Coronavirus

This Health Care Law Bars Competition And Drives Up Prices, Even as a Pandemic Rages

During COVID-19, many states have rolled back their “certificate of need” laws. Now is the time to abolish them.

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COVID-19 has forced doctors to postpone many types of surgeries, but some things can't wait. Ophthalmologist Jay Singleton saw one man at risk of permanent blindness on a recent Friday evening in New Bern, North Carolina.

"He had a rare type of glaucoma caused by a large cataract, and the only thing to do was to remove it so the pressure would go down inside the eye," Singleton says. "We knew it was a very real situation because he already had lost one of his eyes to the same thing."

Singleton had all the skills and equipment necessary for the job at his state-of-the-art vision center. Unfortunately, the government won't let him use his space for the vast majority of the surgeries he performs.

North Carolina and many other states impose a regulatory tool called a "certificate of need" (CON), which forces health care providers to prove an unmet need in the market before operating a facility, scaling up, or purchasing major medical equipment. In practice, CON laws block new competition, funneling traffic to big hospital systems—the last thing that should happen during a global pandemic.

"Most of my patients don't have a choice," Singleton says. "They are being herded into these facilities."

The top-down approach to health care creates other problems, which multiply during a crisis like COVID-19. Some governors have recognized the folly and suspended their CON programs during the pandemic. Singleton's case shows why these changes should be made permanent.

If he wants to collect from Medicare for any surgery he performs, the doctor must travel two miles down the road to a competitor's outpatient facilities in the CarolinaEast Health System. Besides doubling or tripling the costs for most procedures, the coerced arrangement creates accessibility problems.

By the time Singleton made his afterhours diagnosis on June 19, the doors at the state-approved facility had already shut for Father's Day weekend. "Once it's closed, you're done," Singleton says.

Faced with no other option, he did what his oath dictated. He performed the surgery at his own clinic, knowing he never would get paid. "If somebody is in really bad need, I just write it off and do the surgery," he says. "They are not Patient No. 643 dash 21. They are my patient, and we have a personal relationship."

CarolinaEast takes a more corporate approach. With the government ensuring so much business, the $1.3 billion system can inflate facility fees without worrying about losing customers. "Hospitals set their own pay schedules, and they are quite confidential about how they arrive at those," Singleton says. "You can't get in to see their black books, so they can charge what they want."

Picking Winners and Losers

Such protectionism would not stand in most other industries. When entrepreneurs want to open a restaurant or coffee shop, for example, they do their own market research. They don't let the government determine need, and they certainly don't let their competitors decide.

The opposite happens with CON laws, which function like government permission slips. North Carolina and many other states don't just appoint panels of bureaucrats to determine what services are "needed"; they invite existing providers to testify against their potential rivals. The rigged rules all but guarantee unequal treatment.

If regulators decide that a particular neighborhood does not need another provider or service, the applicant is out of luck. Independent doctors and patients have little say in the process.

The red tape that interferes with doctor-patient relationships in New Bern is just one example. Overall, 35 states and the District of Columbia use CON laws to limit growth. Regulators even use their veto powers to stop colon cancer screenings and low-cost MRI scans.

None of the oversight has anything to do with public health or safety. Separate laws govern who may practice medicine and what kinds of procedures they may perform. Applicants would carry the same medical credentials as those currently in the marketplace. The real goal of CON laws is to limit competition for established providers.

"Who is hurt the most? It is easily the patient," Singleton says.

Rather than accept the protectionism, he partnered with the nonprofit Institute for Justice and fought back in court. (Full disclosure: The authors of this article work for the institute.) Health care providers in Kentucky, Nebraska, Virginia and Iowa have joined the Institute for Justice in separate lawsuits.

"The CON idea is obviously a failed experiment," Singleton says. "But large hospital systems guard CON laws fiercely because they are very good at generating revenue and controlling competition locally."

Playing Both Sides

CON law supporters claim that different economic rules apply to health care. HopeHealth President and CEO Diana Franchitto made this argument explicitly in a May 19, 2020, letter to Rhode Island's CON board.

"While market competition is generally healthy for most industries," she wrote, "the state's certificate of need requirements for healthcare recognize that unregulated increases in some healthcare services can result in unnecessary duplication of services, higher-cost care and lower quality of care."

Franchitto provided no evidence to support her claims, nor did she address her conflict of interest. When she wrote the opinion, she and other established providers were rallying to stop a potential competitor, Seasons Hospice & Palliative Care, from entering the Rhode Island market. The campaign paid off on June 9, when the CON board voted unanimously to block the interloper.

