The battle for a more competitive health market continues

Published May 16, 2015

by Katherine Restrepo, The John Locke Foundation, published in,  May 4, 2015.

The battle to allow for more competition in the health care market wages on between the Davids and Goliaths of the North Carolina health care industry. Last week’s NC House Health Committee meeting featured a debate between the Hospital Association’s deputy general counsel and a lobbyist representing the North Carolina Orthopaedic Association. Both parties made their case as to why the state’s excessively bureaucratic Certificate of Need (CON) law – a law where providers must first seek a permission slip from the state, and then their competitors, to develop or expand an existing health facility – should remain intact or be stripped from the books.

Basic economics tells us that restricting supply increases costs for consumers — which is arguably what this current law does. Hospitals, however, declare that health care is an exception to economics 101 because the price-controlling government has had such a strong presence since Medicaid and Medicare passed in 1965. Because of this, there is no free-market in health care.

 To that point, the Hospital Association is correct. But does that mean that an already overwhelming and unpredictable regulatory environment needs additional oversight in the form of CON? Or that attempts to free the market should be resisted?

Among the proposed items in pending House legislation that would no longer need CON approval, the most contentious provision pertains to multi-specialty ambulatory surgery centers (ASCs). I’ve written before how non-profit hospitals fear that more of these facilities – especially those that are physician-owned where surgeries are performed at a fraction of the cost compared to the same procedure in a hospital affiliated outpatient setting – will take away volume from their most lucrative service lines.

In sum, the Orthopaedic Association representative took the side of patients. They argue that patients will benefit from a long-overdue regulatory reform, while the Hospital Association focused on its institutional health. The Q and A session resounded with legislators pondering possible unintended consequences resulting from reform. Will more provider-led ASCs lead to patient cherry picking, thereby compromising patient access to care?

Hospitals like to use the patient cherry picking argument a lot: for-profit surgery centers pick off healthier patients or private coverage patients, leaving hospitals with either more complex or revenue losing cases where costs of care exceed government payer reimbursement.

In an op-ed published in last month’s News & Observer, the CEO of Halifax Regional Medical Center writes:

Government payers like Medicare and Medicaid are responsible for two-thirds of all hospital patients but don’t compensate hospitals for the actual cost of care. Hospital payment rates set by government are nonnegotiable, often less than 60 percent of actual costs.

Nonhospital providers have the option of turning away patients who are uninsured and underinsured, such as those who rely on Medicaid. Those who would like to see CON weakened or repealed aren’t seeking to provide emergency care or to stay open 24 hours a day to respond to disasters. Under current regulations, they are not required to provide care for the uninsured patient.

 And so on, and so forth

If there’s no margin, there’s no mission. I get that. Last year, North Carolina hospitals reported $1.8 billion in uncompensated care, but the latest data from the Department of Revenue also shows they were granted over $227 million in sales tax exemptions. So the deal community hospitals have with the feds is that in order to not pay sales tax, property tax, or income tax, they are required to care for any patient who walks through their doors, regardless of their ability to pay.

Sure, cherry picking occurs. But is it considered cherry picking when hospital systems buy out physician practices or engage in mergers to remain financially sound? While this trend is not new, Mission Health, a sprawling hospital system located in western North Carolina, has been making media waves with its physician group purchasing spree. Under the graces of Certificate of Public Advantage (COPA), Mission has the ability to be a monopoly and remain immune from any intervention by the Federal Trade Commission (FTC) so long as the state exercises regulatory oversight. Such criteria include a margin cap along with cost caps limited to inpatient and outpatient services.

Naturally, humans find ways around rules. A 2011 economic analysis prepared by Charles River Associates in Washington, D.C., highlights how Mission Health has the ability to use the margin cap to its advantage:

 The Margin Cap also creates an incentive for MHS to lower its margin by paying higher-than-normal prices for its inputs. This might take the form of MHS being willing to pay more than others in competitive bidding for hospitals, for empty land on which to build new facilities, or to outbid rivals when purchasing physician practices.

 Reforming Certificate of Need will most likely not compromise patient access to care. If we look at the existing multi-specialty ASCs, payer mix is pretty comparable. Ten ASCs are wholly under physician ownership, while 17 are hospital affiliated. The charts below illustrate average payer percentages based on data from 2014 license renewal applications submitted to the Division of Health Service Regulation.

Hospital Affiliated ASCs

Physician-led ASCs

The House Bill requires that any new multi-specialty ASC provide seven percent charity care. In other words, ASCs need to demonstrate that the combined amount of surgery cases provided to charity care patients plus Medicaid patients is equivalent to at least seven percent of patient revenue — the value of these cases being based on what Medicare would reimburse.

Other than three physician-owned single-specialty ASCs having to comply by a seven percent charity care rule as part of a demonstration project that began in 2010, there is currently not a uniform formula for licensed hospitals in North Carolina to comply with. Triangle Orthopaedics Surgery Center, one of the demo project participants, reported seven percent charity care in year one followed by nine percent in year two.

CON ultimately picks who gets to compete within the health care sector. Reforming the law will by no means untangle the complexities of health care, but state lawmakers should capitalize on an opportunity to make one of the most highly regulated  industries a little less heavy on the red tape and a little more patient friendly.

May 17, 2015 at 10:28 am
Richard L Bunce says:

The more government regulates a market, the more messed up the market gets. That hospitals allowed themselves to get backed into this unprofitable situation does not mean it cannot change and that patients should continue to pay more for outpatient procedures or lose critical care facilities. IF many more outpatient facilities are available then Medicare and Medicaid will save significant money and then would be able to fully compensate hospitals for critical care costs.