Reproduced with permission of the Journal of the Tennessee Medical Association 

To accommodate the coming baby boomers and their healthcare needs, CON programs need to be eliminated so more facilities can be opened to compete against the controlling dinosaurs of healthcare.

 Commentary 

Certificate of Need Programs: Inflationary and Anti-Competitive for Healthcare

By Larry N. Smith, MD, FACS

Controlling healthcare costs and improving access to healthcare have been problems for decades, at least since the federal government decided to enter the business of healthcare delivery in 1965 with the passage of Medicare and Medicaid. Despite the government’s best intentions, I believe it has failed in both programs. Today, increasing healthcare inflation and perceived lack of access are still affecting many Americans. Cost and access are hot topics for politicians. Physicians have significant opportunities to help control costs and improve access, but state governments limit many of these opportunities.

As I see it, the one government program that has done the most detriment to healthcare is the Certificate of Need program (CON), which requires any organization or person seeking to build hospitals or expand healthcare services to first have state approval for the facility. In theory, CON would control the utilization of health care by limiting the number of patients who could be cared for at any one time. This centralized government model of controlled healthcare access was designed to control access and thereby, the politicians believed, cost. The contrary occurred. In effect, the program aided the uncontrolled rise in healthcare costs, destroyed effective hospital competition, and limited access of the poor to healthcare.

CON programs started in New York in 1964 and spread to 25 states by 1974. Believing the program could control utilization of healthcare resources, the federal government passed the National Health Planning and Resources Development Act in 1974. Supported by American Hospital Association lobbyists, the act required all states to have a CON program in place by 1980. After 1986 the federal government realized that by mandating CON nationwide it had put a stranglehold on competition. The hospitals controlled access to nearly every new technology and thereby, the patients who wanted the newest and best treatment choices. An East Carolina University study reported, “The states most likely to enact CON … were those with a highly concentrated hospital industry and increasing competitive pressures.”¹ Communities with large not-for-profit or for-profit hospitals controlled their referral base with an iron hand. Despite evidence of the need for healthcare, doctors could not build facilities to admit, diagnose and treat patients. After reaching a peak of 50 states with CON programs in the early 1980s, the number dropped to 37 by 2006.

 CON gives existing service providers, especially large hospitals, a stranglehold on the market. Existing competitors can object to CON applications and force prospective competitors through a protracted and expensive legal battle to obtain the CON. For example, the Washington State Hospital Association position in 2006 demanded CON for ambulatory surgery centers, which are clearly more cost-effective than hospitals, and outpatient-imaging centers. They also required no dollar thresholds for reviewability, meaning the cost of a new facility had no dollar limit under which it could escape the CON review. In essence, CON effectively cuts off  any competitive challenges to the hospitals.² In 1999, the Washington State Joint Legislative Audit and Review Committee (JLARC) reviewed this control mechanism, finding that the legislative goals for the CON program had not been met; the JLARC found CON did not reduce cost, improve quality or increase access. This assessment was supported by findings of the Federal Trade Commission and the Department of Justice.³

Other states have come to similar conclusions. Kentucky had already concluded the CON program did not control costs and was a barrier to competition, noting that better quality and access could be enforced through licensure requirements.⁴ Alaska faced a comparable situation. The May 26, 2007 edition of The Fairbanks Daily News-Miner reported how Banner Health Systems had limited competition by requiring an outpatient-imaging center to close its doors because it did not have a CON.⁵ Further, CON programs have come under continued calls for repeal, as evidenced by the Commission on Rationalizing New Jersey’s Health Care Resources report in January 2007. Its report acknowledged that CON had not met any of its designed goals of cost containment, increased access or improved quality.⁶ Similarly, a 1995 Florida Law Review article by Patrick John McGinley argued strongly in favor of repealing the obviously anti-competitive state-government practice of CON requirements. The U.S. Congress took up legislation to repeal CON, but the bill died long before seeing the floor for a vote.⁷

