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Landscape Ripe for Certificate-of-Need Reform

September 29, 2016

Consumer Power Report #519

Is a fruit farmer operating in a “free market” if he must pay for and obtain special permission from a state bureaucracy before adding a row to his orchard or even a single tree to his grove? Few would describe such a market, or the farmer himself, as “free.”

Nor are patients and providers free to improve the health care landscape in the three dozen states restricting providers from expanding their facilities, services, and equipment.

Their loss of freedom translates into riskier health care--lower quality of hospital care, and higher death rates following post-surgery complications--in 35 states and the District of Columbia.

Patients in these states have their lawmakers to thank for their elevated risk. These states have yet to repeal laws requiring operators of medical facilities to obtain a “certificate of need” (CON) from a state board before expanding to new locations or even improving existing facilities.

CON laws are holdovers from the 1960s and 1970s, when many lawmakers thought restricting the supply of full-fledged hospitals would lead to the use of less expensive alternatives. Congress coaxed most states to adopt CON laws by threatening in 1974 to withhold funding from those that did not, according to Matthew Mitchell and Christopher Koopman’s “40 Years of Certificate-of-Need Laws Across America,” an article posted by the Mercatus Center at George Mason University on September 27.

Congress repealed the federal CON statute in 1986, having found CON laws failed to achieve their stated goals. More than a dozen states followed suit.

Now CON proponents have moved the goal posts for this antiquated law, claiming that funneling more patients through fewer hospitals will increase providers’ medical expertise, thus improving patient care, Mitchell and Koopman write.

Unfortunately, CON laws undermine proponents’ new stated goal, just as they undermined proponents’ 1960s and 1970s goals. Instead of improving quality of care, “CON laws are associated with lower overall hospital quality,” write Dr. Thomas Stratmann and David Wille in their 51-page working paper, “Certificate-of-Need Laws and Hospital Quality,” also published by Mercatus on September 27.

Worse, CON laws now appear to increase patients’ risk of death caused by pneumonia, heart failure, and surgery complications:

“In particular, we find that mortality rates for pneumonia, heart failure, and heart attacks are significantly higher in hospitals in CON states relative to those in non-CON states,” Stratmann and Wille write. “We also find that deaths from complications after surgery are significantly higher in CON states.”

One reason CON laws create riskier health care environments is they erect a barrier against competitors to existing providers.

Consumers--i.e., patients--benefit from competition, because competition gives providers a financial incentive to innovate and outperform one’s rivals. CON laws, by contrast, essentially create government-protected monopolies and oligopolies that lack a financial incentive to offer the best care at the best value.

Some CON laws even create an incentive for medical facilities operators to avoid making repairs. Earlier this year, a Tennessee hospital owner wishing to invest more than $5 million in upgrades would first have had to pay a nonrefundable CON application fee of at least $11,250 (i.e., $2.25 per $1,000 of capital investment), according to the state’s old CON application.

Tennessee raised the $5 million construction CON application threshold in May, but the state’s Health Services and Development Agency (HSDA) appeared to retaliate on July 1, the day the reformed CON law took effect, by increasing the application fee to $5.25 per $1,000 of capital investment.

HSDA also increased the new nonrefundable minimum CON application fee from $3,000 to $15,000 and raised the maximum nonrefundable fee from $45,000 to $95,000, according to an orange banner plastered across the top of HSDA’s website at the time of this writing.

Until last summer, Tennessee’s CON program imposed restrictions on 20 areas of health care, making it the seventh-most restrictive in the country in 2015, when Mercatus ranked the 36 states with CON programs.

Other CON states should take little consolation in having programs less restrictive than Tennessee’s. State CON programs restrict 14 services or procedures on average.

Instead of waiting on a new president or the next Congress, lawmakers in three dozen states can start working now to improve the country’s health care landscape. CON laws are ripe for plucking.

-- Michael T. Hamilton (mhamilton@heartland.org) is a Heartland Institute research fellow and managing editor of Health Care News, author of the weekly Consumer Power Report, and host of The Heartland Institute’s Health Care News Podcast.


IN THIS ISSUE:


THE REPORT EVERY STATE LEGISLATOR SHOULD READ

Expanding Medicaid won’t save hospitals’ bottom lines.

Regardless of the outcome of November’s elections, health care will likely return to the forefront of policy debates in 2017 -- both in Washington and in state capitals across the country. Should Hillary Clinton capture the White House, liberal groups, proclaiming that Obamacare is here to stay, will likely push to expand Medicaid in the states that have rejected the program’s massive expansion under Obamacare. Hospital groups will no doubt work hand-in-glove with the Left on these efforts, claiming that only Medicaid expansion will allow hospitals to remain viable, particularly in rural areas.

That’s why a report released by the Congressional Budget Office (CBO) earlier this month should be read by every state legislator in every state likely to debate expansion next year. In analyzing profit margins over the coming decade, the nonpartisan CBO concluded that Medicaid expansion will not make a material difference in hospitals’ overall viability.

