Certificate of Need: The Cost of the Process

A hospital applying for authorization to use their own funds for hospital projects will, on average, pay a minimum of $32,000 per Certificate of Need (CON) application.

The CON system has been in place in North Carolina since 1974 as an attempt to regulate federal funding for programs like Medicare and Medicaid and limit healthcare costs. It requires medical facilities to apply to the NC Division of Health Services and Regulation’s (DHSR) CON Division for authorization to fund certain projects, such as adding particular medical equipment or expanding their facility. The division can choose not to authorize a proposed expansion if the CON Division board determines that the additional spending is “unnecessary”.

The CON system is an attempt to control the costs of healthcare by preventing duplication of health resources in competing hospitals and to achieve equal opportunity for healthcare access at reasonable rates.

After the institution of the CON in 1974, healthcare costs skyrocketed and healthcare quality in local communities deteriorated.

In response to these perceived negatives and inconclusive justification for the initiative, the federal government quickly repealed the mandatory CON law in 1987 and many states followed suit. However, 36 out of 50 states currently have a CON process and many of those that do not still have some type of administrative health commission to help regulate healthcare competition.

Currently, the CON process costs North Carolina hospitals in several ways according to a presentation by Daniel Carter, a Managing Consultant for Health Planning Source—a consulting group for CON applicants:

• Preparation Consulting Fees: $25,000-$50,000
• Base Application Fee: $5,000 + 3% of capital costs up to $50,000 total
• Public Hearing Consulting Fees: $2,000 – $15,000
• Expedited Review: Up to $5,000,000
• Appeal: Up to $300,000
• TOTAL Costs: $32,000 – $5,415,000

For perspective, the minimum costs of one CON application is enough to pay for three dialysis stations, establish a Medicare/Medicaid certified home health agency or develop an ambulatory surgical center.

Certificate of Need laws also cost medical care providers valuable time by forcing them to fill out detailed applications and proceed through a lengthy application process.  Any provider that fulfills the requirements to have their application “expedited” also pays a fee of up to $5,000,000, the process takes up to 90 days.  If the care provider cannot have their application expedited, a decision to approve or reject the application can take over 150 days.

The appeal process, should the application be denied, can be exponentially more time consuming and financially burdensome.  The first course of action, appealing to an Administrative Law Judge, can take nearly a year.  Should the division reject the application again, the next step is to bring the case to the NC Court of Appeals, which can take approximately 12 to 18 months.  Should the application again be rejected, the last alternative is to take the case to the NC Supreme Court which can go on for another 12 months.

This entire process, possibly extending to well beyond three years, places a heavy burden on medical care providers seeking to simply expand their facilities or purchase equipment.  During the application period, resources must be devoted to craft a thorough application to the CON board.  Staff must then monitor the application’s progress through the review process.  If the application is rejected, the applicant must devote time and resources to file appeals and possibly pay for court costs should the applicant find it necessary to appeal a rejection to the courts.  All of this time spent by medical service providers dealing with the CON process is time that would be better spent increasing efficiency and finding new innovations to reduce provider and consumer costs.

All of the costs incurred during this process, regardless of the success or failure of a CON application, are passed on to consumers of healthcare while institutions such as the North Carolina Department of Health and Human Services (DHHS) and CON consulting firms benefit from the expenditures of healthcare providers seeking to expand their services.  The DHHS also states that, despite its participation in the development of the State Medical Facilities Plan (SMFP)—which is used in determining the need of communities by CON, it does not necessarily participate in reimbursing the cost of care patients incur when using services and facilities developed in response to the need determined by the SMFP.   Furthermore, every day that the CON Division wastes reviewing an applicant’s submission is a day that purchases are not being made, jobs are not being created, and money is not being earned.

In many cases, the CON Division will only issue a few certificates for more costly purchases, such as new facilities or MRI machines, for a certain area during a review period.  This approach can often lead to heated competition between regional hospitals and other practices applying for a Certificate of Need.  As with most political bodies, whenever power is concentrated over an issue, entities that have an interest are likely to try to sway the body towards their favor. Sometimes, improprieties can result when an outside interest tries to sway a political body’s decision with gifts or a member of the political body finds themselves aligned to an interest for personal gain. CON Division members and members of the State Health Coordinating Council (SHCC) (which is in charge of determining the medical needs of communities via the SMFP) are healthcare professionals and often have many ties to hospitals and other medical care providers—many having worked as healthcare providers before joining the these agencies.

Sadly, the political bodies that had a say in the distribution of Certificates of Need were not placed under any restraint when it came to such corruption until recently.  After years of complaints by the medical community asking the government to put the SHCC under the jurisdiction of the Government Ethics Act, Governor Perdue issued Executive Order 10 in 2009.  This order required members of the SHCC to remove themselves from voting on issues when they have a conflict of interest.  However, the order does not prohibit such recused members from deliberating on an application unless the chair of the SHCC decides otherwise.  Worse, when any party outside of DHHS believes a member of the SHCC may have a conflict of interest but the member decides not to remove himself, they are out of luck.  The only individuals who can challenge this member’s participation in voting are members of the SHCC or an employee of the Division of Health Services Regulation (DHSR) of DHHS.

Despite CON’s intended purpose to reduce costs resulting from duplicative services, it would seem that it simply redistributes those costs.  Rather than allowing medical care providers to individually incur the costs of duplicative services, CON spreads the costs, both monetary and temporal, to all providers in the name of reducing costs.  Furthermore, the failure of government to effectively apply the Government Ethics Act to the SHCC strains the public’s trust in government officials.

By Regina Conley & Paul Valone