Have you ever heard of certificate of need?
Neither had I, until a few years ago when I began to learn more about the health policy environment in Maine, and just how backward it has been.
Put simply, certificate of need is a regulation that requires healthcare entities to obtain government approval before making large capital expenditures that create or expand health infrastructure above a certain financial threshold.
In other words, it makes the healthcare industry justify projects by demonstrating that they are needed.
How do you predict the healthcare needs of a region? How do you project them 10, 20 or 30 years into the future?
Great question, because you can’t. Neither can I. Neither can government bureaucrats.
One of Maine’s most pressing public policy challenges is controlling the cost of health care, and certificate of need is one of the single most unnecessary regulations on the books, and it helps increase cost by contracting the supply of healthcare, and limiting competition.
In 2009, the most recent year for which complete data is available, Maine’s per capita health care expenditures ranked 5th in the country, up from 9th in 2000 and 31st in 1992.
It is no coincidence that the rise in our health care expenditures relative to other states occurred as the government sought to tighten its regulatory control over the healthcare sector through certificate of need.
So where did this foolish idea come from?
Certificate of need policies originated with the concept of Roemer’s Law, the idea popularized by the phrase, “a built bed is a filled bed.” You could also characterize it as “if you build it they will come.”
In other words, the claim is that supply drives demand in healthcare and a medical provider need only expand its capacity in order to attract more patients and generate more revenue.
This notion has been widely discredited, of course. For example, Roemer’s Law predicts that hospital occupancy rates would consistently approach 100 percent. Yet between 1970 and 2000, national hospital occupancy rates dropped from 77 percent to 67 percent.
In 1980, shortly after CON regulations became popular in the United States, a paper was published in the Michigan Law Review in which the authors lay out the historical roots of certificate of need.
In the 1960s, large hospitals began to worry that suburban hospitals and specialty clinics might attract some of their most lucrative patients. To avoid that unwelcome competition, hospitals pushed for CON regulations, using a cost-saving rationale as a pretext.
The federal government began incentivizing states to enact certificate of need laws in 1974 by tying financial strings to passage. After realizing how ineffective the regulations were, those incentives were repealed in 1986. The Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice now actively fight against certificate of need laws nationwide.
Still, the laws that were already on the books persisted, and needless restrictions remained.
Supporters of certificate of need claim that it protects small, rural hospitals from being pushed out of the market by Maine’s largest providers. Yet large hospitals are rarely denied certificate of need applications, and small, entrepreneurial providers are most likely to lack the technical and legal resources to navigate the certificate of need process.
If anything, that process protects large hospitals by keeping new competitors out of the market. In 2007, for example, InSight Premier Health was denied a CON to operate a CT scanner in Scarborough, despite evidence that it could have offered patients in the area shorter wait times and lower prices.
Why? Largely because Mercy Hospital objected to the project.
This is just one example of powerful health care entities using the CON process to limit competition and maintain their customer base.
Study after study demonstrates that certificate of need regulations allow incumbent health care providers to charge higher prices than would be possible under more competitive conditions. As a result, per capita health care spending in certificate of need states is 11 percent higher than in non-CON states.
Fortunately a number of states have been wising up to the foolishness of this regulation. New Hampshire, just next door, passed a repeal of certificate of need in 2015 which just recently took effect.
To its credit, Maine has taken positive steps to curtail the number of spending categories and has raised the financial threshold that the regulation applies to.
Still, this is a classic example of a regulation which does not serve a useful purpose and should be ended. It is time we did just that.