Georgia has had a similar situation, where the American College of Surgeons found the state’s medical competition is restricted by its CON program. There, general surgeons are restricted from developing more-cost-effective healthcare models to compete against the larger, more-expensive models.  After years of expensive legal battles supported by the Federal Trade Commission’s recommendation that CON be eliminated, the surgeons eventually won their battle to build cheaper ambulatory surgery centers. This lack of competition is costing insurance companies more, but also allowing hospitals to control the number of facilities that can provide care. I feel this evidence shows that if Georgia – and America – were to allow more healthcare providers to enter the marketplace, costs would come down until a competitive balance was reached.¹¹

The elimination of CON programs can increase competition. For example, take the expansion of heart-care services in Pennsylvania in 1996 after CON was repealed. There was no documented increase in coronary bypass surgeries in spite of a 25 percent increase in availability of services; mortality rates were unchanged. For years before, the large Allegheny Hospital System of Pittsburgh had expanded at will and taken advantage of the state-mandated CON monopoly. But after years of no competition, Allegheny suffered a significant loss of market share with the repeal of CON and in 1998, filed the largest not-for-profit bankruptcy in U.S. history, at $1.3 billion. Never forced to actually compete to provide healthcare services, Allegheny was bloated, complacent and overconfident. Competition quickly exposed the hospital’s weaknesses and cut out the fat, as it should have.⁸ Without open and fair competition in the healthcare sector, centralized  mentalities of market control prevailed.

To accommodate the coming baby boomers and their healthcare needs, CON programs need to be eliminated so more facilities can be opened to compete against the controlling dinosaurs of healthcare. Even with this expanded competition, demand will still climb as the baby boomers age, but this situation will also offer a great opportunity for insurers and Medicare to negotiate better prices. Then, as the boomers pass on, the market will contract significantly. A flexible, competitive model of healthcare – not a monopoly – will best suit this market fluctuation. As stated in a July 2004 Department of Justice report, “The Agencies believe that CON programs can pose serious competitive concerns that generally outweigh CON programs’ purported economic benefits. Where CON Programs are intended to control health care costs, there is considerable evidence that they can actually drive up prices by fostering anticompetitive barriers to entry.” Monopolies are the antithesis to the American republic’s principles; just review the history of America’s oil and communication industries.^{1, 9}           

In the kind of self-fulfilling prophecy the free market is adept at exposing, the government sowed the seeds of future competitive problems when it formed Medicare. The program’s early reimbursement models and its lucrative capital-formation efforts encouraged hospitals to grow quickly. Also a cause was Medicare’s practice of calculating depreciation on the basis of current replacement cost instead of historical cost. Despite the government’s desire to control costs, it failed to remember that competition in open markets lowers prices.

Similar to Medicare in its distorting effects on the market, CON programs have stifled competition and should be abolished. This move will open the sector and allow for competition that will lower prices. Then the government can allow Medicare and Medicaid administrators to negotiate individual agreements by pitting multiple providers against one another within a given community. By closing competition instead of expanding it, the bureaucrats have guaranteed inflation and limited access and built anti-competitive monopolies. This denial of access to open market competition will only be made worse if the government’s HR 3200 healthcare reform bill is passed. Language within the bill further restricts physicians from ownership of healthcare facilities. This language defies the very findings of the Department of Justice’s report on CON programs. How is it that physicians who are trained to provide healthcare are now being restricted in the way they can provide it? In this author’s opinion, it appears that the current Washington politicos are more interested in advancing a political agenda than in providing open, competitive, and cost effective healthcare.  

In my opinion, business leaders, physicians and believers in the effectiveness of free-market principles need to campaign against any existing state-mandated CON program. By eliminating the CON and any future government restriction of physician participation in the free market, surgeons – indeed, all physicians – will have the opportunity to compete and offer cost-effective, quality alternatives to patients. As Benjamin Franklin stated, “Those willing to give up liberties for security deserve neither.” Similarly, those willing to give up liberties for healthcare will have neither.            

