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Friday Interview: Certificate-of-Need Law

Dr. Roy Cordato calls for repeal of CON law in North Carolina

Welcome to Carolina Journal Online’s Friday Interview. Today the John Locke Foundation’s Donna Martinez discusses North Carolina’s certificate-of-need law with John Locke Vice President for Research Dr. Roy Cordato The interview aired on Carolina Journal Radio (click here to find the station near you).

Martinez: Let’s start with the basics. Why does the state of North Carolina believe it is a good idea — that it is appropriate — for the state to function essentially as a central planner for health care?

Cordato: Well, it’s interesting because this law dates back to the 1970s when the federal government actually mandated that states pursue such laws, and that was because the reimbursement system for Medicare and Medicaid back then was quite different — it had to do with reimbursing doctors and hospitals based on their cost. That system has changed, and the federal government took away the mandate, and North Carolina never rescinded their law. The argument is that, somehow, by restricting the number of hospital beds or whatever, you can keep costs down, that somehow these things will be over-produced in the marketplace and drive health care costs up, which makes absolutely no sense from an economic perspective.

Martinez: It sounds to me like this gives the state an incredible amount of power over health care, and over the folks who work in it and provide services.

Cordato: Oh, sure. It’s pretty much [that] before you can do anything in terms of health care facilities — whether it’s a doctor’s office, for example, wanting to put in an MRI machine or even an X-Ray machine, or a hospital wanting to add a wing, or even a few extra beds. Or, even converting an area they are currently using for one kind of patient — let’s say cancer patients — to another kind, for delivering babies. Just to do those things, you have to get special permission from the state government. And they have to go through a long process to see if those particular changes are needed in the context of the entire health care market. And it’s very silly when you think about it.

Martinez: And, in fact, you have said in a new report that you’ve written on this subject, that if you love the OPEC oil cartel, that you are going to love the state of North Carolina’s certificate-of-need-law. What’s the analogy between it [certificate-of-need law] and OPEC?

Cordato: Well, the analogy is that OPEC is a cartel — an oil cartel — meant to restrict the supply of oil and keep prices up. Certificate of need is essentially a health care services cartel system enforced by the state of North Carolina, restricting the supply of all kinds of health care activities — which does the same thing as OPEC. That is, keep prices higher than they otherwise would be, and not to do what it [the law] says it’s supposed to do — that is, keep costs low — but actually drive prices up. The simple economics is: If you want to keep the price of something high, you restrict its supply. And, actually, what they’re doing is enforcing a cartel — a cartel of existing hospital facilities, of all kinds of facilities. And we’re talking about chemical dependency treatment facilities, and adult-care homes, and it goes on, and on, and on. Well, what you’re doing is, you are restricting entry and you’re protecting these existing companies from competition.

Martinez: You’re keeping new people out.

Cordato: Right — keeping new people out of the market. And who wouldn’t like that for their own business? I mean anybody would like a law that says my competitors have to get permission from state government before they can come in and compete with me.

Martinez: And, in fact, in the policy report that you’ve written about the certificate-of-need law, you give a real world example of how this works. It’s far from just theory. You talk about a group of physicians in Garner, North Carolina — a bedroom community to Raleigh. This group wanted to provide some MRI services — additional services in the marketplace. What happened to them with their proposal?

Cordato: Well, it went on and on, and it was blocked — through the certificate-of-need process — by some hospitals in the area. What the physicians wanted to do was offer MRI services out of their own facility, allowing people to come there rather than go to the other places in the county that are legally allowed to offer MRI services. And I think it’s crazy you should have to say that — that someone has to be legally allowed to offer a service that is expensive, as MRIs are. What we should want is more competition. Anyway, they spent hundreds of thousands of dollars in trying to get a certificate of need. They were denied, denied, denied, denied. And finally, they just threw up their hands and gave up. And in the process, the people of the community were denied — along with denial to them [the doctors group] — additional MRI services.

Martinez: Supporters of this type of law tend to make an argument that has to do with the issue of indigent care. What they say is, that if we don’t somehow control this–from a central planning perspective — that somehow, folks who are in low-income households perhaps might not receive the level of care that others of higher income would receive. Is there anything to that argument at all?

Cordato: Well, it’s actually kind of a strange argument. It’s really a fallback argument, because on the one hand they [supporters] say, well, we want certificate-of-need laws to restrict — to keep costs low. The fallback argument is exactly the opposite. They [supporters] are saying we need certificate-of-need-laws to keep profits of hospitals high, and essentially to keep their prices up so that they can afford to provide service to the indigent. So, they’re using the certificate of need as a tax, and really a dishonest tax. I mean, if you want to do that, fine. Put an overt tax on everybody’s hospital bill, with the money specifically going to indigents and getting rid of certificate-of-need laws. What certificate-of-need laws do is exactly what I claim, and they acknowledge it — it keeps prices high, profits up, and therefore hospitals will be able to serve the indigent. Well, that’s a dishonest way of doing it.

Martinez: So, they’re basically making both arguments, depending on what the criticism is.

Cordato: And they can’t both be true.

Martinez: Exactly. What’s your recommendation?

Cordato: My recommendation is repeal. There are 15 states that do not have certificate-of-need laws. Unfortunately, 35 do. This is all a remnant of the federal mandate, and the Federal Trade Commission has come in and said that costs in the 15 states that don’t have certificate-of-need laws are lower than in the states where certificate-of-need laws are in place — like North Carolina. And, I think we should follow the lead of those other states, and just completely repeal our certificate-of-need laws.

Martinez: Would that require General Assembly action to do that?

Cordato: Yes.

Martinez: Are there any champions in the legislature right now for something like this?

Cordato: Well, unfortunately, it’s not a front-burner issue, and, I think part of the problem is that there is an entrenched establishment of hospitals and other facilities that will lose if you get rid of these laws. It’s their market that’s being protected.