This One Weird Trick Could Improve Medical Care

Virginia should eliminate Certificates of Public Need.

Say you want to open a new grocery store. You do the market research, scout a location, develop a business plan, line up investors, get all the local zoning and other permits you need, and figure you have a decent shot. Then the state says you have to jump through one more hoop. You have to prove that the area actually needs a new grocery store. Oh, and one more thing: The other grocery stores nearby will have an opportunity to sound off on the question, too.

Any bets on what they'll say?

This, roughly, is how Virginia controls the amount of medical care available to its citizens. The Certificate of Public Need (COPN) system was created by congressional mandate many years ago. Some states repealed their COPN programs after Congress lifted the mandate. Virginia didn't.

So medical providers have to get the state's permission to spend their own money making a variety of business moves—from building a new hospital wing to buying an MRI machine. Repeated examinations by the Federal Trade Commission and the Justice Department have found that COPN regimes reduce patient choice, drive up costs, and limit competition. The only parties that benefit are market incumbents such as large hospital chains.

In recent years lawmakers in the Virginia General Assembly have tried to eliminate the COPN regime, or at least reform it. Intense lobbying by entrenched incumbents has prevented major changes.

The incumbents insist that repealing COPN might let new market entrants "cherry-pick" profitable services, leaving the unprofitable ones, such as charitable care, to hospitals—which are often required to provide them. Maybe, maybe not: More than a dozen states have repealed COPN rules, and their hospitals seem to be getting by just fine.

In any event, once you strip away the bureaucratese, COPN defenders essentially are saying that because government already has imposed many restrictions on providers, Virginia needs to keep this one, too. Which is a little bit like saying the best way to avoid a hangover is to just keep drinking.

There are other reasons to take a dim view of COPN requirements. One of them turns on that four-letter word, "need." Beneath the COPN system lie several troubling presumptions. The first is that the market should provide people with no more than they need—in contrast to what they might want.

The second troubling presumption is that officials can know, with any degree of certainty, how much medical care a given community will need later on. But can they?

Probably not—at least according to an article in the latest edition of Regulation magazine. "Experts," it reports, "often do little better than laymen in predicting the future."

The article draws on the work of Philip Tetlock, a professor at the Wharton School who has conducted experiments on prediction. He has found that so-called experts often end up being just plain wrong. Moreover, the more expert an expert is—the more narrowly he or she specializes—the less accurate the forecasts. Generalists tend to perform better.

The article (by Stuart Shapiro of Rutgers) asks precisely how off base cost/benefit predictions, for example, have been. Tellingly, "the data on this are limited because there is little mandate for government agencies to retrospectively analyze… their regulations."

Shapiro was able to find a 2005 report by the Office of Management and Budget. It reported that "of 47 analyses studied, 11 were roughly accurate, 22 overestimated the cost-benefit ratio, and 14 underestimated it." That's an accuracy rate of less than 25 percent. If an airline flew planes that crashed three times out of four the Federal Aviation Administration would have something to say about that, don't you think?

There's less evidence about how well Virginia's COPN system predicts the so-called need for medical care. But residents have reason to be skeptical that its predictions rest entirely on objective criteria. Writing in The Washington Post recently, Matthew Mitchell and Steven Monaghan of the Mercatus Center at George Mason University find that COPN approvals correlate with campaign contributions.

"Hospitals' campaign contributions to gubernatorial and state senate candidates are associated with greater likelihood of obtaining a certificate of public need," they write. "Specifically, contributing health-care providers are 32 percentage points more likely to have their COPN application approved, even when one controls for the region, year and application type. For every 1 percent increase in contributions, an applicant's approval chances increase by 3 percentage points."

To some, this will seem like an argument for even more government regulation—of campaign finance. But hospitals and hospital associations would have less incentive to pay off politicians if the politicians could not dictate business choices in the first place. Repealing the COPN system would remove one more reason for health care providers to lean on legislators. It also would do a world of good for Virginia consumers.

This column originally appeared in the Richmond Times-Dispatch.