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The Certificate of Need, Otherwise Known as the Certificate of Non-Competition

January 25th, 2007 by Halli

Many years ago, the Idaho Legislature required something called a “Certificate of Need” for each new hospital or hospital addition, medical facility or even new equipment. The Certificate of Need was ostensibly designed to prevent duplication of services when scarce medical dollars were being allocated.

The result, however, was to squelch competition for existing hospitals and medical facilities. A board was selected to review all proposed new facilities and decide whether there truly was a need. Of course, the board included individuals with serious conflicts of interest – they were vested in existing facilities which they hoped to protect from new competition. It was a political process, not based on true need. Fair trade was denied, and consumers of medical services suffered.

Fortunately, that law expired sometime in the early 1980’s. But now the Idaho Hospital Association is seeking to resurrect this very bad idea. Already St. Alphonsus Hospital in Boise has hosted a number of legislators at a lovely meal that included a course in “Certificate of Need” flambe’, so to speak. Lead “chef” was Jeremy Pisca, lobbyist (you remember – he helped bring us another great idea in Contractor Registration).

The argument now specifically addresses doctor-owned facilities, which existing hospitals see as threatening their bottom line. Even though surgical centers and other specialty facilities can offer much lower prices for patients, save money for private insurance, Medicaid and Medicare, and offer yet another health care choice, they are in the cross hairs.

Clearly, Certificates of Need are not about “need”, or patients, or saving money at all. They are about stamping out competition for existing hospitals who would like an exclusive corner on the health care market.

Keep an eye out for legislation bringing Certificates of Need back to the Idaho health care scene. A bill would likely be introduced in the Senate or House Health and Welfare Committee. Be prepared to contact legislators with your opinion on the subject.

Posted in General, Idaho Legislature, Taxes | 2 Comments »

2 Responses

  1. Hadley Callaway Says:


    It is hard to argue against Certificate of Need (CON) programs because they sound so darn good. CON supporters talk about “planning ahead,” “meeting needs,” “the public good,” “equal access,” “reasonable costs,” “charity care,” and “quality.” As observed by a CON researcher, “the very word ‘planning’ has a comfortable aura of expertise, suggesting precise computations, scientific methodology, and rationality.” But the reality of CON is a healthcare franchise system that maintains high prices and retards innovation.

    We all can agree that hospitals are a public good and shouldn’t be subject to the same level of market competition as fast-food restaurants. Clearly it would harm a community to lose its hospital. But for every hospital that is saved by CON regulations there are several healthcare facilities denied a permit to open. It is not just as harmful for a community to be denied a hospital as to lose one?

    The unsolved problem is determining the appropriate supply of healthcare facilities. An undersupply of healthcare facilities rations the amount of services but allows monopoly pricing. An oversupply of facilities will increase services more than appropriate because of the so-called “Roemer effect” of supply driving demand. In the end, the appropriate supply of facilities can’t be scientifically determined. So the CON program is guesswork, subject to influence from the regulated industry.

    Every insurance buyer knows that CON regulations have failed to control healthcare costs. CON supporters frequently quote the 2002 testimony of automobile manufacturers that CON states had lower healthcare costs. However, this testimony was never published and has been discredited because of confounding factors, such as the more rural location of auto plants in CON states. Other studies have also compared states before and after CON repeal with contradictory findings. Despite the high economic stakes, no one can prove that CON saves money.

    There is a substantial cost for CON regulation. A contested case may cost in excess of a million dollars, divided among the applicants. Agency and court time may be additional costs. Delays in construction harm patients in need and result in cost over-runs. Regulation also retards innovation which could save money and improve quality.

    But the biggest cost may be paid over time. One researcher called CON regulation a “mechanism of public finance” whereby the CON regulator taxes consumers through the price-raising effect of CON franchises. I am not sure the legislature realizes they have delegated the power to collect and spend this hidden tax.

    CON doesn’t make sense as a cost control mechanism. If we seek to control costs in this way, why limit the number of healthcare facilities? Why not limit the number of doctors, nurses, syringes, or medications instead? No one would consider such an idea. CON limits make no sense either. There is no simple choke-point in the healthcare system which can be used to reduce costs.

    CON has also failed as a guardian of quality. In fact, CON franchises discourage quality improvement, because the certificate insulates the hospital from competition and cannot be recalled for poor outcomes. The quality of CON applications reflects the skill of lawyers and consultants hired to create the document.
    The best argument that CON might improve quality is this: higher-volume facilities have better outcomes in eleven technical procedures, such as cardiac surgery. CON regulations can limit these procedures to a few high-volume hospitals. Ironically, this is also the argument made for specialty hospitals and single-specialty surgery centers, which hospitals oppose. Harvard Business School touts these “focused factories” as the future of medicine, but the CON politics have killed them in the cradle.

    So what is CON really good for? The only consistent effect of CON is supporting hospital prices by limiting the number of facilities. Some proposed facilities fail the application process. But far more are lost because of CON’s “sentinel effect,” the widely held perception that the CON is an unreasonable impediment to building. When the CON is repealed, a healthcare building boom usually results–some of which was truly needed to meet demand.

    Even limited CON has unanticipated effects. A CON-based monopoly in even one service boosts a hospital’s reimbursement for all services. A monopoly in cardiac surgery, for example, will compel every insurance company to include that hospital in its network. This insulates the hospital from price competition, even on outpatient services like surgery or imaging. The solution is to either abandon CON or limit the expansion of hospitals into outpatient services.

    The CON regulators have been “captured” by the hospitals. Hospitals interact regularly with the regulatory staff, sharing expertise and gaining trust and respect. As a result, the regulators view hospital representatives more as colleagues than adversaries. Thus the CON program reflects the wishes of the hospital cartel rather than the public.

    Hospitals claim that money from their CON franchise is needed to cross-subsidize the emergency room. We can’t know whether that is true, because assignment of hospital costs and revenues is somewhat arbitrary. For example, the emergency room itself may be a money-loser, but it creates 70% of hospital admissions and drives ancillary services which are quite profitable. The bottom line is that most hospitals make a comfortable profit, which means their benefit from CON is excessive.

    CON should be viewed as one of several subsidies given to hospitals in return for providing indigent care: non-profit status, tax-free bonds, disproportionate share payments, and CON. Hospitals also enjoy a more favorable Medicare reimbursement formula than non-hospital providers. Their monopoly on some specialty services, huge size and market dominance allow them to obtain favorable commercial insurance reimbursements. The question is how much subsidy do hospitals really need.

    Opponents of CON are accused of “skimming the cream,” but they really propose to eliminate the cream entirely. Hospitals have been enjoying “cream” from CON price supports for thirty years. They can get along fine on a low-fat diet; I am not aware of many hospital failures as a result of CON repeal.

    We should look carefully at Certificate of Need programs and scale them back. CON sounds like a good idea but doesn’t work in reality.

    Hadley Callaway
    Raleigh, NC

  2. » Blog Archive » Please Read the Comment on “Certificates of Need”! Says:

    [...] It is a rare occasion when I will refer you to a reader comment in a post. However, a comment with extraordinary insight was received on the post “The Certificate of Need, Otherwise Known as the Certificate of Non-Competition”. [...]

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