State should let hospitals compete

By JOHN HOOD

RALEIGH — By restricting competition among hospitals and other medical providers, North Carolina keeps the cost of health care down while maintaining or even enhancing the quality of services provided.

If that claim makes sense to you, then congratulations — you are among a select group of North Carolinians likely to view our state’s certificate-of-need (CON) law as a good public policy. You may well think it sensible and prudent for state regulators in Raleigh to attempt to determine how many hospital beds, MRI devices, and other medical options should be available in your community.

I confess that I’m not eligible to join your club. My experience tells me that when government artificially restricts competition and innovation, the result is unlikely to be in the interest of anyone other than the monopolists or cartel members fortunate enough to obtain such a permission slip from the government.

It isn’t just my personal experience telling me that squashing competition is bad for consumers, however. My reading of the empirical evidence renders CON regulation impossible to defend in a state that has on so many other fronts made progress in streamlining regulations and maximizing economic freedom.

In 1974, the federal government ordered North Carolina and all other states to implement CON as a form of central planning in health care. At the time, the rationale offered was that because of the way medical services are financed and consumed, traditional market forces can’t work properly. If multiple hospitals are allowed to own competing machines and offer competing services, the argument went, costs will go up, not down. Hospitals hurting for revenue will have strong incentives to keep expensive machines in operation, even if there is little likely benefit to patients, and simply pass the bill to institutional payers.

It was never a ridiculous rationale. In fact, the prevalence of third-party payment — private insurance, Medicare, Medicaid, and other programs — does distort how medical services are bought and sold.

Still, the case for CON regulation must rest on more than theory. Do state-mandated monopolies and cartels really make health care less expensive or more efficacious? Alas, no. Because the original 1974 federal mandate was later repealed, some states have abolished or significantly curtailed their CON systems. North Carolina hasn’t. In fact, a Mercatus Center study found that our state ranked second in the nation in the number of medical facilities and services subject to CON.

Because these regulations vary widely across states, researchers have been able to exploit that variation to evaluate their effects. Most studies show that CON doesn’t reduce health care costs. Indeed, quite a few suggest that constraining competition increases cost.

More troubling, it seems to me, is the growing body of evidence linking CON regulations to adverse outcomes for patients. For example, a 2021 paper published in the Journal of Health Economics estimated that by restricting access to services, the advent of CON increased the number of heart-attack deaths by as much as 10%.

A 2020 paper published in the Journal of Private Enterprise explored the range of patient experiences in the emergency departments of hospitals across CON and non-CON states. The authors found that CON laws were associated with longer wait times to be seen, longer wait times before admission to hospitals, longer wait times until discharge from the emergency department, and longer wait times to receive medication. “These metrics indicate that multiple CON laws could be a significant detriment to patient outcomes in terms of hospital cost and patient mortality even though the laws’ stated benefits are to help patients,” the authors wrote.

Another recent study, published in the Journal of Risk and Financial Management, looked at the timely question of how state regulation affected hospital capacity during the COVID crisis. “Certificate-of-need laws seem to have exacerbated the risk of running out of beds during the COVID-19 pandemic,” the authors concluded.

North Carolina needs more health-care competition, not less. If you ever belonged to the CON club, please reconsider your membership status.