One important health care reform being discussed now in Lansing involves the state's "Certificate of Need" (CON) program. While the House is considering a Senate-passed plan to reduce its regulatory burden, research suggests that outright abolition might be an even better idea.
Under the Certificate of Need program, hospitals and nursing homes must receive state approval before making certain capital expenditures for new technology, expanded facilities, or additional medical procedures. The authority to grant such approvals rests with the State of Michigan's Certificate of Need Commission. If a hospital wants to purchase a Magnetic Resonance Imaging (MRI) machine, a CAT scanner or more beds, or expand services from open-heart surgery to organ transplantation, it must secure the state's permission.
State governments first began passing CON laws in the mid-1960s. The stated goal was to slow the rate of growth in medical costs by encouraging consolidation and reducing duplication of hospital services. State officials believed, for example, that one efficient and fully-utilized piece of equipment was better than two that were under-utilized.
The notion was not without merit. No one wants to waste scarce resources. And at a time when government's share of our total health care bill was rising, it's not surprising that legislators looked for ways to clamp controls on medical spending. CON laws are largely the legislative application to medicine of the old adage, "He who pays the piper calls the tune."
Extensive research, however, suggests strongly that CON programs have not worked as originally intended. It appears, in fact, that they may have boosted the very costs they were supposed to control for these reasons: 1) they restrict competition among hospitals, and 2) by curtailing efficient capital investments they actually raise operating costs.
An analysis by Wharton School economist Mark Pauly compared states that had enacted CON laws with those that had not and found no effect on overall capital investment. In a 1988 article, Pauly wrote of his findings, "The surveys did find evidence that the form of investment was altered, away from beds toward other facilities, and that the consequence of restricted supply was higher prices." Interestingly, Pauly also observed that CON programs "tended to be `captured' or dominated by the hospitals they were intended to regulate, and that those hospitals used regulation to keep out competition."
CON programs vary in their emphasis from state to state, but examination of the available data shows that when large projects are targeted, hospitals make investments in small projects. When CONs focus on hospitals, investments are made in non-hospital facilities.
The gains from avoiding or removing the duplication of facilities through the use of CONs are small, according to a 1980 study. Only a miniscule amount of medical cost inflation over the previous few decades can be attributed to duplication, reported William B. Schwartz and Paul L. Joskow in the prestigious New England Journal of Medicine. Meanwhile, the CON process itself is ever more costly, requiring extensive monitoring, paperwork and bureaucracy.
In any event, perhaps this is an area where costs should be measured in more than dollars and cents. A 1988 analysis from Northwestern University surveyed the hospital records of more than 200,000 patients in 45 states. It found that those states with the most stringent CON regulations had mortality rates 5 to 6 percent higher than states with less stringent regulations.
Since Michigan's CON program was reformed in 1988, the CON Commission has exercised restraint in vetoing requests from hospitals for approval of capital construction projects. Of 83 proposed projects covered by the CON program between May 1988 and October 1991, only two were denied. Some legislators, however, feel that further deregulation is advisable.
Currently, CON approval is required in Michigan for clinical construction projects over $850,000 and non-clinical projects over $1.7 million. The Senate-passed bill now under review in the House would raise those thresholds to $2 million and $3 million, respectively. The bill would also permit more MRI units in rural counties, reduce the program's ability to micromanage administrative decisions made by hospitals and nursing homes, and cut the paperwork burden.
Recognizing the harm that CON regulations have done, a number of states have now relaxed, ended, or are planning to end their CON programs altogether. Abolition of CON programs makes even more sense if coupled with other market-oriented reforms. That would include policies that strengthen competition in the medical marketplace, encourage consumers to be better-informed "shoppers" for medical care, and end the reimbursement practices of federal and state governments that simply subsidize and reward ever higher costs.
Nothing in economic experience suggests that government bureaucracy more efficiently allocates scarce capital resources than free and competitive markets. It appears that Certificate of Need programs are no exception to this cardinal rule.