Opinion: Daily Journal

CON Regulations Prove Useless

Legislators involved with the certificate-of-need debate are probably overwhelmed with conflicting studies on whether the regulatory program should stay, be reduced, or go altogether.

This column makes the case that CON is an outdated law that has not proven to be effective when it comes to optimizing the “triple aim”: reduce health care costs, increase access, and improve quality.

Let’s take a look at the cost component.

Back in 1974, Congress mandated certificate-of-need programs. State planners were assigned to restrain the rise in health care spending by reducing duplicative services, prohibiting an overinvestment of underutilized services, and allowing for the development of health care infrastructure as “needed” in geographical areas.

The Department of Justice notes that CON laws were passed in large part because hospitals used to be reimbursed on a cost-plus basis, (i.e., the actual cost of care delivered). This in turn ignited a “medical arms race.”

Providers lured patients to hospitals with the latest and greatest technology. Hospitals didn’t have to compete for patients on cost, and patients were insensitive to price because many were covered under generous indemnity plans at the time.

A 40-year look back shows that the federal CON mandate did not help slow growth in health care expenditures, which is why Congress repealed the mandate and made it optional for states in 1987. Just look at the chart below.

Cost containment can instead be attributed to the advent of managed care in the 1980s, when insurers began to pay providers at a discounted rate in return for a guaranteed volume of patients.

Duke University’s Chris Conover and Frank Sloan conducted a widely cited study to find out whether removing CON regulations on acute care, including ambulatory surgery and inpatient hospital and physician visits, led to a surge in health care spending. Controlling for factors such as other forms of regulation and area competition, the authors found that an overall surge in spending did not happen.

Mature CON programs may have contributed to a 5 percent spending reduction for acute care services, but they did not constrain overall spending per capita. Put simply, since some states’ CON programs don’t monitor every service under the sun, it makes sense for health providers to acquire equipment or deliver care that isn’t regulated.

A perfect example relates to the procedure room loophole incumbent CON holders in North Carolina use to their advantage.

In November 2012, Surgical Care Affiliates filed a legal challenge to the state’s Department of Health and Human Services, alleging that procedure rooms should not be defined as sub par to operating rooms.

Prior to Surgical Care Affiliates v. DHHS, procedure rooms differed from operating rooms due to factors such as smaller square footage, lower ceiling height, or having to pump medical gases into the room from outside. Less invasive procedures were conducted in these settings. However, since DHHS settled the lawsuit, procedure rooms can now be built to the same standards as operating rooms.

As a result, health systems now have a strong incentive to add more full-blown procedure rooms while completely bypassing the obstacle to gain state approval for more operating rooms. And because surgeries performed within procedure rooms are not accounted for within the State Medical Facilities Plan, it appears on paper that there is a low demand for more operating rooms — when the reality could be quite the contrary.

The cost argument can be put to rest. When figuring how CON in isolation is most effective, many states point out that it fails in the cost-control category.

CON instead is a deadweight loss to society. Belhaven Mayor Adam O’Neal recently lambasted the regulatory regime for denying Beaufort County the go-ahead to reinstate a community hospital:

The truth is the CON process is broken. I know the big hospitals have said that rural areas need CON to keep rural county hospitals open. You know the story of what happened in Belhaven. Our hospital was struggling. A community-organized board decided the best step was to hand it over to Vidant Healthcare — the big hospital system in Greenville. We thought they would put a handle on the facility appropriately and keep it open to serve patients in the Belhaven area.

We were wrong. Vidant closed our hospital and shifted those services to the hospital they run in Washington — 35 miles away. Since then, we have had several instances of emergency situations where people have died because of the added distance to reach an emergency facility.

We had a community in Belhaven that was willing to find the money and take the chance of reopening the facility on our own. We addressed the problem and found funding to reopen our hospital facility. All along, our lawyers were telling us to not worry about Certificate of Need regulations since we were an existing facility. Everything was going well, and we were encouraged that we would be able to reopen our hospital.

Then we ran into a roadblock. The state regulators for CON said we couldn’t reopen the hospital because regulations said it had to be currently operating to get approved.

That’s where we are today. And unless the House and Senate find a way to reform our state’s Certificate of Need laws, a government bureaucrat has the power to keep us from reopening our hospital.

I’ll let that story sit for a minute. Until next time, cheers to hopefully passing a budget in the near future, sans CON.

Katherine Restrepo is Health and Human Services Policy Analyst for the John Locke Foundation.