CON laws are too risky

By John Hood

RALEIGH — I’ve long thought the North Carolina General Assembly should reform our state’s archaic and anti-competitive requirement for certificates-of-need. In the post-COVID world we are entering, however, CON reform is no longer just a good idea. It’s an imperative.

Created during the 1970s in response to a federal mandate, our certificate-of-need system requires hospitals, physicians, and other health providers to get what amounts to a permission slip from state regulators to purchase new equipment, add a service, or open a new location.

The original idea, believe it or not, was to reduce the cost of health care. Although restricting competition usually has the effect of jacking up prices and diminishing quality, CON advocates argue that health care isn’t like other sectors of the economy. Because so much of the bill is financed indirectly, by governments or private insurers, neither providers nor patients have sufficient incentives to control costs — at least when it comes to high-dollar services for which patients will quickly meet deductibles and copays.

If a hospital wants to maximize revenue, it can purchase, say, an MRI machine and then keep it busy through referrals by affiliated physicians, even when the potential diagnostic value for patients is modest. That’s the argument from CON proponents, anyway. They contend that only by limiting the number of MRI machines or other offerings can the state keep a lid on overutilization.

Third-party payment creates perverse incentives in medical care. That much is certainly true. But central planning by government bureaucrats isn’t the right answer. It rarely is.

Some 15 states have repealed their certificate-of-need laws. They could do so because the federal government, in a rare moment of wise introspection, got rid of its original CON mandate back in the 1980s. There was little evidence it was having the desired effect of dampening health-care inflation.

Since then, scholars have produced a mountain of studies examining CON laws from every angle. Many confirm the basic economic insight that if you protect incumbent providers from competition, you get higher prices and less-quality services. In fairness, I’ll say that some studies show little relationship between CON and average costs. Even if those findings are true, though, it still means the system stymies medical innovation and consumer choice without any appreciable benefit.

Reformers have been trying to break up North Carolina’s medical cartels for many years. So why do I argue that the COVID pandemic has strengthened the case for immediate action? Well, consider this study recently published in the Journal of General Internal Medicine.

Researchers from Brown University looked at the experience of vulnerable patients in nursing homes. After adjusting for other factors, they found that counties with larger-than-average nursing homes tended to have more confirmed COVID cases and faster growth in COVID caseloads than counties with smaller homes did. The study also found that counties subject to certificate-of-need laws had higher incidence of COVID.

The virus doesn’t discriminate on the basis of regulatory policy, of course. The likely causal factor here is that jurisdictions that restrict competition in nursing-home care tend to have fewer facilities, each with relatively large bed counts. Places with more robust competition tend to have more facilities with smaller bed counts.

This is only the latest study to confirm the negative effects on CON regulation on the quality and availability of medical care. On average, CON states have 30 percent fewer rural hospitals and 13 percent fewer rural ambulatory surgical centers compared to states without CON laws. “The elderly, the poor, people under time constraints, and people with emergency medical needs would be better served by having medical services nearby,” my John Locke Foundation colleague Jordan Roberts wrote, “rather than traveling to a hospital or clinic fortunate enough to have received CON approval for a service or procedure.”

It’s time to let providers and patients make decisions for themselves. It’s time to reform CON in North Carolina. The alternative, the status quo, has simply become too risky to tolerate any longer.