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How the Covid Crisis Exposed the Absurdity of "Certificates of Need"

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Tags Bureaucracy and RegulationHealthPrices

In August 2020, the Institute for Justice published a report entitled “Conning the Competition: A Nationwide Survey of Certificate of Need Laws.” Certificate of Need (CON) laws are a particular problem in a health crisis like we are experiencing now. However, the problem with CON laws is nothing new to readers of the Mises Institute. In 2017, Alice Salles wrote about how the government ruined US healthcare, pointing to the requirement of a certificate of need as one reason for rising healthcare costs. In the Accad and Koka Report by the Mises Institute two doctors shared their firsthand experience with CON laws. The current covid pandemic exposes some of the absurdities of CON laws in a time when politicians tout their concern for ordinary citizens. While eliminating CON laws will not solve the current pandemic, eliminating them will be a first step in reforming healthcare. The facts in this article are from the Institute of Justice report. 

In a rare admission of policy failure, Congress in 1986 repealed a federal act, eliminating federal incentives for states to maintain CON programs. CONs are government permission slips that are required to enter certain industries, in this case, anything healthcare related. Basic economic theory predicts that supply is inversely correlated with cost: as you increase supply, prices should fall and vice versa. CON laws are an attempt to contradict this basic economic principle with the idea that if you restrict supply, in this case healthcare facilities and services, cost can be controlled. The mistaken belief, at this point, was that reducing supply of healthcare would reduce overall healthcare expenditures. The main idea was to eliminate costly duplication of services and increase access to quality care. The argument of wanting to eliminate costly duplication is one that is heard often when government wants to consolidate its power. However, the experiment with CON laws failed, and Congress, to its credit, repealed a law requiring states to enact CON laws. But the damage was done; before the repeal of the requirement every state except Louisiana had CON laws. Since then, states have very slowly dismantled CON laws, with Hew Hampshire being the latest (2016). Currently, thirty-five states and the District of Columbia maintain CON laws, with another three states enforcing quasi-CON requirements. In contrast, diverse states in geography, political views, and socioeconomic characteristics like California, Colorado, Texas, and Pennsylvania have done away with CON laws. Currently, nearly 40 percent of the nation’s population lives in states without CON laws with any serious negative consequences. I think this provides proof that patients and the general public will not be harmed by eliminating CON laws.

Policymakers claim CON regulation is intended to ensure adequate healthcare resources and access for rural communities plus promote high-quality healthcare. At this point, I am ignoring the absurd claim that CON will restrain the cost of healthcare services. One of the most absurd parts of CON laws is the ability of competitors to object to an application. In thirty-four of thirty-nine states with a CON program, a would-be competitor can object to the CON application. Not only is a healthcare provider required to ask the government for permission to provide a new service, expand service, change hours or location, etc., but a competitor can block their application by simply stating that there is no need. Imagine if a local ice cream shop had the ability to object to another ice cream shop opening its doors in town by simply stating there is no need for two ice cream shops in town.

A second absurd part of CON laws is the fact that application fees can range from as low as $100 up to $250,000, or in some states a percentage of the proposed project cost with no maximum. So, the more expensive the project, the more expensive the application. While some states have CON laws that are triggered beyond a certain threshold allowing existing providers some freedom to run their businesses without government interference, other states use expenditures to make sure that nothing happens without state approval, requiring a CON for any project over a certain amount. What these restrictions amount to is a covert government-run healthcare solution where healthcare administrators have to work hand in hand with the state government. 

This is not the only burden an applicant faces. An applicant must also deal with time delays that can stretch for months, even years. Some application periods run two to four months, but some can last as long as a year or more. If that is not enough, the government agency considers applications sometimes not on an as-needed basis, but infrequently, such as twice a year or, as in the case of a specific regulation in Ohio, once every four years.

There are many cases of entrepreneurs who respond to a need in the community to provide a service that was previously not offered or offered at a much higher price who have had to abandon their entrepreneurial activity. Applicants have to hire attorneys and experts to present evidence for why a service is needed and go through a long legal battle to receive government approval.

All of this is contradicting what Mises wrote about the consumer being the ultimate decider of entrepreneurial success. Even more damaging is the current situation when a pandemic requires hospitals to adjust quickly to an ever-changing healthcare need. Image a hospital simply not accepting patients with covid simply because they have reached the limit of beds allowed under their certificate of need. “Luckily,” twenty-five states suspended or loosened some of the CON laws during the pandemic to allow healthcare settings to provide adequate coverage of needs. But should a healthcare provider have to worry about appeasing the government in an emergency by filing paperwork to allow for changes in the number of patient beds, increases in the number of ventilators per hospital, etc. The answer should be a clear no. 

The recent report by the Institute for Justice provides a comprehensive survey of CON laws and the absurdity of most rules and regulations in them. The absurdity of CON laws is clear from the way state CON policies contradict each other in almost every aspect.

The authors of the study summarize their key findings as follows (I have taken three of the five key findings for brevity's sake):

  1. Closely reviewing the nation’s 39 CON jurisdictions reveals an incoherent doctrine. There is no rhyme or reason to what services require a CON. This strongly suggests that CONs are driven less by the government’s perception of what will improve patient health and more by lobbying efforts of powerful insider groups within each state.
  2. CONs are not limited to facilities with large capital investments as originally imagined. CONs were first envisioned as a tool to prevent two hospitals from opening around the block from each other. Unfortunately, today, CONs are required for hundreds of minute, inexpensive and often mundane activities. Today, CONs in some states are required for such things as adding or removing a single hospital bed; converting an existing hospital bed to a different use (e.g., psychiatric bed to intensive care unit bed); adding ventilator services to a facility, performing a small or necessary renovation.
  3. CONs that apply solely to new technology undercut the justification that government must prevent duplication of services. If a state maintains a CON for “equipment utilizing technology not previously used in the state.”, it cannot be argued, that CON laws decrease costly duplication of services because, when there is no duplication of service.

But now with the outbreak of the covid pandemic, CON laws and similar regulations need to be eliminated. Repealing or eliminating regulations that work like CON laws does not offer a solution for the pandemic, but the pandemic exposed the absurdity with CON laws and how they harm patients. Many states have seen the light at the end of the tunnel and suspended or loosened CON requirements, but how states responded varies again. It is time to suspend all CON requirements, not just for covid reasons but for the benefit of all patients in the long run. 

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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