common-sense expectation that reducing competition in health care tends to raise the cost of care while diminishing its quality. A 2020 study published in the Journal of Private Enterprise found that CON states tend to have longer wait times for patient examinations, hospital admissions, and the administration of pain medications. A 2021 study published in the Journal of Health Economics found that CON regulation was associated with a 6% to 10% increase in deaths from heart attack.

A systematic analysis of all the CON studies as of its publication date (2020) found that “expected costs of CON exceed its benefits,” though the authors granted that more research might be needed to reach a more definitive conclusion.

Well, whatever else once might say about the reforms enacted by North and South Carolina last year, they do represent a real-world test of the pros and cons of CON reform. North Carolina is pursuing it gradually. South Carolina is pursuing it aggressively. How will their very different choices affect prices, quality, and the availability of medical services in rural areas? We’re about to find out.

John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history.