COVID Might Help To Kill These Expensive, Anticompetitive Hospital Regulations in South Carolina

The state's certificate of need laws are currently blocking an estimated $1 billion in potential health care investment.

Residents of Fort Mill, South Carolina, had to wait 18 long years for construction to start on a hospital that state regulators determined in 2004 was necessary—and then proceeded to hold up in an absurdly long legal battle that eventually went all the way to the state Supreme Court.

Hopefully, that saga won't ever be repeated.

The state Senate voted 35–6 on Tuesday to repeal most of South Carolina's Certificate of Need (CON) regulations that require hospitals and other health care providers to obtain permission from the state before expanding facilities, buying new equipment, or offering new services. Often, those regulations gave de facto veto power to existing providers, which lobby health policy bureaucrats to block the approval of new competition.

That's exactly what happened in Fort Mill, where plans for a new 100-bed hospital were tied up for more than a decade and a half, in part because a rival hospital wielded the state's CON laws in an attempt to block the new facility, as Reason previously reported.

"Eighteen years, no hospital. Eighteen years, no medical care. Broken bones, ruptured spleens, heart attacks, births—all of it came and went," state Sen. Michael Johnson (R–Fort Mill) told the Associated Press this week, after the bill passed with bipartisan support.

The CON repeal bill moves next to the state House, where it is likely to be picked up in March after lawmakers finish work on the state budget.

The bill passed by the state Senate would eliminate South Carolina's CON regulations for all health care facilities except nursing homes.

If the bill becomes law, the Charleston Post and Courier reports, it would clear the way for 28 projects that are currently tied up in legal battles despite having won preliminary CON approval. Another 34 projects awaiting review by the state's Department of Health and Environmental Control would be able to proceed as well. The paper estimates that those delayed projects represent more than $1 billion in health care investment in the state.

All those backlogged projects—and the time-consuming, expensive litigation associated with navigating the CON review process and inevitable lawsuits—nicely illustrate the often hidden costs of these rarely considered regulations.

And that doesn't include the loss of projects that never materialized in the first place. A recent report published by the Americans for Prosperity Foundation, a free market think tank, found that 25 percent of South Carolina CON applications during a recent three-year period were denied or withdrawn after being submitted. Those applications represented more than $450 million of investment in the state that never occurred—simply because regulators got in the way, or because competitors would have objected.

As the same report notes, the president of the South Carolina Hospital Association, which opposes the elimination of CON laws in the state, once admitted to the state Legislature that the lengthy and expensive CON process "does not serve the community."

That became too apparent even for state lawmakers to ignore, thanks in part to the COVID-19 pandemic. As part of his emergency order issued when COVID-19 first struck in March 2020, Gov. Henry McMaster (R) suspended enforcement of CON regulations—making South Carolina one of several states to do so because of the pandemic. When it became obvious that the sky wasn't falling in the absence of those rules, some state lawmakers rightly began to question whether they were needed in the first place, says Candace Carroll, South Carolina state director for Americans for Prosperity.

"Government should never stand in the way of any South Carolinian receiving quality, affordable health care—especially during a global pandemic," Carroll told Reason. "Now, it's up to the House to finish the work the Senate has started by swiftly sending a repeal bill to the governor's desk to sign."

Previously, then-Gov. Nikki Haley had tried and failed to kill South Carolina's CON laws in 2013 when she used a line-item veto to scratch it out of the state budget. Hospitals sued, and the state Supreme Court ruled in 2014 that the regulations would remain on the books.

Artificially limiting the supply of health care services can be a major issue when a pandemic or another emergency strikes, of course, but CON laws harm public health even without the help of COVID-19. States with CON laws have higher mortality rates for patients with pneumonia, heart failure, and heart attacks, according to research published in 2016 by the Mercatus Center, a free market think tank that argues for repealing CON laws. Other studies show that CON laws contribute to health care shortages in rural areas because they force medical providers to focus on wealthier, more populated areas in order to make up for the added costs imposed by the CON process.

The federal government is ultimately to blame for the CON laws that litter state governments—though some, like South Carolina, are finally getting repealed. As Reason has previously explained, CON laws were originally intended to curb rising health care costs by limiting capital investment by hospitals and other health care providers. In 1974, Congress mandated that all states must pass CON laws for health care providers in order to continue receiving Medicaid funding. By the mid-1980s, amid mounting evidence that CON laws were not achieving that goal and were instead creating anti-competitive arrangements that drove costs even higher, Congress repealed the mandate. Unfortunately, the damage had been done.

Now, pretty much everyone (except the hospitals and other providers who are shielded from competition) agrees CON laws are bad policy. But removing the inertia in state capitals is no easy task, even after situations as ridiculous as what happened in Fort Mill.

If the repeal bill becomes law, state Sen. Wes Climer (R–Rock Hill), who sponsored it, predicts it will unleash health care investment in South Carolina. "Now all they have to do," he told The Post and Courier, "is raise the money and go build it."