Certifiable Improvement

North Carolina’s healthcare system could be considerably more effective at controlling costs, increasing rural access and delivering quality services. That much Republicans and Democrats agree on. It’s the details that are in dispute and one healthcare policy, certificate of need regulation, has been particularly controversial.

The Certificate of Need (CON) system was mandated by federal law in 1972 under the Nixon administration.  It required a state regulatory agency’s grant of a legal document permitting any proposed health facility expansion, acquisition or creation. The system’s goal was to prevent the creation of duplicative or unnecessary services in order to lower healthcare costs, but contradictory research led the government to repeal the law mandating CON in 1987. Currently, 36 out of 50 states have a CON process and the ones that do not typically have some sort of advisory board to deal with health care expansion. North Carolina’s Division of Health Service Regulation has a CON division to regulate the state’s own CON process.

Supporters of the CON system believe it is necessary partly because of the health policy paradigm inspired by “Roemer’s Law”. Milton Roemer, MD, was a health policy expert who advocated for national health systems around the world. His ‘law’ grew from a single study published in 1959 that found a correlation between the number of hospital beds per person and the rate of hospital days used per person. Roemer’s research inspired CON regulations, managed care and other centralized health planning procedures. Essentially, Roemer’s Law amounts to: “A built bed is a filled bed”.

There is a basic truth to the premise behind Roemer’s law. Because third-party payers pay medical expenses, the connection between a buyer and seller doesn’t exist. The consumer incentive to avoid excessive prices and treatment is weakened. However, the argument is taken to dramatic levels in support of centralized healthcare policies like CON regulations.  The consumer-provider disconnect is taken to mean a healthcare provider seeking profit is limited only by its capacity to provide services. That is, without some sort of restraint, medical providers would go overboard in creating new facilities and providing expensive medical technology knowing that patients would utilize them because the cost is shifted elsewhere (insurance companies, Medicaid, etc.)  The resulting buildup in facilities would result in skyrocketing spending on healthcare, much of it unnecessary. This explains the supposed need for CON, which addresses the alleged problem by limiting capacity through strict controls on the availability of services.

Despite the flawed payment system, “Roemer’s Law” and its implications are deficient in light of behavioral and statistical considerations. Behaviorally, hospitals cannot just sell as many services as they can provide because people are not keen to enter the hospital even if it costs them nothing. This calls into question the need to limit a hospital’s service capacity in light of projected demand. Statistically, if Roemer’s hunch were true, hospital occupancy should near 100 percent at all times. In reality, occupancy rates vary considerably based on geography and by year.

CON advocates have had an equally difficult time convincing researchers that such a system lowers healthcare costs. Absent that evidence, their arguments focus on two other potential consequences they claim will result without a CON system: 1) that hospitals will be unable to afford to administer indigent care because profit-generating medical procedures would be cherry picked by private practices and 2) that less privileged communities in rural areas will not have access to quality affordable healthcare. The second argument is particularly questionable and is addressed here.

The indigent care argument essentially claims that larger hospitals need to be protected from competition so that they can continue to afford to provide care to the poor free of charge. Basically, hospitals can afford to provide the free indigent care because they can charge higher prices on paying patients.  Without protection from competitors provided by the CON system, hospitals would no longer be able to charge these higher rates because of the threat of losing customers. In short, the CON system helps to enable hospitals to charge higher rates on paying patients in order to subsidize the free indigent care.  If that is the public policy goal, however, these costs could be clearly placed on hospital bills so patients would be made aware of this process. That would be a more direct, less prohibitive means to address such a problem.

The indigent care argument was not the original purpose behind the CON policy when it was introduced, but it is a legitimate one and raises other tough questions.  Do all the negatives associated with CON laws, like decreased choice and competition leading to higher costs, less access to care, and limited innovation in the medical industry get brushed aside when considering the numerous alternatives available to provide indigent care (such as enhanced private charity)? The indigent care argument does not appear to offer justification for the entire CON system.

Ignoring the inconsistency between the revised arguments and the original intention of the Certificate of Need program, is the current system still justifiable? CON regulation is built off the flawed premise that centralized health planning can efficiently allocate medical care resources across a country or state. In light of research by the Federal Trade Commission and Department of Justice, it would be desirable to generally reconsider CON legislation.

If  legislators do not have the stomach for repeal, there are several clear deficiencies to the CON system that should be fixed. This series of articles has tried to illustrate some of these flaws.

Firstly, the CON process is excessively political, or at least vulnerable to inappropriate incentives on the part of its administrators. The State Health Coordinating Council (SHCC), which helps write the State Medical Facilities Plan containing the policies and methodologies used to determine ‘need’, is not subject to the Government Ethics Act (GEA). Governor Perdue’s Executive Order 10 superficially addressed the problem, but kept a loophole in place to leave the board’s members unpressured to recluse themselves from conflicts of interest

Secondly, this lack of accountability is not isolated. A common complaint levied at the system is that it is biased against competition and favors established hospitals and medical research facilities. The lack of accountability extends to the actual enforcement of the certificate’s requirements. According to some physicians, certificates are rarely, if ever, revoked.

Thirdly, the statutes that are designed to preserve the integrity and quality of North Carolina’s healthcare system are not binding. If a CON dispute is litigated between two potential health service providers, and nearly any significant application is litigated, then the two legal parties may settle discreetly outside of court away from the CON division’s statutory restrictions. In essence, health providers can agree to drop a challenge to one another’s application in return for support for, or at least tacit acceptance of, a future application. The potential for providers to divide the market, therefore, becomes increasingly enticing.

In the worst cases, applicants find creative ways to avoid the content of statutes by nominally addressing their rules, while reinforcing a limited competitive environment. As a result, there has been a trend towards larger hospitals operating almost as branch banks delivering several services at inflationary prices absent competition from particular private specialists. To be eligible to apply for a CON, an applicant must already be a state-licensed practitioner in a given field.

Either way, the current CON system in North Carolina should be reevaluated. There are several simple improvements that should be made. Georgia successfully reformed its CON program in 2008 by at once allowing ambulatory surgical centers offering special services like prenatal care to operate in private businesses, altering the appeals process to limit contentious challenges to original applications and allowing hospitals the ability to build or further renovate their facilities. North Carolina should consider repealing CON laws altogether, but short of that state lawmakers have plenty of opportunity to introduce practical improvements to the current CON process.