Health Care Landscape Ripe for Certificate-of-Need Law Reform

Michael Hamilton Oct 03, 2016

Is a fruit farmer operating in a “free market” if he must pay for and obtain special permission from a state bureaucracy before adding a row to his orchard or even a single tree to his grove? Few would describe such a market, or the famer himself, as “free.” Nor are patients and providers free to improve the health care landscape in the three dozen states restricting providers from expanding their facilities, services, and equipment.

Their loss of freedom translates into riskier health care—lower quality of hospital care, and higher death rates following post-surgery complications—in 35 states and the District of Columbia.

Patients in these states have their lawmakers to thank for their elevated risk. These states have yet to repeal laws requiring operators of medical facilities to obtain a “certificate of need” (CON) from a state board before expanding to new locations or even improving existing facilities.

CON laws are holdovers from the 1960s and 1970s, when many lawmakers thought restricting the supply of full-fledged hospitals would lead to the use of less expensive alternatives. Congress coaxed most states to adopt CON laws by threatening in 1974 to withhold funding from those that did not, according to Matthew Mitchell and Christopher Koopman’s “40 Years of Certificate-of-Need Laws Across America,” an article posted by the Mercatus Center at George Mason University on September 27.

Congress repealed the federal CON statute in 1986, having found CON laws failed to achieve their stated goals. More than a dozen states followed suit.

Now CON proponents have moved the goal posts for this antiquated law, claiming that funneling more patients through fewer hospitals will increase providers’ medical expertise, thus improving patient care, Mitchell and Koopman write.

Unfortunately, CON laws undermine proponents’ new stated goal, just as they undermined proponents’ 1960s and 1970s goals. Instead of improving quality of care, “CON laws are associated with lower overall hospital quality,” write Dr. Thomas Stratmann and David Wille in their 51-page working paper Certificate-of-Need Laws and Hospital Qualityalso published by Mercatus on September 27.

Worse, CON laws now appear to increase patients’ risk of death caused by pneumonia, heart failure, and surgery complications:

“In particular, we find that mortality rates for pneumonia, heart failure, and heart attacks are significantly higher in hospitals in CON states relative to those in non-CON states,” Stratmann and Wille write. “We also find that deaths from complications after surgery are significantly higher in CON states.”

One reason CON laws create riskier health care environments is they erect a barrier against competitors to existing providers.

Consumers—i.e., patients—benefit from competition, because competition gives providers a financial incentive to innovate and outperform one’s rivals. CON laws, by contrast, essentially create government-protected monopolies and oligopolies that lack a financial incentive to offer the best care at the best value.

Some CON laws even create an incentive for medical facilities operators to avoid making repairs. Earlier this year, a Tennessee hospital owner wishing to invest more than $5 million in upgrades would first have had to pay a nonrefundable CON application fee of at least $11,250 (i.e., $2.25 per $1,000 of capital investment), according to the state’s old CON application.

Tennessee raised the $5 million construction CON application threshold in May, but the state’s Health Services and Development Agency (HSDA) appeared to retaliate on July 1, the day the reformed CON law took effect, by increasing the application fee to $5.25 per $1,000 of capital investment.

HSDA also increased the new nonrefundable minimum CON application fee from $3,000 to $15,000 and raised the maximum nonrefundable fee from $45,000 to $95,000, according to an orange banner plastered across the top of HSDA’s website at the time of this writing.

Until last summer, Tennessee’s CON program imposed restrictions on 20 areas of health care, making it the seventh-most restrictive in the country in 2015, when Mercatus ranked the 36 states with CON programs.

Other CON states should take little consolation in having programs less restrictive than Tennessee’s. State CON programs restrict 14 services or procedures on average.

Instead of waiting on Donald Trump, Hillary Clinton, or the next Congress, lawmakers in three dozen states can start working now to improve the country’s health care landscape. CON laws are ripe for plucking.