Issue Brief – Vermont’s CON Laws: More Harm Than Good

By David Flemming & Rob Roper
2017

WHAT IS A CERTIFICATE OF NEED (CON) LAW?

A Certificate of Need (CON) is a government-granted authorization that new or existing healthcare providers and facilities must apply for before making large capital expenditures, expanding services, or simply opening up shop. It is essentially a permission slip from government to do business.[1]

THEORIES, PRO & CON

CON law proponents believe that healthcare costs rise when healthcare facilities “overbuild”. Therefore, in order to lower the cost of healthcare, government must (and is best qualified) to determine the level of “genuine need” for healthcare services that exists in each community, regulate investment in expanded services, and control and restrict the supply of healthcare services.[2]

Opponents believe that CON laws raise healthcare costs by increasing the regulatory costs for providing healthcare, which are then passed on to consumers, artificially lowering the supply of healthcare (increasing demand and therefore price), which also decreases patient access to genuinely needed medical care.

BACKGROUND: THE WASTE PRODUCT OF A FAILED POLICY

In the 1960’s and early 1970’s, it was policy for private insurers and the US government to compensate medical facilities for unoccupied space and unused medical equipment. This incentivized facilities to acquire more of both, despite a lack of actual demand for services.

In order to control the practice and rising costs associated with manufacturing surplus beds, etc., Congress passed the National Health Planning and Resources Development Act of 1974 (NHPRDA) to prevent “over-investment” in medical technology.[3] This law subsidized Certificate of Need (CON) programs at the state level, encouraging each state to act as a gatekeeper when medical facilities wanted to expand, and to block them from doing so when deemed unnecessary.

However, the CON laws proved counterproductive. Between 1974 when NHPRDA passed and 1989, hospital care expenditures exploded from $52.4 billion to an estimated $230.1 billion.¹ Faced with the reality that the regulations didn’t work, Congress repealed NHPRDA in 1986, and ended the state subsidies. “At first glance, the idea [of certificate of need] may have looked pretty good. In practice, however, the effect of certificate-of-need on health care costs has been dubious, at best. And the program has certainly been insensitive in many instances to the true needs of our communities,” read the congressional testimony.

Given the outcomes and with the end of the federal subsidy, fifteen states discontinued their CON programs, but thirty-five, including Vermont, kept these anachronisms in place. Today, Vermont subjects thirty categories of healthcare to CON, more than any other state.

TODAY: WHAT THE EVIDENCE SHOWS

Contrary to their stated purposes, in practice CON laws raise healthcare prices, lower the quality of care, and significantly reduce access to healthcare in rural areas. The differences between states with and without CON laws are striking.

Cost Containment

A wide body of work concludes that CON laws do not restrain healthcare costs and, more often than not, add to them. A fact sheet prepared by the American Medical Association (AMA) titled, “Certificate of need: Evidence for repeal” cites several such studies, including Washington’s State Joint Legislative Audit and Review Committee (1999) stating that CON laws have “not restrained overall per capita healthcare spending.”[4] Rivers, Fottier and Younis (2007) found that CON laws do not “contain hospital costs,” but may increase costs by way of reducing competition.[5] Morrisey (2000) echoed that sentiment, with the additional note that “prices are higher” in states with CON laws.[6]

Why? Several reasons.

First, simple laws of supply and demand: restrict supply (which is what CON laws are designed to do) and demand/prices go up.

Second, CON laws eliminate competition and foster monopolies, which inevitably leads to higher costs and reduces the quality of care.

Additionally, even when competitive facilities are granted CONs, the price of going through the application process is usually expensive in time and treasure, and these costs are ultimately passed on to the consumer, artificially raising the price of healthcare services.

