Why do Some States Still Require Certificates of Need?

April 18, 2017 BY Definitive Healthcare

Why do Some States Still Require Certificates of Need?

When it comes to state-level healthcare policy, possibly the longest-running and most controversial issues is the certificate of need (CON) process. CON laws are intended to reduce overutilization, duplication of services, and other wasteful capital spending that can drive up health costs. First mandated by the federal government in 1974, CONs require healthcare providers to justify any major capital projects and service changes to state regulators, who must decide if a project is economically sustainable and meets an actual medical need within the community. Though the legislation was repealed in 1987, 34 states still have CON laws of some type still in effect, despite near-universal criticism of the programs from economists and business advocacy groups, who say the rules stifle competition and diminish quality. As more states have come closer to repeal their CON laws or have recently succeeded, as New Hampshire did in 2016, it’s important to assess the current state of the debate and see where the issue is headed.

Researchers have had decades to assess the effects of CON laws, and their findings have been overwhelmingly critical of the process. Multiple studies have concluded that CON laws do not effectively control healthcare costs, while others have linked them to greater spending. According to critics, CON laws fail to discourage spending growth because of simple economic theory: by limiting competition, established providers have little incentive to reduce costs. CONs act as a barrier to entry by prioritizing the financial stability of existing providers, as well as by instituting real costs through the process itself, on which providers often spend tens of thousands of dollars, depending on the scope of the project. As a result, a facility that offers a medical service at a higher cost may be protected from any competitors that could do the same at a lower price, especially if it has unused capacity. In addition, some research has determined that the repeal of CON laws did not lead to a dramatic acceleration of healthcare spending.

New Hospital/Unit CON Statistics by Year

  Applications Approved Declined/Withdrawn No CON Required Median Value (M)
2017 (YTD)  68 7 2 1  $2.8
2016  398 79 21  21 $2.6
2015  770 143 47 35 $0.4

*Source: Definitive Healthcare

Critics have also pointed out that CONs are intended to prevent a spending growth risk that is no longer relevant. When CONs were first introduced, most providers were reimbursed under a retrospective, “cost-plus” payment system that paid for direct care spending plus a portion intended for profit and overhead costs. Providers in the cost-plus system had no incentive to reduce costs, as their profit was almost guaranteed. However, in the current diagnosis-related group (DRG) system, providers are reimbursed at a mostly fixed cost for specific care episodes, regardless of actual spending by an individual facility or provider. Organizations, therefore, have little reason to invest in major capital projects with a low certainty of financial return.

Because of the comparative lack of strong statistical evidence in favor of CON laws (CONs have demonstrated a slight ability to reduce acute-care utilization and expenditures in some states and positively impacted hospital efficiency, according to some studies), most supporters point out reasons why the traditional economic theory doesn’t apply to healthcare. In cases of emergency, for instance, patients usually are not in any condition to make a choice of providers, and any investment in emergency capacity that doesn’t offer meaningful benefits (such as a substantially lower response time) represents wasteful spending. Of course, patients can make choices for other decisions, such as planned or elective medical procedures. And while it’s true that insurance companies, rather than patients, directly pay for care, the growth of high deductible plans in recent years has made consumers more aware of out-of-pocket costs.

Perhaps the strongest argument for maintaining CON laws is that they help keep facilities with high volumes of poor and indigent patients afloat. A common hypothetical example is that of an ASC that opens near a critical-access facility. The ASC has structural advantages that allow it to perform outpatient surgeries at a lower cost, and it may not be required to accept Medicare or Medicaid patients, drawing off commercial payers from the hospital. As a result, the hospital has lost a critical revenue source it had been using to subsidize other services that were provided at a loss. The hospital may then be forced to cut those services if it wants to stay solvent, especially if it is privately owned and cannot raise revenue through tax increases. Ironically, most advocates of CON repeal concede that separate legislation may be necessary to address such a scenario, such as a requirement for new facilities to accept Medicaid patients, pay a certain amount of charity care each year, or contribute to a community cost-sharing pool.

It’s possible that another growing initiative, the push for price transparency in healthcare, may preempt some issues central to the CON question. Critics and supporters of CON laws tend to emphasize the future consequences of their repeal based upon consumer’s future behavior. Repeal advocates believe patients will flock to the cheapest provider, while CON supporters contend some existing providers will simply be unable to compete. While price may be the dominant factor in many markets, it has yet to be fully tested in the healthcare industry. Providers in most price transparency programs only release their charge data, which rarely reflects what insurers actually pay or what patients must spend during their deductible. In addition, existing patient preferences have often been based on non-financial indicators like provider reputation and convenience. It is unclear if consumers will respond strongly to price comparisons, and most providers would likely scramble to adjust their rates accordingly in order to keep their existing patients and find new ways to innovate which they may not have believed were possible before, a scenario often described by transparency advocates. While both sides may differ on when a provider should be allowed to enter a market or offer a new service, certainly they would agree on the benefits of a fully informed patient.

Definitive Healthcare has the most up-to-date, comprehensive and integrated data on over 7,700 hospitals, 1.4 million physicians, and numerous other healthcare providers. Our database includes records on over 17,000 CONs, sorted by status, value, project category, and application/decision date.

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