The CBO paper modeled the impact of various provisions of Obamacare in 2025, and compared those outcomes with hospitals’ profitability in 2011, before the law’s major provisions took effect. Each scenario allowed CBO analysts to isolate the effects of separate provisions -- for instance, the law’s reduction in Medicare payments to reflect improved productivity, expanded health-insurance coverage through Medicaid and the exchanges, and other payment changes.

By analyzing the effects of expanded insurance coverage, and examining whether expanding Medicaid in more states would impact hospitals’ financial condition, CBO shows that such an expansion will not materially improve their solvency:

“Differing assumptions about the number of states that expand Medicaid coverage have a small effect on our projections of aggregate hospitals’ margins. That is in part because the hospitals that would receive the greatest benefit from the expansion of Medicaid coverage in additional states are more likely to have negative margins, and because in most cases the additional revenue from the Medicaid expansion is not sufficient to change those hospitals’ margins from negative to positive. Moreover, the total additional revenue that hospitals as a group would receive from the newly covered Medicaid beneficiaries ... is not large enough relative to their revenues from other sources to substantially alter the projected aggregate margins.’ …”

SOURCE: Chris Jacobs, National Review


VERMONT AND FEDS AGREE ON ‘ALL PAYER’ SYSTEM FOR PAYING DOCTORS MONTHLY AS A GROUP

Gov. Peter Shumlin and a team of health care officials announced Wednesday they have a draft agreement with the federal government to overhaul Vermont’s health care payment system.

The step comes after nearly two years of negotiations involving the Agency of Administration, the Agency of Human Services, the Green Mountain Care Board, and the U.S. Centers for Medicare and Medicaid Services.

Shumlin and Al Gobeille, the chair of the Green Mountain Care Board, hosted a two-hour news conference to discuss the deal. State officials have not signed the draft agreement, but they may sign it in the next three weeks.

The board plans to hold three meetings on the issue on Sept. 29, Oct. 5 and Oct. 13 and take public comment through its website. The administration will hold public hearings Oct. 3 in White River Junction, Oct. 6 in Chittenden County and Oct. 11 in Rutland County to discuss the plan.

The payment reform being proposed is called an all-payer model, and Vermont would be the first state to set up the system. Under the model, Medicare, Medicaid and commercial insurance companies would pay doctors monthly fees for taking care of patients instead of pay for individual services.

Specifically, doctors would sign up to be part of one giant organization -- called an accountable care organization -- that would accept those payments from Medicare, Medicaid and commercial insurance companies. The accountable care organization may be OneCare Vermont or the Vermont Care Organization.

The accountable care organization would then pay doctors for the quality of their patient’s care, not the number of individual tests and procedures they perform for the patient. The Green Mountain Care Board, which currently approves hospital budgets and insurance prices, would be the primary regulator for the accountable care organization. …

SOURCE: Erin Mansfield, VTDigger


IDAHO LAWMAKERS CONSIDER OPTIONS ON HEALTH CARE COVERAGE

Anti-Medicaid expansion advocates are warning Idaho lawmakers that expanding the federal health care program designed to cover the poor will end up costing the state millions and do little to drive down medical fees.

Instead, those advocates on Wednesday urged the small legislative group tasked with reviewing Idaho’s so-called Medicaid gap to consider supporting more charity care and finding jobs for the unemployed.

Supporters of Medicaid expansion counter that Idaho should take advantage of the federal government’s offer to cover nearly the entire costs of expansion. Doing so would provide care to the estimated 78,000 Idahoans who don’t qualify for Medicaid or make too much to for a subsidy.

The 10-member taskforce has remained split on the best solution to submit to the Idaho Legislature in 2017.

SOURCE: Associated Press

Editor’s Note: Read “Idaho Lawmakers Reject Modified Medicaid Expansion” at Heartland.org to learn how some Idaho lawmakers attempted to expand Medicaid in the previous session.


MARYLAND CONSIDERS PHARMA PRICE TRANSPARENCY MANDATES, OUTLAWING UNFAIR HIKES

With EpiPens and other prescription drugs rising in cost, families who desperately need them but do not have health insurance are bearing a huge financial burden, according to community advocates.

The Maryland Citizens’ Health Initiative, a coalition of more than 1,200 religious, labor, business and policy groups seeking quality and affordable healthcare, wants the state Legislature to address that financial burden by overhauling some of the laws governing drug pricing.

“The problem is when prices are raised so high, it’s really hard on families with children who need access to life-saving medications to budget to get these medications that they really need,” said Anna Davis, the health policy director for Advocates for Children and Youth.

The health initiative recently released the results of a poll of 802 Maryland registered voters that showed an overwhelming 80 percent supporting three key actions to combat high drug costs -- and all three are to be incorporated in proposed legislation.

The health care advocates want to require companies to disclose the price basis (how much they spend on production, research, advertising, and profit) of their drugs, require companies to notify the public of an increase in price of a drug, and authorize the state’s attorney general to take legal action to prevent unfair price hikes.

SOURCE: Modern Healthcare, Associated Press

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Michael Hamilton writes and edits for the liberty-minded clients of Good Comma Editing, LLC, a freelance writing and editing company.
media@heartland.org @MikeFreeMarket