Quality of Care/Outcomes

A recent study (Stratmann and Wille, 2016) found that hospitals in states without CON laws had statistically significant lower rates of “Death among Surgical Inpatients with Serious Treatable Complications,” “Pneumonia Mortality,” “Heart Failure Mortality,” and “Heart Attack Mortality.”[7]

Access to Care

Some advocates of CON laws argue that there is a special need government intervention in rural areas to ensure adequate access to healthcare. The theory goes, for example, allowing Ambulatory Surgical Centers (ASC’s) to compete unchecked with rural hospitals would result in ASC’s “cherry picking” the most profitable patients and forcing hospitals out of business. In reality, however, the opposite appears to be true.

A study by Stratmann and Koopman (2016) found that CON states actually have 30 percent fewer rural hospitals per 100,000 residents than do non-CON states and 13 percent fewer rural ASCs per 100,000 rural population.[8] In other words, states with CON laws have the worst of both worlds — fewer hospitals and fewer ASC’s providing access to medical services for rural patients.

Even hospice care is negatively affected by CON laws. Carlson (2010) found that “the existence of CON policies was associated with more limited geographic access to hospice.”[9]

Impact on Charity Services

CON law proponents argue that without CON laws, medical facilities will lose the excess profits they need to provide care to those who cannot afford it.

Stratmann and Russ (2014) studied whether or not states with CON programs provide more or less indigent care than those without CON.[10] Since Medicaid provides the most funding for low-income groups in the US, Medicaid patients were a good group to test this hypothesis. In both CON and non-CON states, “approximately 17 percent of all inpatient days are accounted for by Medicaid patients” indicating that the presence of CON laws does not increase the availability of charity care.

Cronyism & Corruption

Though CON laws were originally implemented as a means to control costs, they have been corrupted over the years into a mechanism for politicians to grant highly profitable monopolies to favored entities and then to protect them from unwanted competition. Patients and taxpayers pay the price (Rahman, 2016).[11]

In 2004, the Federal Trade Commission found that CON laws have the effect of “shielding incumbent health care providers” from groups interested in expanding patients’ access to healthcare.[12]

Missouri’s Senate Interim Committee on Certificate of Need discussed a “distinct chilling effect” that discouraged “modernization, specialization and efficiency in healthcare.”[13]

Yee (2011) described the process in detail. Current hospitals use the CON process as a way to “keep tabs” on potential competitors. The months-long process hurts a medical facility’s ability to “recruit top-tier specialist physicians.”[14]

Given these considerations, it is altogether unsurprising that CON laws enable CEOs of non-profit hospitals in CON states to receive “$91,000 of additional pay per year” (Eichmann and Santerre, 2010).[15] According to Vermont Digger, “In 2015, the average pay and benefits for a CEO at a Vermont hospital, as well as Dartmouth-Hitchcock Medical Center in Lebanon, New Hampshire, was $612,698. The median was $435,554.” The CEO of UVM Medical Center’s compensation package exceeded $2 million that year.

THE VERMONT EXPERIENCE

Vermont bears the dubious distinction of being the state with the most CON laws on the books. To be exact, we subject thirty different categories of healthcare to the Certificate of Need process. Our results are consistent with national findings – higher costs, restricted access.

Fastest Rising Hospital Costs in the Nation

A study by the Kaiser Foundation determined that between 1990 and 2014 hospital costs in Vermont have increased faster than any other state in the US.

Less Access

Recent articles in the Vermont press highlight long wait times for patients, especially for specialty care.[16]

Evidence for the CON-induced restriction of supply can be seen in the number of hospital beds that Vermont has, relative to the rest of the region. In 1999, Vermont had the second-most hospital beds per thousand residents in New England. By 2015, Vermont had the lowest per thousand of any New England state. Despite that, according to the Kaiser Family Foundation, per-capita spending in Vermont hospitals nearly tripled from $1,570 to $4,670 from 2000 to 2014.[17]

Clearly, the theory that reducing the number of hospital beds will reduce overall healthcare costs has failed the test of real world experience.