Dr. Smith is a retired facial plastic reconstructive surgeon who now writes about medicine and science’s role in history, America’s uninsured, and the progressive move toward medical socialism.

            References:

1. Cordato J: Certificate-of-Need Laws: It’s Time For Repeal. John Locke Foundation; Nathaniel Macon Research Series, No. 1, Oct 2005.
2. Washington State Hospital Association: Bulletin Details, Jun 5, 2006. Available at  http://www.wsha.org/page.cfm?ID=bulletinDetails&EID=626.
3. Barnes J: Failure of Government Central Planning: Washington’s Medical Certificate of Need Program. Washington Policy Center; Policy Brief, Jan 2006. Available at http://www.washingtonpolicy.org/Healthcare/PBBARNESCON.htm.
4. Kavanagh KT: Perspective: Promoting Health Care Transparency and Competition: Certificate of Need Unneeded. Health Watch USA, 2006-8.
5. Friedenauer M: Radiologist says certificate of need is in violation of physicians’ rights.  Fairbanks Daily News-Miner, May 26, 2007. Available at  http://www.adn.com/money/story/892891p-8829134c.html.
6. Sagness J: Certificate of Need Laws: Analysis and Recommendations for the Commission on Rationalizing New Jersey’s Health Care Resources. WWS 597, Jan 12, 2007.
7. McGinley PJ: Beyond Healthcare Reform: Reconsidering Certificate of Need Laws in a Managed Competition System. Fla St Univ Law Rev, 1995.
8. Robinson JL, Nash DB, Moxey E, O’Conner J: Certificate of Need and the Quality of Cardiac Surgery. Annual Meet, Int. Soc Technol Assess Health Care 17:abstract no. 206; 2001. Available at http://gateway.nlm.nih.gov/MeetingAbstracts/102274538.html.
9. Improving Healthcare: A Dose of Competition; A report by the Federal Trade Commission and the Department of Justice. Jul 2004. Available at http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf.
10. 10.  Sutton JH: Health Care Competition in Georgia: Still Restricted for General Surgeons. Bulletin: Am Coll Surg 91(11): 23-25, Nov 2006.

Reprinted from Friday August 28, 2009 Washington Times Op-Ed Page 

Private Alternatives:

Tax System can Foster Real Change

Coverage, Cost and Control: Rational Healthcare Reform and Understanding

By

Larry N. Smith, M.D. and Stephen T. Parente, Ph.D.

            As the healthcare reform debate heats up, the true costs and the complexity of the issue are finally coming to the surface. Sticker shock has moderated many proponents of reform, but for many the attitude nevertheless seems to be “damn the tax increases, full speed ahead into some reform.” It is important to keep in mind, though, that the costs of reform will come in more than money. In the push to nationalize healthcare, it will be liberty that is truly the sacrificial lamb, as pointed out at the June 17, 2009 CATO Institute Healthcare Reform Symposia. The reality is that the current healthcare system can expand coverage, lower costs and allow for the patient and the doctor to maintain the constitutional freedoms that we all enjoy, without changing the coverage of the 85 percent of Americans who now have healthcare access.

            Expanding coverage to the 47 million uninsured Americans can be accomplished through simple accounting and tax code changes. These changes would allow doctors to deduct the uncompensated healthcare they provide from their year-end taxable earnings. Physicians are already providing uncompensated coverage all across America, and in Florida, doctors and hospitals provide free care through the We Care Program, specifically for the uninsured. The doctor would deduct the dollar amount of care that is representative for that level and quantity of service, based on the dominant regional payer’s reimbursement for such care. In effect, this change elevates the uninsured patient to a fully insured status, and costs the IRS a small incremental decrease in tax revenue. Plus, the physician and hospitals are rewarded for providing a valuable aggregate social service and these 47 million get comprehensive care. Of course, physicians are mandated by law to provide care through the hospital emergency room already, but generally they do not collect for these services, although they’re still a target of litigation for such services. This simple change in code would mitigate these issues, and it would also help patients who, because of illness, lose their jobs and are in fear of bankruptcy. By allowing the healthcare provider to deduct the ongoing uncompensated costs, the patient’s care is not interrupted and physicians can continue to meet their moral obligations, which the vast majority already do without compensation.  

