How Government Red Tape Increases Health Care Costs and Strangles Free Enterprise

The problem with "certificate of public need" laws.

Ask Virginia's Republican lawmakers about Obamacare, and you can see the veins in their foreheads start to throb. The law's an excrescence, they will tell you. It's the big hand of government smashing a framing hammer down on the invisible hand of Adam Smith. It's socialist social policy married to misguided industrial policy.

Republican Party officials—including Barbara Comstock, newly elected to Congress—led "Hands Off My Health Care" demonstrations against the law when it was being debated. They've fulminated against it ever since. "Obamacare has proven that government-run health-care programs don't work well, if they work at all," wrote House Speaker Bill Howell in early January. Del. Steve Landes used that same line in a speech a few days later.

So why hasn't the GOP led an assault on the state's certificate of public need law?

The COPN law is supply-side Obamacare: top-down, command-and-control restrictions on which providers can offer which services. A certificate of public need is, essentially, a government permission slip. Without one, a Virginia doctor can't put an MRI machine in his clinic. A hospital can't build a new wing. A hospital company can't add a satellite campus. And so on.

Getting such permission slips is a long and costly process. The owner of a Northern Virginia radiology practice, for example, spent five years and $175,000 asking permission to buy a new MRI machine. The state said no.

One reason the process takes so long is that competitors often fight such requests. When Bon Secours proposed the St. Francis Medical Center in Chesterfield, rival chain HCA fought it vigorously, arguing there was insufficient demand. The hospital was approved and enjoys a robust business. You'd think state regulators would laugh off competitors' arguments, but sometimes they're actually taken seriously. When a Richmond radiology practice wanted to move—not add, but move—a radiation device to its Hanover offices, the state said no in part because Virginia Commonwealth University's Massey Cancer Center worried the project "could take some of their business."

In any other industry, the proper response to that would be: So what? If Kroger sets up across the street from Food Lion, we consider that good for consumers: They have more choice. And if they migrate from Food Lion to Kroger, that's not a bad thing. It means they're getting more utility for their grocery dollar.

Studies of the COPN system around the country have confirmed what seems intuitively obvious. A joint examination by the Justice Department and the Federal Trade Commission found that COPN regulations hurt competition, fail to contain costs, and "can actually lead to price increases." Restricting supply raises prices? Imagine that.

A reader recently offered some information that illustrates the point. One of his daughters, in Virginia, needed an MRI. "There was no discussion of cost, either by her doctor or the hospital when registering," he emailed. "Nor was she ever informed whether she had a choice of facility. The non-negotiated charge was $5,166.70." The reader's other daughter, who lives in Oregon, also needed an MRI around roughly the same time. Oregon has a COPN law too, but unlike Virginia's it does not restrict MRIs. The second daughter's doctor suggested she comparison shop. Her insurance company actually phoned her "and offered to call area facilities and obtain quotes for her, which ranged from $800 to $3,000. . . . She went with the $800."

COPN started not because of alleged market failures, but because of actual government ones. Medicare and Medicaid used to reimburse providers on a cost-plus basis. That created a structural incentive for doctors and hospitals to do as much as possible: The more services they provided, the more profits they would reap. Rather than fix the reimbursement flaw, Congress forced the states to adopt COPN regulations, on the harebrained theory that restricting supply would help hold down costs.

When that didn't work, Congress eventually changed federal reimbursement formulas and freed states to lift their COPN restrictions. Some did—but not Virginia.

A couple of years ago, two doctors denied practice opportunities by Virginia's COPN law filed suit to overturn it. They argue that it denies them equal opportunity and that it interferes with interstate commerce. (One of them wanted to expand his practice into Virginia.) Federal District Judge Claude Hilton upheld the law, on the grounds that it passes the incredibly weak "rational basis" standard. Under that standard, a law is considered constitutional if anybody can think of any reason that conceivably might provide a rational basis for its existence.

The doctors appealed, and the Fourth Circuit sent the case back for further review. Late last month, Hilton affirmed his original ruling—and the COPN law. That means the only avenue left for deregulating health care in Virginia is the legislature, which Republicans control.

To paraphrase House Speaker Howell and his colleagues, COPN has proven that government-run health-care programs don't work well, if they work at all. The question now is: What do they intend to do about it?