Disincentives for Cost Saving Innovation

Compared to traditional hospitals, Ambulatory Surgery Centers (ASC’s) save between 17% to 43% on surgeries.[18] Since Vermont has the most extensive CON program in the country, it is not surprising that Vermont has only one ASC. That is 27 fewer than New Hampshire, which has twice the population of Vermont, and 18 fewer than Wyoming, which has less population. No other state has fewer than nine.

CON laws also create a disincentive to adopt new technology. In 2016, several new innovations were unveiled: a tool for removing blood clots, a brain implant for helping paralyzed people move, and an improved screening process for ovarian cancer. The long and costly process of having to ask permission to invest in new technologies such as these means we risk treating patients with outdated and perhaps more costly medical procedures.

Squeezing the Competition (and the Consumer)

According to the State of Vermont Green Mountain Care Board’s (GMCB) website, a CON applicant pays an official fee between $250 and $20,000 depending on the size of the project.[19] That does not take into consideration the money needed to pay qualified consultants and the time needed to complete the application process (as opposed to investing in patient care), which can be years. Such obstacles can deter would be competitors from even attempting to enter the market as no outcome is assured. If a project is approved, these added costs are inevitably passed on to the consumer, raising unnecessarily the cost of healthcare.

CONCLUSIONS

More money spent on CON fees means less money invested into patient care. Worse still is the wasted time for processing CON applications. Two years waiting for a CON may seem insignificant to regulators, but is an eternity in the constantly and rapidly evolving healthcare marketplace

In 2007, Mark Botti, Chief of Litigation for U.S. Department of Justice, Antitrust Division, testified to the The CON Special Committee of the State House of Representatives of the General Assembly of the State of Georgia.[20] He implored the state of Georgia to end its Certificate of Need laws, using Vermont as a case study. According to Mr. Botti, Vermont’s home health agencies entered into “territorial market allocations,” divvying up Vermont into “exclusive geographic markets” that prevented competitive entry into the marketplace for healthcare. The Department of Justice’s research “found that Vermont consumers were paying higher prices than were consumers in states where home health agencies competed against each other.” When the federal agency dedicated to breaking up monopolies uses Vermont as an example to other states for how not to regulate healthcare, perhaps it’s time we reconsider CON laws.

Studies And Links

https://sourceonhealthcare.org/legislative-topics-certificates-need/#inbox/_blank

National Council of State Legislators https://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx

Federal Trade Commission https://www.ftc.gov/system/files/documents/advocacy_documents/joint-statement-federal-trade-commission-antitrust-division-u.s.department-justice-certificate-need-laws-south-carolina-house-bill-3250/160111ftc-doj-sclaw.pdf

American Medical Association https://www.ama-assn.org/sites/default/files/media-browser/public/arc/con-evidence-for-repeal.pdf

Rivers, Fottier and Younis https://journals.sagepub.com/doi/pdf/10.1177/0017896907080127

American Medical Association, https://www.ama-assn.org/sites/default/files/media-browser/public/arc/con-evidence-for-repeal.pdf

Stratmann and Wille https://www.mercatus.org/system/files/mercatus-stratmann-wille-con-hospital-quality-v1.pdf

Stratmann and Koopman https://www.mercatus.org/publication/entry-regulation-rural-health-care-certificate-of-need-laws-ambulatory-surgical-centers

Carlson https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3000898/

Stratmann and Russ. https://www.mercatus.org/publication/do-certificate-need-laws-increase-indigent-care

Rahman https://www.ncbi.nlm.nih.gov/pubmed/26223431

Federal Trade Commission https://www.ftc.gov/sites/default/files/documents/reports/improving-health-care-dose-competition-report-federal-trade-commission-and-department-justice/040723healthcarerpt.pdf

Missouri’s Senate Interim Committee https://www.ama-assn.org/sites/default/files/media-browser/public/arc/con-evidence-for-repeal.pdf

Yee https://nihcr.org/analysis/improving-care-delivery/prevention-improving-health/con-laws/

