It does not take a Ph.D. in economics to realize this is a foolish regulation. In the absence of proper competitive incentives, the other lemonade stands will continue serving sour lemonade.

Now replace the words “lemonade stand” with “three-bed hospital” and “your eight-year-old self” with “Paul McKee,” and you have a real-life situation.

McKee, a well-known real estate developer in the area, has been working on a project to renovate a portion of North Saint Louis City. On July 9, he unveiled a plan to establish a three-bed urgent care facility within the redevelopment area. According to state law, a certificate of need (CON) must be obtained in order to open a new hospital with costs of at least $1 million. It appears his proposal meets this threshold. However, requiring McKee to obtain a CON to open a small urgent care hospital in an underserved and impoverished area is a totally unnecessary government regulation.

CON programs initially were implemented in order to prevent the duplication of health services in a given geographic area, thereby controlling costs. The reasoning was that an excess supply of medical services would compel hospitals to increase prices in order to cover the high fixed costs associated with medical treatment.

There have been many different studies on how CON regulations impact the cost of care. A thorough survey of the relevant data reveals that CON regulations do very little, if anything, to control the overall cost of care. Furthermore, with respect to certain procedures, CON regulations have been shown to limit patient choice, resulting in worse care delivered from less capable doctors. Additionally, these regulations can create an inefficient market structure and grant existing hospitals monopolies over certain regions.

Some may even argue that McKee will attempt to use the regulatory program to prevent competitors from entering the market in North Saint Louis. Given CON rules, if his project is approved, it likely will be more difficult for new medical facilities to open nearby. But doesn’t the potential to abuse and use CON regulations to create a monopoly give all the more reason to eliminate them?

Additionally, Missouri’s CON program delays groundbreaking on new hospitals. McKee said he intends to submit his proposal by Aug. 22 and, in all likelihood, his application will not be reviewed until early November.

Christien West is an intern at the Show-Me Institute, which promotes market solutions for Missouri public policy.

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A 2004 report by the U.S. Department of Justice and Federal Trade Commission found that CON programs “pose serious anticompetitive risks that usually outweigh their purported economic benefits.” So far, I have written about how CON regulations can limit access to care and have been shown to not effectively control costs. CON regulations have the potential to stifle competition and grant existing hospitals monopolies over certain regions. Some existing hospitals may even attempt to use these regulations to prevent competition from entering the market.

How does this play out in Missouri?

In the past, any time a new hospital wanted to open up in Missouri, it had to apply for a CON – irrespective of its size and cost. A revision to Missouri’s CON rules changed the criteria for review from every new hospital to every new hospital whose cost is at least $1 million.

In April 2010, Patients First Community Hospital expressed its intent to build a small hospital in Saint Louis County that did not meet the new threshold for certificate of need review. Shortly thereafter, a regional rival, St. John’s Mercy Health System, filed a lawsuit against the Missouri Health Facilities Review Committee and Patients First. St. John’s challenged the legitimacy of the new $1 million amendment and construction of the new hospital. In 2012, the Missouri Supreme Court ruled that the new criteria for review was perfectly legal, thus giving Patient’s First the green light for the project.

Despite the ruling against St. John’s, this is an excellent example of a hospital using the legal system in an attempt to stomp out the competition, all under the pretense of CON regulation. It took about two years for Patients First to have its plan approved. These sorts of delays can deprive patients of new, much-needed medical facilities.

The state should not allow such an environment to exist.

The post Show Me Better (Part 4): Certificate Of Need And Market Power appeared first on Show-Me Institute.

In a world of limited resources and virtually unlimited wants, we are forced to make trade-offs. A decrease in the quality of health care might be acceptable if CON led to lower costs. Proponents of CON argue that this regulation does contain the cost of care by preventing the “duplication of services” in a given geographic area. To illustrate this chain of reasoning, let’s say that Barnes-Jewish Hospital and Saint Louis University Hospital buy “too many” MRI machines – as a result, many of the new MRI machines go unused. Because of the outlay, CON proponents assume the two hospitals will probably charge higher prices for MRI scans to make up for the mistake.

There is evidence to suggest that theory is not well founded. One evaluation of Illinois’ CON program found that “there is little direct broad proof that overcapacity duplication leads to higher charges.” CON regulations may result in “tangible savings on the actual costs of specific medical technologies” but these programs tend to “redirect expenditures to other areas.” In other words, CON may actually prevent hospitals from spending too much on a certain type of medical technology, but any savings will be spent on other items instead of being passed onto patients. One study even suggests that strict CON programs may actually increase health care costs by as much as 5 percent.

What use is a program that can be delivering sub-optimal health care without cutting costs?

The post Show Me Better (Part 3): Certificate Of Need And The Cost Of Care appeared first on Show-Me Institute.

Unfortunately, Missouri’s certificate of need (CON) program may be erecting barriers to the market functioning efficiently when matching care providers and care consumers. A recent working paper by the National Bureau of Economic Research examined how hospital entry deregulation in Pennsylvania affected the market for cardiac revascularization. Because Pennsylvania eliminated its CON program in 1996, economists were able to compare clinical outcomes before and after the program’s repeal — the ideal conditions by which to conduct an experiment. The researchers found that “free-entry improves the match between underlying medical risk and treatment intensity” and “improved access to care.”

Another study conducted in the same state, on the same topic, found that the post-deregulatory market did a better job at matching the appropriate procedure to the appropriate risk level. After deregulation, better doctors also saw an influx in demand for their services.

Removing the CON program in Pennsylvania empowered patients to attain better care from better doctors. Certainly, a market uninhibited by cumbersome regulations does a better job at matching the right patient to the right procedure, performed by a better doctor, than a nine-member regulatory board. Missouri could follow Pennsylvania’s lead in doing away with the micromanagement and creating a system conducive to competition and innovation.

The post Show Me Better (Part 2): Certificate Of Need And Access To Care appeared first on Show-Me Institute.

A certificate of need is a legal document the state issues to allow a health care provider to expand, modify, or construct certain health care facilities. In Missouri, a nine-member committee reviews applications for certificates of need and administers them in accordance with its own rules. For example, last year, the Lafayette Health Center received a CON to construct a new $40 million hospital. Based on the committee’s rules, Lafayette likely paid the review committee a hefty $40,000 application fee.

One of the original purposes of the program was to guarantee health care access by limiting competition in a particular region. Proponents assert that, with less competition, the likelihood of a hospital going out of business will be reduced, hopefully ensuring a sufficient level of care for citizens near the health care provider. Yet, empirical evidence suggests that CON programs neither control costs nor improve health outcomes. Indeed, they may actually hamper access to care and patient choice, at least under some circumstances.

If the certificate of need law could be hurting the people it was intended to help, should it be reformed? Abandoned? These questions are central to why we, as Missourians, ought to take a serious look at the necessity and efficacy of the state’s CON program. In future posts, I will review how CON regulations impact health care costs, access to care, and clinical outcomes.

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