Singleton sees similar campaigns in North Carolina. He says CON advocates talk about health care like a business when it serves their purposes—like when they complain about lost revenue from canceled surgeries during COVID-19—but then turn around and talk about health care like a community service when they want tax breaks and CON protection.

"You have to pick a side," Singleton says. "If you treat it like a business, you must allow other people to enter the market and compete with you like every other business. If you treat it like a public partnership, then you can't enrich yourself on the backs of Medicare patients. You can't have it both ways."

Singleton made a medical decision, not a business decision, when he performed the free cataract surgery for his after-hours patient, an African-American retiree from a low-income community. But unlike the CON board, which makes decisions for others, he acted on his own.

History of Failure

Decades of history and multiple studies show that CON laws are both anticompetitive and anti-scientific.

New York passed the first medical CON law in 1964, saying it reduced costs by cutting down on unnecessary services. The American Hospital Association, recognizing the system's money-making potential, then began a campaign to pass similar laws nationwide. By 1974 the U.S. government had joined in, offering states financial incentives to adopt CON laws.

The lure of federal funding led every state but Louisiana to establish CON programs. But over time, evidence of the harmful effects accumulated. Finally in 1986, Congress admitted its error and repealed funding. Since then, 15 states—including California, Colorado, and most recently New Hampshire—have eliminated their CON programs.

None of these states has experienced any negative effects. Indeed, Matthew Mitchell, a researcher at George Mason University's Mercatus Center, says states that got rid of their CON laws have more hospitals and surgery centers per capita, along with more hospital beds, dialysis clinics, and hospice care facilities.

"Forty years of peer-reviewed academic research suggests that CON laws have not only failed to achieve their goals but have in many cases led to the opposite of what those who enacted the laws intended," he says.

CON advocates ignore the evidence, including a joint report from two federal antitrust agencies—the Federal Trade Commission and the Antitrust Division of the Justice Department. The 2004 study finds no reliable evidence that CON laws achieve any public benefit.

Kentucky hired Deloitte to provide another opinion in 2013, but regulators rejected the results when the consulting firm recommended dismantling the state's entire CON program. Big hospitals suggested a few tweaks instead, and the state complied.

Killing Innovation

These laws also block innovation from entrepreneurs with fresh ideas for serving their communities. Another Institute for Justice client, Dipendra Tiwari, discovered that when he tried to launch a home health care agency in Kentucky that focused on Nepali speakers from the Himalayan region where he was born.

Tiwari spoke the language, understood the culture, and had the connections to deliver customized care that no other agency in the state could match. He also had the requisite business skills. After immigrating to the United States in 2008, he earned an MBA and launched an accounting firm. Yet when Tiwari stepped forward to fill the market gap in home health care, the state CON board shut him down.

Customers wanted his service, yet regulators determined lack of "need" based on a formula that fails to consider factors like culture and language. Instead, the system counts all Kentucky residents the same—like interchangeable widgets on a spreadsheet.

The impersonal approach benefits Baptist Healthcare System, a $2 billion conglomerate founded almost a century ago. Despite the rigid CON rules that would block Tiwari regardless of his qualifications, Baptist Health piled on with a formal objection to his application.

Tiwari says his lawsuit is not just for himself, but for people like his bedridden neighbor, a refugee from the Nepali-speaking Lhotshampa community in Bhutan. It's not easy to get truly personal care from providers who do not know your language or culture.

"Few things are as personal as home health care," Tiwari says. "Families should be able to choose for themselves who comes into their bedrooms."

Adapting to the Pandemic

Many states, including Connecticut, Georgia, and South Carolina, suspended their CON laws after the pandemic came to America. Other states, such as Rhode Island, rolled back CON laws at hospitals and nursing facilities but not outpatient surgery centers or hospices.

Instead of just being a temporary reprieve, these emergency actions should be expanded and made permanent. COVID-19 could change the health care landscape for years to come, and communities will need responsive providers willing to adapt—not government-mandated restrictions, anticompetitive red tape, and monopolistic high costs.

"All we're asking the state to do is to repeal a bad law," Singleton says. "Sometimes you make mistakes, so you have to go back and take care of that mistake."

Things worked out for Singleton's emergency patient. "Now his pressure is normal, and he is seeing better," Singleton says. But the next case could be worse. States should not force patients to press their luck.

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