A CON Gone Bad

Last week, William and Mary held its annual Benjamin Rush Symposium, at which selected students presented papers addressing issues in health law and bioethics. Among the many well-researched and articulate presentations, one that was particularly enlightening (in that it addressed a topic directly relevant to our daily lives yet little known among most of us) was Jeff Palmore’s presentation on certificate of need (CON) laws.

CON laws are state laws that essentially require healthcare facilities to obtain a permit from the state before constructing new buildings, expanding existent ones, purchasing new medical equipment, or offering new medical services. State approval is based on an evaluation of current need for the service or facility and further takes into account factors like location, accessibility, and cost.

CON laws originated during the 1950s and 1960s and culminated in 1974 when the United States Congress passed the National Health Planning and Resources Development Act, requiring states to pass CON laws in order to be eligible for federal subsidies for hospital construction. This federal mandate was enacted with three daring objectives in mind: to restrain skyrocketing health care costs, to prevent unnecessary duplication of health resources and to achieve equal access to quality health care. The idea was that by restricting supply, allocating services based on geographic location and need, and creating local monopolies, a state could override the fluctuations of the market and the selfish interests of particular healthcare players, and thereby control healthcare costs.

Only a few years later, however, it became obvious that CON laws fall short of reaching their goals and come with problems and costs of their own. Numerous empirical studies, including a series of studies conducted by the Federal Trade Commission in the 1980s (PDF) and again in 2004 (PDF), have shown that CON laws not only fail to contain healthcare costs but may actually increase them by suffocating competition and curtailing efficient capital investments. CON law restrictions on market entry in effect shield unproductive and inefficient healthcare providers from competition and take away their incentives to introduce new services or upgrade existing ones. Instead of going down, prices are driven up by the created state-endorsed, Sherman-Act-exempt local monopolies.

Based on these empirical data, Congress let the federal mandate for CON laws expire in 1986, but by that time forty-two states and the District of Columbia had enacted CON laws. The vast majority of these laws remain in effect today despite the limited and inconclusive evidence to support them.

If you ever wondered why Sentara is the only hospital in our area and why it’s located all the way off of highway 199 rather than in our community of Williamsburg, your answer lies in the Virginia CON law system. When Sentara first tried to enter the Williamsburg healthcare market, it applied for a CON but was denied by the state because there wasn’t sufficient evidence of need for a new hospital facility in the area. Sentara proceeded to buy out the existent local hospital and thus became the sole provider in the area. Whenever competitors try to enter the market, Sentara can rely on one of two alternatives to maintain their monopoly. If there is no need for new facilities, the competitor’s CON application will be denied by the state. If there is need for new facilities, all Sentara has to do is file a competitive CON application. Since it is generally cheaper to expand an existent facility than to build a brand new one and since the state accounts for cost in the approval process, Sentara’s application will prevail over the competitor’s application.

Sensitive to this problem, legislators in Virginia are currently trying to tweak the CON laws in a way that will encourage a healthy dose of competition and protect consumers from the dangers of an uncontrolled monopoly. However, many critics remain skeptical as they fear that this legislation will only worsen the problem by superficially ameliorating it, instead of doing the sensible thing – abandoning the CON law system altogether.

Photo courtesy of Flickr user ryanrules.

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Published in: on February 17, 2009 at 11:27 pm Comments Off on A CON Gone Bad

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