While Patients Wait, Hawaii Plays Favorites in Health Care
by Jaimie Cavanaugh & Daryl James, Real Clear Health Care, July 21, 2022
Launching any type of business involves risk, but health care providers face an extra hurdle in Hawaii. Before they can set up shop, they must prove to the state’s satisfaction that a need exists for their entrepreneurship.
The process adds months and sometimes years to any project, delaying options for Hawaii patients. Kahua Home Health Services had to apply twice for permission to open a home health and rehabilitation agency in Honolulu after the state rejected its initial petition in August 2021. Other applicants never clear the hurdle. Regulators told California-based Aasta Health to stay away when it tried to build a hospice in Honolulu. They told Texas-based U.S. Renal Care it could operate kidney dialysis centers on Oahu, but not on Maui or the Big Island. And SSB Mobile Diagnostic Imaging Group hit a wall when it tried to provide portable services for homebound Oahu patients.
In every case, entrepreneurial dreams and visions of expansion hinge on something called a “certificate of need” (CON), which works like a golden ticket. Winners are free to pursue their dreams. Losers must sit out. And a panel of 21 government gatekeepers — stacked with industry insiders — gets final say over who falls into which category. The system, which has nothing to do with quality or safety, works well for established providers because they control it. State law even allows CON holders to testify against would-be competitors, despite the direct conflicts of interest.
Germany-based Fresenius Medical Care, which operates Liberty Dialysis with locations on Maui and the Big Island, made sure U.S. Renal Care did not make the jump from Oahu. “It’ll only dilute and disrupt Liberty’s efforts to sustain their clinics in rural areas,” one nurse claimed in written testimony.
The CON process even brings bitter rivals together to keep newcomers off their turf. Navian Hawaii sued its former CEO when he resigned and launched Mālama Ola Health Services in 2017. Yet both hospice providers teamed up against Aasta to block its CON application in 2021.
If the government allowed similar meddling in other industries, Hawaii consumers would have fewer options and likely pay even higher prices for just about everything. First Hawaiian Bank, founded in 1858, could have claimed that no need existed for the Bank of Hawaii in 1897. Rainbow Drive-In, founded in 1961, could have opposed Zippy’s in 1966. And the Moana Hotel, which opened in 1901, could have argued against the construction of the Royal Hawaiian in the 1920s. Both establishments could have challenged Kyo-Ya when investors arrived from Japan in 1961.
Stopping newcomers in any industry ultimately helps no one. Misguided incumbents even hurt themselves when they support CON laws because competition keeps them sharp and drives innovation — which is why Michael Jordan needed Isiah Thomas and Patrick Ewing. Yet Hawaii pretends the basic laws of economics do not apply in health care.
Defenders of the CON regime claim the oversight ensures even distribution of resources, which prevents redundant investment, reduces waste and saves money. Yet none of the promised CON benefits has ever materialized. A joint report from two federal agencies — the Federal Trade Commission and the Antitrust Division of the Justice Department — finds no evidence that CON laws achieve any public benefit. Instead, they promote medical monopolies. More importantly, decades of real-world experience show that CON laws do not work as advertised. Recognizing the policy error, Congress reversed itself in 1986 and repealed federal CON mandates it had imposed just 12 years earlier.
Since then, California, Texas and 10 other states, which contain nearly 40% of the U.S. population, have canceled their CON laws entirely. Each time, the American Hospital Association and local affiliates predicted disaster, but the negative effects never materialized.
Despite the evidence, Hawaii has persisted. “Conning the Competition,” a nationwide analysis of state laws from the Institute for Justice, shows that Hawaii is one of only eight states that requires CONs within six broad categories: hospital beds, beds outside hospitals, equipment, facilities, services and emergency medical transport. Hawaii even requires CONs to terminate services or renovate aging facilities.
State lawmakers contemplated reforms in 2021 and 2022 with House Bills 224 and 2205, but big hospitals intervened each time and helped kill the efforts. Hawaii families struggling with high medical costs must demand another try during the next legislative session.
Scaling back the protectionism will require political will, but killing CON laws is good medicine.
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Jaimie Cavanaugh is the lead author of “Conning the Competition” and an attorney at the Institute for Justice in Arlington, Virginia. Daryl James is an Institute for Justice writer.