Myth Busters #6: Certificate of Need

So, national health planning was repealed, and hospital rate setting was repealed in all but Maryland — all after wasting many billions of dollars and who knows how much pain and suffering to patients.

Yet one similar command and control program keeps ticking along — Certificate of Need (CON). Certificate of Need programs require hospitals and many other facilities to get permission from a state agency before making capital investments in new buildings, equipment, or services. The thinking behind it is, once again, based on Roemer’s Law — the more providers there are, the more spending there will be, because patients are gullible puppets doing whatever the Greedy Doctors tell them to do.

The National Conference of State Legislatures (NCSL) publishes state-by-state information on state CON laws, including the scope of affected entities and contact information for each program. It also includes a brief history of the program.

As the NCSL points out, one of the earliest and most vigorous advocates of CON was the American Hospital Association (AHA). If this surprises you, you might want to consider getting out of the office more often.

You may think we live in a capitalist economy, or in some cases socialist. But in health care, we are still in a mercantilist system, featuring a guild of select providers, who are protected from competition by the government.

The support of the AHA once again belies Roemer’s Law. If it were true that “a built bed is a filled bed,” the AHA would oppose CON because demand is unlimited and there are plenty of patients to fill every bed that could ever be built, and plenty of money to pay for it.  In fact, the AHA knows perfectly well that demand is limited, and it wants its members to be the only ones allowed to fill that limited demand.

These incumbent providers will fight tooth and nail to prevent competitors from coming in to their market area. As a result, prospective competitors have to spend very large amounts of money and time on attorneys, economists, accountants, architects, and public relations firms just on the approval process.

Even then, they may not be able to overcome the corruption of the approval boards, which opens the door for more corruption. After all, when a mere handful of people on a panel determine whether your $300 million hospital will be built or not, it is hard not to slip them some favors to get the okay. Illinois was the poster child of such graft under the reign of Gov. Rob Blagojevich. (See Mark Todd Engler’s blogs on CON in that state.)

Political corruption aside, CON is a fundamentally flawed idea. It assumes that each community has only so many consumers who can sensibly fill only so many beds, so any “overbuilding” is wasteful. (One might think that it would be wasteful only of the investors’ dollars — if they are overbuilding, they will lose their money. But that is not how social planners think.)

In fact, a new facility is not confined to serving the number of patients located in that community. A world-class facility will attract patients from all over the country, and from all over the globe.

For example, Washington state blocked the construction of new facilities that might have prospered by serving citizens from British Columbia and the Pacific Rim, because the CON Board tallied up the number of Seattle residents, divided by the number of existing beds, and declared there were already enough beds to serve Seattle. Thus, the state killed off what was a promising economic development program for Seattle, one that might have created thousands of new jobs and millions in new tax revenue. For more about Washington state’s CON program, see “The Failure of Government Central Planning: Washington’s Medical Certificate of Need Program,” by John Barnes.

CON also stifles innovation and improved quality. Existing providers who are accustomed to doing things in a certain way are protected from being challenged by new, more efficient, competitors. In 2004, the Federal Trade Commission and the Department of Justice released a joint study, “Improving Health Care: A Dose of Competition,” urging states to:

Reconsider whether Certificate of Need Programs best serve their citizens’ health care needs. On balance, the DOJ and the FTC believe that such programs are not successful in containing health care costs, and they pose serious anticompetitive risks that usually outweigh their purported economic benefits.

At a minimum these “purported benefits” should include some reduction in the costs of health care spending. But Christopher Conover and Frank Sloan of Duke University were unable to detect such an effect in a study they conducted, “Does Removing Certificate-of-Need Regulations Lead to a Surge in Health Care Spending?” The authors write:

Mature CON programs are associated with a modest (5 percent) long-term reductionin acute care spending per capita, but not with a significant reduction in total per capita spending. There is no evidenceof a surge in acquisition of facilities or in costs followingremoval of CON regulations. Mature CON programs also resultin a slight (2 percent) reduction in bed supply but higher costsper day and per admission, along with higher hospital profits.CON regulations generally have no detectable effect on diffusionof various hospital-based technologies.

That study was conducted in 1998. Today it is far more likely that CON will be shown to have raised costs after the dramatic consolidation of the hospital industry, especially in CON states. Monopoly providers can charge whatever they like, and have no fear that health plans will refuse to include them in their networks. How many people will enroll in a health plan that doesn’t cover the only hospital in their locale?

CON has been an amazing success story for the American Hospital Association and it members, but it has been disastrous for the American consumer and taxpayer.

Comments (8)

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  1. Buster says:

    The AHA’s support of Certificate of Need (CON)
    is a rather powerful argument that CON must protect existing hospitals more than it protects taxpayers.

  2. KG says:

    It’s awful how often we see political corruption, and CON panels are no different.

  3. Trudy says:

    Great post, thanks Greg.

  4. Ken says:

    Certificate of need sounds like a hold over from the medieval guilde system.

  5. Brian says:

    I am curious as to what people are paying for various health plans in western states without CON laws, such as New Mexico and Colorado, and how those plans compare to what people are paying in states with CON laws.

  6. Frank Timmins says:

    Good post Greg. Your analysis should make the lights go on in people’s heads not only with regard to hospital CONs, but with every other human enterprise.

    The point being that it is human nature to strive for betterment of one’s self, one’s family, one’s company, etc. etc. Whether the definition of betterment is money, power, personal happiness, or other, if we are constantly trying to oppose motivation as a society instead of using it when we can to the advantage of society, we are always going to have these counter productive measures.

    In this case we shouldn’t wonder why the results are what they are with CONs (all the way up and down the line). Hospitals are trying to protect their market share, and the “corrupt” bureaucrats and others of influence are trying to empower themselves and better themselves financially. The culture of this stuff becomes engrained and acted out as business as usual. It makes us merely a more sophisticated version of the infamous economic reality of Mexico. We are a society of collective morons if we expect it to work out any differently in the long run.

  7. Chris @ Event Space says:

    Nice post. I really appreciate this one. I really enjoyed reading and I am inspired about this thing. Keep it up and good work.

  8. Manish says:

    CON – corruption or nepotism; The need is for competition. If bureaucratic hospitals are better, they will survive. But they are scared to death of the physician base that can do it better for less. No bureaucratic BS’ers to pay. By the way! Why can they employ doctors to compete with other doctors and self refer into their systems but doctors can’t start specialty hospitals, labs, imagers etc to compete? The answer CORRUPT POLITICIANS. Freedom is a farse when one individuals civil liberties are subjugated for anothers or one business is chosen as the winner and the other the loser by our government (sound familiar?) Medicare stood a better chance of solvency if cost was driven down by competition. The same would benefit BC/BS, Cigna, Aetna etc. Because they could shop options for their clients based on complications, success, specialty care, etc.