North Carolina

North Carolina Hospital Wants State to Block Competition From Two New Surgical Centers

Another illustration of how hospitals use Certificate of Need laws to limit competition, and why those laws are bad for patients.


MANFRED WEIS Westend61/Newscom

According to the most recent census estimate, the number of people living in Brunswick County, North Carolina, in the state's southeastern corner, nearly has doubled since the turn of the century. More people means a higher demand for medical facilities of all sorts, and two hospitals are aiming to meet that growing demand by building new operating rooms.

The State Port Pilot, a Brunswick County newspaper, reports that one hospital, Novant Health Brunswick, proposes to develop a new surgery center in Leland, North Carolina, by relocating an existing operating room and adding a new one. Meanwhile, Brunswick Surgery Center LLC proposes building a new surgery center with one new operating room and two procedure rooms, also in the Leland area.

Thanks to North Carolina's Certificate of Necessity laws, though, only one of those proposals will become reality—and both could be blocked if a third hospital gets its way.

Earlier this week, Reason released an investigative report that examined how Certificate of Necessity laws for medical facilities artificially limit the supply of medical care, drive up the cost of care, and give patients fewer options—sometimes with tragic consequences. More than 30 states have CON licensing laws on the books, giving state-level central planners the final say over hospitals' capital expenditures.

Often, these laws are wielded by politically connected medical providers as a way to limit competition—our investigation focused on how a single Virginia hospital prevented another nearby hospital from building a neonatal intensive care unit, despite the project having support from local officials, residents, doctors, and hospital administrators.

A similar story is now playing out in Brunswick County, North Carolina. As part of its 2016 State Medical Facilities Plan, the North Carolina Department of Health and Human Services determined there was a "need" for one more operating room in the county.

The two medical providers that jumped at the chance to fill that need have to compete with each other for permission from the state government, but they also have to compete against a third hospital that's challenging both applications.

Administrators and trustees for Dosher Memorial Hospital in Southport, North Carolina, are opposed to the construction of a new surgery center, according to The State Port Pilot. At a public hearing last week, Dosher executives officially announced their opposition to both proposals, arguing that approving either one "would pull patients away from Dosher Memorial Hospital and greatly impact its financial survival."

The ongoing fight in Brunswick County reveals the absurdity of CON laws. If Dosher Memorial Hospital is worried about losing patients to newcomers, it should compete for those patients by offering better quality of care or lower prices than its competitors. It should not be able to appeal to a state agency and use the power of the government to drive those potential competitors out of the region.

Unfortunately, this is exactly what happens when the government is given the authority to regulate competition through CON licensing laws.

Certificate of Necessity laws—sometimes called Certificate of Public Need laws—were created in the 1970s and 1980s under the theory that states should control medical facilities' capital spending in order to prevent surpluses of expensive medical tech and keep costs for patients down. They haven't worked. States with CON laws generally have higher costs and lower quality care.

"CON laws raise considerable competitive concerns and generally do not appear to have achieved their intended benefits for health care consumers," the Federal Trade Commission and the U.S. Department of Justice said in a joint statement last year calling for state governments to roll back CON laws in order to free health care markets and lower prices. The agencies warned that these laws have been exploited by competitors seeking to protect exclusive markets by raising the cost of entry.

In North Carolina, hospitals have to get state approval for almost any new service or facility. Everything from surgery centers to the addition of hospital beds must be approved by the state Department of Health and Human Services, which uses a data-driven formula that produces the annual state Medical Facilities Plan, a 450-page inventory that accounts for all types of health care settings and services delivered across the state.

"North Carolina has one of the most micromanaged CON programs in the country. The SHCC regulates over 25 services, and it can take years for new and established health facilities to break ground," writes Katherine Restrepo, a Forbes contributor who covers healthcare issues in North Carolina.

Regulating what services a hospital can offer makes about as much sense as letting the state government determine whether there is a need for more Chinese restaurants in a certain area, wrote Ray Cordato, an economist with the John Locke Foundation, a Raleigh-based free market think tank, in a 2005 report.

These laws persist because hospitals derive huge benefits from them and lobby hard to keep them on the books. An effort to reform North Carolina's CON laws last year was derailed by hospital lobbyists.

A similar reform effort is now underway in Virginia.