News: CJ Exclusives

Repealing Certificate-of-Need Law Would Help Boost Health Care Supply

New JLF report notes CON’s problems, examines legislative response

North Carolina lawmakers can boost patient choice, put downward pressure on health care costs, and reduce red tape by repealing the state’s certificate-of-need law. A new John Locke Foundation Spotlight report offers that recommendation.

The report arrives as the General Assembly considers competing proposals for addressing certificate of need, or CON, in the future.

The state requires health care providers to acquire a CON before moving forward with many types of new and improved services, said report author Katherine Restrepo, JLF Health and Human Services Policy Analyst.

“If medical providers have plans to build or expand an existing health care facility, offer new services, or update major medical equipment, they must first ask for the state’s permission,” Restrepo said. “Then the CON process requires the medical provider’s plan to survive challenges from competitors as well.”

Thirty-five of the 50 states use some sort of CON process. North Carolina’s CON law is among the most restrictive, Restrepo said. “North Carolina burdens health care entrepreneurs with one of the most micromanaged CON programs in the nation, regulating over 25 services that range from organ transplants to acute-care hospital beds to ambulatory surgery centers.”

In contrast, 15 states have scrapped CON laws completely since the federal government repealed its certificate-of-need requirement nearly 30 years ago. “Originally mandated in 1974, it was clear to the federal government by 1987 that CON did not meet its original goal,” Restrepo said. “CON did not effectively restrain health care costs.”

Unlike the states that have taken advantage of the end of the federal mandate, North Carolina continues to base its centralized health care planning decisions on an annual State Medical Facilities Plan, a 450-page inventory of providers and services offered across the state.

A 2005 reform should prove instructive to the current debate, Restrepo said. “Gastroenterologists were allowed to perform colonoscopies in their own endoscopy units,” she said. “Utilization of that service increased by 28 percent over four years, in part because of the state’s baby boomer population. But overall Medicare savings still amounted to more than $224 million within six years since procedures performed at these free-standing facilities were reimbursed at a lower rate than those performed in full-service hospitals.”

Those numbers should not surprise anyone, Restrepo said. “Basic economics illustrates that restricting the supply of health care services, as with anything else, keeps costs artificially high,” she said. “The CON process is all about restricting the supply of health care based on state bureaucrats’ determination of the state’s ‘needs.'”

The current CON structure is “outdated and flawed,” Restrepo said. Her report details the lengthy process for securing a certificate of need, including the months of delays tied to challenges from competing CON applications. The overall process can stretch over several years.

Restrepo also exposes a “gaping loophole” that artificially lowers the demonstrated need for new hospital operating rooms. “So-called procedure rooms are not regulated under CON, so health systems now have a strong incentive to add more full-blown procedure rooms while completely bypassing the obstacle of gaining state approval for more operating rooms,” she explained. “Surgeries performed in procedure rooms are not accounted for within the State Medical Facilities Plan. Thus it appears on paper that there is a low demand for more operating rooms, when the reality could be quite the contrary.”

Senate Bill 702 would dismantle the CON law, while House Bill 200 would scale back CON restrictions by exempting diagnostic centers, ambulatory surgery facilities, gastrointestinal endoscopy rooms, psychiatric hospitals, and operating rooms.

The JLF report examines both bills, focusing especially on potential benefits of relaxing CON restrictions on ambulatory surgery centers, or ASCs. “Relaxing CON deals a huge break to patients, as independent ASCs are typically reimbursed by Medicare at 45 percent to 60 percent less for the same procedure than the rates linked to procedures performed in a hospital outpatient setting.”

Restrepo debunks an argument from CON supporters that the current process helps preserve existing health care infrastructure, especially in rural areas. “To the extent that market forces can operate under CON, patients already are migrating to access ambulatory surgical care outside their county of residence,” she said. “Examples from Anson and Onslow counties show that many patients forgo care at the local hospital now and instead drive to other counties for same-day surgeries.”

“If the market itself determines a demand for more ASCs, not only will this enhance patient access, but it can also enable patients to enjoy lower health care costs,” Restrepo added. “Reforming or repealing the CON law will most likely not compromise patient access to care.”

Those who oversee the CON process ultimately pick who gets to compete within North Carolina’s health care sector, Restrepo said. “What the health care industry needs instead is a strong dose of disruptive innovation,” she said. “Reforming the CON 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.”