Trump administration could leverage waivers for state CON law repeals

The Trump administration may start using approval of 1332 waivers as a means to spur states to unwind healthcare regulations, including certificate-of-need laws.

Technically, the federal government can't force states to overhaul CON laws, but it has both a powerful bully pulpit and leverage to spur repeals, specifically through its final sign-off on 1332 state innovation waivers that state governments are increasingly depending on to shore up their health exchange markets. These waivers are used to funnel federal money into reinsurance pools and other measures.

A White House official told Modern Healthcare late last week that there is no "black and white" discussion of trading waiver approvals to move reforms of CON laws. However, he pointed to the administration's recent guidance on so-called innovation waivers and its assurance to states that their efforts to deregulate could help them secure the pass-through funding to finance insurance market reforms.

Influential Washington analysts who have urged CON overhaul for years said the administration's willingness to wield this leverage is the real test for how serious they are about pushing the policy.

"Given that they've gone pretty far with the guardrails on waivers, why don't they do something for the right reasons?" said Thomas Miller of the American Enterprise Institute. "If you think the markets work better (than regulation), and you want to allow competition, and if competition improves the market, find a way to measure that and use waiver authority to go that direction."

The administration raised the stakes on CON last week in its "Reforming America's Healthcare System Through Choice and Competition" report. In the 120-page document, HHS and the Labor and Treasury departments contend that CON laws are "frequently costly barriers to entry for healthcare providers rather than successful tools for controlling costs or improving healthcare quality." They urged states to consider repealing, or at least scaling back, the scope of CON regulations.

On the state level, where CON repeal proposals have long been simmering, hospitals are on the alert.

"It's interesting the administration would suggest that all states comply with this mandate or recommendation," said Ethan James of the Georgia Hospital Association. "I always thought the administration was going to push states' rights issues."

Georgia has been ground zero for the conflict over CON, complete with litigation financed by a conservative activist group and annual drives in the Legislature to overhaul the laws. State hospitals consistently warn that existing community providers would be on the hook for more charity care should they have to start competing with new entrants that could siphon off paying or insured patients.

David Mosley, managing director of Navigant's healthcare practice, said CON repeal directly threatens struggling rural hospitals on the brink of closure, based on data he's been culling over the past year.

It isn't likely that a free-standing provider would enter those markets to set up an emergency room for charity care, he said. They'd be more likely to draw on high-revenue services like orthopedics or imaging.

“When you move those services out of a hospital, it will crush them,” he said.

Thirty-six states and the District of Columbia have CON laws in place even though it's been decades since the federal government repealed its 1970s-era mandate to maintain them.

In 2017, New Hampshire was the first state in 15 years to repeal a CON program. Hospitals there don't know yet how that move will change business as usual since the state hasn't finalized a replacement special healthcare licensing program.

Indiana went the other way this year and actually passed legislation ordering the state health department to set up certificate-of-need regulations, but none have gone into effect yet.

Paul Ginsberg, director of the USC-Brookings Schaeffer Initiative for Health Policy, framed the administration push on CON as "moral suasion" for states more than anything else. A critic of CON, Ginsberg and Martin Gaynor, an Obama administration anti-trust official, co-authored a policy brief last year urging states to overturn or dilute their programs.

"I don't think just telling states they should do this, with evidence, will have much impact," Ginsberg said. "On the other hand, they could say: if you want this waiver, costs need to come down and you need to (repeal CON) and other things to get the costs down."

On Thursday, a few days after the White House released its recommendations, the Georgia House of Representatives' Rural Development Council released its own year-end report recommending a robust CON overhaul.

Among them: legislation to replace CON "with a rigorous accreditation and licensing requirement for new providers." The recommendation seeks to address provider concerns about a potential imbalance of charity care by adding a requirement for certain levels of indigent or charity care. The requirement would be reinforced with fines for hospitals that don't follow the rules.

The recommendation didn't come as a surprise to hospitals. Proposals to repeal CON laws crop up every year, James of the Georgia Hospital Association said.

It's also extended to the courts. Last year, a lawsuit backed by the conservative Goldwater Institute and seeking to overturn the state's CON laws went to the Georgia Supreme Court. The complaint came from two physician co-owners of a women's surgery center who were prohibited under CON from expanding their practice. The CON law was upheld, to the hospitals' relief.

But Naomi Lopez Bauman, the Goldwater Institute's director of health policy, saw the case as an overall gain because it brought increased attention to the issue.

Providers bristle at a directive they see as only going one way. The White House statement, James said, seemed to him like sweeping commentary on a highly complicated issue.

"There are so many more moving parts on CON and access to care for the uninsured, rather than just the suggestion that free market principles and competition would lower costs," he said. "The healthcare environment is undoubtedly not a free market when certain providers must offer services at little or no reimbursement."

He said the administration is pushing a policy imbalance by urging a repeal of all CON laws without addressing the Emergency Medical Treatment and Labor Act, where Congress mandated all emergency departments to treat and stabilize any patient who enters their doors regardless of their ability to pay.

"How could the administration suggest that all CON laws be repealed but not address what could be referred to as the unfunded mandate of EMTALA?" he said.

Instead of a wholesale repeal of the laws, Mosley said states should draw distinctions between rural and urban markets instead of mandating a universal policy for both.

Nevada has taken this approach. The state has CON laws but Clark County, the home of Las Vegas, doesn't.

“As long as you hit a certain population density, you can be open to competition,” Mosley said. “But when you are a very essential, rural hospital, it is imperative that the state when possible not allow someone else to come in and open specialty hospitals that would take away the very few services from which the hospital derives any positive cash flow.”

"For those of us working in state policy, it's like the cavalry coming into the rescue," said Rea Hederman of the Ohio-based Buckeye Institute. The Buckeye Institute is another conservative policy group that works extensively on deregulating issues. In Ohio they are focused on scope-of-practice regulations.

"It's a big way for the administration to say: this is the right idea on healthcare, giving state policymakers better ways to achieve it," he added.

Other groups like the John Locke Foundation in North Carolina hope to see the discussion renew in 2019 as legislative sessions get underway.

"We have one of the most stringent (CON) programs," the foundation's Becki Gray said. "We regulate every kind of surgical center, and we have been pretty frustrated with that."

James from the Georgia Hospital Association said providers in neighboring Southeastern states are bracing for more legislative debate over CON programs.

"We know the state planning process is under attack," he said.

He also noted that in these states, from the Carolinas to Florida to Georgia, ideas for expanding access to Medicaid to the poor and uninsured will likely continue.

"I think you will see the remaining states that have not expanded Medicaid will look to more waiver options," he said. "As it becomes more and more unlikely that a divided government in D.C. is not able to do anything to further modify the Affordable Care Act and it becomes further cemented in the healthcare environment, they will look to flexibility to develop their own programs."

In other words, if more conservative states want to adapt or tweak Affordable Care Act Medicaid expansion they would need rely on the one point of leverage the administration holds over CON laws: waivers.