Health & Human Services

The Pros of Cons

The assault on certificates of need, put in place decades ago to control health costs, couldn't come at a worse time.
by | July 2003

At first, St. Luke's played by the rules. The Missouri-based health care system wanted to build a new 52-bed hospital in Kansas City and applied to Missouri's Health Facilities Review Committee for the necessary certificate of need. When the certificate was denied, St. Luke's decided to try to change the rules of the game. It went to the state Supreme Court to ask the judges to strike down the certificate- of-need statute.

This is just one example of how certificate-of-need programs for hospital construction are coming under assault throughout the country. After a 1974 federal law requiring all states to have certificate-of- need programs was repealed in 1986, 14 states (including Missouri's neighbor, Kansas) expunged such programs from their books. Others have diluted the impact of their guidelines or tempered the extent of their oversight. Moreover, nearly one-third of the 27 states that regulate acute-care hospitals gave the go ahead to every application they received--arguably not in keeping with the profile of a watchdog agency.

This undermining of certificates of need couldn't come at a worse time. CONs, as they are known, were put in place as a cost-control device--a way for a state to ride herd over unnecessary duplication of services that can run up costs. While CON opponents argue that facilities developed in a free market increase competition and thereby keep prices low, there's a powerful countervailing argument, known as "Roemer's Law," which implies that a built bed is a filled bed is a billed bed. In addition, there's a 2002 study by the Big Three automakers that found lower health care costs for car manufacturers in states that have certificate-of-need regulation.

It seems to me that rather than do away with certificate-of-need oversight of hospital construction, it's more important to reinvigorate and reform the CON process. Certainly, the need to hold the line on costs is front and center. Health care inflation was at 8.7 percent in 2001, according to the most recent numbers available from the Centers for Medicaid and Medicare Services. Prescription drug costs pulled it far above inflation in the general economy (a lowly 2.8 percent in 2001) with a 15.7 percent increase over the previous year's spending. But hospital care is another strong inflationary force. Spending on hospital care increased 8.3 percent in 2001, its biggest one-year rise in a decade.

In part, the escalation comes from hospitals' improving their leverage in the market by merging and consolidating. As bigger entities, they've been able to negotiate higher reimbursement levels from health insurance and managed care organizations.

But there's another reason the hospital sector is creating new spending pressures: the rise of specialty or niche hospitals-- facilities set up, often by doctors, to provide just one narrowly targeted service, such as orthopedics or cardiac care. These boutique units raise a question about conflicts of interest when physicians own the hospital to which they send their patients. It's clear, however, that niche hospitals add to the oversupply of hospital beds.

Several cities are in the midst of controversies over the construction of new, for-profit specialty hospitals. In Milwaukee, for instance, two new cardiac care hospitals--with 32 and 54 beds, respectively--are under construction and scheduled to open within the coming six months. But Milwaukee already has nine hospitals offering cardiac care, and the state overall has 24, with an average of 400 cases each; the national average is 530 open-heart cases per hospital. The controversy centers on how the new facilities will affect health care costs in a region where such costs are significantly higher than in other parts of the country. Meanwhile, Wisconsin repealed its CON laws for hospitals a decade ago. An effort last year to resurrect those laws failed to gain any steam.

The problem, of course, is not just having the laws on the books but enforcing them with rigor. The knock on CON laws in the past few years has been that the boards that oversee them approve everything anyway, so why put hospitals to the costly effort of filing applications.

It's an issue Governor John Baldacci of Maine is addressing directly. Using his emergency rule-making power, he issued a moratorium in May to halt all new hospital construction and purchases of equipment that require a certificate of need. He has been concerned that the state's health care system is faltering as a result of overcapacity. In Bangor, for instance, two hospitals just a few blocks apart both have cardiac catheterization labs. Not surprisingly, the state's Certificate of Need office has been under frequent fire for approving just about everything it reviews. Baldacci's moratorium is designed to give state planners a chance to strengthen the regulations and thereby keep CONs as an important player in the fight to get health care spending under better control.

Baldacci's actions fly in the face of the national deregulation trend. But the pendulum may be poised to swing back in the other direction. Some hospitals--especially those threatened by niche competitors--have voiced nostalgia for the laws. Although not, of course, St. Luke's.

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