While the fundamental healthcare model is workable, that does not mean that it does not have room to improve, especially on the cost side of the equation. One issue is the geographic difference in costs for the same risk-adjusted medical condition without better outcomes, as noted in a Dartmouth study. This problem must be addressed and mitigated. With the tax changes noted above, costs can be mitigated since disproportionate share payments to hospitals could be decreased, because the hospitals would receive tax benefits for providing uncompensated care. This change would save the states tax revenue, which can be used elsewhere. Moreover, the hidden cost of the uninsured is eliminated, as there is no need to pass on these costs in the form of higher fees for everyone else. Costs can also be controlled by the government supporting, but not designing, local, regional and national practice guidelines. Once adopted by specialty societies and followed by physicians, these guidelines would insulate the physician from frivolous litigation but also control for regional cost differences. As these care-standards come online, cost comparisons can be undertaken to determine the true balance between quality and cost effectiveness, with the understanding that the cheapest treatment may not always be the best. Third, local healthcare systems need to be allowed to coordinate care into integrated systems free of Federal anti-trust laws, which currently prevent the open exchange of charges and practice data. The patient is the ultimate beneficiary of such changes, since transparency for costs and outcomes can be made available through integrated community networks. Some doctors may stay in private practice, while others may choose to merge into single or multi-specialist groups, but the goal would be for them to be linked electronically with systems designed and integrated by healthcare providers. With these changes, Regina Herzlinger’s and Alain Enthoven’s visions of patient-directed healthcare within a system that is integrated, transparent and conscious of the quality-to-cost balance would be achieved. There may be from one to twenty such competing systems within a community, but quality and price competition will drive the market. Rural physicians and hospitals may receive incentives to participate in several networks, depending upon their areas of proven excellence. In the end, the patient benefits. This is not to say that government assistance would not be needed, but it should be temporary, focused and supportive.

            Much is made of the cost of American healthcare, which represents 17 percent of the GDP. However, no one discusses the fact that medicine only produces healthy workers who are returned to the workforce – a valuable service to the economy but difficult to assign an economic value to. A healthy worker who contributes to the GDP has an innate economic value. Similarly, the economic value that medicine contributes to the GDP by supporting General Electric, Johnson and Johnson, Eli Lilly and those in other healthcare-related industries is not calculated. These two values should be subtracted from this 17 percent of GDP to account for the positive impact that medicine has. As an end-stage consumer and provider of healthcare, medicine‘s contribution to the economy is often overlooked since it produces nothing to sell.

Within these changes, healthcare could be maintained within a market based system among patients, doctors, hospitals and private insurers. If the government is allowed to provide a public healthcare option, then the option will become the dominant single-payer insurance product, as so clearly outlined by David Hyman. Such a move could denigrate the personal choices Americans currently have, while running all other insurance companies out of business. Costs would be controlled by lowering reimbursements to providers by using the Medicare fee schedule – plus 5% to 10% – as an index for payment. One need only study the national healthcare systems around the world to know that a public option could mean long lines, limited access to technology and lower-quality care. Between 1946 and 1952 doctors working with the AMA, American College of Surgeons, and Blue Cross and Blue Shield increased the number of insured from 22 percent to 55 percent. The free market can do it better and should. As noted by our Founding Father Benjamin Franklin, “Those willing to sacrifice liberties for security deserve neither.” Similarly, anyone willing to sacrifice liberties for healthcare will have neither.   

Dr. Larry N. Smith is a fellow of the American College of Surgeons and an adjunct professor at Santa Fe College in Gainesville, Fla. Stephen T. Parente is an associate finance professor at the University of Minnesota, Minneapolis, and director of the university’s Medical Industry Leadership Institute.