health care

State Regulations Let Hospitals Literally Veto New Competition. Here's How To Change That.

Certificate of need laws are on the books in 36 states, but they mostly serve as a way for hospitals to limit competition and keep prices high. State lawmakers should be dismantling them.

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Americans spend more on health care now than ever before, and so-called certificate of need laws (or CON laws) are part of the reason why.

On the books in 36 states, CON laws hike prices and create shortages of care, sometimes with tragic results, under the theory that bureaucrats can do a better job of balancing the supply and demand of health care than the market would. Although the laws differ from state to state, they often require that health care providers seeking to offer new services—everything from drug treatment centers to MRI machines to additional hospital beds—get permission from state regulators before doing so. In all of these cases, CON laws are purely economic regulations, not a safeguard against careless providers.

In practice, CON laws often allow existing providers to effectively veto new competition. In Michigan, for example, the state's Certificate of Need Commission voted last year to restrict which hospitals could offer a promising form of cancer treatment. In Virginia, state officials have repeatedly blocked a Roanoke-area hospital from building a new neonatal intensive care unit (NICU) because a nearby hospital that operates a NICU has lobbied against its would-be competitor.

In short, these laws aren't working. But CON laws also offer some insight into the political process. Congress asked states to repeal their CON laws for health care in the 1980s when it became apparent that the laws were not reducing health care costs as intended. That they persist is testament to the political power of hospitals, which wouldn't lobby to keep CON laws on the books if they weren't inflating prices, says Matthew Mitchell, a senior research fellow at the Mercatus Center, a free market think tank at Virginia's George Mason University.

"The first, best option if you want to increase access to care and lower costs is to just eliminate certificate of need laws," Mitchell says. "If, however, your legislators do not have the political will to do that—because it will take away a lucrative benefit from a concentrated and highly organized interest group—what we offer is a number of alternatives."

Mitchell is co-author of a new report that highlights the basic economic illogic of CON laws and offers a menu of options for state lawmakers to consider for reforms. The report suggests states focus on elements of CON laws that hit vulnerable populations—like restrictions on building new NICUs or drug treatment centers—or by eliminating CON regulations for services like nursing homes and hospice care, where demand is only going to increase as the population ages.

More substantial reforms should be enacted over longer periods of time, the Mercatus research suggests. States could enact sunset provisions that allow CON laws to stay on the books for a temporary period of time to allow hospitals and other providers to adjust to new potential competition.

Alternatively, states could change how commissions review CON applications. One idea, says Mitchell, is to remove "duplication of services" as a justification for rejecting an application—a provision that's common in many state CON laws and one that mostly serves to create local monopolies.

"What the regulators call duplication, economists and consumers call competition," Mitchell says. "Just eliminating that would go a long way towards making health care more competitive."

Ultimately, it's up to state lawmakers to have a backbone and reject the notion that health care can't operate according to market mechanisms.

Even sunset provisions are no guarantee of repeal. State lawmakers in Delaware passed a law in 1993 that was supposed to do away with the state's CON laws the following year. But before that could happen, lawmakers took up the issue again and extended the sunset date to 1996. They would later kick the expiration date back to 2002, then 2005, and eventually 2009.

Finally, in 2009, legislators voted to remove the sunset provision and keep the law on the books.

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  1. And yet when half a dozen internet companies collude to keep people from hosting a website, registering a domain name, publishing content, advertising, or being found in search engine results it’s FREE MINDS AND FREE MARKETS BABY!

    So much the better if they collude with a cartelized banking industry to keep the ickies from accessing capital or bank accounts. LIBERTARIANS FOR GOVERNMENT-CREATED CARTELS!

  2. Jesus Christ, these sorts of laws are based on the idea that central planning can eliminate the waste inherent in the duplication of services of a competitive marketplace. Do you know how inefficient it is to have 5 supermarkets all within a few miles of each other all offering pretty much the same items, including 23 kinds of deodorant? Wouldn’t it be more efficient to have just one supermarket with one set of products? Imagine the infrastructure you can free up, the shelf-space, the delivery truck traffic, the production and warehouse space – people don’t need or buy 90% of the shit in one supermarket let alone 5.

    And yet it’s the competition among the 5 supermarkets that leads to the efficiency – everybody’s got to offer some combination of the best products and service at the best prices because if they don’t their competitors will drive them out of business. If you’re the only store in town, why would you give much of a shit about customer satisfaction? Yeah, prices are a little high, quality is a little low, customer service sucks, but what are you going to do?

    The profit motive has got to be one of the most intuitively-grasped economic ideas on a personal level yet one of the most ignored on a macro level. People will do shit for money that they wouldn’t otherwise do. Put a competitor on the field and they’ll do the shit faster and better and cheaper. How hard is that to understand?

    1. That’s not the main idea these sorts of laws are based on, at least not directly. Rather, the model is one of a public utility. The idea is that competition is wasteful, not for business in general, but for this type of business in particular — and in many ways, hospitals and similar facilities do embody characteristics similar to those of electric power or gas distribution, for example. Therefore they need to be regulated on a “cost-plus” basis to guarantee an adequate but not excessive return on investment, and that means limiting their investment to what is judged necessary, else they’ll be guaranteed profits on pyramids and holes in the ground.

