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Certificate of Need Protects Providers, not People

In these times, lawmakers are all about attracting business to the state and increasing the number of North Carolinians at work. Great pomp and circumstance is placed on a single business moving to the state if it means jobs. The governor’s own website tracks new business opening in the state and how many jobs they create.

Yet, for all the care taken to attract business, North Carolina operates under a process that actively discriminates against new or growing medical businesses within the state. Called Certificate of Need, it stifles job growth, and reduces medical options available to the citizens of North Carolina.

Process

Certificate of Need (CON), strictly controls how many healthcare providers expand their facilities, what procedures they can perform, and what new equipment they purchase to provide better service. CON falls under the purview of the state Health Planning Development Agency, part of the Department of Health and Human Services (DHHS). The agency plans the economic activity of all medical care facilities, leaving little free choice to the businesses themselves. CON’s intent is best put forth in its own summary:

(CON) law prohibits health care providers from acquiring, replacing, or adding to their facilities and equipment, except in specified circumstances, without the prior approval of the Department of Health and Human Services… The law restricts unnecessary increases in health care costs and limits unnecessary health services and facilities based on geographic, demographic and economic considerations… The fundamental premise of the CON law is that increasing health care costs may be controlled by governmental restrictions on the unnecessary duplication of medical facilities.[1]

The process begins when the Health Planning Development Agency releases a report detailing what areas of the state need specific new medical services. Soon after this report is filed, medical groups apply for “approved” expansions to fill the gaps detailed in the report. Once applications are in, anywhere from 90 to 150 days are spent deciding what companies are awarded contracts. After contracts are awarded, petitions are accepted to contest the winners’ bids. Such petitions can, and often will, turn into full-blown lawsuits. Litigation from these appeals has been known to drag out for years, costing valuable time and money to not only the organizations involved, but the prospective patients who have to wait for new facilities or procedures. Only after appeals have cleared the courts can an organization move forward on its bid. As will be discussed later, this lengthy (and costly) process is often used by large organizations to force out competitors and bolster established businesses.

History

Originally created in 1974, CON was federally mandated through the National Health Planning and Resources Development Act to limit the cost of Medicaid and Medicare. At the time reimbursements were based on cost of production (of medical services), and as such new facilities and equipment could be easily purchased thanks to guaranteed revenue from federal reimbursements. CON attempted to minimize overproduction of facilities, and thus medical care costs, due to the guaranteed return on investment Medicaid and Medicare provided. However, in 1987 both the CON mandate and funding were revoked when Medicare/Medicaid payments were switched to the current reimbursement plan (predetermined amounts for specified services and procedures). Without the mandate in effect, 14 states chose to remove CON from the medical profession in favor of a competitive free market model. Unable to let go of the power inherent in a centralized planning agency, however, 36 states kept CON in place, including North Carolina.

Problems with CON

As mentioned previously, the CON process can act as a significant barrier to companies trying to move into a new area, or for existing businesses to improve themselves and their services offered. In effect, the CON process can be harnessed as a monopolizing barrier to entry by established players who have a keen interest in keeping competition down. As an example, the medical organization Novant Health based out of Winston-Salem had a proposed expansion into the Triangle area blocked by Duke, Rex Healthcare, and WakeMed for fear of increased competition in the RTP area. Once inside the protection of the CON process, established organizations can use it as a shield to stave off competition.

This ability to legally drive off competitors causes distortions in the medical market, drastically effecting prices and services alike. With no competition the probability of growth and innovation stagnation increases. In a free market competition ensures those businesses that offer the best services at the most affordable prices will succeed, while those that charge too much or offer poorer services will fail. Competition keeps prices low and service quality up.

CON procedures stifle competition, allowing established organizations to continue regardless of their performance or price. Consumers of medical services are left out in the cold when unable to shop between competing providers (which CON prohibits, as pointed out in their own summary).

Smaller or newer medical providers are not the only parties disadvantaged by CON; local citizens waiting for new medical facilities or procedures are also hurt. Extended legal battles mean potential patients must travel elsewhere to receive medical attention, or forego services that otherwise would have been available. Most communities welcome expanded medical facilities or procedures; they mean more local revenue, more job opportunities, and more services for people in need. With the Novant example, the town of Holly Springs heartily approved of the planned hospital, but were disappointed when opposition indefinitely stalled its construction. Despite local enthusiasm for a new medical facility, the CON process shut down what would have been a net gain for consumers and the community.

In their summary of CON, the DHHS claims that the process reduces the cost of healthcare, primarily by eliminating “unnecessary duplication of medical facilities” and “limit[ing] unnecessary health services and facilities.”[2] Yet as any economics professor can explain, limiting services and restricting growth works against competitive forces that limit prices. One of the first concepts taught in economics is that as supply increases prices drop, and conversely as supply shrinks prices rise. This is a basic tenant of economics, yet DHHS and the Health Planning Development Agency blatantly admit working against it. CON supporters insinuate that without limiting “unnecessary” growth, organizations will build unnecessary facilities, which would then be filled with patients proscribed unnecessary procedures to generate more money for the medical provider (“A built bed is a filled bed is a billed bed”). Ignored is the fact that organizations in competitive marketplaces cannot afford to build facilities or buy new machinery if they are unlikely to have the customers required. Unless businesses project that a profit can be made by expanding, they will rarely take such a risk.

Conclusion

When it comes to healthcare, centralized planning is limiting North Carolina’s potential. Flawed economic logic is severely hampering growth, stifling innovation, and depriving citizens of eagerly sought after healthcare. Medical businesses interested in moving to  our state will be reluctant to do so thanks to the difficult time they will have simply setting up shop.

Originally, CON was an innovative answer to problems with the healthcare system’s payment model. Upon the removal of the federal mandate and changes in medical reimbursement, the practice remained, outliving its original purpose and morphing into a distortion of its intended cause.   It now exists to increase government control and protect current providers from competition. North Carolina needs to join the 14 other states who have already opted for more free market competition between medical providers by eliminating Certificate of Need.

This article was posted in Healthcare by Andrew Blackburn on September 13, 2011 at 10:00 AM.

© 2011 The Civitas Institute. Visit us on the web at www.nccivitas.org.
This article can be found at http://www.nccivitas.org/2011/certificate-of-need-protects-providers-not-people/

Comments on this article

  • 1

    Laurie
    Laurie Sep 14, 2011 at 6:33

    WOW!!!!!!!!!! It isn’t the big bad insurance company to blame. It is our own government that is the wolf dressed up as Grandma. A small change here would reduce medical expenses immediately.
    This information needs to be mailed to every household in the country not just the state.

  • 2

    Tom Glendinning
    Tom Glendinning Jun 21, 2012 at 11:35

    Excellent summary. Keep up the good work and dump this useless, bureaucratic overburden.
    One factor in favor of it is Medicaid reimbursement policy. A smaller hospital unit receives higher reimbursement than a larger one. Again, Econ 101 redefined by hospital and medical planning groups rather than an open market.

  • 3

    Tom Glendinning
    Tom Glendinning Jun 21, 2012 at 11:37

    A further example of how well the state runs business is the spate of bad press received from 2006 to 2009 on its mental health hospitals. If the planning worked so well, how did two hospitals in the MH system get refused Medicaid reimbursement and become investigated by the FBI?
    The state controls a market it can not manage.

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