State certificate-of-need laws weather persistent attacks

Dr. Mark Monteferrante didn't think it would be so hard to help his radiology group's office in Northern Virginia buy a second MRI machine in 2003.

But it took five years and more than $175,000 in lawyers' and other fees to get that second machine. The reason? Virginia's certificate-of -need law, which requires owners of medical facility-care projects to prove public need and get approval for their projects before embarking upon them.

The program is meant to contain healthcare costs, but Monteferrante argues it hurts patients by stifling competition. He now wants to start a new radiology practice in Virginia, but he isn't willing to risk another arduous CON process.

“Competition is a good thing, and the fact that we've got a system that inhibits that, it's un-American,” he said. “It's ridiculous.”

Monteferrante and another doctor, backed by the Institute for Justice, a public interest law firm that focuses on individual liberty and limited government, sued state officials over the state's CON law in 2012. Last week, the 4th U.S. Circuit Court of Appeals ruled against the doctors. They're not yet sure whether they'll appeal their case to the U.S. Supreme Court.

Clashes over CON laws, however, aren't just playing out in courts.

For years, the Federal Trade Commission and the U.S. Justice Department have pressed states to abandon the laws, decrying them as bad for competition. Many states have also engaged in seemingly endless debates over the matter. But none of these efforts—whether through courts, politics or federal agencies—have led to much change. Thirty-five states and the District of Columbia still have CON programs.

The laws' critics say state hospital associations have wielded their political power to keep certificate-of-need programs in place, shielding incumbent hospitals from costly competition.

“They can keep competitors out,” said Frank Sloan, a professor of health policy and management and economics at Duke University. “The public doesn't care much about it.”

James Blumstein, a professor of health law and policy at Vanderbilt Law School, said CON programs are of little value in the current healthcare system, which no longer relies on cost-based reimbursement.

But hospital associations say the laws are still relevant because they ensure quality healthcare services and protect safety net hospitals.

“There is not a free market in healthcare because so much of the healthcare market is governed by reimbursement rates set by the federal and state government,” said Allan Stalvey, an executive vice president at the South Carolina Hospital Association. “It protects hospitals that provide services that other people don't want to provide.”

Decades ago, CON laws were even more popular. Many states enacted them in response to the federal Health Planning Resources Act of 1974, which tied federal funding to the laws. That act, however, was repealed in 1987, leading 14 states to eliminate their CON programs, according to the National Conference of State Legislatures.

CON critics in many states have continued to fight to erase the programs, but without much success.

“Every year there are numerous bills filed that would address pieces of, or all of, certificates of need,” said Richard Cauchi, a program director in health at the National Conference of State Legislatures. “The outcomes are often noticeably smaller or more modest.” Last year, lawmakers introduced at least 14 such bills in six states. No state has repealed its CON law since Indiana eliminated its program in 1999.

The FTC and Justice Department have also jumped into state battles over the laws at the request of politicians in those states.

This month, the agencies recommended that South Carolina pass a bill that would ultimately repeal the state's CON laws. They made the recommendation in response to a request for comment from South Carolina Gov. Nikki Haley.

The FTC and Justice Department also submitted a statement in October to a Virginia work group studying possible reforms to the state's CON laws. FTC Chairwoman Edith Ramirez said in a statement at the time that the FTC was concerned that CON laws may “facilitate anti-competitive mergers and conduct that raises prices for consumers and reduces their access to new sources of care.”

The workgroup ultimately recommended reforming the law but not scrapping it.

In July, the FTC submitted comments to a North Carolina lawmaker in support of a legislative proposal to narrow the state's CON law. The bill hasn't gone anywhere.

Matthew Mitchell, a senior research fellow at the Mercatus Center at George Mason University, said lawmakers likely take the federal agencies' comments seriously. But those comments don't require states to take any action. Politics are also working against change, he said.

“Those that benefit from CON programs are existing facilities that are usually pretty big and pretty sophisticated and know a lot about the program and how to obtain certificates of need,” Mitchell said. “Those who lose are consumers and patients who typically don't even know they exist.”

Darpana Sheth, an attorney for the Institute for Justice, the group backing the Virginia lawsuit, attributed the law's survival in Virginia to the “enormous sway” of the hospital lobby.

But Julian Walker, Virginia Hospital & Healthcare Association vice president of communications, said in a statement that the state's law protects the public from unsustainable overexpansion and protects hospitals from losing revenue needed to offset unreimbursed costs.

“Within an industry laden with market intrusions, consumers stand to benefit from objective review of new facility applications,” Walker said. He also said that Virginia has lower healthcare costs than a majority of states without CON laws.

Still, efforts to undo the program in Virginia are ongoing. Several Republican lawmakers are backing legislation this session aimed at reforming and repealing the state's CON laws.

One of those lawmakers, Del. Chris Peace, said one of his bills is a response to a battle hospital giant HCA fought in Virginia last year over its plans to build a free-standing emergency department in rural New Kent County. The area is a 30- to 40-minute drive from the next nearest ED, but HCA struggled to get approval for imaging devices for the facility. HCA ultimately got those approvals after a grass-roots campaign urged the state's health department commissioner to reverse her staff's decision on the matter, Peace said.

“It's another example, in my mind, of the government saying, 'We know better than you,' ” Peace said. “That was just really confounding.”

Research is mixed on the effects of certificate-of-need laws on overall costs. Some studies suggest the laws do in fact yield lower costs, while others find the opposite. Many CON defenders also say the laws lead to higher patient volumes in hospitals, which contribute to better quality as doctors gain more practice and expertise.

But Monteferrante, the radiologist involved in the Virginia case, doesn't buy it.

“The reason to have a free market and competition is it drives cost down and quality up,” he said. “I'm happy to compete with anybody and everybody because I know I'll do it better and faster and cheaper than anyone.”