A Rare Victory Against Health Care-Strangling Red Tape

With Obamacare coming into effect, things are going to get worse before they get better.

Health care policy is an unholy, god-awful mess thanks to Obamacare, and was no picnic before it. The system is still saddled with the remnants of past attempts at central planning—a Gordian knot of bad incentives, powerful guilds, and anti-competitive rules.

A telling example of this comes by way of the Fourth U.S. Circuit Court of Appeals, which ruled this week that the state of Virginia may have violated the Constitution when it prohibited a doctor from opening shop simply to shield other businesses from competition.

Dr. Mark Baumel, a gastroenterologist, wants to buy CT scanners, which he will use to detect cancerous intestinal polyps in patients at three clinics that he proposes to build. Colorectal cancer claims the lives of over a thousand Virginians each year and is the second-leading cause of cancer death nationally. In large part, that's because more than half of the people who should be getting screened are not.

It's no mystery why. Traditional, invasive rectal inspections are more than mildly unpleasant and can cause infection and other complications. Dr. Baumel, however, proposes to conduct relatively cutting-edge "virtual colonoscopies," eliminating the unpleasantness and minimizing health risks. Patients pay for a CT scan and, depending on the findings, can also opt for same-day polyp removal. (The procedure is recognized by the American Cancer Society and the American College of Gastroenterology.)

No other provider in Virginia offers the service, which has the potential to save many lives simply by improving screening rates. But state health officials won't let Dr. Baumel spend his own money to buy a CT scanner.

To purchase expensive medical equipment in Virginia, one must first obtain permission from the government in the form of a "certificate of public need." In the 36 states (and D.C.) with certificate-of-need (CON) laws, would-be providers must prove to health officials that there is a need for the service they wish to provide. Of course, in a market economy, entrepreneurs know they have hit upon a need after they set up shop and try to attract customers.  

The Commonwealth of Virginia substitutes the market test with a panel of health planners who purport, as per the CON statute, to scrupulously evaluate 20 criteria, including whether a proposal might "undermine the ability of essential community providers to maintain their financial viability."

"Stripped of its linguistic pretense," writes Judge Samuel Wilson of the Western District of Virginia in his concurring opinion, "the Commonwealth's purpose is to protect established "community providers" (i.e. established in-state interests) from the effects of competition."

Each year about 100 medical providers take up the gauntlet and apply for a CON in Virginia. No doubt many more take a hard look at the application process—which can take years, cost hundreds of thousands of dollars, and result in no certificate—and balk.

Established businesses can formally intervene in the hearings as well. Seven different local hospitals and clinics that already own CT scanners fought Dr. Baumel. Yes—even though none of them use their scanners to perform colonoscopies.

Earlier this year, a trial court threw out Dr. Baumel's claims that the law treads on his constitutional rights. A three-judge panel reinstated his suit this week. "The district court gave a serious claim the back of its hand," wrote Judge J. Harvie Wilkinson III. "This was error." The case will now head back to a trial court for further proceedings.

Meanwhile, it's been over four years since Dr. Baumel, who is represented by the Institute for Justice, first applied for a CON. (Full disclosure: I am working on a part-time project for IJ. This article is my own, however, and I thought ill of certificates of need well in advance and independent of this litigation.) 

Health planners claim that CON laws allow states to improve on market outcomes through "managed" competition. Empirical support for this proposition is scant. Like all protectionist laws, CON laws restrict choice, raise costs, and stall innovation by blocking newcomers from entering the market.

As Virginia's CON law demonstrates, the health system is bogged down by dynamism-destroying rules—rules that generate the very outcomes that supposedly justify the Affordable Care Act. 

With the new law coming into effect, things are going to get worse before they get better.