      It turned out that this type of regulation did not reduce health care spending as projected, so getting rid of it and allowing competition is better than nothing, even though competition will be much less effective than in other lines of business. It’s a step back off a road to nowhere, but we’re still lost.

  3. That they persist is testament to the political power of hospitals, which wouldn’t lobby to keep CON laws on the books if they weren’t inflating prices, says Matthew Mitchell, a senior research fellow at the Mercatus Center, a free market think tank at Virginia’s George Mason University.

    Considering that 57%+ of hospitals are private non-profits and 19% are govt-owned, I’d like someone to explain how they are so skillfully attuned to the pricing system.

    This is just more irrelevant handwaving. I got anecdotes too. The overwhelming number of the plans to build new facilities are plans to make the existing pill-hills even more dense. It doesn’t actually lower health care costs – which would require spreading those facilities around to places where nearby access is far lower. It doesn’t create more ‘competition’ in those locations where there are already a shit-ton of hospitals who, in theory, ‘compete’. In fact the only ‘competition’ it creates in medical care is to add a few more chairs to the table where rent-seeking proceeds are divvied up.

    The CON laws did not lower costs at all. Getting rid of them will not lower costs or create actual competition either. But yeesh – apologists for avoiding the actual problem are always ready to divert attention to the irrelevant

  4. /not sarc
    When I was a kid my dad taught me a very valueble lesson. He was going to buy something I thought was stupid and I asked why he needed it. He said “there is a difference between need and want, and I want this”. The same sentiment should apply to people building businesses. The government has no authority to determine people’s needs or wants. Nobody needs to build a hospital/resturant/store/statue of a peanut butter covered moose, they want to, and we alm benefit from the freedom of people to do what they want

    1. statue of a peanut butter covered moose

      Did it fight for the Confederacy?

      1. Close it fought in the cola wars, on the Michele jackson/Pepsi side

    2. And while I agree with what you are saying, far too many people have accepted the government as their lord and savior master.

  5. Ultimately, it’s up to state lawmakers to have a backbone

    OK then. Moving on…

  6. Old news. The issue now is to keep any hospitals at all.
    Bernie will need to bulldoze all hospitals so enough people die to meet his cost/benefit projections.

  7. Probably impossible to unravel.

    1. It gives the existing healthcare powerhouses the right to limit competition.
    2. It gives the state regulators a sense of power in their ability to literally control a market.

    That’s a deadly 1-2 punch combination.

  8. It actually can work the other way in health care. Open a new hospital and hire new doctors and now you have obligations to meet. Not enough new patients? Up your fees. Comparison shopping is almost impossible in health care. As you are having you heart attack you aren’t going to call three ambulance companies to get the best price, then sit down and comparison shop cost and quality of multiple competing hospitals. Furthermore you’ll get bills from radiologists and labs despite never meeting or speaking with anyone from either place. Free market principles don’t work if there is no chance for comparison shopping.

    1. This.

      And how do you define efficiency in a domain as messy as health, where outcomes can be wildly different? Cost accounting and medicine don’t really mix well.

      1. Then you also have situations where smaller community hospitals in outlying areas try to increase revenue by taking on more than they really should. They would do just fine with a basic menu of services but try and add more advanced services, invasive cardiology or something that they are not really equipped to handle.

        I don’t know about this particular case and no fan of government intervention but the hospital should really be asking if another NICU is in the best interest of the community. There are only so many people with the expertise to handle those patients and you really need other folks like high risk OBs, pediatric surgeons, experienced nursing staff, pediatric radiologists, and other support for something like that.

        No matter what cost will not go up or down either way so I don’t think that is a real factor.

    2. There is very little competition left anyway. Independent community hospitals and doctors hardly exist in most places.

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    3. “Comparison shopping is almost impossible in health care.” — BS. Willful ignorance is not “impossible” to cure.

      I need a water pipe for my house RIGHT-NOW and because I don’t have a GOV-FREE credit card I actually CARED to see the price-tag of the last 40-pipes I bought so I know EXACTLY the best place to buy one.

      OMG…. It was so “impossible”…./s

  9. Well, Dear Leader has clearly established for All Time, that Government Almighty is entitled to decide (at the price of vast penalties / taxes tariffs) who I may and may not buy from, or sell to. So… Locally? Which hospital may or may not go into business? Slam dunk, Government Almighty (copying the USSR) can set up 5-year centralized plans, etc., till the cows come home!

    1. Excellent post…

      Lets not forget the B.O.E. mandating “pinch” codes that requires upwards of 15-years of commitment and $200K to even practice.

      Whatever it is that is “not working” there seems to always be a guaranteed long-list of USSR U.S.C. Copy codes attached to it. Actually all one has to do is name the 5-most expensive items in a persons life and see perfectly those are the 5-most GOV regulated items.

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  12. It is probably not the NICU the hospital is really after. I doubt those make a profit. What they really want is to grow Obstetrics and Pediatrics which smaller hospitals are losing out on. Having a shiny new NICU available will attract more patients and doctors.

    1. “Having a shiny new NICU available will attract more patients and doctors.”

      …. because future parents will be more assured that if there is something wrong with their child at birth that higher level care is immediately available?

      Shame on them!! They should pay more attention to the big picture of hospital profitability, it’s not about the well-being of their children!

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