CON Process Should Be Part of HC Reform

Posted on June 29, 2011

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The majority of recent healthcare reform focus has been on cost, access and quality. Part of the cost aspect that has not been critiqued by anyone in the recent past is the certificate of need (CON) process. 

A certificate of need is an approval by a state that allows a healthcare project to be built. Originally a federal mandate for all states, thirty-six states currently require CON approval for healthcare projects. Requirements vary from state to state, but states that participate in CON reviews demand a general package of information prior to review which includes schematic plans, program breakdown, construction cost, etc.  And typically any healthcare project involving an addition of inpatient beds to a facility requires a CON.

CONs have been looked at many times before, yet clearly need a revisit. The CON process was initially posited as a way to control healthcare costs.  The National Conference of State Legislatures website states:

“The basic assumption underlying CON regulation is that excess capacity (in the form of overbuilding) directly results in health care price inflation.  When a hospital cannot fill its beds, fixed costs must be met through higher charges for the beds that are used.”

This premise is flawed because it does not hold for other fixed cost markets.  Hotels are not regulated and guests are not complaining that they are being charged higher rates because there are open rooms. Airlines have tremendous excess capacity (seats) and this has resulted in consolidation within the market—airlines mergers, route reduction, more efficient fleets—not price gouging against travelers.

Since CONs are a market equalizer, i.e. they make healthcare bed supply a controlled variable (theoretically) in the healthcare cost equation, and since healthcare costs have been growing out of control over the past twenty years while the CON process has been in full effect, it is not a stretch to draw two conclusions:

  1. The CON process has not helped control healthcare costs. Recent consultant analyses report one in three hospitals will fail financially and close or will be required to merge / sell to a larger, more successful hospital or system to stay open. This sounds like a management problem, something the CON cannot address, but also a bed supply problem—the exact reason the CON process was created.
  2. Capital costs for healthcare (read:  new projects) are not the genesis of healthcare cost creep. In a typical hospital balance sheet, new construction is a fraction of more serious, burdensome, and difficult to manage expenses like:  personnel, equipment, and regulatory compliance.

In fact, CONs can create false demand and overcapacity. Recently I spoke with the Director of Construction for a large multi-hospital system in a very contested CON state. He said when a CON finally gets approved (after years of appeals and lawsuits), the hospital feels obligated to max out and build what was granted—even if it is unnecessary. A CON may allow for 100 beds in a new facility, and the system will build them all out rather than forgo the opportunity because that capacity will either expire and is costly to reapply for, or could be given to a competitor.  He mentioned if his state was non-CON, they would probably build only what was needed, maybe 20 beds. Thus, a CON creates a hording mentality.

The other problem is that the CON is granted based on community need, not a business case decision. A CON review might uncover a greater ‘community demonstrated need’ than what was applied for, which might provide capacity overkill. However, it could also be too little to be economically viable. For instance, it may take 50 beds to break even in a new suburban hospital location, but if a CON is approved for 35—then what?

In any free market, demand dictates supply and oversupply means lower prices for consumers, not higher as the CON rationale suggests.  Healthcare does not behave like the free market because it is constrained; yet the federal and state governments have not had a successful history of correctly predicting and manipulating markets via regulation for the benefit of consumers.

CON proponents argue healthcare is not like other consumer markets; yet that is why the system is broken—healthcare needs to be like everything else:  integrated and comparable between service providers.  When the dust settles on the transparency of healthcare quality, outcomes, and cost improvement initiatives, patients will be able to shop these services like anything else. In the meantime, if the government is attempting to kick-start the economy, it can kick-start healthcare reform by abolishing Certificate of Need statutes.

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