http://lincolntribune.com/?p=21152
By Neal Inman Civitas Institute
A special committee of North Carolina lawmakers met this month to discuss a little-known program, Certificate of Need (CON), which effectively controls large sectors of the health care economy in the state. While lawmakers could simply reform the program to make it more equitable, they can and should decide to repeal this ineffective process altogether.
North Carolina is one of 36 states that retain some form of a CON law which requires healthcare providers to go through a lengthy application process before most healthcare facilities can open, expand or close. The services regulated range from the acquisition of multimillion dollar equipment to the addition of just one bed in a nursing home. State agencies issue a limited number of these CONs after a lengthy review process. Operating without one can result in enormous fines, the loss of medical licenses and a potential end to Medicaid and Medicare spending.
According to the state Department of Health Service regulation, the fundamental premise of the CON law is that increasing health care costs may be controlled by governmental restrictions on the unnecessary duplication of medical facilities. However, multiple studies have found that the program has largely failed to reduce costs or increase access and mainly exists to protect incumbent healthcare providers.
Proponents of CON claim the process forces hospitals to carefully consider new expansions, keeping healthcare costs down. Following this rationale, the federal government mandated that each state have some form of CON service in 1974. However, the federal government stopped mandating CON in 1987 due to its complete failure to contain the national growth of healthcare costs.
Congressional testimony indicated that the program was ineffective at best. However, no state has repealed CON since Indiana in 1999.
Since repeal of congressionally mandated CON, several studies have shown that the process has failed to decrease the nation’s rapid growth in healthcare spending, including multiple papers published by Duke University researchers Conover and Sloan.
“There is little evidence that CON results in a reduction in costs and some evidence to suggest the opposite,” the researchers said in an examination of Michigan’s CON program.
The program has been effectively used by hospitals and other incumbent healthcare providers to maintain a monopoly on profitable sectors of the health market. One hospital association member admitted to this rationale in a National Institute for Health Reform study.
“Member hospitals initially had mixed views about the benefits of CON but banded together to support the process after realizing it was a valuable tool to block new physician-owned facilities,” said the respondent, who remained anonymous.
Through the CON process, major players in the state’s healthcare industry such as Rex Healthcare, Duke, and Novant are able to tie their competitors up in court for years, preventing consumers from accessing quality healthcare. Navigating the CON regulatory process can take millions of dollars in application and consulting fees. Millions more may be spent as a newcomer’s entrenched competitors challenge them in court. Physician-owned facilities are kept out of the market, whether by regulators or the cost of the CON process itself.
During the recent legislative session, lawmakers from both parties introduced several bills that would help level the CON playing field. While these bills have merit, the General Assembly should repeal most aspects of the current process.
Instead of having the state protect the profit streams of enormous healthcare corporations, let healthcare providers make rational decisions for themselves based on what the market will support. Consumers will decide which services are needed far better than any bureaucracy in Raleigh.
The Certificate of Need (CON) program in North Carolina is a fascinating study in economics. I can’t find anyone who will say it as plainly as I will lay it out below, but I think I see what’s going on here.
ReplyDeleteIn essence, the CON law states that private healthcare providers like hospitals can’t just expand their facilities and purchase expensive medical equipment. They have to prove to the state that the facilities and equipment are truly needed first.
As a simple example, if a hospital wants to expand the number of beds they have for patients to use in recovery after surgery, they need to first request permission from the state before expanding their recovery wing. Why would the state need to approve that? Doesn’t the hospital know best the demand they have for these resources?
I think the reason we need the state to control expansion in the healthcare market is because the suppliers are in charge of demand. We all know that as demand increases, prices go up, production goes up, and profits increase.
Without the CON law, healthcare would run into a situation that could lead to endless price increases and profit seeking expansions.
When a doctor tells a patient they need a three day inpatient stay to recover from their surgery, the patient will do it. If the doctor told them they need five days of recovery, they’d do that too. They don’t know what they really need. They trust their doctor.
For major surgeries, patients commonly hit their out of pocket limits and their insurance is footing the remainder of the bill. What incentive does a patient have to argue with their doctor over how many days they need for recovery? It’s not their money anymore and they are most concerned with their health – not saving money - during this time of crisis. If the doctor says a longer stay is recommended, they’ll likely follow the advice and focus on their recovery.
From the hospital’s perspective, they have invested in expansion. They don’t want those recovery beds sitting empty and not generating revenue. They have an incentive to fill those beds.
So what does that lead to? It’s every supplier’s dream. Every supplier wants to increase demand for their products and services. But most have to earn it the hard way. Make better products, differentiate themselves from the competition, reduce costs to knockout the competition, etc.
In healthcare though, the supplier is in charge. So instead of making better products and reducing costs, they shift demand to the right themselves until those beds are full and generating the maximum amount of revenue.
The same concept applies to MRI machines and other expensive devices. When there’s a million dollar piece of equipment sitting idle in the backroom, it starts looking like every ankle sprain could use an MRI. “Just to be sure”. Or “I needed to order the scan to protect myself from lawsuits”.
That might be the real reason we need the CON program....
Brett - I agree with your economic theory and your case around supply and demand in healthcare industry, especially around healthcare facilities.
ReplyDeleteHealthcare industry as a whole, is not a perfectly competitive industry - a. There are not many players b. Prices vary from facility to facility (especially for same services, the hospital costs vary depending on the type of facility) c. all services are not identical (more room for interpretation) d. no easy entry/exit e. consumers are NOT well informed of the services. The interpretation and diagnosis for a given patient condition might vary between two doctors of same specialty.
I agree, if the hospital has a hidden agenda of increasing their revenue and profits, they may recommend patient for a longer stay (well, some insurance plans try control this ex: post delivery stay - 72 hours, but as the final decision lies with the doctor, patient ends up paying the difference).
This is an interesting article and provides rationale around why government intervention is necessary (at least in situations like this) to stick to the fundamentals of economy to prevent monopolies or avoid imperfect competition. CON might help fix some of these gaps.
I certainly agree with both of you on the potential need for the CON. At this point it seems that both insurance agency and hospitals seem to be in control of healthcare costs. When a doctor is forced to pay the high costs of Mal-practice insurance, they want to ensure that a patient is well taken care of after surgery. Likewise the patient is going to always take the advice of a doctor and to Brett's point if they have already reached their maximum out of pocket deductible they are even more inclined to a longer stay. These decisions are increasing the costs of the insurance carriers as it is placing more burden on them and forcing them to pay the costs after the annual deductible is met by their customers.
ReplyDeleteA CON program could potentially help fix some of these issues as it can prevent hospitals from growing when not necessary. This may help to keep healthcare costs down that the large insurance carriers are having to pay, therefore lowers input prices and lower monthly cost for the consumer. Overall it would end up benefiting all parties involved. The only thing that really bothers me about the government being involved is the internal workings and back door agreements that can be formed by lobbyists for the hospital/health care industry. Seems to be a great idea in theory, we'll see what the long term outcome of the program will be.
Despite the added cost associated with CON, it truly is a consumer protection program, to ensure the healthcare providers are not only making legitimate decisions...but are actually legitimate providers.
ReplyDeleteLike most regulation, it creates some economic inefficiency, and does add to the cost of healthcare- but much like FDA testing and clinical trials regarding human studies, I do believe the gains to the consumer outweigh the losses to providers.