Eichmann and Santerre https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwjglbOTg9_VAhWILyYKHfdxAIcQFggvMAI&url=http%3A%2F%2Fwww.ibrarian.net%2Fnavon%2Fpaper%2FDo_Hospital_Chief_Executive_Officers_Extract_Rent.pdf%3Fpaperid%3D18017028&usg=A

https://www.burlingtonfreepress.com/story/news/2017/01/13/patients-doctors-complain-wait-times-too-long-specialists-uvm-medical-center/95220170/

Kaiser Family Foundation https://www.kff.org/health-costs/state-indicator/expenses-per-inpatient-day/

Hospital for Special Surgery, New York, NY, https://www.ncbi.nlm.nih.gov/pubmed/27792057

Green Mountain Care Board https://gmcboard.vermont.gov/con

Federal Trade Commission https://www.ftc.gov/sites/default/files/documents/reports/improving-health-care-dose-competition-report-federal-trade-commission-and-department-justice/040723healthcarerpt.pdf

Footnotes

[1] https://sourceonhealthcare.org/legislative-topics-certificates-need/#inbox/_blank

[2] National Council of State Legislators, https://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx

[3] Federal Trade Commission, https://www.ftc.gov/system/files/documents/advocacy_documents/joint-statement-federal-trade-commission-antitrust-division-u.s.department-justice-certificate-need-laws-south-carolina-house-bill-3250/160111ftc-doj-sclaw.pdf

[4] American Medical Association, https://www.ama-assn.org/sites/default/files/media-browser/public/arc/con-evidence-for-repeal.pdf

[5] Rivers, Fottier and Younis, https://journals.sagepub.com/doi/pdf/10.1177/0017896907080127

[6] American Medical Association, https://www.ama-assn.org/sites/default/files/media-browser/public/arc/con-evidence-for-repeal.pdf

[7] Stratmann and Wille. https://www.mercatus.org/system/files/mercatus-stratmann-wille-con-hospital-quality-v1.pdf

[8] Stratmann and Koopman https://www.mercatus.org/publication/entry-regulation-rural-health-care-certificate-of-need-laws-ambulatory-surgical-centers

[9] Carlson. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3000898/

[10] Stratmann and Russ. https://www.mercatus.org/publication/do-certificate-need-laws-increase-indigent-care

[11] Rahman, https://www.ncbi.nlm.nih.gov/pubmed/26223431

[12] Federal Trade Commission, https://www.ftc.gov/sites/default/files/documents/reports/improving-health-care-dose-competition-report-federal-trade-commission-and-department-justice/040723healthcarerpt.pdf

[13] Missouri’s Senate Interim Committee, https://www.ama-assn.org/sites/default/files/media-browser/public/arc/con-evidence-for-repeal.pdf

[14] Yee, https://nihcr.org/analysis/improving-care-delivery/prevention-improving-health/con-laws/

[15]Eichmann and Santerre, https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwjglbOTg9_VAhWILyYKHfdxAIcQFggvMAI&url=http%3A%2F%2Fwww.ibrarian.net%2Fnavon%2Fpaper%2FDo_Hospital_Chief_Executive_Officers_Extract_Rent.pdf%3Fpaperid%3D18017028&usg=A

[16]https://www.burlingtonfreepress.com/story/news/2017/01/13/patients-doctors-complain-wait-times-too-long-specialists-uvm-medical-center/95220170/

[17] Kaiser Family Foundation, https://www.kff.org/health-costs/state-indicator/expenses-per-inpatient-day/

[18] Hospital for Special Surgery, New York, NY, https://www.ncbi.nlm.nih.gov/pubmed/27792057

[19] Green Mountain Care Board, https://gmcboard.vermont.gov/con

[20]Federal Trade Commission, https://www.ftc.gov/sites/default/files/documents/reports/improving-health-care-dose-competition-report-federal-trade-commission-and-department-justice/040723healthcarerpt.pdf