Certificate of Need: Does It Actually Control Healthcare Costs?

“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.”
-NC Division of Health Service Regulation website.

While the basic economic case against the entire Certificate of Need (CON) process has already been made, supporters of this process often say that healthcare does not, and cannot, exist in a free market. They argue that the healthcare system needs the CON process to prevent hospitals from over expanding and passing these capital costs on to healthcare consumers.

Does CON Actually Control Cost?

The Certificate of Need program’s effectiveness at reducing healthcare expenditures is verifiable; the issue has been studied by healthcare researchers, the federal government, and in analyses of various state level programs. This research suggests that Certificate of Need has been ineffective at best in controlling costs.

The federal government implemented Certificate of Need nationwide in 1974, but abandoned the process in 1987 after concluding that the procedure had done little to nothing to control costs. Congressional testimony concluded the program was a failure[i].

The repeal of nationwide Certificate of Need and subsequent division between states that kept CON and the 14 states that ended it presented a unique opportunity to analyze whether or not the program actually controls costs. Research published by Duke researchers Conover and Sloan in the Journal of Health Politics analyzed the effect of Certificate of Need laws from their early years to their repeal.

Their conclusion?

“Certificate-of-need laws had no effect on total personal health expenditure per capita or on per capita spending on physician’s services.”[ii]

While they found some evidence that CON implementation produced a small decrease in spending on acute care, removing CON laws did not lead to an increase in these areas’ costs.  Indeed, the researchers found that CON laws may have increased Medicare expenditures. Conover and Sloan also found that repealing the Certificate of Need process did not lead to a massive increase in healthcare spending, a specter often invoked by supporters.

In addition, CON has been ineffective at controlling the costs of Medicaid long-term care expenditures, according to a study published by Drs. Grabowski, Ohsfeldt, and Morrisey[iii]. They have concluded that “states have little to fear in terms of increased Medicaid nursing home expenditures from CON repeal.”

These studies are not alone. Washington State studied their own program in 1999 and found that “CON has not controlled overall healthcare spending or hospital costs.”[iv]

Conover and Sloan examined Michigan’s CON program and found “there is little evidence that CON results in a reduction in costs and some evidence to suggest the opposite.”[v]

A National Institute for Healthcare Reform study of healthcare industry views found that even healthcare providers, usually a major backer of CON laws, did not find that it is particularly effective at controlling healthcare costs.

“Some agency officials and—not surprisingly—most providers said that the CON process has a negligible effect on costs. A few respondents noted CON raises the costs of capital projects, given the expense of completing the process.”[vi]

An independent 2007 examination of Illinois’ Certificate of Need process by the Lewin Group reiterated the same uncertainty.

“Based on our review of relevant literature and our independent analysis, it is clear that the evidence on cost containment is weak, but the evidence suggests that the CON process does affect spending patterns in a state. Expecting the CON process to reduce overall expenditures, however, is unrealistic.”[vii]

These studies are only a sampling of the research questioning Certificate of Need.

The original justification of the process, a broken payment system that drove a large number of capital expansions in healthcare, has been altered and will be altered further.  Payment reforms in entitlements have significantly altered the healthcare equation, as has the rise of managed care. Insurance companies have an obvious incentive to keep costs down by negotiating with providers.

In addition, the 2010 healthcare bill and the nation’s fiscal problems have put strong downward pressure on payment rates. Payments to Medicare providers are among the federal expenditures that will be cut if the Congressional Debt Supercommittee deadlocks. Taken together, these payment reforms have removed many of the incentives for healthcare providers to drive costs up through unneeded capital expansion.

Indeed, Certificate of Need may prove to become a burden on healthcare reform efforts by restricting the growth of new facilities to match the demand generated by the newly insured.  With an explosion of new demand, Certificate of Need would presumably raise costs by delaying the needed increase in supply.

Is the system designed to protect consumers or incumbent healthcare providers?

It is clear that Certificate of Need has failed to meaningfully contain costs, the original justification for the program. However, the program has proved nearly impossible to dislodge in the 36 states that have kept the process. Despite a sustained push for repeal by the Department of Justice during the Bush years, no state has abandoned this regulation scheme since 1999, when Indiana ended a two-year resurrection of the program.

It is no coincidence that most vociferous opponents of CON repeal are hospitals and other incumbent healthcare providers. The current system allows them to have a monopoly on certain healthcare services in their area and they benefit enormously from the system.

One hospital industry respondent to a National Institute for Healthcare Reform Study reported “member hospitals initially had mixed views about the benefits of CON but banded together to support the process after realizing it was a valuable tool to block new physician-owned facilities.”[viii]

Innovation and competition are thus stifled in order to continue the profitability of existing healthcare providers. Physicians and multi-physician groups find it harder to open and operating ambulatory surgery centers, freestanding radiology practices, and other facilities that would allow consumers to enjoy healthcare that is potentially both lower-cost and higher-quality.

Non-profit hospitals already enjoy tax exemptions, state-sponsored capital financing, and, in the case of the UNC hospital system, direct subsidies from the state. Certificate of Need was not set up to guarantee every hospital’s perpetual existence, and it should not be used to prevent competition.  If lawmakers wish to ensure indigent access to care, they can legislate requirements for physician-owned facilities to accept a pro-rata share of indigent care, impose taxes, expand Medicaid rolls, or use other means to directly subsidize indigent care losses.

The CON process is a faulty answer to an outdated question.  The program has failed to implement its “fundamental premise” of controlling healthcare costs. North Carolina lawmakers should seriously consider limiting the scope of the process, or eliminating it altogether for most circumstances.